Landsea Homes Corporation

Ladies and gentlemen, greetings and welcome to the Landsea Homes Corporation fourth quarter 2022 earnings conference call. At this time, all participant lines are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to Drew McIntosh. Please go ahead.

Good morning, and welcome to Lancey Holmes' fourth quarter of 2022 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 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. You should not place undue reliance on these forward-looking statements in deciding whether to invest in our security. 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 Lansi Home's website and in its SEC filings. Hosting the call today are John Ho, Lansi'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 morning, and thank you for joining us today as we go over our results for the fourth quarter and full year 2022 and give our thoughts on the outlook for our industry and our company. Lancy Homes generated total revenue of over $1.4 billion and pre-tax income of $101 million and earnings of $1.70 per diluted share for fiscal year 2022. all records for our company. We closed 2,370 homes during the year, representing a 45% increase over 2021 and expanded home sales gross margin by 290 basis points to 20.4%. We also returned capital to our shareholders in an earning accretive manner through our share repurchase program and increased our book value per share by 20% to $16.04. We achieved these financial and operational milestones while growing our presence in key home building markets, maintaining a strong balance sheet. I want to thank all our team members for their contributions to this record setting year and applaud them for overcoming the operational challenges our industry faced while executing on our business plan. While 2022 was a record setting year in terms of profitability, it was also a year in which the demand environment became more challenging. due to a rapid rise in mortgage rates and a subsequent decline in home buyer confidence. This change in market dynamics caused buyers who were in the market for a new home to become more cautious and prompted buyers in our backlog to cancel their purchase contract. As a result, our net new order activity in the third and fourth quarters dropped off significantly as compared to the prior year. We believe this is a natural reaction to the sudden change in affordability brought by the rise in interest rates, and have taken action through the use of incentives and price adjustments to regain momentum on the sales front. Fortunately, we have begun to see some improvement in market conditions starting in December, and this carried into the new year. We expect near-term demand conditions to remain volatile and subject to changes in mortgage rates and other macro factors. However, we are encouraged by the success of our sales efforts to start the year. In response to the more uncertain demand environment, we have placed an increased emphasis on cost reduction, balance sheet strength, and cash flow generation. In terms of cost reductions, we are proactively negotiating with our suppliers, vendors, and contractors to make sure that the prices we are paying reflect the new market realities. We have experienced significant input cost inflation over the last few years, expect those trends to reverse as the current slowdown works its way through the home building ecosystem. We are also working on establishing more favorable vendor agreements with our national suppliers that factor in our increased size and scale. While land prices typically take longer to adjust during a market correction, we remain disciplined with our land acquisition efforts and have walked away from several current transactions and are prepared to walk away from option agreements should they no longer meet our hurdle rates. We have also made changes to our overhead cost structure, reducing headcount by approximately 8%, which would improve our operational efficiency and expense leverage. As we announced earlier this week, we are relocating our corporate headquarters to Dallas, Texas, from Southern California, a move that should provide cost savings over time that will allow us to operate more effectively as a national homebuilder. This move should also signal our commitment to growing our homebuilding presence in that state. With respect to the balance sheet, we ended the year at the low end of our targeted debt-to-cap range at 41.6%. We also had $141 million in cash and $160 million available under our revolving credit facility. giving us plenty of liquidity to operate from a position of strength. We also extended the term of our credit facility, pushing out the maturity date to 2025. Our current plan calls for a reduction in land acquisition and development relative to 2022, which would put us in a great position to generate cash from operations, giving us additional optionality to pay down debt, reinvest in our operations should more favorable opportunities arise, or return capital to shareholders. Our board of directors recently approved extending our $10 million share repurchase authorization, giving us the added option of buying our stock with excess cash. We accomplished a lot in 2022 from both a strategic and financial standpoint that has poised us well to continue to drive our home building operations to the next level. We've established a presence in some of the best markets in the country and have quickly scaled our operations, thanks to great execution by our teams, our affordable product focus, and the appeal of our high-performance homes. Our strong financial condition gives us the stability to operate with confidence during uncertain times and take advantage of opportunities should they arise. As a result, I remain very confident in the future of Lansing Homes. With that, I'd like to turn the call over to Mike, who will provide more detail on our operations.

