Q3 2023 Landsea Homes Corp Earnings Call
Good day and welcome to the land Sea homes third quarter 'twenty to 'twenty three.
Prince call all participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on attrition so to withdraw your question. Please press Star then two please note. This event is being recorded all back now to turn the conference over to Mr. Drew Mackintosh. Please go ahead.
Good morning, and welcome to Lansky homes third 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 law.
We 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 factors. The risk factors described by 90 homes in its filings with the Securities and Exchange Commission. Accordingly forward looking statements should not be relied upon as representing our views.
As of any subsequent date and you should not place undue reliance on these forward looking statements 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 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 manthey homes website, and then its SEC filings.
Hosting the call today are John <unk>, Chief Executive Officer, Mike for some President and Chief Operating Officer, Chris Boerner, Chief Financial Officer with that I'd like 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 2023.
Sure our outlook for the remainder of the year and discuss some exciting new developments for our company.
Nancy homes generating $258 million in home sales revenue in the third quarter, our new home deliveries of 448 and.
At an average sales price of 576000.
Home sales gross margin came in at 18, 7%.
And net income was $8 6 million or only to SaaS alright diluted share.
We are pleased with these financial results and believe they are reflective of our resilient market accompanied strong execution.
Net new orders for the quarter came in at 486, and a sales pace of $2 seven homes per community per month.
We saw active and engaged buyers in our communities throughout the quarter.
So the upward movement in interest rates resulted in some selling song.
Quarter progressed.
Fortunately, we had several sales tools at our disposal that offset the impact of higher rates.
A sense of confidence in buying their home.
In addition, our unique high performance homes, continuing to set us apart from the competition and drive traffic to our communities.
From a macro perspective.
The long term fundamental outlook for new home construction remains positive.
It continues to be a lack of existing home inventory at all price points.
While the demand for housing remains strong.
The economy continues to add jobs and.
In the U S consumer has shown a willingness and ability to move forward life changing purchase decisions like buying a home despite the high interest rate environment.
We have also seen broad based home price stability in our markets. Thanks.
Thanks in large part to the scarcity of existing home inventory.
All of these factors have and will continue to benefit homebuilders, particularly those with strong balance sheets and access to capital.
Against this strong fundamental backdrop Nancy has continued on its path of growing the size and scale of our operations.
After the close of the quarter, we announced the acquisition of the asset and lot pipeline, a Colorado based richfield homes.
With this acquisition.
ANZ entered into seven homebuilding market with an established presence one of the best housing markets in the country.
Similar to our previous acquisitions, you plan on growing our local market presence quickly so that we achieve better local economies of scale.
We have retained richfield seasoned leadership team, including industry veteran a new division President.
No.
The house lead these efforts build on the success they've already achieved in the market.
We expect the deal to yield of more than 20% IRR for our company and immediately be accretive to earnings and return on capital within 30 months from closing.
Operationally, we expect to follow the same playbook in Colorado, and we have been executing on our other markets.
Which is a focus on the more affordable segments of the market with a differentiated high performance foams series.
Boy, a land light strategy inventory.
Inventory quickly.
We believe this is the right recipe for success in today's market and we'll continue to look for acquisition targets.
Model.
The continued rise in interest rates, we believe the opportunities to grow via acquisition will become more common.
On capital allocation standpoint, we feel that it is important to balance out our investments in the business and shareholder friendly actions I think no our confidence in our company and our stock.
Did that end our board has approved a $20 million share repurchase authorization, which we plan to deploy over the next 12 months.
We believe our stock is undervalued at current share price look forward to buying our shares at a discount to book value boosting our earnings per share throughout this repurchase program.
<unk> is in a great position to finish the year on a strong note and carry that momentum into 2024.
We have an established and growing presence some of the best markets in the country.
Well profile that caters to the largest buyer segment.
Our balance sheet is in great shape, and our senior leadership team with the necessary experience and industry knowledge to compete effectively in a high interest rate environment.
Given these positives we remain excited about the future of Lindsay Hall.
Now I would like to turn the call over to Mike who will provide some additional color on our operational performance this quarter.
Thanks, John.
Net new orders were up 89% year over year in the third quarter, thanks to an 80% improvement in absorption pace.
A 4% rise in average community count.
