Landsea Homes Corporation (NASDAQ:LSEA) Q3 2023 Earnings Conference Call November 2, 2023 10:00 AM ET
Company Participants
Drew Mackintosh – Mackintosh, Investor Relations
John Ho – Chief Executive Officer
Mike Forsum – President & Chief Operating Officer
Chris Porter – Chief Financial Officer
Conference Call Participants
Carl Reichardt – BTIG
Jay McCanless – Wedbush
Alex Rygiel – B. Riley Securities
Operator
Good day and welcome to the Landsea Homes Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.
I like now to turn the conference over to Mr. Drew Mackintosh. Please go ahead.
Drew Mackintosh
Good morning and welcome to Landsea Homes’ third quarter 2023 earnings call. Before the call begins, I would like to note that this call will include forward-looking statements within the meaning of the Federal Securities laws.
Landsea Homes 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 Landsea Homes and 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 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 Landsea Homes’ website and in its SEC filings.
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 third quarter of 2023; share our outlook for the remainder of the year and discuss some exciting new developments for our company.
Landsea Homes generated $258 million in home sales revenue in the third quarter. Our new home deliveries of 448 at an average sales price of $576,000. Home sales gross margin came in at 18.7% and net income was $8.6 million or $0.22 per diluted share. We are pleased with these financial results and believe they are reflective of a resilient new home market and our company’s strong execution.
Net new orders for the quarter came in at 486 in a sales pace of 2.7 homes per community per month. We saw active and engaged buyers at our communities through the quarter though the upward movement in interest rates resulted in some selling softness as the quarter progressed.
Fortunately, we have several sales tools at our disposal and offset the impacts of higher rates, engaged consumers, a sense of confidence when buying their homes. In addition, our unique high performance homes continue to set us apart from the competition and drive traffic to our community. From a macros perspective, we believe the long-term fundamental outlook for new home construction remains positive.
There continues to be a lack of existing home inventory at all price points. While the demand for housing remains strong, economy continues to add jobs, and the US consumer has shown a willingness and ability to move forward with life-changing purchase decisions, like buying a home despite the high interest rate environment.
We’ve also seen broad-based home price stability in our market. Thanks in large part to the scarcity to the existing home inventory. All these factors have and will continue to benefit homebuilders, particularly those with strong balance sheets and access to capital. Against this strong fundamental backdrop, Landsea has continued on his path of growing the size and scale of our operations.
After the close of the quarter, we announced the acquisition of the asset and pipeline of Colorado-based Richfield Homes. With this acquisition Landsea enters its seventh homebuilding market with an established presence in one of the best housing markets in the country.
When we look to our previous acquisitions, we plan on growing our local market presence quickly, so that we achieved better local economies of scale. We have retained Richfieldw seasoned leadership team, including industry veteran and new division President, Lisa Wiebelhaus to lead these efforts and build on the success they’ve already achieved in the market.
We expect the deal to yield a more than 20 plus IRR for our company, and immediately be accretive to earnings and return on capital within 30 months of closing. Operationally, we expect to follow the same playbook in Colorado that we have been executing in our other markets, which is a focus on the more affordable segment of the market with a differentiated high performance home series a land light strategy return on inventory quickly.
We believe this is the right recipe for success in today’s market and we’ll continue to look for acquisition targets that fit this model. With the continued rise in interest rates, we believe the opportunities to grow via acquisitions will become more common. From a capital allocation standpoint, we feel that it is important to balance out our investments in the business through shareholder-friendly actions that signal our confidence in our company and our stock.
To that end, our Board has approved a $20 million share repurchase authorization which we plan to over the next 12 months. We believe our stock is undervalued at its current share price. We look forward to buying our shares at a discount to book value boosting our earnings per share throughout this repurchase program.
Landsea is in a great position to finish the year on a strong note and carry that momentum into 2024. We have an established and growing presence in some of the best markets in the country and a product profile that caters to the largest buyer segment. Our balance sheet is in great shape and our senior leadership team have the necessary experience and industry knowledge to compete effectively in a high interest rate environment. Given these positives, we remain excited about the future of Landsea Homes.
Now I’d like to turn the call over to Mike, who will provide some additional color on our operational performance this quarter.
Mike Forsum
Thanks, John. Net new orders were up 89% year-over-year in the third quarter, thanks to an 80% improvement in absorption pace and a 4% rise in average community count. Order activity was strongest in our Southern California and Arizona divisions, while our northern California division continued to lag due to affordability issues and soft employment trends in the tech sector.
