Landsea Homes Corporation

Please stand by, your program is about to begin. If you need assistance on today's program, please press star zero. Good day, everyone, and welcome to the Landsee Homes Corporation third quarter 2024 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star one on your telephone keypad You may withdraw yourself from the queue by pressing star 2. Please note this call may be recorded. I'll be standing by if you should need any assistance. It is now my pleasure to turn the program over to Drew McIntosh.

Good morning and welcome to Lancey Holmes' third 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. 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 Lansi 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 Lansi Homes' 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. Thank you for joining us today.

As we go over our results for the third quarter of 2024, provide an update on our operations. Nancy Holmes reported a 29% increase in net income, $11.1 million, a 36% increase in earnings per share, 30 cents in the third quarter. Home sales revenue rose 26% year-over-year on a 40% increase in deliveries, while net new orders grew 29% on a sales pace of 2.5 homes per community per month. Home sales gross margin came in at 17.1%, well in excess of our guidance, and SG&A as a percent of revenue grew to 13.9%. representing a 250 basis point reduction for last year. Overall, it was a very productive quarter for our company. I'm pleased with the progress we made on a number of fronts. We continue to see a long runway of growth for Lansi in our existing markets, which represents some of the best home building markets in the country. Florida, Texas, Colorado, Arizona, and California are great places to live. With vibrant economies, we believe the need for new housing in these states persists for years to come. We entered most of these markets via acquisitions, which allowed us to establish a presence more rapidly than if we expanded organically. The difficult task of integrating these acquisitions is largely behind us. We are now focused on growing our presence beyond what it is today, reaping the benefits of increased scale. 250 basis point year-over-year improvement in our SG&A ratio this quarter, tangible evidence of this strategy working. We also see it playing out in the form of better rebates and terms from our suppliers and trade partners.

We will continue to focus on these benefits of scale we execute on our growth strategy.

New home demand trends in the third quarter were solid, as we experienced consistent traffic to our communities throughout the quarter. Buyers continue to respond to financing incentives as a way to offset higher mortgage rates. This selling tool remains a key advantage that the new home market has over the existing home market. Another advantage that Lansi has over the existing home market are their home builders, differentiation that we offer for high-performance homes. which feature the latest in new home automation and energy efficiency. Purchasing a home is likely the biggest investment a family will ever make. We believe that most buyers are willing to pay a little extra to live in a home that is equipped with features and amenities that will enhance their quality of life. When you visit a Lancy Homes community, the difference is clear.

We know that making a strong impression at the point of sale is key to driving sales. From a macro perspective, we believe the outlook for our business continues to be favorable.

The Fed has charted a path to lower interest rates, while the economy appears to be headed towards a soft landing. Inflation coming down and the economy showing signs of resiliency. There appears to be real interest in reducing the barriers to new home construction from both parties in an effort to solve the housing affordability crisis that persists in both markets. Existing home inventory has increased in some markets or remains well below historical levels on an absolute basis, which is driving a higher percentage of buyers to the new home market.

All those factors point to a brighter future for our industry.

While we intend to take advantage of these favorable dynamics, we will do so within the framework of a conservative balance sheet. We made further progress toward our goal of getting our debt-to-cap ratio into the mid-40% range. reducing our leverage by another 100 basis points this quarter compared to the end of the second quarter. We expect to achieve our mid-40% target by the end of the first quarter of 2025. It will put us in a great position to operate from a position of strength, financial strength.

As we turn our attention to the fourth quarter, prepare for next year's spring selling season, I feel good about what lies ahead for our company.

We have a strong backlog in place and enough in-process inventory to hit our delivery goals for the year. Our communities are well-positioned throughout our markets. Our high-performance homes continue to perform well versus the competition. We are on track to meet our balance sheet goals by the first part of next year. We should continue to see the benefits of our increased scale in the form of better expense leverage. As a result, I believe Lansi Homes on the path to greater success in the future.

