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Landsea Homes Corporation (NASDAQ:LSEA) Q1 2024 Earnings Call Transcript

Landsea Homes Corporation (NASDAQ:LSEA) Q1 2024 Earnings Call Transcript May 1, 2024

Landsea Homes Corporation misses on earnings expectations. Reported EPS is $0.06 EPS, expectations were $0.13. Landsea Homes Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Landsea Homes Corporation First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Drew Mackintosh. Please go ahead.

Drew Mackintosh: Good morning, and welcome to Landsea first quarter of 2024 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. Landsea Homes cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which range over time. These risks and uncertainties include, but are not limited to, the risk factors described by Landsea Homes in its filings with the Securities and Exchange Commission. We do not undertake any obligation to update forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through Landsea Homes website and in its SEC filings.

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Hosting the call today are John Ho, Landsea's Chief Executive Officer; Mike Forsum, President and Chief Operating Officer; and Chris Porter, Chief Financial Officer. With that, I'd like to turn the call over to John.

John Ho: Good morning, and thank you for joining us today as we go over our results for the first quarter of 2024, discuss current market conditions and provide an update on our outlook for the remainder of the year. Landsea Homes delivered strong top line growth of 22% in the first quarter, thanks to a 7% year-over-year increase in home closings and a 14% rise in average sales prices. Order activity during the quarter was also solid as we generated 612 orders at a sales pace of 3.3 homes per community bus. We continue to see strong interest for our new homes in our markets and look to capitalize on this demand through our well-located communities in our desirable high-performance home product line. The macro environment remains favorable, thanks to a resilient economy, strong job growth and low levels of existing home inventory.

Against this backdrop, we continue to pursue a strategy of targeting high-growth markets and rapidly achieving economies of scale at the local level. This strategy has proven successful in places like Arizona and Florida, and we look to achieve similar success in Texas and Colorado. Our Texas expansion goals got a big boost with the April 1 acquisition of Antares Homes, which provided us with 20 communities and over 2,100 lots in the Dallas-Fort Worth area. We are extremely excited about what this acquisition brings to our organization, not only from a land and loss perspective, but also from a talent and local market expertise standpoint. The team from Antares Homes shares our vision operationally as it relates to product and new home affordability as well as our values when it comes to quality home construction and customer service.

The integration is proceeding smoothly, and we expect to have Antares operations fully on board on our platform by the end of this month. In addition to the operational progress we made during the quarter, we also executed 2 capital markets transactions that added more stability to our balance sheet. First, we successfully placed another 2.8 million shares from our largest shareholder, Landsea Holdings Corporation with more traditional institutional investors. The transaction brought Landsea Holdings ownership to approximately 47% meaning Landsea Homes is no longer considered a controlled company under Astec listing standards. While we have always operated independently from our largest shareholder, we felt this was an important designation to achieve and believe it is in the best interest of all of our stakeholders to accrue a diverse and stable investor base.

The second transaction was our placement of $300 million in senior notes due in 2029 and an interest rate of 8 7/8ths. This was a significant achievement for our company as it allowed us to pay down a portion of the outstanding borrowings under our revolving credit facility and provide us with longer-term fixed rate capital to pursue our growth initiatives. Given the recent increase in interest rates since the deal closed, we felt fortunate to have place these notes when we did. One of our goals for the remainder of 2024 is to generate enough cash from operations to bring our net leverage down from current levels while continuing to invest in our homebuilding business. Over the last several quarters, we have made significant upfront investments in our operations, particularly in Texas and Colorado, and we're beginning to see a return on those investments as well in close homes.

This shifting dynamic will bring more cash in the door as well improvement in cycle times, which lowers the capital tied up and work-in-process inventory. Higher cash balance will allow us to operate from a position of strength going forward that will give us the optionality to either reinvest in the business, pay down debt or return capital to shareholders. We ended the first quarter with 10% fewer shares outstanding as compared to the first quarter last year, a direct result of our share repurchase efforts over the last 12 months. We accomplished a lot in the first quarter, both from an operational and financial standpoint and feel we are in a great position to achieve our goals for 2024 and beyond. The new home market continues to benefit from a lack of existing home inventory and pent-up demand from buyers were motivated to own a home.

We have made great progress in positioning our company to take advantage of these favorable trends, both in terms of our geographic footprint and our product positioning. As a result, I believe Landsea Homes can build on the success we've already achieved and established our company as a top builder in each of our markets. Now I'd like to turn the call over to Mike, who will provide more color on our operational performance this quarter.

Mike Forsum: Thanks, John, and good morning to everyone. Landsea turned in a solid performance in the first quarter of 2024 as our teams did an excellent job selling and closing homes, culminating in a delivery total of 505 homes, which was higher than our stated guidance. Arizona led the way with 183 deliveries followed by Florida and California. As John mentioned, we should start to see higher delivery contributions from Colorado and Texas moving forward particularly with the addition of Antares in the Dallas-Fort Worth market. Our operations in Austin are also starting to gain momentum as several phases of new communities are now selling in earnest with a number of homes under construction and an open model complex. Net new orders were up 23% on a year-over-year basis for the quarter, resulting in a total of 612 home sales.

Aerial view of a residential neighborhood with manufactured homes and developed homesites.

Demand was broad-based across our homebuilding platform as buyers in each of our markets continue to favor our high-performance homes and the value proposition they provide. Financing incentives continue to be an important selling tool to our communities and the levels that we've needed to use to spur sales activity has mirrored the movements in the mortgage rates. We expect sales incentives to remain elevated as long as rates stay higher for longer. The availability of quick move-in homes continues to attract buyers, which is why we continue to operate with an elevated supply of spec homes. The new home market has filled the void created by the lack of existing homes for sale, and these buyers typically want to close on a home within 60 days.

Our goal is to start the homes while leaving enough lead time to allow for personalization and upgrades from the buyer. We are also being mindful of not letting too many homes reach completion without a buyer in a given community and we'll adjust the pace of our starts accordingly. We are seeing better labor and material availability in each of our markets, which has resulted in better cycle times and improved inventory turns. This has alleviated some of the cost pressures we've experienced in the past, the land prices continue to rise. Some of this is a function of a tight land market but is also a result of land banking arrangements, which reduced the risk of upfront capital required to own and develop land, but comes at a cost. In general, we believe the benefits of a land-light strategy outweigh the cost, and we will continue to look for ways to tie up lots in a capital-efficient manner.

Overall, I would characterize the spring selling season is solid. Traffic and interest from buyers have been consistent throughout the spring, while the changes in interest rates have dictated the level of incentives we have had to offer. Our cancellation rate for the first quarter came in at 10% compared to 16% last year aside that buyers who move forward with their purchase remain confident in their decision. Our existing operations in California, Arizona and Florida continued to perform well, and we are excited about the addition of Antara in the Dallas-Fort Worth market and the growing contributions from Austin and Colorado. We entered the second quarter in great shape, both operationally and financially, and I believe we are on track to meet our goals for this year and beyond.

With that, I'd like to turn the call over to Chris, who will provide more detail on our financial results this quarter.

Chris Porter: Thank you, Mike. As Mike mentioned, our 505 deliveries were 7% higher than first quarter of 2023 and our 579,000 average selling price reflected a 14% increase over last year. Both exceeded the high end of our guidance and produced a 22% increase in home sales revenue to $292.6 million. Our gross margin of 14.9% came in at the low end of guidance as incentives and discounts continued to weigh in the quarter and were approximately 5% of revenue. With the outlook for rates to stay higher for longer, we would expect these levels of incentives to remain relatively constant for some time. Fully adjusted gross margin came in at a stronger 19.4%. We reported net income of $190,000 or $0.01 per share. This compares to $3.2 million in net income or $0.08 per share in the first quarter of last year.

This quarter, we had a $1.7 million of transaction costs primarily related to Antares acquisition, along with $2.5 million of purchase price accounting from previous acquisitions. Excluding the onetime transaction costs, our net income was $1.9 million or $0.05 per share. We ended the quarter with 63 average selling communities, up 7% from first quarter of last year. During the quarter, we opened 10 communities and closed 6 communities. As John noted, with the Antares acquisition, we added 20 communities in approximately 2,100 lots as of April 1. Backlog ended the quarter with 624 homes for a total value of $384 million and an ASP of $616,000. Our SG&A expenses came in at 15.2% of home sales revenue this quarter, 110 basis points better than the first quarter of 2023.

Excluding the $1.7 million transaction cost, this ratio would have improved to 14.6%. We will not add any corporate staff or overhead for the Antares acquisition, and we'll begin to see our SG&A leverage improve starting in the second quarter. Our tax benefit of $30,000 for the quarter was primarily the result of our improved site performance and the additional tax benefits from stock option vesting in the quarter. Now turning to our balance sheet. We ended the quarter with $364 million in liquidity and $140 million in cash and cash equivalents and $224 million in availability under our revolver. Our leverage ratios remained in line with our expectations, ending the quarter at 46% debt to total capital and 35% net debt to total capital. On April 1, we utilized cash on hand and revolver capacity to purchase Antares homes for approximately $242.5 million and closed on the issuance of our $300 million 5-year note, which gave us longer-term fixed rate capital and reduces our reliance on our revolving credit facility.

The rate is effectively equivalent to our current pricing and our revolver. Subsequent to these transactions, we completed the refinance of our revolver, led by Bank of America and U.S. Bank that broadened our bank group by adding 2 new banks to the syndicate and extended the term into 2027. We reduced capacity to a total of $355 million, reflecting the lower reliance for this facility and paid down $75 million during the quarter. We continue to have an accordion feature to increase up to $850 million should we need the capacity. Additionally, we updated our pricing to a grid pricing and will initially realize an approximately 50 basis point improvement in rate. Net-net, consistent with what we have been indicating, our leverage will increase temporarily for the acquisition and should be back in our targeted levels of 45% debt to cap within 1 year.

Now looking forward to the second quarter, we anticipate our new home deliveries to be between 600 and 650 at an average selling price between $525,000 and $530,000 with GAAP gross margins of 15% to 16%. And for the full year, we are confirming our previous guidance of new home deliveries in the range of 2,500 to 2,900 units. We expect ASPs of these deliveries to be in the range of $500,000 to $525,000. Additionally, we anticipate GAAP home sales gross margin for the full year to be in the 17% to 18% range. These gross margin ranges are dependent upon assumptions in our purchase price accounting with the Antares acquisition. We will not know the final allocations until later in the second quarter. Also, this guidance is based on our estimates as of today with the current market conditions as inflation, incentives and interest rates continue to change, overall results could change accordingly.

That concludes our prepared remarks. And now we'd like to open the call up for questions.

See also

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