Q1 2023 Landsea Homes Corporation Earnings Call
Good morning, ladies and gentlemen, and welcome to the land Sea homes Corporation first quarter 2023 earnings Conference call.
At this time all lines are in listen only mode.
Following the presentation, we will conduct a question and answer session.
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This call is being recorded today Wednesday made the third 2023.
I would now like to turn the conference over to drew Mackintosh from Mackintosh Investor Relations. Please go ahead.
Good morning, and welcome to <unk> 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.
Lindsay homes caution 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 Lansing homes in its filings with the Securities and Exchange Commission.
The 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 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 <unk> website and SEC filings.
Hosting the call today are John <unk>, Chief Executive Officer, Mike <unk>, President and Chief operating Officer, and Chris Boerner, Chief Financial Officer.
Good morning, and thank you for joining us today as we go over our results for the first quarter 2023, and provide an overview of our operations.
Lastly homes delivered strong results in the first quarter.
Culminating in net income of $3 2 million or earnings of <unk> <unk> per diluted share.
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 closing homes in a timely manner, while holding the line on profitability.
We also generated cash from operations during what is typically a time when we use more cash than we bring yet which we believe is a testament to our ability to respond quickly to the changing market conditions and the flexibility of our operating model.
Selling conditions improved considerably in the first quarter relative to the fourth quarter of 2022.
As a combination of limited existing home inventory.
Our acceptance of the higher mortgage rates and more aggressive pricing at our communities.
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 two eight quarters our community.
Yes.
Selling conditions remained stable into April as we generated 219 net orders on a sales pace of three eight for the month.
From a macro perspective, we believe the new home market is in good shape.
Thanks, Joe resilient job market.
Both demographics and the App.
Aforementioned limited supply of existing home inventory.
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 in smart home technology at an affordable price.
This is especially true for millennial and Gen Z buyers, who appreciate the functionality of our home offerings and view the home is more than just a place to live.
We have centered our sales efforts around these fires understanding that they will be the primary drivers of the new home market for years to come.
With respect to our balance sheet lastly ended the first quarter in great financial shape.
We grew our quarter ending cash position to approximately $140 million.
Dana Conservative leverage profile with a net debt to total capital ratio of 37%.
Do you 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 resiliency in the first quarter by adjusting to changing market conditions and finding ways to bring buyers back into the market.
With that I'd like to turn the call over to Mike who will provide more detail on our homebuilding operations this quarter.
Thanks, Sean 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 and.
In response to this we pull the necessary levers to increase buyer 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 buy downs to overcome a virus concern over affordability.
These pricing actions prove 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 us.
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 Bill 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 you to all phases later this year.
We're doing everything in our power to return to cycle times pre COVID-19 levels and believe the lessons we have learned from the supply chain issues will make us a better more efficient homebuilder in the long run.
Overall, I would characterize the new home market is stable.
Lance.
And the rest of the industry did a great job.
Reestablishing equilibrium in the market by finding the right levels of pricing and incentives to restore buyer confidence and drive sales activity.
Lack of existing home inventory has definitely made the new home market more attractive to prospective buyers and has also help providing a floor on pricing.
There are still lingering issues to address with respect to build times and by our confidence, but I am confident those will be resolved over time as.
As a result, I am much more optimistic about our prospects for 2023.
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.
Yes.
Thanks, Mike and good morning, everyone for the first quarter, we generated $246 million in homebuilding revenues 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 $316 two in the first quarter of last year.
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 our home sales gross margin of 18, 1% a.
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 $567000 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.
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 11435 lots under control.
<unk>, 56% of these lots were under option approach as we continue to focus on our asset light strategy.
Lot position represents approximately three 5% to four years of supply.
This year, we also began landscape title to further enhance our homebuyers experience Lindsay title issued their first policies on close in April in Florida, We will quickly move to Arizona and then when we start closing homes in Texas at our anthem project Lindsay title will be there from the beginning.
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 one time 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 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 subsides.
Ending the quarter with $39 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.
520000.
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 1650 homes to 2000 homes and delivery.
Piece to be in the range of 540 to 575000.
And with that that concludes our prepared remarks, and now we'd like to open up the call for additional questions.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
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One moment. Please for your first question.
Your first question will come from Matthew Bouley at Barclays. Please go ahead.
Hey, good morning, everyone. Thanks for taking the question.
I wanted to ask about the spec strategy.
<unk> it was good to have spec in the ground during Q1.
And maybe you had some success reselling cancellations from Q4.
I heard you say at the top of that you are 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 that.
Spec positioning and why or why you mentioned youre going to pull back a little bit. Thank you.
Hey, Matt Mike for some thanks for the question.
I will respond by saying that generally where were looking on our spec strategy going forward is roughly around I would say 50 50 deal dirt starts spec starts.
For.
For example, we have a construction release going forward and sales release, we would probably put for a predictor starts are four five up for dirt starts and then the other five.
We would do it as 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 auctions.
And they want to feel that they are building those 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 a 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 is that right now we think that thats the proper approach.
Got it okay. Thank you for that Mike and then.
That's very helpful. The second one.
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.
When you think about kind of incentives price and then that question on spec for strip margins what are some of the.
Pluses and minuses I guess that sort of get you to that flattish margin outlook. Thank you.
Yes, let me I'll start it and then I think John will kind of tag onto this is Ed.
We are currently looking at the business.
We do believe that our margins are better with a 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.
Will the buyer then seek additional incentives to help buy down the interest rates should continue to go up and.
And with that being said.
John Moore has specifics around the actual margins.
Yes.
We do see.
Probably in the second half of the year.
Probably improving margins that has a lot to do with what Mike.
Mike was speaking to.
We always.
Historically, it's always been a.
Dirt start buyer that will by selecting their options always it 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 will seek discounts.
Traditionally obviously.
And this market currently theyre looking for mortgage incentives.
So having a dirt start buyer always has higher margins and that's part of why our strategy.
And this balanced approach that Mike spoke to.
We also see in the <unk>.
Back half of the year.
As we have turnover inventory.
Particularly in this first quarter and going to the second quarter and the second half of the year, we're going to see this improvement with these.
Dirt start buyers and also some improvements on the cost side as well too as were 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.
Alright very helpful. Thank you John Thanks, Mike Good luck guys.
Thanks.
Your next.
Question will come from Carl Reichardt at BP.
Please go ahead.
Thanks, Good morning, guys hope you're doing well.
I wanted to ask my one of my margin question. So let me ask more about geographic mix say relocating the headquarters theres going to be a focus on sort of outside of California can you give me a sense sort of three five years from now how you think about where youre chess pieces are nationally.
And is the forward investment as it 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 cities.
Hey, Kyle this is John I am 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 at Dallas was a very important milestone.
This is our 10th year will 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 two starting as a California builder then moving into Arizona and then a last couple of years now into Texas, Florida, We've really positioned the company to be.
More diversified.
Bicoastal company.
Throughout the sunbelt, so as I see our business move in the next three to five years I see us having a.
A more balanced.
Portfolio.
That will probably.
B equally.
Appropriate in California, Arizona, Texas, and Florida, right now, we're actually pretty fairly distributed between California, Arizona, and Florida were very very interested in building and growing our Texas business.
I think thats 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 were.
Looking at growing sure. Thank you John .
Paul.
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 are 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, it's that we do believe that ultimately our future those 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.
The markets that we're now participating in and we believe that we're going to have huge growth opportunities going forward.
But were never shy about also looking at other opportunities and expansion and growing our business in two other states. So we have 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.
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 two to three years.
Okay. Thank you, Mike and John and following up on that particular element of the strategy. So obviously 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.
Are you starting to hear private builders chat about.
Losing capital availability in 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 thanks Tom.
Sure I'll take a first stab at it and Chris I don't know if you want a backstop that's better.
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 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 <unk>.
Hindered at 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.
That had gone dormant.
Really.
Most of the last year frankly.
So we're pretty well.
I 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.
It makes them acquisitions that are very strategic to what we're doing on the land side.
We haven't seen a lot of capitulation.
Generally around the country.
Out of the GSC those land developers that survived a pretty solvent savvy and patient.
So what we've really seen mostly as not a reduction in price on lots, but maybe more 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, we do well, we all do well.
That's kind of the proposition as opposed to.
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 haven't seen that really is coming through the land yet Chris.
John .
Carl.
Answer your question about capital availability on the land side, there definitely is a tighter market in terms of availability of Cogs ADC loans for land and land development for us.
A majority of our lots are controlled.
I'd say, probably the majority of our loss also come to us in terms of finished lots.
We do have we have been very good and self developing as well too we obviously do that in California.
We've done that in Arizona successfully in Texas. So there are opportunities for us to do that.
But with our current strategy, where we're about 40% 60% finished we tend to have more of our majority of our lots are finished lots.
Okay. I appreciate that thank you for your Disabuse me of my notes and can I ask one more question just on.
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 have raised base prices in.
Roughly.
10% to 15% of our communities, we have been able to get some incremental price increases.
Forward.
Most have been stabilized at current pricing and incentives, which is driving traffic.
Sales volume.
But for the most part any reduction in pricing are increasing them incentives through our business has ceased.
Okay Super I appreciate it thanks for all the detail guys.
Sure.
Your next question will come from Alex Rigel at B Riley financial Please go ahead.
Good morning, gentlemen, very nice quarter couple of quick questions here first.
Any update on what the cancellation rate it looked like in April .
Yes.
Yes, Alex this is Chris quarter, we continued to see improvement in the cancellation rate again and got back down into single digits for April .
Fantastic and then California seemed a bit stronger than I would've thought any commentary around that.
Youre launching shlomi.
Alex This is Mike.
But as I said earlier, we're really happy about our California performance, particularly coming into the new year.
We believe that our positioning in the inland Empire and out in San Joaquin County, Northern California, with our price points is really.
Touching a sweet spot in terms of demand.
I think we're seeing those buyers at retreated to.
<unk>.
Are now coming back out again, realizing that rates arent going to drop a whole lot more in pricing isn't going to get deteriorate at a whole lot more than that incentives are what they are.
That.
We're in a nice position to.
Absorb that demand as it is coming to the market today, So, yes, southern California, particularly northern California, as well have been outstanding this quarter.
Great. Thank you very much.
Ladies and gentlemen, once again, if you would like to ask a question. Please press star one now.
There are no further questions. So I will turn the conference back to John Hall for any closing remarks.
Thank you everyone for joining us for our first quarter earnings call. We look forward to speaking with you again in the quarter.
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.
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