Now I'd like to turn the call over to Mike, who will provide more color on our operational performance this quarter. Thanks, John, and good morning to everyone.

Selling conditions in the third quarter were solid as we were able to maintain consistent level of sales through the use of incentives, including mortgage rate buy-downs. We did experience a bit of hesitation from buyers during the quarter, either because of mortgage rate volatility or economy and political in political uncertainty, but our sales team did an excellent job putting these fears at ease and working with buyers to make purchase decisions and absorption rates in line with 3Q last year. Florida continues to be a great market for us, and we have seen no evidence of a meaningful drop-off in buyer interest despite the recent storms and higher existing home inventory levels. In fact, with similar volume of orders, our ASPs were up 7% 3Q last year. We experienced no major setbacks to our operations as a result of the storms in that region. And more importantly, no reported injuries to our team members there. Competition among home builders in Central Florida region remained fierce, which is to be expected in such an attractive home building market. But we feel we have a distinct advantage with our high performance homes, and well-located communities to go head to head with anyone. The same is true of Texas, where we took another step forward in further establishing our presence in the Austin and Dallas-Fort Worth markets. We are currently selling out of three communities in Austin and 18 in Dallas-Fort Worth and look to grow those numbers in the coming years. The heavy lifting associated with integrating our recent acquisition of Antares Homes in Dallas onto the Lansi Homes platform is already behind us. And we are excited about the opportunities that lie ahead as a result of this acquisition. Our operations in Colorado, Arizona, and California all performed well in the third quarter and demonstrate the positive benefits of geographic diversification. We have carved out a solid niche for our company in each of these markets by offering affordable homes with an emphasis on energy efficiency smart home technologies, and quality construction. We ended the quarter with 83 selling communities, up 40% from the third quarter last year. As stated already, Texas added 21 communities to our account this quarter compared to third quarter last year. Build conditions continue to be favorable as we now are back to pre-COVID construction cycle times in most markets and in some instances, we've been able to improve on those times. For instance, we reduced cycle times for our typical single-family detached home by 25 calendar days just from last quarter alone, equating to a 13.4% decrease in construction time. We've also experienced better responsiveness from municipalities when it comes to permitting and approvals, which has helped further expedite building process from Permit application to start of homes foundation. These impressive improvements in cycle time reductions are timely as we have started to see a modest shift in consumer preferences back to dirt sales as opposed to spec homes, as some buyers have become more comfortable with the lead times associated with build-to-order homes. While this may reduce backlog turnover rates we achieved in recent quarters, we feel it is a more risk-averse and higher-margin way of doing business. Having our buyers more vested in the early process of their home build is essential in fostering deeper customer relationships and an overall brand building. Regardless, we still plan on having plenty of move-in ready homes at our communities for those that want a quicker close as we believe this product offering will be necessary to compete against quick close resale and other competitor spec inventory. As John mentioned, we are really starting to see the benefits of our increased size and scale. As an example, we have lowered direct housing costs over the last couple years, and as a result, we have been able to drive down overall building costs throughout all of our divisions. On average, our building costs are down 3% to 5% year over year, and we look to continue to improve upon that metric in quarters to come. As well, we have plenty of room for growth in each of our markets, and we strongly believe we have the right product, people, and strategy in place to increase our market share. Overall, I feel good about how we have executed in the quarter and how our company is positioned as we head into the end of the year. market conditions remain generally favorable and our home offerings continue to sell well versus competition by way of our clear value proposition. At the same time, our team continues to drive improvements in operating efficiencies, construction costs, and cycle times while looking to lowering selling costs when possible, which will continue to add to our overall positive results in the quarters to come. With that, I'd like to turn the call over to Chris, who will provide more detail on our financial results this quarter and give an update on our forward-looking guidance.

