Q3 2022 Landsea Homes Corp Earnings Call
Yeah.
Welcome to the land Sea homes Corporation third quarter 2022 earnings call.
At this time, all participants will be in a listen only mode.
Later, we will conduct a question and answer session.
I would now like to turn the call over to your host drew Mackintosh of Macintosh IR Mr.
Mr. Mackintosh, you may begin sir.
Good morning, and welcome to <unk> homes third quarter 2022 earnings call.
For the call begins I would like to know.
Note that this call will include forward looking statements within the meaning of the federal Securities laws.
Lanthier homes caution that forward looking statements that 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 19 homes in its filings with Securities and Exchange Commission.
Accordingly, 40 look 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 in deciding whether to invest in our securities.
We do not undertake any obligation to update forward looking statements reflect events or circumstances. After the date they were made.
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 access to remains the home's website and SEC filings.
Hosting the call today are John home landscapes, Chief Chief Executive Officer, Mike for some president and Chief operating Officer.
This quarter, our Chief financial Officer.
I'd like to turn the call over to John .
Good morning, and thank you for joining us today as we go over our results for the third quarter of 2022.
An update on our current business conditions and give some insight into our company's strategy going forward.
Lastly homes posted strong profitability in the third quarter.
<unk> delivered a record 543 homes during the quarter with Asps, increasing 9% year over year to 601000.
This produced a 56% improvement in our top line with revenue growing to $335 6 million.
We also improved our home sales gross margin by 480 basis points, which all translated to net income of $20 million or <unk> 49 per.
Diluted share.
130% increase over the third quarter of 2021.
I want to thank all our team members for producing such great results this quarter and for executing at a high level. Despite continued operational headwinds.
I, especially want to call attention to our Florida Division, which had an excellent job of preparing for managing through the impacts of hurricane.
In total we had 38 deliveries are poised division equating to $14 3 million in revenues that were pushed into the fourth quarter due to hurricane yet.
Those homes have since closed.
Teams did an excellent job getting things back on track after the storm passes.
We are extremely fortunate all things considered given the severity of the hurricane as known employees sustained serious injury, and we were able to get our communities back up and running in a short amount of time.
Even with these challenges, Florida still deliver 45% of our homes.
Third of our homebuilding revenue.
Our strategy of expanding into strong growth markets continue to show results.
Although we produced exceptional results this quarter, we along with the rest of the homebuilding industry continue to face headwinds.
As has been widely reported the recent run up in mortgage rates has resulted in a difficult sales environment for our industry.
Higher financing costs turned many new homebuyers from purchasing April go into third quarter and led several buyers in our backlog to reconsider their purchase as.
As a result, our net order results for the quarter were down 7% compared to third quarter last year, and our cancellation rate was 9% of our starting backlog.
Mike will provide additional detail shortly but our response to the softer sales environment.
Implemented several initiatives to spur sales activity and protect buyers in our backlog we plan on staying competitive in the marketplace by responsive by being responsive to any changes in market conditions.
The consumers' needs.
At the same time, we think it is important in this environment to stay focused on strengthening our balance sheet generating cash and increasing liquidity.
This includes the re evaluating all of our land spend for 2023.
In 2022, we estimate we will spend roughly $450 million on land acquisition and development and.
And as we move into 2023, assuming no changes to market conditions. We expect this to go down at roughly $400 million.
With respect to our pipeline, we feel we're in a great position to navigate today's uncertain market. Thanks to the asset light nature of our land portfolio.
With 57% of our lots controlled via option agreement, we have the ability to work with landowners to adjust pricing and takedown schedules are levels that reflect the more challenging market conditions.
In addition, we purposely negotiated provisions in our option agreement that allow for extended loss take out schedules. So that we would be able to have additional flexibility during times like these.
We plan on being disciplined with future lot takedowns are prepared to walk away from deals that no longer make sense in todays market.
In fact.
<unk> owned and controlled decreased 5% sequentially from 13017 last quarter to 12410 this quarter.