Order activity was strongest in our southern California, and Arizona divisions, while our Northern California Division continued to lag due to affordability issues and soft employment trends in the tech sector.
Our ability to offer financing incentives was a key driver of demand during the quarter as it allowed us to meet the affordability needs of our buyers.
Most home shoppers are trying to solve for a monthly payment and being able to adjust the rate associated with that payment is a big competitive advantage for homebuilders versus the existing home market.
It allows us to maintain base price stability in our communities as well.
As John mentioned traffic was solid throughout the quarter, but tapered off a bit from normal seasonality and adjusting rates moving higher near the end of the quarter.
It is important to note that the quality of traffic we saw stayed consistent as.
As the majority of buyers who came through our communities was motivated and resulted in solid lead conversion rates.
Currently we are seeing an increase in incentive activity from some of our bigger players in the market, which is to be expected at this time of the year.
While we remain committed to meeting the market with our pricing to sustain appropriate absorption levels. We continue to monitor each of our communities individually in order not to generally overreact to short term market shifts created by competitive year end clearance practices.
As a result, we are being strategic by being community and what specific with our incentive activity rather than taking a broad brush one size fits all strategy.
Finally, we have a clear path to hitting our delivery goals for the remainder of the year, thanks to a solid quarter ending backlog and our targeted sales approach.
We saw further improvement in building conditions in the third quarter, leading to a significant reduction in cycle time on a sequential and year over year basis.
Cycle times are now approaching pre pandemic levels, which will be a tailwind for our return profile going forward.
It also allows us to return to a more balanced business model when it comes to spec homes versus to be built.
Buyers, who visit our communities can choose from either a quick move in home or a to be built which allows for more customization and typically better margins for our company.
Overall, we feel really good about our business as we head into the end of the year, despite the higher mortgage rate environment.
We continue to see motivated buyers in our market while existing home supply remains at all time lows.
Housing fundamentals have remained positive in our existing markets and we are excited about the opportunities that lie ahead for our new division in Colorado.
Cost inflation appears to be waning and labor and material availability or the best we have seen in years as a result, we believe the outlook for our company remains bright.
With that I would like to turn over the call to Chris who will provide more detail on our financial results this quarter and give an update on guidance for the remainder of the year.
Thank you, Mike and good morning, everyone as Mike and John mentioned, we had a strong quarter and we're pleased with the way the entire organization executed.
The third quarter, we generated $258 million in homebuilding revenue, a 21% decrease over third quarter of 2022, taking us to a total of $790 million for the first nine months of the year.
We also delivered $19 million in lot sales and other revenue for total revenue of $277 million.
This quarter, our team delivered 448 homes with an average sales price of 576000.
Our asp's were at six 5% sequentially from the second quarter, but down 4% from the third quarter of last year exclude.
Excluding New York, and Texas, which had deliveries last year, our asps were up three 8% from the third quarter of last year.
Production was driven 26% from California, 26% from Arizona, and the balance from Florida.
We will start seeing the contribution from Colorado in the fourth quarter and although it will be small to start it will grow in 2024.
Sales gross margin was 18, 7% for the quarter and 24% on a fully adjusted basis, which excludes interest and cost of homes as well as purchase price accounting.
$3 9 million in purchase price accounting for the quarter and have approximately $34 million remaining that we anticipate burning off over the next 18 months.
Pretax income for the quarter was $12 5 million compared to $25 3 million last year.
Dollar basis, our G&A declined slightly from second quarter as we continued to focus on improving our efficiency S.
SG&A as a percentage of home sales revenue was 16, 4% this quarter, reflecting relatively constant fixed costs, coupled with lower overall revenues compared to last year.
As John mentioned, we are very pleased with our new order volume and the consistency produced in the quarter.
Net new orders were 486 with an average selling price of 587000 and in total order value of $285 million.
There's we're at 89% from a year ago, and our absorption rate was two seven homes per community versus one 5% in the third quarter of last year. We also ended the quarter with an average of 59 selling communities up 4% from a year earlier.
Throughout this year, we remain disciplined on our land acquisition as we assess the current market conditions and ended the quarter with just over 11200 lots under control.
5% of these lots were under option agreement as we continue to focus on our asset light strategy.
Our tax expense in the third quarter was $3 million, which represents an effective tax rate at 24%.
Now turning to our balance sheet, we ended the third quarter of $389 million in liquidity.
144 million of which was cash and cash equivalents and $245 million available under our revolving credit facility.
During the quarter, we repurchased one 4 million shares for $13 $1 million and our tangible book value per share ended at $15 46.
An increase of 3% sequentially from second quarter, and up 12, 8% from a year ago.
Additionally, our leverage ratio has remained in line with our stated policies ending the quarter at 44%, that's the total capital and 33% net debt to total cap.
For the full year, we still anticipate new home deliveries to be in the range of 1900 to 'twenty 100 units and delivery asps to be in the range of 550000 to 560000.
Additionally, we anticipate GAAP home sales gross margin for the full year to be in the 18% range.
This guidance is based on our best estimate as of today with current market conditions and as inflation incentives and interest rates continue to change overall results could change accordingly.
With that we conclude our prepared remarks, and now we'd like to open the call up for questions.
Yeah.
Well now begin the question and answer session to ask a question in the press Star then one on your Touchtone phone.
He's using a speakerphone please pick.
Pick up your handset before pressing that.
If at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, well pause momentarily to assemble our roster.
The first question comes with <unk>.
Carl breach hard with BPI.
<unk>. Please go ahead.
Good morning, everybody.
Thank you for all of your auto question.
Hey.
So I wanted to ask first just about the acquisition in Colorado.
Market there has been tough if you listen to other builders. So one could argue that this is a great time to get in and the other hand, it could be tough for a while so can you talk about that decision from a strategic perspective.
And also maybe discuss some of the other markets you are thinking about or looking at from a forward acquisition standpoint.
Hey, Carl this is John.
I'll talk about that strategically and then.
Mike also I'll follow up.
I think for us as we've.
You talked about it has thought that tightening credit conditions and certainly.
These high interest environment, probably pinching a lot of these smaller private builders that have less access to less resources and access to capital. So it is opportunistic for us.
As we came across this opportunity and.
Was able to acquire the assets primarily.
And then inherit the team that we thought was really.
Really well qualified won't really what Greg welborn.
So it was an opportunistic acquisition for us and.
And it's a market that we think is kind of a long term runway for us supported by all the reasons why we think Denver is a great market the demographics.
Sure.
Hey, Carl it's Mike.
Mike.
Just to follow up on John.
I've been in the Colorado market in one fashion or another since the 19 nineties and I have always really liked that market for various reasons, but I would say primarily is that it does.
It does have a higher barrier to entry, which requires a little bit stronger skill set around land entitlement land development, which.
I have honed by homebuilding career around notice from California, and I believe it does give us a strong leverage point, we do the more the market very well either through my homebuilding experiences or through private equity at Starwood, where we on land and then through land banking.
Familiarity with that we know the markets to be and we know the market is not too bad.
And then we thought that this was an incredibly low cost entry into that market. It was opportunistic.
And then as to your question.
Where we're looking we're looking everywhere all the time I think over the course of our 10 years in existence, and then growing through acquisitions, we'd become a builder of choice for that smaller private thats looking to exit.
We have a whole cadre of.
Of folks out there looking on our behalf as well as others that have inbounds that come in directly and we got excited about this we got excited about the platform. We got excited about their early positions and we think that we can make a real mark there, but that doesn't mean, we're not consistently looking in those markets, we've talked about before in Texas.
Florida in fact.
We're having really great conversations currently with folks and we hope that we can continue to go down this path.
Growing our business.
Through bolt on M&A.
To get the growth that we want.
I appreciate the details on those thank you and then for your guidance for 'twenty three on deliveries.
It's still a fairly wide range can you talk about the conditions that would cause you to hit the lower end versus the higher end of that range. What are the toggle points that would help you get to that top end or or or Conversely, it to the bottom end over the course of the next what we have here like eight weeks. Thanks.
Yeah Karl Sir.
The good question I think a lot of the uncertainty right now is revolving around incentives and.
And mortgage buy downs and just the volatility.
Costs related to that and.
And I think that some stability in the market.
There's a lot of bets that the fed's going to hold rate steady the tenures rallied today, even and so I think some some steadiness within that aspect is going to give us more confidence on the upper end up there.
We kept the range a little bit wider just based on mix as well as where incentives may or may not be for the year.
Alright, Thank you guys I'll get back in queue. Thanks, guys.
Okay.
Oh.
Next question comes with Jay Mccanless with Wedbush. Please go ahead.
Hey, good morning, Thanks for taking my questions.
Just trying to think a little bit ahead to 'twenty four you've got the Colorado acquisition, Austin's youre going to be coming online.
Maybe could you talk in rough numbers, what we should think about for community count growth looking into next year, just with all the different things that you have going on.
Yeah.
Hey, Jay this is John I'll.
I'll start with that and then maybe hand, it over to Chris to talk about community count.
And we are excited about.
The new opening of our communities in Austin.
And then with the acquisition of Colorado Richfield homes they.
They have three actively selling communities right now.
We will start seeing some of those deliveries in this fourth quarter.
As it relates to 2024, I think we probably share the same.
Sure.
I would say.
<unk>.
Thoughts about.
The market a lot of uncertainty as it relates to interest rates the amount of incentives we have to offer around there. So we haven't given any guidance.
2024.
As it relates to community growth.
I think that remains unchanged.
Yeah I would agree.
Jay the Colorado acquisition.
Three communities there today and you can see them out on our website.
We will expand those communities and then Austin.
We've said that we think that will start with a three.
Three communities and then continue to grow it so I would see that our growth in community count to be relatively consistent with where we thought in 2023 at that 10% to 15% range.
Okay. Okay.
Okay. That's great. Thank you.
Yes.
And then Mike I wanted to dive in a little bit to your comment that.
Labor availability materials availability is the best you've ever seen.
Thats pretty encouraging given where the industry was two years ago I guess, what you already talked about how declining cycle time gives you better cash flow, but maybe maybe from a product perspective, maybe talk about what other options. This gives you an.
If things are good does this give you more incentive to go out and find more builders I just I think there's a lot we could draw from that comment. So maybe if you could dig down on that a little bit. Please.
Okay.
I would say as a point of clarification that I believe that labour and materials are the best probably sensor.
I'll go back pre pandemic levels were getting back to a normalization of our business and the execution and flow. So that's super encouraging as well as cost seem to be righting themselves and so from that standpoint on that side.
We're really happy with the trajectory of things what it does though for us.
Generally and it's again our strategy our business model is it moves us a little bit more towards dirt starts and dirt starts are always better.
That allows us to create a relationship with our customer allows them to customize their house, a little bit more to the way that they want it.
That's them more in the house and the final outcome, we do collect more deposits because they have to put deposits down on options that they are taking so we believe that it's a.
A deeper.
And more secured transaction.
By doing dirt starts and one third starts on what's higher cycle times, you're kind of closing the gap of where the industry was moving towards the spec.
Level type of build to shrink the distance between sale and close.
This is happening more organically by virtue of the fact that we can get our cycle times down.
And so we're seeing that roughly right now where we're seeing more buyers coming to the market.
Looking to do a dirt acquisition versus a spec.
A quick move in acquisition or close I should say so.
From our standpoint, we think that that's a good healthy thing that's happening and we liked the normalization and we think it's just it's building a stronger business for us.
That's great. Thank you, Mike and then Chris if we could talk about I think you said, 18% approximately 18% for the full year gross margin.
I guess is most of that mortgage rate buy downs and the cost of those.
Or is there something else, we need to talk about as it relates to pricing power and your all's ability to push price right now.
No I think that that is primarily related to the mortgage incentives that I was mentioning earlier and just incentives in general to continue to push that demand through.
If you look at our.
Kind of our base business year over year, our Asps were up 4%, if you exclude New York, and Texas, which didn't deliver in this quarter and so I think that that shows some some some pricing within the portfolio, but I think margin wise a lot of it is just based around.
The incentives that we're seeing.
Okay.
Got it.
Okay. That's it for me I'll get back in queue. Thank you.
Thanks.
The next question comes with Alex <unk> with B Riley. Please go ahead.
Thank you good morning, gentlemen, very nice quarter.
Talk a bit about how you are helping your buyers find lower mortgages.
Yes, Kristina Yeah sure Yeah Alex.
As you know, we've got a partnership with NFL mortgage to brand under <unk>.
<unk> see mortgage so we have the tagline Lansing mortgage powered by an F N.
And they have access to all of our buyers and we work with them on just creating the mortgage programs and also doing at mortgage incentives through there. So we'll do either the buy downs and primarily it's 30 year fixed.
What we're seeing out there we still havent seen a lot of movement on the.
On the variable rate or the.
The 15 year.
But primarily it's all around a 30 year that we're able to as everybody has buy in bulk and then use that as an incentive towards closing costs in <unk>.
Towards some mortgage and so that's primarily what we're doing is using our mortgage company.
And then can you talk a bit about if you're seeing any opportunities to raise these prices.
And give us a quick update on sort of the trends in October relative to September.
Oh.
Sure Alex This is Mike I'll jump on that one.
We are actually in some cases raising prices.
Yeah, not aggressively but.
I think that we're doing it thoughtfully prudently.
Where and when we can.
So that one.
We're locking in our backlog because they feel like they're at a community that's doing well.
Saying that and places in Florida, as well as Arizona and in Southern California.
It would be our strongest markets right now and we're able to do that.
And further note I think what we're really at a point right now.
Alex is that it's really a business of monthly payment as opposed to absolute price and so the toggling to keep absorptions up are really around what Chris was talking about the ability to buy down.
Mortgage interest rates such that the monthly payment is more affordable against the backdrop of the credit for the homeowners ability to qualify.
There does not seem to be.
A real hesitation resistance out there in terms of absolute pricing from our buyer profile of this coming through it's just making sure that they know that they're comfortable that they have.
A monthly payment that they can afford and be again comparable with.
Yeah.
Yeah.
Thank you.
The next question comes with Caro Rach hired with BTG. Please go ahead.
Great. Thanks again guys.
So.
Is your mix is changing here and over time do you Mike have sort of a normalized sort of absorption rate per month that you think the company should be targeting overall and I ask that just because I know the mix moves around quite a bit and at the entry level you'd be trying to target say, one a week four months higher Ed.
It's going to be more like three so I'm just trying to get a sense of in your head roughly what do you think a normalized absorption pace would be for the company as it is currently.
Constituted.
Sure I think that we aspire Karl to be in that three to three and a half net.
Absorption rate per community.
That is ideal and I think that generally.
Over the course of time in the business that seems to be the sort of organic natural absorption, where you're not pricing too low or not pricing too high and that's where you should be.
Although there is seasonality that comes into play so if youre going through the summer you may be dipping down into the twos as you're kind of moving through the.
The summer lull and then you'll have some spiking that may take you even up.
So naturally higher as you start to get kind of maybe a little bit of energy in some greater momentum in the market, but if you look at the course of a community from beginning to end if youre hitting that three to three and a half for what an average you've done a really great job and you've got a really healthy community optimize.
Everything along the way.
Okay perfect. Thanks, Mike and then.
You had a couple of smaller peers, who had talked about.
Developers who had deals.
Sold to small builders. So finished lot deals that had been dropped and so these publix and had a chance to go and pick up finished lots not at great prices, but at least there is availability you have had some larger peer say that's not happening at all where do you guys see and obviously with the acquisition in Colorado. There's there are some positive element, but but where do you see.
Overall.
This landmark our opportunity showing up more than they had because of private builder distress or were higher cost of capital or is that really not happening as you see it.
That's actually a really great question Carl because.
What we're saying is and.
Some of our markets, Florida, and Arizona specifically.
Opportunity has come our way, where we are talking to single family.
Per rent build to rent.
Builders, who can't get financing that have acquired properties and we're back filling into infill there with some smaller bite sized type of communities that are <unk>.
In our business that are feeling some holes between quarter to quarter or month to month.
We really like those because they're finished lot they're ready to go the price points are right in our wheelhouse.
And they're in locations that we probably wont be looking at because it just efficiency sake.
So we actually have taught and and looking at and getting close to a handful of those in those locations. So that's really what we're seeing right now I think the most stress is really.
On that sort of private build to rent.
Builder out there that are struggling to find financing to get them all the way through that project.
That makes a lot of sense all right I appreciate that Mike Thanks, all right.
Sure.
Once again, if you wish to ask a question. Please press Star then one.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to John <unk> for any closing remarks. Please go ahead.
Thank you everyone for joining us today, and we look forward to speaking to you after.
For the fourth quarter again.
This concludes today's meeting thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
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Thank you.
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Okay.
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