Our ability to offer financing incentives was a key driver of demand during the quarter, as it allowed us to meet the affordability needs of our buyers. Most home shoppers are trying to solve for a monthly payment and being able to adjust the rates associated with that payment is a big competitive advantage for homebuilders versus the existing home markets. It allows us to maintain base price stability in our communities, as well.
As John mentioned, traffic was solid throughout the quarter, but tapered off a bit from normal seasonality and adjusting rates moving higher near the end of the quarter. It is important to note that the quality of traffic we saw stayed consistent as the majority of buyers who came through our communities was motivated and resulted in solid lead conversion rates.
Currently, we are seeing an increase in incentive activity from some of our bigger players in the market, which is to be expected at this time of the year while we remain committed to meeting the market with our pricing to sustain appropriate absorption levels, we continue to monitor each of our communities individually and order not to generally overreact to short-term market shifts created by competitive year-end clearance practices.
As a result, we are being strategic by being community, and lot-specific with our incentive activity, rather than taking a broad brush one-size-fits-all strategy. Fortunately, we have a clear path to hitting our delivery goals for the remainder of the year, thanks to a solid quarter-ending backlog, and our targeted sales approach.
We saw further improvement in building conditions in the third quarter, leading to significant reduction in cycle times on a sequential and year-over-year basis. Cycle times are now approaching pre-pandemic levels, which will be a tailwind for our return profile going forward. It also allows us a return to a more balanced business model when it comes to spec homes, versus to-be-built.
Buyers who visit our communities can choose from either a quick move-in home or a to-be-built, which allows for more customization and typically better margins for our company.
Overall, we feel really good about our business as we head into the end of the year, despite the high mortgage rate environment. We continue to see motivated buyers in our markets, while existing home supplier remains at all-time low.
Housing fundamentals have remained positive in our existing markets and we are excited about the opportunities that lie ahead for our new division in Colorado. Cost inflation appears to be waning and labor and material availability are the best we have seen in years. As a result, we believe the outlook for our company remains bright.
With that, I would like to turn over the call to Chris who will provide more detail on our financial results this quarter and give an update on guidance for the remainder of the year.
Chris Porter
Thank you, Mike, and good morning, everyone. As Mike and John mentioned, we had a strong quarter and we’re pleased with the way the entire organization executed. For the third quarter, we generated $258 million in homebuilding revenue, a 21% decrease over the third quarter of 2022, taking us to a total of $790 million for the first nine months of the year.
We also delivered $19 million in lot sales and other revenues for a total revenue of $277 million. This quarter, our team delivered 448 homes with an average sales price of $576,000. Our ASPs were at 6.5% sequentially from the second quarter, but down 4% from the third quarter of last year. Excluding New York and Texas, which had deliveries last year, our ASPs were at 3.8% from the third quarter of last year.
Our production was driven 26% from California, 26% from Arizona and the balance from Florida. We will start seeing the contribution from Colorado in the fourth quarter. And although it will be small to start, it will grow in 2024. Home sales gross margin was 18.7% for the quarter and 24% on a fully-adjusted basis, which excludes interest and cost of homes, as well as purchase price accounting.
We’ve booked $3.9 million in purchase price accounting for the quarter and have approximately $34 million remaining that we anticipate burning off over the next 18 months. Pre-tax income for the quarter, was $12.5 million, compared to $25.3 million last year. On a dollar basis, our G&A declined slightly from second quarter as we continue to focus on improving our efficiency.
SG&A as a percentage of home sales revenue was 16.4% this quarter reflecting relatively constant fixed costs, coupled with lower overall revenues compared to last year. As John mentioned, we are very pleased with our new order volumes and the consistency produced in the quarter. Net new orders were 486 with an average selling price of $587,000 and a total order value of $285 million.
Orders were up 89% from a year ago, and our absorption rate was 2.7 homes per community versus 1.5 in the third quarter of last year. We also ended the quarter with an average of 59 selling communities, up 4% from the year earlier. Throughout this year, we’ve remained disciplined on our land acquisition, as we assessed the current market conditions and ended the quarter with just over 11,200 lots owned or controlled. 55% of these lots were under option agreement as we continue to focus on our asset light strategy. Our tax expense from the third quarter was $3 million, which represents an effective tax rate of 24%.