And much of the land we do have on our books was underwritten between 2019, and 2021 and reflects home price assumptions that were much lower than today's levels. So.
So we feel good about the communities, we are bringing to market in the coming quarters.
Additionally, our acquisition of Hanover family builders is producing stronger asps and gross margins than our underwriting.
We're experiencing faster synergies anticipated by combining our operations in Florida.
While we expect the sales environment to remain challenging in the near term.
We remain optimistic about the outlook for the industry and our company over the long term.
There continues to be a lack of existing home inventory in our markets, particularly at the more affordable price points and the cost of Repsol will try that.
Hi.
In addition, we continue to see a strong desire for home ownership by the millennial buyer cohort, which is looking for the customization and state stability that new home provides.
We believe that landscape well position to take advantage of these trends by focusing on a more affordable segments of the market by offering homebuyers the latest new home automation.
Our high performance halls.
Our unique offering home offerings are a true differentiator in a market provide a clear competitive advantage versus the competition.
With that I'd like to turn the call over to Brian will provide more detail on the operational aspect of our business.
Thanks, Sean and good morning to everyone I would like to Echo John's sentiments about our company's solid execution. This quarter. The team did an outstanding job in this environment of short interest rate increases continued supply chain issues and even a hurricane right at quarter end and still produced a very profitable quarter for our shareholders.
As John mentioned, our order activity in the third quarter was adversely impacted by the run up of mortgage interest rates, which have more than doubled since the beginning of the year.
The sharp increase in interest rates has created a more difficult sales environment for our industry and has put a strain on new home affordability, but we are quickly adapting to this new reality.
We are focusing our efforts in the near term on closing out our homes in backlog, while looking for ways to improve our overall value proposition home offerings and cost structure to stay competitive in the marketplace.
We have many levers to pull to generate sales activity and can adjust our operational practices to meet the needs of today's buyers. We are keeping with their mortgage affiliate Nancy mortgage to produce product to help buyers get the payments they need to move in these.
These initiatives include financing incentives to lower a buyer's monthly payment.
Leading rate locks rate buy downs.
Pre purchasing attractive financing Paul credits that can be used towards options and upgrades.
And attractive pricing and quick move in homes.
The third quarter incentives represented roughly three 4% of our.
Our gross new order value.
We remain selective on price reductions focusing on inventory ready to move in and reselling cancellations.
In addition to the adjustments we are making on the sales front the core tenants of our strategy moving forward will be to focus on streamlining our cost structure and to remain disciplined on the land front.
Over the last few years, we have incurred significant increases to our building costs due to affordable upwardly trending the housing market.
Now the incidents have softened we will be working with our suppliers and trade partners to make sure that the prices, we pay for labor and materials reflect today's market dynamics.
We have already seen some relief with respect to the costs associated with the front end of the build process and expect this relief to show up on the back end once the effects of the current slowdown work their way through the system.
Additionally, we are working diligently on improving our production cycle times to further shorten the distance between sales and closings, which is already bearing fruit.
In the fourth quarter, our focus remains on protecting and closing our existing backlog, which ended the quarter at 1285 homes.
This will also provide a good starting point for in momentum for 2023.
As John said, we plan on staying competitive markets with respect to pricing and incentives and should have a healthy amount of quick moving inventory for buyers who are looking to shorten the time between sale and close it.
At the end of the quarter, 37% of our homes under construction were spec starts where we plan to sell closer to move in date and we had 54 finished homes ready for move in.
We are fortunate to have a group of seasoned veterans Rodney our local operations, who have been through this times before in our dosing off their playbooks to weather the storm.
Overall, we are encouraged by the way our company performed in the third quarter and our outlook heading into the end of the year as I mentioned, we have 1285 homes in backlog worth a little over $740 million in value a volume increase of 18% over third quarter last year, and a 22% increase in <unk>.
Value.
This backlog puts us in a great position to deliver another quarter of profitability in the fourth quarter.
In short while there is still a lot of uncertainties surrounding the direction of interest rates the economy and the housing market conditions.
<unk> has the right strategic focus financial strength and operational expertise for whatever comes next with that I'd like to turn the call over to Chris who will provide more detail about our financial results this quarter.
Thanks, Mike and good morning, everyone as John and Mike said, we are pleased with the results this quarter delivering $335 6 million in revenues at 57% improvement over third quarter of last year, putting us past the $1 billion Mark for the year. The improvement in revenues was driven by a 9% year over year increase in our average.
Selling price to 601000 and home deliveries at 543, or 43% increase over third quarter last year. Our diversification strategy continues to show results with a more balanced portfolio performance across California, Arizona, and Florida, with California, contributing 36% of our revenues.
Florida, 32% in Arizona, and 21%. This compares to third quarter, 2021, where California, Arizona represented 53% and 30% of our revenue respectively.
In addition, we closed 11 homes that produced $28 1 million and our New York operations and only have five homes remaining to sell.
New orders in the quarter.
Totaled 257 down 7% from last year as we felt the impact of the sharp increase in interest rates and buyers waiting on the sidelines for more solid direction from the federal reserve.
And as Mike said to counteract some of this impact we have been working with land seen mortgage to address buyers payments, including locking in 30 year fixed mortgages below 5% and have seen momentum from these efforts.
Lengthy mortgage has a capture rate of just over 75% and 5% of our buyers in California, and Arizona are cash buyers the credit profile of our buyers in backlog the east Lansing market remained strong across all divisions average credit score is 720 loan to value ratios are coming in at 84% and an average household income.
These buyers is roughly 150000 with Californian taxes coming in above that level in Florida, and Arizona just below as you would expect.
The overall slowdown in net orders. However, it was reflected in our absorption rate for the quarter.
We ended the quarter with an average of 57 selling communities up from 35% in third quarter last year and all of our segments with the exception Irvine, Arizona hovered around <unk> absorptions per community.
Arizona continues to be the less of that its affordability concerns we anticipate closing the year with 60.
<unk> selling communities and expect to average roughly $70 million and 2023.
For the quarter home sales gross margin improved 480 basis points on a GAAP basis from third quarter, 2021% to 29% and 580 basis points on an adjusted basis, which excludes purchase price accounting and capitalized interest to 27, 2%.
In the third quarter, our SG&A expense was $42 2 million or 12, 9% of home sales revenue. This compares with prior year SG&A expense of $29 2 million or 14% of home sales revenues, we will continue to monitor and make adjustments to our overhead cost structure as the market continues to evolve.
Our tax expense for the third quarter was $4 million, which represents an effective tax rate of 16%, reflecting the inclusion of the federal energy efficient home credits, which were extended as part of the inflation reduction Act that was enacted into law in August of this year.
EBITDA in the third quarter totaled $36 8 million versus $22 6 million for the same period last year year to date EBITDA was $102 4 million.
Third 16% increase over $47 5 million EBITDA reported for the first nine months of 2021.
The strong top line growth improved operating margin and lower tax rate helped drive an 85% increase in net income compared to the third quarter of last year to $20 million or 49% <unk> 49 per diluted share.
The company's prior year net income was $10 8 million or <unk> 23 per diluted share.
On an adjusted basis. The company produced net income of $27 6 million or <unk> 69 per diluted share an increase from <unk> 18 per share in the third quarter of last year.
Turning to the balance sheet, we ended the quarter with 198 million in liquidity, which includes a $117 million in cash and $81 million in availability under our unsecured revolving credit facility.
During the quarter, we increased our credit facility availability by $20 million and we remain committed to continuing 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 the quarter with $585 1 million and total debt and net debt $467 7 million a ratio of debt to capital at the end of the quarter was 46, 1% and our net debt to net book capitalization ratio was 46% as we enter our strongest closing quarter, we expect to generate cash as the improvement in our leverage.
Levels now.
Now I'd like to provide some guidance for the fourth quarter.
That includes of course based on our best estimate as of today with the current market condition as inflation and interest rates continue to change their impact may affect our overall results with the recent changes in interest rates and change in sales pace, we anticipate fourth quarter, new home deliveries to be in the range of 750 to 800 units and delivery.
Asps expand the range of 560000 to 580000 and we.
Dissipate GAAP home sales gross margins to be in the 20% range with adjusted gross margins hovering around 26% to 27%.
With that it concludes our prepared remarks, and now we'd like to open the call up for questions.
If you would like to ask a question. Please press star one on your telephone keypad now.
You will be placed into the queue in the order received.
Please be prepared to ask your question when prompted.
Once again, if you have a question. Please press star one on your phone now.
And our first question comes from Matthew Bouley.
Your line is open.
Hi, Good morning, you have Elizabeth Lane on for Matt today.
So I just kind of wanted to get started on asking about incentives.
Now that you mention that you are seeing some momentum on the financing incentives that you have put in place.
Do you mind talking a little bit more specifically about what youre seeing maybe in Arizona, and California, specifically, given the affordability pressures in those areas.
And are you anticipating that you'll need to take any price reductions or maybe you could just generally talk about how youre thinking about financing incentives relative to potential price discounts in the future.
Hi, Elizabeth it's Mike.
Generally I would say that it's.
It's really a mix of incentives and selective price reductions for us currently.
In some markets are stronger than others. Some are responding differently to different adjustments that we're making in terms of our ability to drive traffic and to get to closing so.
For the most part we're seeing really incentives around our.
Mortgage programs that were offering spin.
Specifically around a fixed rate program through a buy down that allows for a lower monthly payment.
And then sort of followed up through any sort of price adjustments that need to take place, but we havent had wholesale price reductions nor have we gone to one.
Specific incentive across the country again, our business is unique that is very local and theres responses that happened locally and that's where we're adjusting because at the local level.
We're listening to our teams and trying to provide them with the tools that they need to be successful against a competitive environment.
Okay. Thank you that's really helpful.
Then kind of touching on the van strategy, a little bit and talking about.
Potential option like write downs or impairments would you mind talking a little bit about how you're looking to that kind of going forward.
Can it continue to fall I know you said that.
Most of your land was acquired between 2019 and 2021.
The land Thats been acquired more recently, how are you kind of thinking about those prices and the relative risks there.
Hello. This is John how I can speak to that.
I would say that where we.
We've gone back and underwritten in all of our land deals and updating that to current market conditions.
We are.
Walking away from certainly deals that we've been looking at.
And might have been tied up in terms of deposits.
Unfortunately today, a lot of that has been refundable deposits and due diligence expenses that we might have.
Spent.
So we are pushing.
Deals out.
Canceling them altogether, if they don't make sense under current market conditions.
If market conditions were continued to worsen.
We have the ability as we mentioned to go back to our land owners asked for extensions price reductions.
I think a lot of cases, we will get that given that a lot of our options.
Have some built in extensions in them.
At the same time, if there are land owners are not willing to give price reductions then we will look to potentially walk away from some of those options in the future but to date, we haven't had any write offs.
Okay. Thank you so much.
Thank you.
And our next question comes from Alex <unk>.
Your line is open.
Good morning, guys nice quarter.
Thanks, Alex.
Couple of questions here.
First let's start with average selling price so average selling price in the quarter was.
<unk> one if we kind of exclude New York It looks like it was right around $5 60, which is kind of your guidance for the fourth quarter.
How do you think about Asps.
As we look out into 2023.
Alex This is John .
I think as we have spoken before our focus is continue to be in the entry level and the first move up segment.
And you can see how we've really pivoted out of.
These higher ASP markets, particularly California and also in.
And then selling out of our New York properties as you mentioned, so as we're growing our portfolio.
And diversifying our business in markets, like Florida, and Texas, and really growing that business for us.
And as that represents a bigger percentage of our overall mix of units like Chris mentioned Youll see our asps.
Start to moderate and probably continue to come down a little bit.
For a lot of those reasons, because it's driven by our business strategy and really growing in those markets.
That's very helpful. And then can you talk a little bit about sort of the cadence of new orders.
Last couple of quarter or last couple of months, particularly in October as it relates to maybe September or August .
Yeah, I'll have Mike take that sure.
Obviously.
I think through all the information that's coming through Alex that the market continues to deteriorate and we're seeing that as well at our communities primarily in Phoenix, which seems to be really ground zero for what I would call for price correction in.
In the marketplace.
I haven't seen it as strongly in California, and Central Florida for Us is holding up.
Fairly well so.
Each again as I said earlier to Elizabeth each market.
As a unique unto itself and has its own dynamics.
So we're seeing some of that flow through and we're adjusting accordingly.
That's helpful and then.
Our outlook for 2023 includes a number of.
New community openings.
So I appreciate that guidance.
Think about sort of absorption targets for 2023.
What about obviously a.
Challenged market here understanding thats kind of the net absorption. This quarter was one five what do you think kind of like a good near term target is for you is it too is a two and a half is it something higher.
Right. This is Mike again, Alex.
What we've been seeing.
As we come towards the end of the year and we've seen our competitors cleaning up the end of their fiscal year.
There has been some inventory.
Flush out.
That has created a different type of dynamic against some seasonality, although I would say that the seasonality is not really.
The issue.
So.
As it has been in the past.
I think that.
US generally we believe that there is a natural flow to our communities that need to be maintained and that roughly is around three point O.
You can straddle that at a two and a half maybe a three five and that sort of a nice nap.
Natural flow of the community in terms of absorptions.
We do believe that our business has to have momentum in it sales into lubricant of everything we do in terms of our organization.
So we really gear our business around.
Our offerings and incentives and price discounts to maintain sort of roughly around that three point of sale space.
Very helpful. Thank you.
And our next question comes from <unk>.
Carl Reichardt.
Your line is open.
Good morning, guys how are you.
Great.
Fair enough.
Wanted to be clear about this that.
The 70 communities for 2003 that target is that a period end target or an average target and then as youre looking to ramp the individual markets I'm.
Assuming Texas is the place where the growth's going to be most significant.
How does that 70 lay out between the other the other three major markets.
I call. This is John how are you.
Jonathan average so a lot of that obviously is from.
Our growth in Florida.
Then.
Coming growth in Texas, So this year.
Has been particularly.
Year of growth for us as is reflected in our numbers.
And we will have more communities that obviously opened in those markets next year, but we're also maintaining our scale that we have in Arizona, and California as well too. So we do see that pretty nicely distributed between each of those respective markets with Texas, probably still catching up.
You said a lot of other builders have said about the front end of that.
Of the process the construction process beginning to ease up some in terms of labor availability can you define where front end and so is this through frame or are we getting too.
Getting are beginning to frame at all are we starting to see any kind of movement in the mid <unk> to the finished trades.
Hi, Carl it's Mike.
Generally for US it's two components on the front end one is from the sales of the start in which we saw a huge lag back coming out through Covid.
Normally you could go to a study.
And pull a building permit within two weeks in some cases it turned into three months, which was a huge drag in terms of the overall cycle time and holding a buyer in escrow.
That has adjusted meaningfully meaningfully.
Meaningfully for us So that's really really great news is we're seeing cities.
Coming back online and inspections happening quicker than planned check.
Done faster so from that standpoint, that's been great.
We're also seeing some positive adjustments in our cycle time is in the front end trades around really the rough.
So it would be your framing your concrete your plumbing your HVAC.
Electrical.
Those front end trades are really kind of pivotal in terms of giving you really.
Either.
Real strong head start going into that house, Bill time, where it can really lag as those things back up and then there isn't the capacity further down the cycle time to catch up with it. So we're.
Seeing our.
For instance, our concrete our foundation guys actually getting to the site when they are scheduled to get to the site, which is victory number one.
And then we're seeing a pretty consistent follow up on the trades on their upside coming through.
We've experienced on the backend is really just the folds of the finish the trim out on the plumbing the finished carpentry.
Some electrical where that is.
Huge amount of.
Inventory rolling through right now and they've been pressed in.
Ah stretched and that we hope going into next year well.
Will alleviate itself for instance, let me just sort of give some perspective in Arizona.
And roughly going through the last two years roughly around 3000.
Starts per month that has trimmed back down to about 1100. So that's taken a lot of pressure off the trade pools out there and so we're starting to see that come through.
Okay.
Really helpful color. Thank you and then just my last question I think you said you had 54 finished specs and of the end of the quarter whats the whats the ideal number for you as you guys look at your business in a normal time would you want to have any finished specs per store, one or two or whats the kind of number that you target in a normal environment.
This is Mike again.
Finished spec as a euphemism for standing inventory, which is never yes. It is and so for me.
The answer is zero.
The liver loved to have a house setting their unoccupied. That's finished however, when we're talking about the spec starts our specs going through the system.
We generally feel like that if you had a start of 10 units on our line.
If you're out there with three to four possibly depending upon where you are at maybe three and thats rolling through that sort of natural for us. It's always been kind of the case, but of course, if you have <unk>.
The entity that is attached.
He's going to inherently have a higher spec level when your starts because youre starting six to eight to 10 in the building and so those will not always be sold.
And some don't sell as quickly as others, particularly the inside units of a building seemed to lag and so thats, our sort of escalator elevates spec inventory so.
And for Us.
We monitor it heavy.
We don't like inventory to drag on our whip.
It's an efficient use of our capital so for us again.
If you have two or three that are four or five maybe.
Community, that's okay, but we don't like to get much more than that we want them sold we want people living in our houses.
I appreciate it Mike Thanks, so much for the help thanks guys.
Carl.
And as a reminder, if you do have a question. Please press star one on your telephone keypad now.
And our next question comes from Alex Barron.
Your line is open.
Yes. Thank you.
I wanted to just.
<unk> recently about New York I saw there's only seven lots remaining so.
I think by my count that means Theres only five homes left to sell is that can be like your last community and you guys are.
Closing up that state or is there some future beyond that.
Hey, Alex This is John Yes, that's correct.
We have one building left.
And thats for retina, 14th and six.
And the 50 units.
We've only got five left to sell.
Actually probably for us for now.
Yes.
Okay, but I am saying are you guys exiting that market. After this building is done.
Yes, correct.
This would be our last asset and then the capital.
The return, we would reinvest into our horizontal business and it will be.
No longer in New York.
Got it.
You also.
Mentioned that I think Arizona was experiencing more sharp price declines and I see your orders were down somewhat in that state.
What do you think is causing that or what's different about this state and as a sign of the future or there's just something unique to this market.
Hey, Alex this is John specifically around the Arizona in our Phoenix market.
I think that market has probably declined more given.
A more commodity.
Driven market.
There's also a lot of competition.
There was a much faster ramp up in pricing there as well and it's also been very very active with the SFO and BFR community out there I think a lot of that has also slowed down and that's why there may be as bullish of inventory, that's really coming through the end of the year like Mike mentioned.
And a lot of.
Homebuilders that might be cleaning up at the end of their fiscal year are taking more drastic price reductions in that specific marketplace.
Got it.
And if I could ask one more.
Year starts.
In the quarter and what is your general approach to.
Spec building versus build to order is given everything thats going on in lung.
<unk> build times and rising interest rates, how are you guys positioning for that and what were your starts in the quarter.
Hey, Alex this is John again.
Disclose that level of detail, but I can say that we are.
Sure.
Managing our starts to align with our sales as well Mike did mention earlier in the prepared remarks at just under 40% of our homes for the quarter.
Our spec starts so we do believe in maintaining a minimum.
Volume through our business.
<unk>.
Sales orders.
<unk> at three point now.
Per community per month is what we believe is.
The lubricant that we need to continue to run our business efficiently.
Got it thanks a lot.
Thank you.
And we have a question from Alex Roger.
Your line is open.
Thank you my questions have been answered.
Thank you.
And we have no further questions in queue at this time.
Well, thank everyone for joining our call today and we appreciate the attention.
That concludes today's conference call.
Thank you for attending.
The host has ended this call.