Thank you, Mike. As John noted, Lancey Homes reported net income of $11.1 million, or 30 cents per share, for the third quarter, compared to $8.6 million, or 22 cents per share, in the third quarter of 23. We reported fully adjusted net income of $15.9 million and adjusted earnings per share of 44 cents. which were up 36% and 47% respectively from third quarter of last year. Our fully adjusted net income includes 5.6 million of purchase price accounting booked in the quarter. We had 629 deliveries, which was 40% higher than the third quarter of 23 and home sales revenue increased 26% to 325.6 million. As we've stated, our goal is to have a more balanced portfolio between California, Arizona, Texas, and Florida. with Colorado adding between 5 and 10%. With the performance of both our Texas and Arizona operations, we are closer to our goals. Texas contributed 20% of our closings and 16% of our home sales revenue in the quarter, and Arizona contributed 31% of our closings and 26% of our home sales revenue. We are very pleased with our gross margin of 17.1%, which exceeded our guidance as we enjoyed the lower cost of incentives and stability of our direct costs and our adjusted gross margin was a stronger 22.8%. Incentives and discounts for the quarter were just below 6% of home sales revenue, which was a slight improvement over second quarter. We saw an improvement in this cost starting in July as the 10-year Treasury dropped below 4.5% and ultimately into the 3.6% range. We've seen that trend reverse recently with economic news released and are watching the incentives closely for their impact in fourth quarter. but we do expect them to remain at an elevated state. We have also seen more aggressively advertised fixed-rate incentives from competitors, with many offering 3.99% rates, which costs more to offer than the 4.99% rates we have been using. Backlog ended the quarter with 691 homes for a total value of $373.1 million for an ASP of $540,000. During the quarter, we had 91% backlog conversion rate. Our SG&A expense was 13.9% of home sales revenue this quarter. The improvements from our cost realignment strategy that we discussed last quarter really helped us resolve. We see this ratio improving further in fourth quarter as we deliver more homes and have higher home sales revenue, but relatively stable G&A. We continue to target improving this ratio further next year. Our tax rate in the quarter was 23.5% and expect a full year tax rate between 24% and 26%. Now turning to our balance sheet, we ended the quarter with $263 million in liquidity, $36 million in cash and cash equivalents, and $227 million in availability under our revolver. As we have mentioned previously, we are focused on being more efficient with our cash and reducing our overall leverage and interest expense. During the quarter, we reduced our leverage 100 basis points sequentially to 51.8% debt to total capital and ended the quarter at 49.2% net debt to total capital. We continue to focus on generating cash flow from our acquisition and reducing leverage back to within our stated policies of 45% total debt to capital and mid-30s net debt to total capital by the end of first quarter. Coming off of our successful third quarter, but realizing the continued higher levels of mortgage rates and related incentives, we now expect full-year new home deliveries to be between 2,890 units and 3,000 units, with average sales prices between $520,000 and $535,000. Home sales gross margins are expected to be in the 15% range, and adjusted gross margins should be around 21%. These sales and gross margins reflect our best estimate as of today with the current market conditions. As the volatility in the 10-year Treasury remains high and incentives and mortgage rates continue to change, overall results could change accordingly. With that, that concludes our prepared remarks, and now we'd like to open up the call for questions.

At this time, if you would like to ask a question, please press star 1 now on your telephone keypad. To withdraw yourself from the queue, you may press star 2. Once again, to ask a question, that is star 1 on your telephone keypad. One moment while we queue. We'll take our first question from Matthew Bully of Barclays.

Good morning, everyone. Thank you for taking the questions. I wanted to first start on the topic I believe Mike was mentioning earlier around security. the mix between quick move-in and bill-to-order. Because obviously looking at the model today, it feels like you're obviously still assuming a fair amount of quick move-in to kind of get to the delivery guide this year. So I'm just curious if you can kind of level set us on where you are today between, I guess, bill-to-order and QMI and kind of how you're thinking about actually enacting that shift as you get into 2025 and, you know, sort of what it would mean for pace and margin and all that. Thank you.

Hey, Matt.

