Landsea Homes Corporation

Good afternoon, and welcome to Lancey Holmes' first quarter 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. Lancey Holmes cautions 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 Lancey Holmes 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 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 it may be required under applicable securities laws. Additionally, reconciliation of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through Lancey Holmes' website and in its SEC filings. Hosting the call today are John Ho, Lancey'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.

Good afternoon, and thank you for joining us today as we go over our results for the first quarter of 2022. and provide some insight into the outlook of our industry and our company. Lansley Homes reported net income of $13 million or earnings of $0.28 per diluted share in the first quarter of 2022, a significant improvement over the net loss of $7 million or $0.16 per diluted share reported in the first quarter of 2021. On an adjusted basis, which excludes the impact of purchase price accounting for acquired inventory and losses associated with the remeasurement of worn liability, net income for the quarter was $32.1 million, or $0.71 per diluted share. Home sales revenue grew 93% year-over-year on an 83% increase in deliveries as our teams did an outstanding job delivering homes in what continues to be a challenging operating environment. Home sales gross margin expanded 930 basis points year-over-year on a gap basis to 20.9% as the price increases we implemented on homes closed in the quarter stayed ahead of cost inflation. We also ended the quarter with 1,605 homes in backlog with a dollar value of $930 million, putting us in a great position to deliver on our goals for the remainder of the year. These results are a testament to the ongoing strength of the new home construction industry and further proof that Lansi Homes can successfully scale its operation in a profitable manner. We experienced healthy order trends across our home building platform in the first quarter, as evidenced by our sales pace of 3.9 homes per community per month. This sales pace could have been higher for the quarter were we not constrained by the supply chain issues that continue to plague our industry. While these operational headwinds have made it difficult to close homes in a timely manner, they have also kept a lid on new home supply, which has helped maintain a sense of urgency among buyers and create a natural floor for new home pricing. We continue to make progress in our efforts to scale operations in some of the best home building markets in the country during the first quarter. Polo lot count at the end of the quarter stood at 12,768 lots. representing a 95% increase over the first quarter of 2021. These slots are located in markets like Orlando, Austin, and Phoenix, which are experiencing high population growth and rapid home price appreciation, thanks to strong local economies and ongoing migration to lower-cost areas of the country. We believe these markets have a long runway for growth, given the positive demand drivers in place, which should benefit Lansi for years to come given our sizable investments in these markets in recent quarters. It is important to note that our rapid growth has not come at the expense of profitability. We have been extremely disciplined with our land acquisition efforts, whether it be organic or through M&A, and as a result, have posted strong margins despite the headwinds associated with purchase price accounting adjustments. In addition, we have increased our lot count in the most capital-efficient manner possible. tying up lots via option agreements and land banking arrangements when available. At the end of the first quarter, 53% of our lots were controlled, 47% were owned. We believe that controlling a substantial number of lots via option agreements helps de-risk our portfolio and gives us additional financial and operational flexibility while enhancing our return profile over time. That's the end of the first quarter with a lot of momentum. thanks to the continued strong fundamentals we see in our market and the progress we made scaling our home building operations. Both management and the board have great confidence in our strategy and our ability to execute in today's market. To show this confidence, we began repurchasing our stock in the quarter and anticipate further share repurchases in the coming quarters, as we believe our stock represents a great value given our current outlook. With that, I'd like to turn the call over to Mike, who will provide more detail operational results this quarter. Mike?