Thanks, John, and good morning to everyone on the call. Lansi Homes closed 703 homes in the fourth quarter of 2022, representing a 32% increase over the fourth quarter of 2021 and taking our total homes closed for the year to 2,370. Our team did an excellent job throughout the quarter communicating with buyers and backlog and giving them the confidence to close on their home. Backlog Preservation and conversion were our top priorities for the quarter, and this focus helped us produce strong top-line growth and cash flow from operations. It also limited our ability to be more aggressive on the sales front, which led to a disappointing order performance for the quarter. However, as John mentioned, we began to see improvement in order activity starting in December, which has carried into the new year. Following fourth quarter's net absorption pace of 0.5 per community, our order pace improved to 1.8 per community in January and accelerated to 2.8 per community in February. Part of the demand improvement we have seen can be attributed to mortgage rates coming off their highs, but an equally important factor has been our ability to be more responsive with pricing and incentives now that we've closed out a majority of our high margin backlog. We understand that most buyers are trying to solve for a monthly payment that fits their budget, and we have been able to address their affordability needs through some combination of base price reduction and financing incentives. We believe that this is a clear sign that there is demand elasticity in our markets and that there continues to be motivated new home buyers at the right price. We have recently seen an uptick in buyers coming from single-family rental situations who now want to own their home. Typically, these buyers want a quick close and we have enough inventory in our communities that are at a or near completion to satisfy this demand. Another positive recent development has been a noticeable improvement in the supply chain. Cycle times have come down 30 days from their peak as labor and materials availability have gotten better with the slowdown in activity. While most of this improvement is on the front end of the construction process, We are starting to see shorter lead times on key product categories that we need to get our homes closed. After years of delays and disruptions, better cycle times and a more reliable supply chain will be a great tailwind for industry and will allow us to turn our inventory more quickly. Overall, I am optimistic about the current state of our industry and the direction of our company. After two difficult quarters marked by sluggish sales and increased cancellations, we are starting to see a real shift in the marketplace. Buyers are responding to the pricing and incentive adjustments we are making, and home buyer confidence has improved thanks to a resilient economy and a healthy employment picture. We are excited about the future in the markets we're in, and we believe we have an opportunity to gain market share thanks to our focus on affordability and our compelling and differentiated high-performance homes series. With that, I'd like to turn the call over to Chris, who will provide more detail on our financial results and give some guidance on our first quarter outlook.

Thanks, Mike, and good morning, everyone. For the fourth quarter, we generated $426 million in revenue, a 6.9% increase over 2021, as our move into Florida continued to show benefits, along with increased sales from our New York and Texas operations. Pre-tax income for the quarter was $34.4 million, while net income was $25.6 million, or $0.62 per diluted share. This compares to $49.2 million in pre-tax income and $38.4 million, or $0.83 per diluted share, in the fourth quarter of 2021. As both Mike and John discussed earlier, we faced increased incentives and price discounts as we delivered high margin backlog during the quarter and solved for the price clearing market. Our home sales gross margin decreased 250 basis points compared to the fourth quarter of 2021 to end at 19% due primarily to these items. Just as home sales gross margin decreased 160 basis points to 23.4%, incentives as a percentage of home sales revenue came in at slightly over 3% and were primarily the result of mortgage rate buy-downs. The fourth quarter results, though, solidified our record year where we delivered $1.4 billion in revenue, a 41.4% increase over 2021, pre-tax income of $101.1 million, a 51% increase over last year, and a 39% increase in net income to $73.6 million or $1.70 per diluted share. The results were driven by strong ASP growth in Arizona, the expansion in Florida where we delivered 1,106 homes and $473 million in revenue, and our New York project providing $111.4 million in home sales revenue. Our home sales gross margin improved 290 basis points year-over-year to 20.4%, and our adjusted home sales gross margin improved 430 basis points year-over-year to 26.9%. We generated 88 net new orders in the fourth quarter, down 80% from last year as we felt the impact of the sharp increase in interest rates and buyers waited on the sideline for a more solid direction from the Federal Reserve. The overall slowdown in net orders was reflected in our absorption rate for the quarter of 0.5 homes per community. For the year, we averaged 2.4 homes per community. We ended the quarter with an average 58 selling communities, up from 35 in the fourth quarter of last year. And for the full year of 2023, we expect to grow our year-end active community account by 15% to 20% as compared to year-end 2022. To address some of the buyer's sensitivities, we have continued to work with Landsee Mortgage to address buyer's payment needs, including locking in 30-year fixed mortgages below 5% and have seen good momentum from these efforts. We also began Lansi Title in early 2023 to further enhance our home buyers experience. Having our own title company allows us to ensure the highest level of service and maximize efficiencies throughout the home buying process by controlling the quality and timing of title and closing. In the fourth quarter, our SG&A expense was 43.5 million or 10.4% of home sales revenue, a 230 basis point improvement from fourth quarter of last year. And for the full year, we had $178.6 million in SG&A expense, or 12.8% of home sales revenue, a 30 basis point improvement. As John said earlier, we will continue to monitor and adjust our overhead structure as the market evolves. Our tax expense in the fourth quarter was $7.9 million, which represents an effective tax rate of 23.1%, reflecting the catch-up of the federal energy-efficient home credits. For the year, our tax effective rate was 25.1%. For 2023, we expect our tax rate to range between 25.5% and 26%. Turning to the balance sheet, we ended the quarter with a healthy 301 million in liquidity, which includes 141 million in cash and 160 million in availability under our unsecured revolving credit facility. After we paid down $80 million during the quarter, We also extended the maturity an additional year and remain committed to continue to expand our lending relationships and borrowing capacity. As John stated in his opening comments, we are focused on strengthening our balance sheet and preserving liquidity in these uncertain times. We feel this will enable us to operate from a position of strength as we move into 2023. We finished 2022 with $505.4 million in total debt and achieved net debt of $364.7 million. Our ratio of debt to capital at the end of the quarter was 41.6% and our net debt to total capital ratio was 30%. Now I'd like to provide some guidance for the first quarter of 2023. This guidance is based on our best estimate as of today with the current market conditions. As inflation and interest rates continue to change, Their impact may affect our overall results. With that said, we anticipate first quarter new home deliveries to be in the range of 400 to 445 units and delivery ASPs to be in the range of $520,000 to $525,000. We anticipate gap home sales gross margins to be in the 17% to 18% range, reflecting continued price discounts and incentives with adjusted gross margins hovering around 21% to 23%.

Now that concludes our prepared remarks, and now we'd like to open up the call for questions. Thank you.

Ladies and gentlemen, at this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Alex Riggle from B. Riley. Please go ahead.

Thank you very much, and nice quarter, gentlemen. Tough times here, but it seems like you're managing through it well. John or Mike, could you talk a little bit about some of the regional demand trends that you're seeing across your four state territories?

Yeah, Mike, you want to? Sure. Alex, it's Mike. I would say really coming to the end of December to where we are today, that we have had a very nice bump back in all of our markets through all of our regions and through all of our demographics. We're knocking on wood that this continues, but we have been very excited about week-over-week sales absorption paces at all of our communities. And it seems like we're finding the sweet spot between our price recalibration and what we're offering in terms of financial incentives to drive the right type of traffic and to get the right absorption rates back into our communities.

That is helpful. And then...

What was the cancellation rate in the fourth quarter? And maybe talk about sort of the trends in cancellation rate December, January, February, and how that's changed.

Well, the cancellation in the fourth quarter, particularly in Arizona, was extraordinarily high. We basically ran up to as close to 72% in that market in general. We're ranging between probably 10 to 40% in our other markets. But since that time, Alex, it has normalized back down between the 9 to 15% range as we've been going forward under our new pricing and incentive structure.

That is very helpful.

And then what's the number of homes under construction? And can you talk a little bit about sort of spec strategy versus build to order?

Well, right now we have roughly around 540 houses under construction, approximately around 100 or so are nearing total completion. That's dispersed around all of our 58 communities, so on average it's not a lot, roughly around two-ish, I would say, maybe more in some others and less in others. But what we're finding is that the market is responding like a resale market. Most of our buyers are transacting in a period of 45 to 30 days. This is mostly around locking in interest rates that are favorable to them. We see it as, I guess, what maybe some of our industry peers are talking about, sort of spec inventory strategy around sales. We're deploying a lot of those same kind of methodologies and processes to do exactly that. If we have a house near completion, we're highly successful in getting that sold and closed within that 45 to 30-day period.

That's great. Thank you very much. Thanks.

Thank you. Our next question comes from the line of Carl Ricard from BTIG. Please go ahead.

Thanks. Good morning, guys. Alex just asked one of my questions, but I did want to ask about the lot count. So I think it's 5,300 owned. What percentage of those are fully developed? And what's your guess as to what your development spend might be this year, either on taking down a lot options or finishing out the stuff you own already?

Hey, Carl, this is John. Hey, John. So the lots that we own, that's about 45% of our total lot count. And as we've shared before, our goal is to really be building a home on that lot within 12 to 18 months. So I would say most of those lots that we own and have taken down are very close to starting homes on within that time period. Anything that would require entitlements or require more land development, we typically have used more of a structured transaction where we'd be taking down that closer to when it's in finish lot condition. As it relates to sort of executing on our options this year, I think we shared in our prepared remarks. So anything that we believe still meets our underwriting guidelines, we'll still execute on. Anything that we believe may be challenged, whether it's by pricing or whether by cost, we're reengaging with the landowners and the sellers to renegotiate some of the transaction structure and sometimes pricing as well. So our land spend will be down this year, I would say, probably in that 20% to 25% range overall this year. given how fast we grew in 2022 with expansion in Florida.

Great. I appreciate that detail, John. Thanks. And then just on the side note, did you walk from any option contracts this fourth quarter? And if you did, what were the charges associated?

We didn't walk from any in the fourth quarter. We didn't have any charges in the fourth quarter.

Okay. Thanks. And then last question, just on the community account growth, Chris, I think you said 15% to 20% target for 2023. Will that result in any significant mix adjustments geographically? Obviously, Texas is coming, I know, but just as, and obviously New York going away. But roughly, what do you think your split among communities might be if you hit that target in 23 in terms of geographical share? Thanks.

Yeah. It'll be about the same split as it was at the end of the year. Like you said, New York went down, but we only had three lots left in New York. But generally speaking, we're trying to maintain that balance between the different regions. Texas will come on towards the end of the year with more volume. But generally speaking, it'll be about the same mix.

Thanks, Chris. Thanks, fellas. Thank you. Thanks, Carl.

Thank you. Our next question comes from the line of Matthew Boulay from Barclays. Please go ahead.

Hey, morning, everyone. Thanks for taking the questions. A question on some of the year-to-date trends. It was helpful color there. You gave around sales pace in January and February. Just curious, as clearly it was a strong start to the year in a lot of places, we've seen it with your peers, and then you know, rates have kind of moved higher, call it mid-February, and you've seen some of the pullbacks in the overall data. You know, I'm curious if you guys can get into some of the leading edge of trends, you know, what's been, you know, how's the market been kind of evolving, you know, in the past couple weeks? And, you know, specifically with, if you can kind of layer on the incentive conversation into that, were you pulling back on incentives and now having to press a little harder? How is that playing into this very dynamic environment? Thanks, guys.

Yeah, sure. Hey, Matt. It's Mike. Solid question. I would say by, you know, let me just begin by saying our sales week last week was probably one of the best sales weeks we had this year, if not probably since the history of our company. Now, albeit we have more communities than we've had before, but it does not seem like the trends are abating currently. as well as the fact that we are decreasing our incentives. And as we go forward, and what I mean by that decreasing really around price decreases and incentives to kind of keep our homes moving and absorption rates up. We found sort of the bottom of that around the first week or so of January as we were coming through December and started to feel sales kind of moderating to the extent that they were and what we were against. found the sweet spot and it's been building since that point. So really what we did see is the high cancellation rate came through the company. We had to make the course corrections that were probably larger and bigger around pricing, adding more incentive to get the absorptions. And then as we've come through and the new year has begun, those price adjustments have retracted. And in some cases, we're now just reselling at par if we have a cancellation. And in other areas, particularly like in North Orlando, he's still getting some price increases, albeit minor, from where they were in the past. But we're still able to get some price increasing into some of our communities. So I think, again, we're feeling that the consumer is adjusting to the new normal and which is rates that are around that five-ish, if you will, with a five handle on it. They know it's not going back to three and a half. They're looking at pricing, and they're seeing some adjustments that are being made, but they're not looking at radical price adjustments. The resale market continues to be very low, so their options are limited. And we're seeing people coming out of rentals. They've been there for a year. Their leases are coming up. They're seeing their rental rates going up. And they're seeing this as an opportunity to jump into the new housing market. And I think we're capitalizing on that. I will say, though, that probably the more attracted to our smaller square footages and lower price points, which you would expect, but we believe that we have a really wide array of attractive products that are available to them. And we have inventory that we can deliver in that 45- to 30-day period. So I think all in all, we're really excited about how the year has commenced. We're knocking on wood that it continues, but we're feeling pretty good from at least the optics we have about what the future looks like here in the next quarter or so.

Got it. Thanks for that, Mike. That's super helpful. So then the second one on the gross margin, you know – To the extent you've been reducing incentives, and I think I heard John say earlier that you're starting to see some of the cost reductions coming through. I know you don't want to guide beyond Q1, but are you getting any kind of visibility to a bottoming in gross margins at some point, or is it just kind of too early to say at this stage?

I think it's probably too early, Matt. We will start seeing probably the benefits of some of those cost reductions, but that's probably not going to happen in the latter quarters of this year, the third and fourth quarter. It really depends on how much more we need to continue to provide incentives throughout the next several quarters. If we continue to see the momentum that we've had in this year, then there's certainly an opportunity for some margin expansion the latter half of this year. But I think we'll have to wait and see how this next quarter or two goes.

All right. Thanks, John. Thanks, everyone. Good luck, guys.

Thanks, Matt. Thanks, Matt. Thank you. Ladies and gentlemen, if you wish to ask a question, please press star 1. Our next question comes from the line of Alex Varon from Housing Research Center. Please go ahead.

Yeah, thanks, gentlemen. I was hoping you could kind of give us the path ahead for the Texas region. Right now, I don't see any backlog, but I do see over 1,000 lots. I'm kind of curious if you guys can talk about, you know, what that's going to look like, what kind of price points. I think in the past you were in the... 800 to a million plus range. But, you know, I'm wondering if that's going to change just any color on, you know, what we should expect in terms of some type of run rate, whether it's later this year or next year, just to get an idea of where you guys are going.

Sure. That's our community. And this is Mike Forson, by the way. Thanks for the question. That is our community and Kyle called Anthem. You're right, it's close to about 1,000 lots. But what we have there is a full spectrum of product offering from entry level to first time, first time move up. The price points will be within the fours to the sixes, roughly, sort of maybe straddling a little bit on the other side of that. We're currently in our development stage. Lots should be completed here coming into early summer. And we're looking to go vertical hopefully by fall, if all things go well, and possibly opening up from sales by the end of the year and then really starting into full production at the community in 2024. Got it.

And if it's going full blast, what's the roughly annual units or how many units? If it's one community, how many different product types are going to be available?

Well, we're going to be running three to four communities at a given time when it's up and running. And so it will be probably a couple hundred a year that would be coming out of that collectively, and it will sort of balance itself out depending upon what program is in full swing and what one's coming online and what one's going offline. So it could range from 150 to about 200. Got it.

And, you know, in the current environment, you know, the Fed's still talking about raising interest rates, and we kind of saw what that did in fourth quarter. How are you guys thinking about that going forward? You know, if rates kind of stay above 7%, you know, how much can you buy down the rate, too, or what's your strategy? You know, how are you guys thinking about it?

Yeah, Alex, this is Chris Porter. We're continuing to buy mortgage rates down into the – low fives high fours and you know just depends on the size and the time that we are buying those for typically we're buying you know 45-day chunks and and it seems to be working very very well and within our overall margin guidance. And so I think as you see where we guided for the first quarter, that's really kind of priced into that guidance is continuing to have those mortgage rate buy downs in there as part of our packages.

Okay. Well, thank you very much and good luck. Thank you. Thank you.

Thank you. Ladies and gentlemen, a reminder, if you wish to ask a question, please press star 1. Since there are no further questions, I would like to turn the conference over to John Ho, CEO, for closing comments.

Thank you everyone for joining our call today. We look forward to speaking to you soon at the end of our first quarter.

Thank you. The conference of Land, Sea, Homes Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.