Good morning. Thanks for the question. Yeah, we are seeing a bit of a pivot, not a major pivot, but a gentle pivot more towards buyers coming back and looking for a what we would call sort of build to order, you know, dirt starts is the lingo. That is because there's a sense of that if rates may be coming down, moderating, that there isn't this high level of urgency to get into a home today because of enough possibility that they may miss out on rates if they're going back up. So for us, we've seen a more desirous position coming from many of our consumers today to engage with us early, build the house, to order. to spend a little bit more time customizing the home to them and their family. But also along the way is that we've also increased our cycle times to the extent that within their ability of the time horizon, it's fairly quick in terms of being able to deliver that house back to them. So we think this is a good adjustment, although it's not completely eliminating spec sales. So from our standpoint, we've probably moved from Almost no dirt orders here not too long ago to roughly around 20 to 25%, roughly, maybe 30 roughly in terms of where we are in the country. Then to a dirt start to our spec start around 70%. Most of all, if not all of them today that we're having are really deliveries that are going to be happening in the first and second quarter of next year. And we'll continue to kind of feel that out as we go forward to see if we want to expand that and contract it. But like I said on the call, Matt, is that we do definitely see that, particularly in light of the fact that there is a lot of competition out there from the new home builders that are doing just-in-time, what we call sort of just-in-time or near-term delivery, that we're going to constantly have to have spec inventory in front of us to feed into that demand.

Great. That's really helpful, Collar. And then secondly, I wanted to zoom into the margin guide. I think the implication with the full year guide is that the fourth quarter gross margin is probably a little bit lower than what you guys had previously signaled. And obviously, Lansi is not unique in that. I mean, it sounds like across the board, the incentives are kind of persistently higher and stickier. So I guess just number one, you know, if you can kind of bridge us between the prior guide and the new guide for the fourth quarter gross margin, and then maybe just at a higher level, you know, this kind of stickiness of incentives, just your kind of overall thought on what it would take to really see incentives actually start to move lower. Thank you.

Hey, Matt. This is John Ho. I'll take the first part of that question, and then Chris and Mike can also follow up. I think you're right, we're not unique. We are anticipating and seeing, given the increased inventory of quick move-in homes available and coming into this fourth quarter, it is very highly competitive environment out there, particularly in markets like Florida and Texas, where there's more volume, more competition. So we're anticipating some of that in our fourth quarter in our guidance. We also see some pressures as it relates to the cost of those rate buy-downs. Incentives are prevalent. They're the tool that we're using to be able to get homebuyers off the fence and committed to purchasing a home. But we're also balancing it against what Mike is saying is that we've got a nice pivot in terms of demand of built-to-order homes that we'll see in the next first, second quarters of 2025.

Yeah, and I would say just specifically on the numbers, Matt, I think our original guidance, you know, was looking at the trend for where the tenure is and where these incentives had settled down between, you know, depending on the market between a 499, a 575, you know, just depending on where the market is. And we've seen Two things, one, the competition and the willingness to offer 399 mortgages, 499 more sparingly, and then also the cost of those backing back up with the 10-year volatility. I mean, it's moved back up, as you know, 60, 70 basis points in the last month or so. So those costs are different, and that's really what's driving the big bulk of the change. associated there. We did have a little bit of mixed shift between third quarter and fourth quarter as well that played into that, but really it's primarily around the incentives. One of the things, again, that we're working towards is we're being a little more surgical about some of these mortgage rate buy-downs and really focusing on the locations and the rates that are needed to continue to move our homes, and our team's doing an exceptional job of really toning in on exactly which rates within which markets are going to be driving that volume that we need.

Got it. Well, thanks, everyone, for all the details, and good luck.

Thanks. We'll take our next question from Carl Reichert of VTIG.

Hey, thanks. Hey, guys. Chris, can you just explain again, the margin guide for this quarter was 15, I think, and you did 17-1, right? So you talked about incentives being lower, but that's still a pretty big delta. What else was in there that allowed the GM this quarter to beat Guy by so much?

Yeah, I think, Carl, good question. It really is the backup of incentives. The cost has really changed quite a bit this quarter. And the delta between a 499 rate and a 399 rate is pretty substantial. And as we see that continue for a little bit on the 399 side, just our costs are higher on those incentives. And then, as I said with Matt, a little bit of it was mixed just between deliveries and where we were able to deliver. We had a little bit more California this quarter and expect more on the Florida side next quarter. So a little bit of it was mixed, but really a lot of it is driven off of the cost increases around the 399 plus the move in the 10-year treasury.

Okay. All right. Thank you for that. And then just a bigger picture question. So if you're talking about intending to grow market share as you go here, who do you intend to take the share from? I mean, in your case, many of the markets that you guys occupy are also heavily trafficked by the other large publics. And in many of them, there's not a whole lot of market share headroom left for those who are not already the large public. So what's your sort of surgical tactical approach to gaining share in these places where you are up against the large spec guys, in particular, the volume focused players?

Hey, Carl, this is John. I'll start and then maybe I'll hand it over to Mike to follow up. I think for us, certainly it's how we've penetrated some of these markets, whether it was Phoenix and Arizona or Orlando, Florida, and now the DFW market. We mentioned, obviously, we've grown pretty quickly through acquisitions. In each of those three markets, we acquired one, two builders to penetrate the market. and then grow that market through organic growth, new community count, and growing our market share in that presence. So that continues to be part of our strategy. We also see that, you know, and understand that this is a business of scale. We have to get bigger in each of our markets. We have to be able to compete with some of our larger peers. And we're doing that quite successfully. We've been doing it by integrating acquisitions And we've also seen as the largest are getting larger, we've seen the smaller privates really sort of retract from the market as well and not be as competitive. I'll turn it over to Mike to see if he has anything to add.

No, I think you did a good coverage on that, John. You know, Carl, again, I would just say that, you know, we're operating in the mindset of leaner, faster, better, and everywhere that we're at. And we believe that by execution of our business, defining the products of which the consumers want the most, really differentiating ourselves through our value proposition in the markets in which we're operating in against other home builders, the uniqueness just of what we do in around our pillars of our high-performance home strategies, and then just purely by the people. I mean, we just believe that we have outstanding people in all of our operating divisions that really know the game and the markets in which they're operating in locally. And that they know that at the end of the day, that they've got to deliver against the competition. We're not afraid of competition. We knew we were going to go into those markets that we were going to be going up head to head against some incredibly formidable players. But our, you know, personally, my whole career has been that whether it's that KB, Ryland, Taylor Morrison, we're always going to have competition and we always have to learn how to define ourselves and how to win the day. So it, It's a little bit preachy here, but at the end, it's really about the people, and we believe that we have outstanding teams on the ground that really know their stuff, like I said, and they've got their sandbox, and every day they're putting up a good fight and figuring out a way to grab that incremental buyer as we go forward, and we'll continue to do that.

I appreciate that, guys. Thanks so much.

Thank you. We'll take our next question from Alex Riggio of B. Reilly.

Thanks. Good morning, John, and very nice quarter. Could you talk a little bit about the margin implications, gross margin implications, on sort of a modest shift from move-in, quick move-in to bill to lure?

Yeah, so I think that, you know, it really varies, right? But what we see on the Build to order with the options that are out there, we're clearly making a higher margin on some of those options that are added in there. Additionally, you're not having to give quite as much on the incentive side, although we see that shifting from time to time. So typically, Alex, we're looking at anywhere between 100 to 200 basis point difference between those two options. components when you look at gross margin.

Very helpful.

And then my compliments to you in improving SG&A, and it sounds like you've got some more plans in 2025. So, what kind of actions are you taking in order to reduce SG&A?

Hey, Alex. This is John.

Earlier this year in May, we made some changes in terms of our GNA, obviously with the move to Dallas, Texas with our corporate headquarters. The, I would say, efficiencies that we've improved on in California, really creating one operating unit there. And then also just being, I would say, leaner on the corporate side. That's all improved in terms of our total G&A dollars that we're spending. At the same time, you know, our business is growing. You know, our volume year over year, you can see the benefits of having the DFW division in a growing Texas business, as well as growth that we've seen in Arizona, as well as in California and Florida. So our volume is growing. We're leveraging our scale, our SG&A scale. So, you know, we've really built this company to achieve efficiencies of 4,000, 5,000 units. We really don't need any more, let's say, G&A to continue to build this business. We're just going to continue to see additional scale to the growth of our divisions and the growth of our business.

Perfect. Thank you.

And once again, to ask a question, that is star 1 on your telephone keypad. We'll move next to Jay McCandless of Wedbush.

Hey, good morning, everyone. Chris, could you say again what the purchase accounting impact was this quarter on gross margin and maybe what you're expecting for the fourth quarter?

Sure. So it was $5.6 million for the quarter, which is about 1.7% on the gross margin ad back there. And Jay, although we don't give specific guidance around that, we would think that it would be in and around that same level. We've still got a little bit left on Florida, and that gets bled out through you know, the homes that are sold and then the bulk of it is in the DFW side of it. We'll see a larger amortization of that in 2025, but we'll still see a pretty nice clip still here in fourth quarter and probably in and around that same level.

Great.

And then last quarter you guys talked about move up and getting some pricing power there. Maybe could you tell us what percentage of your communities now are move up and how you're thinking about that percentage in terms of what you're going to be opening going into 25?

Hey, Jay, it's Mike.

Yeah, I think we see a slight gravitational pull to the move up buyer, particularly those buyers that are coming out of unlocked markets. homes in the resale inventory that have been tied to mortgage rates that are in that three, three and a half percent. As they see mortgage rates coming down, they're seeing sort of that moment of which there's probably not a big differentiation between their monthly payments and where they are today, and then meeting their needs to better their housing situation. For us, we're looking at that as a segment that's going to be coming back a little bit stronger into the future. And we have been approaching that in terms of our segmentation, particularly in the master planning communities where we develop them ourselves, where we have a product offering and such that we always will have a planning area that allows for that move-up buyer to find a product within that community that suits their needs. We see that not being a huge portion of our future offering. We're not going to get disproportionate there. We still see ourselves as primarily a first-time builder of homes for the most attainable products in that marketplace in which we're serving. But we'll see maybe roughly around, probably around that 20%-ish, so to speak, of that first-time move-up, second-time move-up. And then from time to time, we do carry a luxury position. We think it's great for brand building. It helps us in terms of our ability to forward see new products that are coming in in terms of specs that we can then introduce into our more attainable houses into the future. So we do play in different pricing spectrums. But again, at the bottom of the pyramid will be roughly around 40% first-time affordable. Another 20% of that first time move up, and then we kind of break it up probably in increments of 5% to 10% from there.

Okay, great, Mike. And then just last for me, any commentary on October orders or pricing trends? Anything you can give us on October and then beginning of November?

I can say, and I'll turn it back over to John and Chris, is that we've been very pleased with what we're seeing going on in October in terms of our showroom floors and the conversion into sales. So it's not abating. We're having a strong fall season, so we're feeling pretty good.

Yeah, Jay, from a little bit more specifics, we've actually seen absorptions in October tick up from where we saw them in August and September. So that makes us feel a little bit better as we close out October and start into November. Okay.

That's great. Thanks, guys. Appreciate all the color. Thanks. Thanks, Jay.

And it appears that we have no further questions at this time. I'd be happy to return the call to our host for any concluding remarks.

Thank you all for joining us on our third quarter earnings call. And we look forward to speaking to you again at the next earnings call.

This does conclude today's conference. You may now disconnect your lines. And everyone, have a great day.