Thanks, John, and good afternoon to everyone. 2022 is off to a great start for Lansing Homes as we exceeded our stated guidance for new home closings and average sales prices in the first quarter, achieved solid profitability, and generated strong orders that resulted in a company record backlog both in terms of units and value. We saw positive demand trends in each of our divisions, as the combination of great market fundamentals, well-located communities, and a limited supply of new and existing home inventory created a favorable sales environment. Our sales efforts were bolstered by our focus on the more affordable segments of the market, which continues to be one of the healthiest areas of demand. Our sales efforts also got a boost from our high performance home platform, which features the latest in new home automation, sustainability, energy savings, and healthy lifestyle amenities. We believe that this focus on new home innovation at an attainable price appeals to a number of demographic segments and has been instrumental in our sales success. We generated 637 orders in the first quarter, representing a 50% increase over the first quarter of 2021, driven largely by a 101% increase in our active community count. Order activity remained fairly consistent throughout the quarter, even as rates started to rise. Sales activity stays strong into April, as we generated 184 orders on a sales pace of 3.9 per community. This figure remains somewhat constrained, as John mentioned, as we continue to meter our sales efforts to better align our production capabilities. While higher rates are no doubt a headwind for our industry, we still see more qualified buyers in our markets than there is available supply. We are keeping a watchful eye on our backlog in light of the recent rise in mortgage rates and are doing everything we can to minimize their effect. Buyers in backlog who finance their home purchases through our mortgage affiliate have a strong credit profile with an average loan-to-value of 82%, an average FICO score of 741, and an average annual household income of $164,000. We stress tested the backlog up to 6% mortgage rate and believe the fallout will be in the single digits, and the average debt-to-income level will remain in the low 40% range. We have been proactively reaching out to our existing buyers and backlog, particularly ones with extended lead times to close, and encouraging them to get rate locks in place. So far, we have seen very few buyers fall out of backlog as a result of rising rates and have noticed real commitment on their behalf to complete the purchase of their home. Now, I would like to turn the call over to Chris, who will give more detail on our financial results this quarter and provide an update to our forward-looking guidance. Chris?

Thanks, Mike, and good afternoon, everyone. I will cover the highlights of our exceptional first quarter and provide our outlook for the company for the second quarter and full year. We are pleased to have delivered net income of 28 cents per share in the quarter compared to a 16-cent loss the same period last year. On an adjusted basis, we delivered a remarkable 71 cents per share, up from 3 cents per share in the first quarter of last year. Throughout the last year, we have focused on expanding our portfolio to some of the most desirable housing markets, and the result reflects the team's success. We had great results across all of our key KPIs. As Mike mentioned, we increased our average selling communities 101% to 54.4% and added Florida, Texas, and New York to our mix. In total, our community sold 637 homes during the quarter at an average selling price of $650,000 for a total of $414 million and enjoyed a monthly absorption rate of 3.9 per community. These represent a 50% growth on orders, a 60% growth in dollar value, and a 7% increase in ASP compared to the first quarter of 2021. The team delivered 552 homes at an average selling price of $540,000 for home building revenue of $298 million during the quarter, a 93% improvement over the same period last year. And we expanded our home sales gross margin 930 basis points to 20.9%. On an adjusted basis, excluding the effects of purchase price accounting and interest and cost of home sales, our home sales gross margin increased to 29%. reflecting that the team continues to have the ability to increase pricing more than offset the cost pressures we have been experiencing. Additionally, as we monitor the possible effects of rising interest rates, we continue to stress test our backlog for potential issues and remain highly confident in the quality of the purchasers and their ability to qualify and close. During the quarter, we maintained a high single-digit cancellation rate, and as Mike mentioned, at a 6% mortgage rate, We anticipate that less than 10% of the portfolio could potentially fall out, and we believe based on our current demand, we'll be able to replace those purchasers. We ended the quarter with 1,605 homes in backlog with a total dollar value of $930.4 million at an average sales price of $580,000. This represents an 83% growth in volume and 89% in total dollars compared to last year. Now turning to the balance sheet, we ended the quarter with $1.1 billion in real estate inventory and more evenly balanced between California, Arizona, and Florida. And as we projected, we used cash on hand and a small amount of borrowings under our credit facility to purchase Hanover Family Builders in January and close the quarter with $85.2 million in cash, cash equivalents, and cash held in escrow. We also had $162.7 million in availability under our unsecured credit facility for a total liquidity of $247.9 million. We ended the first quarter with $494.4 million in total debt and net debt of $409.2 million. Our ratio of debt to capital at the end of the quarter was 44%, and net debt to net book capitalization ratio was 39.4%, right in line with our targeted levels. We're also pleased with the pace of our previously announced stock buyback program. On April 27th, we completed the first phase of our $10 million stock repurchase program, purchasing 1.16 million shares at an average price of $8.57. Based on their confidence in our performance and the current price of our shares, the Board of Directors has approved an additional $10 million authorization to purchase shares throughout the rest of this year. Now I'd like to provide some guidance for the second quarter and full year of 2022. For the second quarter 22, we anticipate new home deliveries to be in the range of 600 to 650 units and delivery ASPs to be in the range of 500,000 to 525,000. We also expect a slight improvement in SG&A as a percentage revenue this quarter with a larger benefit in the back half of the year. For the full year 2022, we are reiterating our previous guidance of new home deliveries to be in the range of 2,700 to 2,900 homes, Delivery ASP is to be in the range of $500,000 to $515,000, and home sales gross margin to be in a range of 20% to 22% on a GAAP basis, or 22% to 24% on an adjusted basis. Now I'll turn the call back over to John for some closing remarks.