Now turning to our balance sheet, we ended the third quarter $389 million of liquidity. $144 million of which was cash and cash equivalents and $245 million was available under our resolving credit facility. During the quarter, we repurchased 1.4 million shares for $13.1 million and our tangible book value per share ended at $15.46, an increase of 3% sequentially from second quarter and up 12.8% from a year ago.
Additionally, our leverage ratios remained in line with our stated policies ending the quarter at 44% debt-to-total capital and 33% net debt-to-total capital. For the full year, we still anticipate new home deliveries to be in the range of 1900 to 2100 units and delivery ASPs to be in the range of 550,000 to 560,000.
Additionally, we anticipate GAAP home sales gross margin for the full year to be in the 18% range. This guidance is based on our best estimate as of today with current market conditions, and as inflation, incentives, and interest rates continue to change, overall results could change accordingly.
With that, we conclude our prepared remarks. And now I would like to open the call up for questions.
Question-And-Answer Session
Operator
[Operator Instructions]
The first question comes with Carl Reichardt with BTIG. Please go ahead.
Carl Reichardt
Thanks. Morning everybody. Thank you for all the information. Hey, so, I wanted to ask first just about that acquisition in Colorado market. There has been tough if you listen to other builders. So, one could argue that this is a great time to get in and on the other hand, this could be tough for a while.
So can you talk about that decision from a strategic perspective? And also maybe discuss some of the other markets you’re thinking about or looking at from a forward acquisition standpoint?
John Ho
Hey, Carl, this is John. I’ll talk about that strategically and then Mike also follow-up. I think for us, as we’ve talked about it, we thought that that tightening credit conditions and certainly these high interest environments probably pinching a lot of these smaller private builders that have less access to less resources and access to capital.
So, it is opportunity to stick for us as we came across this opportunity and was able to acquire the assets primarily. And then, inherit the team that we thought was really well qualified. So, it’s a opportunistic acquisition for us and it’s a market that we think it’s been a long term runway for us supported by all the reasons why we think that it was a great market, the demographics.
Mike Forsum
Hey, Carl, it’s Mike, just to follow-up on John, I’ve been in the Colorado market in one fashion or another since 1990s, and I have always really liked that market for various reasons, but I would say primarily that it does, does have a higher barrier to entry, which requires a little bit stronger skill set around land entitlement, land development, which I’ve honed by homebuilding career around those through California.
And I believe it does give us a strong leverage point. We do know the market very well, either through my homebuilding experiences or through private equity. It’s Starwood where we own land and then through land banking. We’ve got a great familiarity with that. We know the markets to be in, we know the markets not to be in.
And then, we thought that this was an incredibly low cost entry into that market. It was opportunistic and then to your question, we’re looking, we’re looking everywhere all the time. I think over the course of our 10 years of existence and then growing through acquisitions we become a builder of choice for that smaller private, that’s looking to exit.
We have a whole cadre of folks out there, looking at our behalf, as well as others that have inbounds that come in directly. And that we got excited about this. We got excited about the platform. We got excited about their early positions and we think that we can make a real mark there. But that doesn’t mean we’re not consistently looking in those markets when we talked about before in Texas, Florida.
In fact we are having really great conversations currently with folks and we hope that we can continue to go down this path of growing our business through bolt-on M&A, continue to get the growth that we want.
Carl Reichardt
I appreciate the details on this. Thank you. And then, your guidance for ‘23 on deliveries. Chris, it’s still a fairly wide range. Can you talk about the conditions that would cause you to hit the lower end versus the higher end of that range? What are the toggle points that would help you get to that top end? Or conversely to the bottom end over the course of the next what we have here like eight weeks? Thanks.
Chris Porter
Yeah, Carl. Sire. The good question. I think a lot of the uncertainty right now is revolving around incentives and mortgage buydowns and just the volatility of cost related to that. And I think that some stability in the market. There’s a lot of bets that the feds can hold great steady to ten years rallying today even. And so, I think some steadiness within that aspect is going to give us more confidence on the upper end of there.
We kept the range a little bit wider, just based on mix, as well as where incentives may or may not be for the year.
Carl Reichardt
All right. Thank you, Chris. I’ll get back in queue. Thanks guys.
Operator
Next question, comes with Jay McCanless with Wedbush. Please go ahead.
