Q4 2022 Landsea Homes Corp Earnings Call
Speaker 1: The.
Speaker 2: Ladies and Gentlemen, Greetings and Welcome to the Land, Sea, Homes Corporation 4th Quarter 2022, Earnings Conference Call.
Speaker 2: At this time all parts and lines are in a listen only mode.
Speaker 2: A brief Q&A session will follow the formal presentation.
Speaker 2: If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad.
Speaker 2: As a reminder, this conference is being recorded.
Speaker 2: It is now my pleasure to introduce you to Drew McIntosh. Please go ahead.
Speaker 3: Good morning and welcome to Lansing Homes' fourth quarter of 2022 earnings call.
Speaker 3: Before the call begins, I would like to note that this call will include forward-looking statements within the meaning of the federal security laws.
Speaker 3: Lansy Homes cautions that for looking statement are subject to numerous assumptions, risks, and uncertainties, which change over time.
Speaker 3: These risks and uncertainties include but are not limited to the risk factors described by Lansing Homes and its filings with the Securities and Exchange Commission.
Speaker 3: Accordingly, forward-looking statements should not be relied upon as representing our view as of any subsequent date. You should not place undue reliance on these forward-looking statements and deciding whether to invest in our security.
Speaker 3: 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.
Speaker 3: Additionally, recommendations of non- GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed when Lanty Homes website and in its SEC file.
Speaker 3: Hosting the call today are John Ho, Nancy's Chief Executive Officer, Mike Fawson, President and Chief Operating Officer, and Chris Porter, Chief Financial Officer.
Speaker 3: With that, I'd like to turn the call over to John .
Speaker 3: 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.
Speaker 3: I see homes generated total revenue of over 1.4 billion in pre-tax income of 101 million in earnings of $1.70 per diluted share for fiscal year 2022. All records for our company. All records for our company.
Speaker 3: We close 2,370 homes during the year, representing a 45% increase over 2021, expanded home sales growth margin by 290 basis points to 20.4%.
Speaker 3: We also return capital to our shareholders in an earning accretive manner through our share repurchase program to increase our book value per share by 20 percent to $16.4.
Speaker 3: We achieve these financial and operational milestones while growing our presence in key home building markets, maintaining a strong balance sheet.
Speaker 3: 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.
Speaker 3: While 2022 was a record-setting year in terms of profitability, it was also a year in which the demand environment became more challenging.
Speaker 3: due to a rapid rise in mortgage rates and a subsequent decline in home buyer confidence.
Speaker 3: This change in market dynamics caused buyers who were in the market for a new home to become more cautious.
Speaker 3: and prompted buyers in our backlog to cancel their purchase contract.
Speaker 3: As a result, our net new ordered activity in the third and fourth quarters dropped off significantly as compared to the prior year.
Speaker 3: We believe this is a natural reaction to the sudden change in affordability brought by the rise in interest rates. We have taken action through the use of incentives and price adjustments to regain momentum on the sales run.
Speaker 3: Fortunately, we have begun to see some improvement in market-to-conditions starting in December , and this carried into the new year.
Speaker 3: We expect near-term demand conditions to remain volatile and subject to changes in mortgage rates and other macro factors.
Speaker 3: However, we are encouraged by the success of our sales efforts to start the year.
Speaker 3: In response to the more uncertain demand environment, we have placed an increased emphasis on cost reduction, balance sheet strength, and cash flow generation.
Speaker 3: 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.
Speaker 3: We have experienced significant input costs inflation over the last few years and expect those trends to reverse as the current slowdown works its way through the homebuilding ecosystem.
Speaker 3: We are also working on establishing more favorable vendor agreements with our national suppliers that factor in our increased size and scale.
Speaker 3: 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.
Speaker 3: We've also made changes to our overhead cost structure, reducing headcount by approximately that 8%
Speaker 3: which would improve our operational efficiency and expense leverage.
Speaker 3: 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 and that will allow us to operate more effectively as a national home builder.
Speaker 3: This move should also signal our commitment to growing our home building presence in that state.
Speaker 3: With respect to the balance sheet, we ended the year at the low end of our targeted debt-to-cap range at 41.6%.
Speaker 3: We also had 141 million in cash.
Speaker 3: and 160 million available under our revolving credit facility.
Speaker 3: giving us plenty of liquidity to operate from a position of strength.
Speaker 3: We also extended the term of our credit facility, pushing out the maturity date to 2025.
Speaker 3: 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 our operations, should more favorable opportunities arise, or return capital to shareholders.
Speaker 3: 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.
Speaker 3: We accomplish a lot in 2022 from both strategic and financial standpoint that has poised us well to continue to drive our home building operations to the next level.
Speaker 3: 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 focused, and the appeal of our high performance homes.
Speaker 3: Our strong financial condition gives us the stability to operate with confidence during uncertain times and take advantage of opportunities should they arise.
Speaker 3: As a result, I remain very confident in the future of Lansing Homes.
Speaker 3: With that, I'd like to turn the call over to Mike to provide more detail on our operations.
Speaker 4: Thanks John and good morning to everyone on the call. Lansey 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 team has done an excellent job throughout the quarter communicating with buyers and buyers.
Speaker 4: which led to a disappointing order performance for the quarter.
Speaker 4: 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.
Speaker 4: We understand that most buyers are trying to solve for a monthly payment that fits their budget.
Speaker 4: And we have been able to address their affordability needs through some combination of base price reduction and financing incentives.
Speaker 4: We believe that this is a clear sign that there is demand elasticity in our markets and that there continues to be motivated new home buyers at the right price.
Speaker 4: We have recently seen an uptick in buyers coming from single family rental situations.
Speaker 4: 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 a 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 of labor and materials availability.
Speaker 4: be a great tailwind for industry and will allow us to turn our inventory more quickly.
Speaker 4: We are starting to see a real shift in the marketplace.
Speaker 4: 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 pitcher. We are excited about the future in the markets we are in and we believe we have an opportunity to gain market share thanks to our focus on affordability.
Speaker 4: and are compelling and differentiated high performance homes series.
Speaker 4: 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.
Speaker 4: 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.
Speaker 5: Pre-tax income for the quarter was 34.4 million, while net income was 25.6 million or 62 cents per diluted share. This compares to 49.2 million in pre-tax income and 38.4 million or 83 cents per diluted share in the fourth quarter of 2021.
Speaker 5: As both Mike and John discussed earlier, we faced increase incentives in price discounts as we delivered high margin backlog during the quarter and saw for the price clearing market. Our home sales gross margin decreased 250 basis points compared to the fourth quarter of 2021.
Speaker 5: to end at 19% due primarily to these items. 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 solidified our record year where we delivered...
Speaker 5: growth in Arizona. The expansion in Florida will be delivered 1106 homes and 473 million in revenue. In our New York project providing 111.4 million in home sales revenue.
Speaker 5: 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%.
Speaker 5: 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 waited on the sideline for a more solid direction from the Federal Reserve.
Speaker 5: The overall slowdown and net orders was reflected in our absorption rate for the quarter at 0.5 homes per community.
Speaker 5: 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.
Speaker 5: And for the full year of 2023, we expect to grow our year-end active community accounts by 15% to 20% as compared to year-end 2022. To address some of the buyer's sensitivities, we have continued to work with Lansing Mortgage to address buyer's payment needs.
Speaker 5: including locking in 30 year fixed mortgages below 5% and have seen good momentum from these efforts.
Speaker 5: We also began Lansy Title in early 2023 to further enhance our homebuyer's experience.
Speaker 5: 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.
Speaker 5: 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.
Speaker 5: As John said earlier, we will continue to monitor and adjust our overhead structure as the market of halls.
Speaker 5: 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.
Speaker 5: For the year, our tax effective rate was 25.1%. For 2023, we expect our tax rate to range between 25.5% and 26%.
Speaker 5: 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.
Speaker 5: After we paid down $80 million during the quarter, we also extended the maturity in additional year and remained committed to continue to expand our lending relationships and borrowing capacity.
Speaker 5: As John stated in his opening comments, we are focused on strengthening our balance sheet and preserving liquidity in these uncertain times.
Speaker 5: 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.
Speaker 5: 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 condition. As inflation and interest rates continue to change, we will continue to see a decline
Speaker 5: 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 ASP is to be in the range of $520,000 to $525,000.
Speaker 5: We anticipate gap 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 marks and now we'd like to open up the call for questions.
Speaker 2: Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session.
Speaker 2: If you would like to ask a question please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker 2: You may press star 2 if you would like to remove your question from the queue.
Speaker 2: For participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys.
Speaker 2: Ladies and gentlemen, we will wait for a moment while we poll for questions.
Speaker 2: Our first question comes from the line of Alex Riggle from B Riley. Please go ahead.
Speaker 5: Thank you very much and nice quarter gentlemen, tough times here, but it seems like you're managing through it well. John or Mike, could you talk a little bit about some of the regional demand trends that you're seeing across your four state territories?
Speaker 4: Yeah, Mike. Sure. Alex, it's Mike. I would say really coming to the end of December to where we are today, that we have had a very nice bump back in all of our markets through all of our regions and through all of our demographics. um
Speaker 4: We were not can with that this continues, but we have been very excited about week over week sales adsorption paces at all of our communities. And it seems like we're finding the sweet spot between our price recalibration and what we're offering in terms of financial incentives to drive the right type of traffic and to get the right adsorption rates back into our.
Speaker 5: and how that's changed.
Speaker 6: Well.
Speaker 4: The cancellation of the fourth quarter, particularly in Arizona, was extraordinarily high. We basically ran up to as close to 72% in that market in general. We're ranging between probably 10 to 40% in our other markets. But since that time, Alex, it has normalized back down between.
Speaker 3: bit about sort of tech strategy versus build to order.
Speaker 4: Well, right now we have roughly around 540,000 under construction, approximately around a hundred or so or nearing total completion. That's dispersed around all of our 58 communities, so on average it's not a lot. Roughly around two ish. I would...
Speaker 4: So we see it as I guess what maybe some of our industry peers are talking about, sort of, expect inventory strategy around sales. We're deploying a lot of those same kind of methodologies and processes to do exactly that. So if we have a house near completion.
Speaker 4: We're highly successful in getting that sold and closed within that 45 to 30 day period.
Speaker 2: That's great. Our next question comes from the line of call record from BTIT. Thanks, morning, guys. Alex just asked one of my questions, but I didn't want to ask about the lot count. So I think 5300 owned.
Speaker 2: What percentage of those are fully developed and what your guess is to what your development spend might be this year either on take-and-down, a lot of options or finishing out the stuff you own already?
Speaker 3: Hey, Carl, this is John . Hey, John .
Speaker 3: So that's about the loss that we own. That's about 45% of our total lot count. And as we've shared before, our goal is to really be building a home on that lot within 12 to 18 months. So I would say most of those lots are that we...
Speaker 3: either we own and have taken down are very close to starting homes on within that time period. Anything that would require entitlements or require more land development, we typically have used more of a structure.
Speaker 3: transaction, we'll be taking down that closer to when it's in the Initial Art Condition.
Speaker 3: As it relates to executing on our options this year, I think we shared in our prepared remarks.
Speaker 3: So anything that we believe still meets our underwriting guidelines will still execute on anything that we believe Maybe challenge whether it's by pricing or by whether by costs We're re-engaging with the landowners and the sellers to renegotiate
Speaker 3: some of that, the transaction structure and sometimes pricing as well. So our land spend will be down this year, I would say probably in that 20 to 25 percent range overall this year, given how fast we grew in 2022 with expansion in Florida.
Speaker 2: And I appreciate that detail John . Thanks and then just on the side note. Did you walk from any option contracts this 4th quarter? And if you did, what was what were the charges associated?
Speaker 2: We didn't walk from any of the fourth quarter. Last question, just on the community count growth, Chris, I think you said 15-20% target for 23. Is that result in any significant mixed adjustments geographically? Obviously, Texas is coming. I know, but just as an obviously New York going away.
Speaker 2: But roughly, what do you think your split among communities might be if you if you hit that target in 23 in terms of geographical share? Thanks. Yeah, it'll be about the same split as it was at the end of the year. You know, X, like you said,
Speaker 5: New York went down, but we only had three lots left in New York. But generally speaking, we're trying to maintain that balance between the different regions. Texas will come on towards the end of the year with more volume. But generally speaking, it'll be about the same mix.
Speaker 3: Thanks Chris, thanks Alice. Thank you.
Speaker 7: Thank you. Our next question comes from the line of Matthew Bollet. From Bout Place. Please go ahead.
Speaker 8: Hey, morning, everyone. Thanks for taking the questions. Question on some of the year-to-date trends, it was a helpful color barrier you gave around sales pace in January and February . Just curious, as clearly it was a strong start to the year, in a lot of places, we've seen with your peers, and then...
Speaker 8: rates have moved higher, call it mid-February, and you've seen some of the pullbacks in the overall data. I'm curious if you guys can get into some of the leading edge of trends, what's been how's the market been evolving in the past couple of weeks, and specifically with you can layer on the incentive conversation into that, were you pulling back on incentives and now having to press a little harder? How is that playing into this very dice?
Speaker 4: but it does not seem like the trends are abating currently, as well as the fact that we are decreasing our incentives. And as we go forward, and when I meet by that decreasing really around price decreases and incentives to kind of keep our homes moving and absorption rates up, we found sort of the bottom of that around the first- one the first-
Speaker 4: week or so of January as we were coming through December and started to feel sales kind of moderating to the extent that they were and what we were against and then found the sweet spot and it's been building since that point. Really what we did see is the high cancellation rate came through the company.
Speaker 4: We had to make the course corrections that were probably larger and bigger around pricing, adding more incentive to get the absorptions. And then as we've come through and the New Year's begun, those price adjustments have retracted. And in some cases, we're now just re-selling at par if we have a cancellation.
Speaker 4: And in other areas, particularly like in North Orlando, we've actually, he's still getting some price increases. I'll be a minor for more than they were in the past, but we're still able to get some price increasing into some of our communities. So I think again, we're feeling that the consumer is adjusting to the new normal.
Speaker 4: which is rates that are around that five-ish, if you will, with the five handle on it. They know it's not going back to three and a half. They're looking at pricing and they're seeing some adjustments that are being made, but they're not looking at radical price adjustments. The resale market continues to be very low, so their options are limited.
Speaker 4: And we're seeing people coming out of rent rentals. They've been there for a year. Their leases are coming up. They're seeing their rental rates going up. And they're seeing this as an opportunity to jump into the new housing market. And I think we're capitalizing on that. I will say though that probably the more attracted to our smaller square footages and lower price points, which you would expect.
Speaker 4: But we believe that we have a really wide array of attractive products that are available to them. And we have inventory that we can deliver in that 45 to 30 day period. So I think all in all, we're really excited about how the year has commenced. We're knocking on wood that it continues, but we're feeling pretty good from at least the optics we have. Music
Speaker 8: you know and i think i heard John say earlier that you know you you're starting to see some of the cost reductions coming through you know i know i know you don't want to guide beyond key one but but are you getting any kind of visibility to uh... you know a bottoming in in gross margins at some point or is it just kind of too early to say at the stage
Speaker 3: I think it's probably too early, Matt. We will start seeing probably the benefits of some of those cost reductions, but that's probably not going to happen in the latter quarters of this year, the third and fourth quarter. It really depends on how much more we need to continue to provide incentives.
Speaker 3: throughout the next several quarters. So if we continue to see the momentum that we've had in this year, then there's certainly an opportunity for some margin expansion in the latter half of this year. But I think we'll have to wait and see how this next quarter or two goes.
Speaker 8: All right, thanks, John . Thanks, everyone. Thanks, Pat. Thanks, Pat.
Speaker 7: Thank you. Ladies and gentlemen if you wish to ask a question please press star 1.
Speaker 7: Our next question comes on the line of Alex Varon from Housing Research Center. Please go ahead.
Speaker 3: Yeah, thanks, gentlemen. I was hoping you could kind of give us the path ahead for the Texas region. Right now I don't see any backlog, but I'm going to see over a thousand lots. Some kind of curious as you guys can talk about, you know.
Speaker 9: What that's going to look like, what kind of price point. I think in the past you were in the 800s or million plus range, but you know, wondering if that's going to change just any color on.
Speaker 9: You know what we should expect in terms of some type of run rate whether it's later in the year next year just to get an idea of where where you guys are going
Speaker 4: That's our community and that is our community and Kyle called Anthem. You're right it's close to about a thousand lots but what we have there is a full spectrum of product offering from entry level to first time, first time move up. The price?
Speaker 4: points will be within the fours to the sixes, roughly. Maybe straddling a little bit on the other side of that. We're currently in our development stage. Lots should be completed here coming into early summer. And we're looking to go vertical, hopefully by...
Speaker 4: what's the roughly annual unit or how many, if it's not, if it's one, can we need how many different product types are gonna be available? Well, we're gonna be running three to three or four communities at a given time when it's up and running. And so, you know, it'll be probably a couple hundred a year that would be coming out of that collectively and it'll sort of balance it itself out depending upon what program.
Speaker 9: is in full swing and what ones come online and what's going offline. So, you know, it could range from 150 to about 200. Yeah, that's it. And, you know, in the current environment, you know, the Fed's still talking about raising interest rates and we kind of saw what that did in 4 quarters.
Speaker 9: How are you guys thinking about that going forward, you know, afraid to stay above 7%, you know, how much can you buy down the rate 2 or what's your strategy, you know, how you guys thinking about it?
Speaker 5: We're continuing to buy mortgage rates down into the low fives, high fours. And it just depends on the size and the time that we are buying those for. We're buying 45 day.
Speaker 5: chunks, and it seems to be working very, very well. And within our overall margin guidance, and so I think as you see where we guided for the first quarter, that's really kind of priced into that guidance, is continuing to have those mortgage rate buy downs in there as part of our packages.
Speaker 10: Okay, well thank you very much and good luck.
Speaker 10: Okay, well, thank you very much and good luck. Thank you.
Speaker 7: Thank you. Ladies and gentlemen, a reminder, if you wish to ask a question, please press star 1. Since there are no further questions.
Speaker 7: Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.
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