Thanks, Chris. Lancy Homes made progress on a number of fronts in the first quarter of 2022 by capitalizing on the positive housing fundamentals in our markets, by executing on our strategy of scaling our operations in a profitable manner. We ended the quarter with a record backlog, giving us great visibility into the remainder of the year and a roadmap to achieving our goals for 2022. We remain optimistic about the long-term outlook for our industry, thanks to the underlying fundamentals and limited supply of new and existing home inventory. We also believe our strategy of focusing on the more affordable segments of the market while offering a great value proposition through our high-performance home series will produce great results for our shareholders over time. While the ongoing supply chain issues and rising rate environment present headwinds for our industry, I am confident we have the right team in place with years of operational experience to successfully navigate through these challenges. Finally, I would like to thank our team members for getting us to where we are today. Earlier this week, Lancey Holmes was named the 2022 winner of the prestigious Builder of the Year Award by Builder Magazine, which is a great honor for our company and a validation for all the hard work the entire team has put in. We should all take pride in this accomplishment. I look forward to sharing in the future successes with all of you as our company grows.

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

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the keys. One moment, please, while we poll for questions. The first question comes from Matthew Bowley from Barclays. Please state your question, Matthew.

Hey, good afternoon, everyone. Thanks for taking the questions. Congrats on the execution and the Builder of the Year Award as well. That's nice validation of everything you guys have been doing. I wanted to ask first on the rate lock commentary. That was a really helpful color you gave. I'm sure you've seen a lot of your peers, I guess, kind of went after going with sort of different strategies on approaching rate locks. I'm curious, kind of going forward, you could elaborate a little on that sort of, you know, is there any, you know, what would it take, I guess, for you guys to start actually buying rate locks for potential buyers or for buyers in backlog? Or, you know, what else are you doing to sort of encourage people to do that just to try to limit this sort of, you know, clear, quick move in interest rates here? Thank you.

Hey, Matt. It's Mike Forsum. I'll take that question. Generally at this moment, it's really just us encouraging buyers to lock in their interest rates now. We do have a provision whereby if it floats down, we'll give them coverage. But for the most part, it's on a voluntary basis, and we're really not having to do anything to incentivize them to do that. Some actually are still willing to wait. Others are a little bit more anxious. It's ones that are probably closest to delivery that would like to kind of get some comfort to know where they're going to be at here in the short order in the next couple months. But for the most part, again, as I said, we are not putting out any incentives or doing any buy-downs or doing anything that would help to mitigate that, I guess, other than just playing it through.

Okay, well, thank you for that. It's great color there, Mike. Second one on the gross margin, you know, so 29%, I guess, pre-interest, pre-purchase accounting in Q1 there. You held the guide at 22% to 24%. So I'm just curious, you know, are you sort of embedding some conservatism in there? You know, why the implied, I guess, decline in gross margins from where you are today? just kind of any color on the cadence of that as we should think about the model. Thank you.

Matt, it's Chris Porter. Yeah, great question. We experienced a pretty high delta between the two this quarter just because we were a little more front-loaded in the purchase price accounting for this quarter. And as we look out towards the back part of the year, we just wanted to make sure that we had those numbers correct. We've pretty much finalized the purchase price accounting. It will get completely wrapped up next quarter and we'll have a little bit more clarity on that spread through the back part of the year. But there is definitely some conservatism built in just to offset that uncertainty a little bit.

Gotcha. Okay. No, thank you. Thank you for that. And then the last one for me, I'm just curious, you know, you gave the sales pace, you know, for the quarter. Just curious if you can kind of speak to maybe some of the trends into March and even into April, if possible. Obviously, we're just trying to get a handle on sort of the leading edge of demand here as a result of the uptick in interest rates. So I'm just curious if you can kind of speak to any of those demand trends into March and April. Thank you.

Sure. Matt, it's Mike again. I would say that the demand – is remaining consistent as it was last month and the month prior to that. We had a very strong sales week again this week. Traffic stayed robust. And so we haven't seen any real abatement in interest in our homes, at our communities, in all of our locations across the country.

Wonderful. Well, thanks, everyone, and good luck. Thanks, Matt. Thanks, Matt.