Jay McCanless
Hey, good morning everyone. Thanks for taking my questions. Just trying to think a little bit ahead to ’24, you’ve got the Colorado acquisition. Austin is going to be coming online. Maybe could you talk in rough numbers, what we should think about for community count growth looking into next year, just with all the different things that you have going on?
John Ho
Hey Jay, this is John. I’ll start with that and then maybe hand it over to Chris to talk about community count. We are excited about the new opening of our communities in Austin. And then, with the acquisition of Colorado, Richfield homes, they have three actively selling communities right now, which we will start seeing some of those deliveries in this fourth quarter.
As it relates to 2024, I think, we probably share the same. I would say, thoughts about the market a lot of uncertainty, as it relates to interest rates and about incentives we have to offer around there. So we haven’t given any guidance on 2024. As it relates to community growth, I mean, I think that always remains unchanged.
Chris Porter
Yeah, I would agree Jay, that Colorado acquisition, there’s three communities there today. You can seem them on our website. And we would expand that those communities and then Austin, we’re – we’ve said that we think that we’ll start with three communities and then continue to grow it. So, I would see that growth in community count to be relatively consistent with where we thought 2023 at 10% to 15% range.
Jay McCanless
That’s great. Thank you. And then, Mike, I wanted to dive in a little bit to your comment that labor availability, materials availability is the best you’ve ever seen that. That’s pretty encouraging, given where the industry was two years ago. I guess what you already talked about how declining cycle time gives you better cash flow, but maybe from a product perspective, maybe talk about what other options this gives you? And it seems that this could, does this give you more incentive to go out and find more builders? I just I think there’s a lot we could draw from that comments or maybe if you could dig down on that a little bit, please?
Mike Forsum
Sure, Jay. I would say, as a point of clarification that I believe that labor and materials are the best probably since our – like pre-pandemic levels. We’re getting back to a normalization of our business and the execution and flow. So that’s super encouraging, as well as costing to be rating themselves in. So. from that standpoint on that side, we’re really happy with the trajectory of things.
What it does though for us generally and it began our strategy, our business model is it moves us a little bit more towards dirt starts and dirt stars are always better in a sense that it allows us to create a relationship with our customer allows them to customize their house a little bit more to the way that they want it. It vests them more in the house and the final outcome.
We do collect more deposits because they have to put deposits down on options that they’re taking. So we believe that it’s a deeper and more secure transaction by doing dirt starts with dirt starts and dirt starts and with higher cycle times, you’re kind of closing the gap of where the industry was moving towards the spec level type of build to shrink the distance between sale and close.
This is happening more organically by virtue of the fact that we can get our cycle times down. And so we’re seeing that roughly right now, where we’re seeing more buyers coming to the market looking to do a dirt acquisition versus a spec quick move-in acquisition or closed, I should say. So, from our standpoint, we think that that’s a good healthy thing that’s happening and we like the normalization and we think it’s building a stronger business for us.
Jay McCanless
That’s great. Thank you, Mike. And then, Chris would talk about, I think you said 18% approximately 18% for the full year gross margin. I guess, is most of that mortgage rate buydowns and the cost of those, or is there something else we need to talk about as it relates to pricing power? And you have the ability to push price right now?
Chris Porter
No, I think that that is primarily related to the mortgage incentives that I was mentioning earlier and just incentives in general to continue to push that demand through. If you look at kind of our base business year-over-year, ASPs were up 4%. If you exclude New York and Texas, which didn’t delivered in this quarter. And so I think that that shows some pricing within the portfolio, but I think margin-wise, a lot of it is just based around the incentives.
Jay McCanless
Okay. Got it. That’s it for me. I’ll get back in queue. Thank you.
Operator
The next question comes from Alex Rygiel with B. Riley. Please go ahead.
Alex Rygiel
Thank you. Good morning, gentlemen. Very nice quarter. Could you talk a bit about how you’re helping your buyers signed lower mortgages?
John Ho
Yeah, Chris, do you want to?
Chris Porter
Yeah, sure. Yeah. Alex, as you know, we’ve got a partnership with NFM mortgage to brand under Landsea Mortgage. So we have the tagline Landsea Mortgage Powered by NFM and they have access to all of our buyers. And we work with them on just creating the mortgage programs and also doing mortgage incentives through theirs. So, we’ll do either the buydowns and primarily it’s 30 year fixed is what we’re seeing out there. We still haven’t seen a lot of movement on the variable rate or the 15 year.
And, but primarily it’s all around a 30 year that we’re able to – as everybody buy in bulk. And then use that as an incentive towards closing costs and towards the mortgage. And so, that’s primarily what we’re doing is using our mortgage companies.
Alex Rygiel
And then, can you talk a bit about, if you are seeing any opportunities to raise these prices, and then give us a quick update on sort of the trends in October relative to September?
Mike Forsum
Sure. Alex this is Mike. I’ll jump on that one. We are actually, in some cases raising prices not aggressively, but I think that we are doing it thoughtfully, prudently, where and when we can. So that one we are locking in our backlog, because they feel like they are at a community that’s doing well. We are seeing that in places in Florida, as well as Arizona and in Southern California. That seems to be our strongest markets right now and we’re able to do that.
In further note, I think what we’re really at a point right now, Alex is that, it’s really a business of monthly payment as opposed to absolutely price. And so the toggling to keep absorptions up are really around what Chris was talking about the ability to buydown mortgage interest rates such that the monthly payments is more affordable against the backdrop with the credit or the homeowners’ ability qualify.
There does not seem to be a real hesitation resistance out there in terms of absolute pricing from our buyer profile that’s coming through. Just making sure that they know that they’re comfortable that they have a monthly payment that they can afford and beagain comfortable with.
Alex Rygiel
Thank you.
Operator
Next question, comes with Carl Reichardt with BTIG. Please go ahead.
Carl Reichardt
Okay. Thanks again, guys. So as your mix is changing here in over time, do you, Mike, have sort of a normalized sort of absorption rate per month that you think the company should be targeting overall? And I asked that just because I know the mix moves around quite a bit and at the entry level you’d be trying to target, say one week or a month higher end. It’s going to be more like three.
So I’m just trying to get a sense of in your head, roughly what you think a normalized absorption pace it could be the company as it’s currently constituted?
Mike Forsum
I think that we aspire, Carl, to be in that 3 to 3.5 net absorption rate per community, that is ideal. And I think that generally, over the course of time in the business, that seems to be the sort of organic natural absorption where you’re not pricing too low or not pricing too high and that’s where you should be. Although there’s seasonality that comes into play.
So if you’re going through the summer, you may be dipping down into the twos that’s you’re kind of moving through the summer rolls and then you’ll have some slicing that may take you even a net, sort of a naturally higher as you start to get kind of maybe a little bit of energy and some greater momentum into the market.
But if you look at the course of the community from beginning to end, if you’re hitting that 3 to 3.5 through it, on average, you’ve done a really great job and you’ve got to really healthy community that I think can optimize everything along the way.
Carl Reichardt
Okay. Perfect. Thanks, Mike. And then, you have a couple of smaller peers who had talked about developers who had deals sold to small builders. So, finish-light deals that dropped and so these publics have had a chance to go and pick up finished lots not at great prices, but at least there’s availability. You had some larger peers say that’s not happening at all.
Where do you guys see? And obviously, with the acquisition in Colorado, there’s some positive elements, but where do you see, overall that this land market is? Are opportunities showing up more than they had because of a private builder distress or higher cost of capital? Or is that really not happening as you see it? Thanks.
Mike Forsum
Yeah. That’s actually a really great question, Carl, because what we’re seeing is, in some of our markets, Florida and Arizona, specifically, opportunity has come our way where we are talking to a single family for rent, built-to-rent, builders who can’t get financing that have acquired properties. And we’re backfilling into infill there with some smaller bike size type of communities that are gappers in our business that are filling some holes between quarter-to-quarter or months to months.
We really like those, because they’re finished lots. They’re ready to go. Price points are right in our wheelhouse and they’re in locations that we probably won’t be looking at, because it’s just efficiency sake. So we actually have talked and looking at and getting close to a handful of those in those locations. So that’s really what we’re seeing right now.
I think the most of that is really on that sort of private built-for-rent builder out there that is struggling to find financing to get them all the way through that project.
Carl Reichardt
That makes a lot of sense. All right. I appreciate that, Mike. Thanks all.
Mike Forsum
Sure.
Operator
[Operator Instructions]
This concludes our question and answer session. I would like to turn the conference back over to John Ho for any closing remarks. Please go ahead.
John Ho
Thank you, everyone for joining us today and we look forward to speaking to you after the fourth quarter again.
Operator
This concludes today’s meeting. Thank you for attending today’s presentation. You may now disconnect.
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