Q2 2022 Landsea Homes Corp Earnings Call
Good morning, and welcome.
Land Holdings second quarter earnings call, all participants will be in listen only mode. Excuse you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions.
Please note that this event is being recorded.
I'd like to turn the call over.
Okay.
Drew Mackintosh.
Corporate Investor Relations. Please go ahead Sir.
Good morning, and welcome to <unk> 2022 second quarter 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.
Nancy homes caution that forward looking statements are subject to numerous assumptions risks and uncertainties, which change over time. These.
These risks and uncertainties include but are not limited to the risk factors described by Lindsay homes in its filings with the Securities and Exchange Commission.
Accordingly forward looking statements should not be relied upon as representing our views.
Any subsequent date and you should not place undue reliance on these forward looking statements in deciding whether to invest in our securities we.
We do not undertake any obligation to update forward looking statements to reflect events or circumstances. After the date. They were made whether it was a result of new information future events or otherwise.
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 Lindsay homes website and SEC filings.
Hosting the call today are John <unk>, Chief Executive Officer, Mike for some President and Chief operating Officer, and Chris quarter, Chief Financial Officer.
With that I'd like to turn it over to John .
Morning, and thank you for joining us today as we go over our results for the second quarter of 2020 to provide an update on the company's outlook.
Let's see homes delivered another quarter of strong profitability generating earnings of <unk> 34 per diluted share for the period.
Presenting a 48% increase over the second quarter of 2021.
Home sales revenues grew 46% year over year to $351 million driven by a 35% increase in new home deliveries and a 9% increase to our average selling price.
Home sales gross margin expanded 430 basis points year over year to 21, 3% on a GAAP basis or 560 basis points to 29, 1% on a fully adjusted basis.
These results are a testament to our company's strategic focus on scaling operations in high growth markets, while maintaining an emphasis on bottom line results.
Net new orders came in at 538 for the quarter, representing a 63% increase versus last year.
Our sales pace averaged three three homes per community per month during the period.
However, demand tapered off as the quarter progressed.
A combination of higher interest rates and lower consumer confidence has taken a toll on order activity across our homebuilding platform that has created a more challenging sales environment for our industry.
Fortunately, we believe <unk> has several distinct advantages that will allow us to compete effectively for buyers in this new environment.
Our company has established a presence in some of the strongest markets in the country with healthy job to permit ratios expanding employment basis.
Payable in migration patterns.
These solid housing fundamentals should mute the impact of macro headwinds over time.
Second we are intentionally focused our land acquisition efforts on the more affordable segments of the market in prime locations.
Finishing our company at the upper end of the entry level segment.
We believe this buyer segment is one of the strongest from a demographic perspective, it should show more resiliency relatively to other buyer segments.
Third our investments in new home technology innovation.
The creation of our high performance home series gives us a distinct selling advantage against our competition and provide a real value proposition for buyers in the market.
Yes.
While no builder is immune to the broader market forces that are currently impacting our industry. We believe <unk> has the right product in the right locations to navigate these uncertain times better than most.
Supplementing our strong market position as our well capitalized balance sheet and our risk averse land light strategy.
In terms of our land position, we increased our lot count by 52% on a year over year basis during the quarter to just over 13000 owned and controlled lots.
This growth was driven by a 150% increase to our controlled lot count as our owned lot count actually decreased by 9%.
The end of the second quarter, 63% of our lots for controlled at 37% World. This trend is consistent with our land light strategy, which emphasizes optionality and capital efficiency is a means to improve returns while limiting our exposure to market risk during periods of uncertainty.
We believe our current land position puts <unk> in a great position to continue on its current growth trajectory should selling conditions improve and limits our downside exposure should our markets stay choppy for an extended period of time.
Yeah.
The second quarter, we acquired a $5 1 million shares at an average price of $7. Seven SaaS. This includes purchasing four 4 million shares from our controlling shareholder.
This represents approximately 11% of our prior quarter's outstanding share count.
I believe this was an attractive use of our capital given our undervalued stock price.
Quarter end, we had $10 million remaining on our share repurchase program authorization.
Additionally, we retired all $5 5 million outstanding private warrants.
The warrants will be beneficial in cleaning up the company's capital structure remove large fluctuations caused by the warrants and are reporting earnings quarter to quarter and remove any dilutive overhang on our stock.
Going public last year, we have been focused on creating shareholder value and a retirement of the private warrants is another step in that direction.
Furthermore, this event will result in a cleaner capital structure that will provide a positive backdrop for investors and shareholders. We accomplish these measures with virtually no impact to our leverage profile.
The great land position strong balance sheet, and a favorable product profile fancy homes is poised to navigate these uncertain times for our industry.
Addition, accompanies led by homebuilding veterans, who have experienced previous downturns, we know how to operate effectively during periods of market dislocation.
Long term outlook for our industry has not been diminished by recent slowdown thanks to the favorable demographic trends and lack of existing supply that should drive the new need for new housing.
As a result, we remain optimistic about the future of land Sea Hawks that I'd like to turn the call over to Mike who will provide more detail on our operational results for the second quarter.
Thanks, John the second quarter of 2022 was marked by strong revenue growth and solid gross margin gains for our company as well as continued challenges with supply chain issues and a slowdown in order activity as the quarter progressed.
We ended the quarter with an average 54 selling communities a 73% increase over <unk> 2021, primarily through the growth in Florida.
Asps were up between 6% and 21% across each of our divisions, reflecting the strong pricing advantage over the year last year.
Order activity was fairly consistent across our more established markets of Arizona, California, and Florida with each generating an absorption pace of three four or better for the quarter.
However, as John mentioned, the combination of higher mortgage rates and lower consumer confidence impacted our sales effort starting around June and carried into July .
In some markets such as the inland Empire. The slowdown was more affordability driven as potential buyers were suddenly price out of the market due to the sharp move higher and mortgage rates and other markets such as in Phoenix in Central Florida, the slowdown seems to be more psychological as potential buyers pause to us.
SaaS, whether now is the right time to buy.
What is consistent across our homebuilding platform is that there is a sustained desire to own a home and that potential homeowner interest level remains high. So it may take some time to see this desire translate into better order conversion Intel buyers and builders adjust to this new reality.
To that end, we have been proactively addressing potential buyers affordability concerns by offering mortgage finance incentives such as rate buy downs and rate locks.
Also making sure the buyers already in backlog are still comfortable moving forward with their purchase.
Our cancellation rate for the quarter was 11%.
And most of those buyers were from those who have purchased their home in the last 30 to 45 days.
With the recent improvement in mortgage rates, we think some of these buyers may come back to the table in the fall.
For the remaining homes to be delivered in the year all have been started and over 80% are already in our backlog.
We finished June with 1571 homes in backlog with a total dollar value of $902 1 million at an average sales price of 574000.
This represents a 31% growth in volume and a 43% and total in total dollars compared to the second quarter of last year.
Yes.
The credit profile of our buyers in backlog that use our mortgage affiliate Lansing mortgage remains incredibly strong.
Across all divisions, the credit score of 737, while we still see the majority of loans going conventional that market is starting to trend towards more government buyers.
A majority of our subdivisions across all divisions will fit into the FHA loan limits to accommodate these buyers. It's a demographic that has largely been blocked and disenfranchised from buying due to heavily heavy demand for conventional buyers.
We feel this will be a strong opportunity and provide a competitive edge in the future loan to value ratios are coming in at 82% across all divisions with the lowest being in northern California at 74% and the highest being in Arizona at 86%.
This is translating to an average cash down payment of roughly 95000.
The average household income of these buyers is roughly 163000.
As of July 40% of the backlog is rate locked that will continue to rise as the closing dates are solidified.
We are consistently running stress tests on the backlog to ensure that we head off any potential issues by being proactive with our buyers to lock them in if they run the risk of not qualifying due to rising rates.
In terms of the supply chain, we continue to see difficult operating environment.
Particularly with the materials and trade base needed to finish a home.
All of our scheduled closings for the second quarter were pushed into the third quarter. As a result of these issues. So it is important to note that this is a timing issue and not an instance, where the revenue was lost.
On a positive note we have seen an increase in the availability of front end trades, such as framing and foundations, which should help curb input costs in the future and reduce cycle times.
We believe supply chain issues will start to ease as the effects of this recent slowdown work their way through the system.
Overall, I am pleased with how our teams executed during the quarter and how they adapt to the changes in selling conditions. We have several tools at our disposal to spur demand and as John has mentioned, we already provide a great value proposition to our buyers in our markets given the location price point and quality of our homes.
That I would like to turn the call over to Chris who will provide more detail on our financial results this quarter and released some guidance for the coming quarter Chris.
Thanks, Mike Good morning, everyone. We're pleased to have delivered second quarter pre tax income of $23 2 million and net income of $14 9 million or <unk> 34 per share compared to <unk> 23 in the same period last year during the quarter, we recorded nonrecurring losses of $1 8 million from the fair value of warrant liabilities and $2.
$5 million from an early extinguishment of debt and we incurred $12 8 million in purchase price accounting. Excluding these items. Our adjusted net income was $31 5 million and our adjusted earnings per share was <unk> 71.
This is up from 38 per share in the second quarter of last year or 87%.
Our per share earnings benefited from a 40% growth in net income driven by our strong ASP growth increased profitability through our margin expansion and the successful execution of our stock buyback program.
Our SG&A as a percentage of home sales revenue increased year over year as we work during the quarter to right size, the integration of our Hanover acquisition, including creating synergies through combining our Florida operations transitioning from the Hanover founders to the New Division President rebranding all of the communities to the ANZ homes, and ensuring staffing and marketing are appropriate.
The closing schedule for the balance of the year.
These may has created roughly $2 5 million in one time charges during the quarter and set us up to improve our G&A leverage to a more historical level similar to 2021, especially with our anticipated fourth quarter revenue, which is typically our largest.
For the second quarter, our tax rate was 36% compared to 28, 5% last year. This increase was primarily a result of the non deductibility of our warrant revaluation the mix of revenue by state and the benefits of federal energy tax credits that we received last year that were not renewed for 2022.
Turning to the balance sheet, we ended the quarter with $215 1 million in liquidity, including $104 4 million in cash and $110 7 million in availability under our revolver.
Availability under our unsecured revolver increased this quarter as we expanded our bank group and increased our capacity $70 million.
With the retirement of the private warrants, we also eliminated a corresponding liability on our books and the potential future valuation swings.
On the leverage side at the beginning of the quarter, we fully repaid the last construction loan outstanding with a draw under our credit facility with closings beginning to occur in New York. This repayment will allow us increased flexibility as we have access to utilize the full cash from the proceeds rather than pay down the secured loan. Additionally, the interest cost on our <unk>.
Oliver is significantly less than the previous loan.
We incurred a $2 $5 million charge for debt retirement during the quarter associated with this payoff.
Were all we were able to repurchase shares retire the private warrants and repay the outstanding construction loan while maintaining our targeted leverage ratios and discipline on our balance sheet. We finished the quarter with $534 6 million and total debt and net debt of $433 million our ratio of debt to capital.
At the end of the quarter was 44, 6% and net debt to net book capitalization ratio was 39, 3%.
We believe our conservative balance sheet and ample liquidity give us the financial flexibility to operate from a position of strength in any market environment and take advantage of strategic expansion and acquisition opportunities should they arise.
Now I'd like to provide some guidance for the third quarter and full year as.
As Mike said earlier, all of our homes, we need to deliver for the year are started and we have less than 20% of our targeted deliveries to sell.
With the recent changes in interest rates and changes in sales pace, we anticipate third quarter, new home deliveries to be in the range of $550 to 630 units and delivery asps to be in the range of 550 to 575000, recognizing the impact of New York into the portfolio.
For the full year, we are updating our guidance in anticipation of current market conditions and now expect the new range of new home deliveries to be between 2500 2700 homes delivery asps to be in the range of 525000 to 550000.
And home sales gross margins to be in the range of 20% to 22% on a GAAP basis or 24% to 26% on an adjusted basis.
Now I'll turn the call back over to John for some closing remarks John .
Thanks, Chris.
Not to be proud of this quarter, both in terms of our profitability and how we position our company as we head into the back half of this year.
We posted significant year over year increases to both our top and bottom line results for the quarter and ended the period with a solid backlog valued at more than $900 million.
We also grew our lot position and some of the most attractive markets in the country doing so in a capital efficient and risk averse manner.
While industry is currently facing several macro headwinds we believe we have the right strategy leadership product focus to compete effectively in this new environment.
Finally, I would like to thank the entire land sea team for their efforts this quarter.
Market conditions changed dramatically over the last few months and I am proud of the way you have responded to these challenges we have built a strong entrepreneurial culture at our company and this is reflected in the obstacles we have been able to overcome the success, we've been able to achieve.
Thanks for all your hard work.
That concludes our prepared remarks, and now we'd like to open the call up for questions.
Well now begin the question and answer session to ask a question you May Press Star then one on your Touchstone phone using a speakerphone. Please pick up your handset before pressing the keys.
Your question. Please press Star then two.
We will pause momentarily to assemble the roster.
First question comes from Alex <unk> B Riley Securities. Please go ahead.
Good morning, gentlemen, this is actually min Cho for Alex Congratulations on the quarter just a couple of questions for you.
Can you provide just some more updates on the July trends in terms of traffic and sales pace. Obviously it sounds like it's kind of continued from the end of June but anything that you want to highlight.
And thoughts about do you expect this to continue obviously in the third quarter will be challenged due to seasonality but.
You expect kind of an improvement in the fourth quarter or.
We expect these types of trends to continue for the rest of the year.
Alright maintenance, Mike can you hear me.
Yes.
Let me take that question.
We see generally a.
Rough stabilization at the numbers right now that were experiencing in terms of current absorption rates net net current absorption rates as we're moving through the summertime, which you suggested that as being somewhat affected by some seasonality as well as those conditions that we highlighted in the call.
So.
I think that will probably over the next few months.
Focus in again on <unk>.
Looking to find competitive differentiation through our.
Mortgage offering products that we developed through our relationship.
<unk> mortgage and wealth.
Doing periodic different incentives.
Homes move closer to.
Completion, I will say, though for us.
We have very little inventory, that's near completion that needs to be delivered.
By the end of the year as Chris stated, we really only have roughly 20% left to go in terms of sales.
So for from the standpoint, we have a little bit of Optionality in time to.
To find different ways to continue to keep our absorption rate up as opposed to having to do any kind of real cells to get product moved.
With that being said is that we do anticipate with the way that we still see strong interest around our communities by way of traffic and through our website traffic investigating our communities that there'll probably again be a bit of a bump that we usually experience.
Right around that time.
No.
Generally I think we are coming off of those four plus net absorption rate down into a 3435, and we see that holding steady.
Okay.
Thank you.
And you also talk about I know you mentioned some of our financial incentives rate locks and.
Great.
Have you started adjusting any of your base prices yet.
Have you seen competitors start to do that yet.
We have done very very little adjustment to base prices as I said, we're not in a situation whereby we have any inventory.
Coming to the point of which they're standing inventory and we need to move it. So we're in pretty good shape there.
For the most part I would say across the country.
We may have had one or two price adjustments on some phasing of some houses that may have had some conditions that were not optimal and we're kind of coming in the sequence and so we moved along but maybe.
This has been negligible price adjustments from a competitor standpoint.
In places in Phoenix Inland Empire in Southern Florida, we've seen some.
Price pricing changing going on there.
And the landscape that.
It Hasnt really been.
Very material, it's been very focused and targeted.
Clearly on quarter end or year end deliveries.
So it seems like the industry for the most part is purely focused on driving absorptions.
Through.
Level of incentives around options.
<unk> and then through their mortgage financing.
Got it perfect and then my last question I'm, obviously your land position remains strong can you provide and I'm not sure. If you have in the past, what's your kind of lot acquisition and development spending within the quarter and kind of thoughts on that spending in the current environment for the rest of the year given your current land position.
Yes. This is this is Chris.
I don't have the exact land spend for the quarter.
Overall, we are being very disciplined on our land spending right now.
And making sure that we are meeting all of our targeted.
IRR hurdles, so any new land spending goes through a very disciplined review not that it wasn't before but it's more focused.
And.
And we're being very judicious on any land spending in this environment and really have such a great land position that we're very comfortable with where we are and heading into 2023.
And making what we have.
For what our needs are.
Great. Thank you that's it for me.
Thank you and again if you have a question. Please press Star then one.
Our next question comes from call Richard <unk>. Please go ahead.
Thanks, Hey, everybody will be doing well.
Mike I just I wanted to ask you about your comment about change and psychological demand in Phoenix.
Central Florida is your sense. This is related more to fear of changes in home prices or is this more macro sort of related to jobs in the economy.
Okay.
No I think it's the former not the latter Karl.
What's interesting and we've had this discussion internally is that as we sort of head into these headwinds I don't think it's structurally around.
The idea that there is.
A fundamental problem with the economy I mean people have jobs people have great liquidity in savings people have great credit scores. There is still a very strong desire as I said earlier about.
The interest generally within our communities and what we're offering.
I will say that there is.
Lots of concern around what's going to be happening with home pricing.
Are we.
Buying at the at the high watermark in a community that seen price appreciation going up 30% and how far will retract.
I think there is just sort of that I don't want to be the last one and then sort of feel like the pool that I paid too much.
Pricing has kind of changed.
Change down the road. So we're doing a lot in terms of trying to educate.
Those prospects in terms of what is going on in the market today with the lack of inventory that rates are still relatively low historically, we're offering some great entry.
Entry level.
Mortgage products, they can keep their mortgage payments down.
Just to get them comfortable that it's still a great time to buy a house and that the buying decision of sound.
Okay and then.
Talk a little bit about the financing shift to some degree I am curious how consumers, especially younger consumers are reacting to arms.
And I'm, just I'm wondering if that product regardless of the shape of the curve I am wondering if that product is is attractive or they think that it's attractive or if younger consumers are thinking about what happened sort of last downturn and what how arm became naughty word and I'm just sort of interested in that in that shift and if youre seeing that dynamic work.
Folks really stand look just by me down or like me on a fixed rate.
Yeah, Carl this is Chris.
Take that.
Just to give you a couple of stats just within our our backlog that uses our mortgage affiliate.
Less than 10% of the backlog is priced on an arm.
And actually less than <unk>, 1% has anything to do amortization less than 30 years. So.
So we're seeing everything continue to be in that 30 year.
Amortization side and.
And really more on the fixed rate and conventional and jumbo.
Okay makes sense great I appreciate it thanks.
Thank you.
This concludes our question and answer session I would like to turn the call back over to Mr. John over closing remarks. Please go ahead.
Thank you all for joining us on our second quarter earnings call. We look forward to speaking with you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Yeah.