Thank you. Ladies and gentlemen, just another reminder, if you would like to ask a question, please press star, then 1. If you would like to ask a question, please press star, then 1. The next question comes from Alex Ragio from B Reilly. Please go ahead.

Good evening, gentlemen. Great quarter. Congratulations. A couple quick questions here. First, can you update us on the Hanover acquisition, how integration is going, how sales activity is going? and thoughts about the product and so on.

Hey Alex, it's Mike. Nice to hear from you. Thanks for that question. I will say that we're very, very happy with the integration to date with Hanover. The team that we've inherited through that acquisition is proving to be top notch and executing at the highest level and we continue to perform their you know, I think as we expected or even better in some respects. The conversion from Hanover family builders to land, sea, homes at the community level is now complete other than those trailing communities that were winding up. We left a handful or so out there to finish up as Hanover. But if you're driving around the Orlando Metroplex area, you would now just see land, sea, homes on the signs and within the sales offices. So we're really happy. We're getting better at this every single time. This conversion was probably one of the quickest we've done. I will give high praise and compliments to the Hanover management team and then our team here that went out and worked with them to do this conversion and to kind of keep things just seamlessly moving along. The market remains strong. The products are are highly desirable or the houses are highly desirable at the communities that we're at. And so we're really thrilled with how things are going there.

That sounds great. And then broadly speaking, are you still limiting sales in some communities?

We are. Yeah, we're calibrating them against really our production. If we see the production tail extending out really roughly past nine months or so, at a community level, we definitely like to kind of rein that in. We don't want it to be too long and be too exposed. And so that's one of the factors that we're looking at.

Excellent. Last question. Can you just give us an update on the pace of sales at the Legacy New York property?

Yeah. Hey, Alex. This is John Howe. I believe we have only 12 remaining units left to sell there. We started delivering units in the month of March, and I have a pretty good cadence of deliveries of the 38 units that we've sold. So we expect to be entirely sold out and closed out of that building this year.

Fantastic. Congratulations. Nice quarter, gentlemen. Thank you. Thank you.

Thank you. The next question comes from Alex Barron from Housing Research Center. Please proceed with your question, Alex.

Yeah, thanks, gentlemen. I wanted to ask about the share buybacks, and how are you guys thinking about that? Is that something you're going to do more systematically, or is it just opportunistic here and there?

Hi, Alex. This is John Ho. Thanks for the question. We've deployed it successfully these past couple of months, and I think our stocks performed well as well year to date. We still continue to believe that our stock is undervalued, which is why we obtained another $10 million authorization. I think this is something that should be one of the tools in our toolkit as we continue to generate significant cash flow with our operations, especially with our expansion to these geographies that have a quicker turn. So we think it's a good allocation of a capital. It doesn't take away from our growth, obviously, and something that we continue to use to invest in ourselves.

Okay, great. And then I was wondering if you could provide any sort of guidance as far as the new acquisition. How many homes are you guys expecting over the next 12 months? And also on the Texas region, is that gonna be just a million dollar type operation or are you guys looking to expand to more affordable homes from that price point?

I'll take the first question and I'll hand it over to Mike for the second one. On the first one, you're talking about the handover acquisition that we made in January, correct?

Yes.

Yeah. We closed about, I believe, just under, was it 500 or so units at the end of the year in 2021, and that's about 50% of what we expected for the year in 2022. That business will probably expect to do close to 1,000. Mike, you want to talk about Texas? Sure.

Hi, Alex. We are not planning on staying at that high price point that you just identified. Our mission there and we're actually executing it as we speak, is to pivot out of that semi-custom production format into our typical volume format, production format that we employ and deploy across the country with the idea that we're trying to make all of our homes as attainable from a price point as possible. And so we'll be doing that in Texas as well. In fact, the community we acquired in Kyle is multi-segmented in terms of its product positioning and pricing. And we'll have many product types there that'll be much more affordably priced than the price point you had mentioned earlier. And that's how we'll continue in Texas.

All right. Well, thank you very much and best of luck. Thank you.

Thank you. Ladies and gentlemen, just one final call before we conclude. If you'd like to ask a question, please press star, then one. If you would like to ask a question, please press star, then one. We will pause to see if there are any further questions before we conclude. At this time, we have no further questions. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to John Ho for closing remarks. Thank you.

Thank you. Thank you, everyone, for joining us on our call today, and we look forward to talking to you next quarter.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation.