Good morning and welcome The Landsea Homes Second Quarter Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask actions. Please note that, this event is being recorded. I'd like to turn the call over with Drew Mackintosh, Corporate Investor Relations.

Please go ahead, sir..

Good morning, and welcome to Landsea Homes 2022 Second 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.

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 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 and 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 it was 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 it over to John..

Good morning, and thank you for joining us today as we go over our results for the second quarter of 2022 and provide an update on the company's outlook. Landsea Homes delivered another quarter of strong profitability, generating earnings of $0.34 per diluted share for the period, representing a 48% increase over the second quarter of 2021.

Home sales revenue grew 46% year-over-year to $351 million, driven by a 35% increase in new home deliveries, and a 9% increase to our average selling price. Home sales gross margin expanded 430 basis points year-over-year to 21.3% on a GAAP basis, or 560 basis points to 29.1% on a fully adjusted basis.

These results are a testament to our company's strategic focus on scaling operations in high-growth markets, while maintaining an emphasis on bottom line results. Net new orders came in at 538 for the quarter, representing a 63% increase versus last year. Our sales pace averaged 3.3 homes per community per month during the period.

However, demand tapered off as the quarter progressed. The combination of higher interest rates and lower consumer confidence has taken a toll on order activity across our homebuilding platform that's created a more challenging sales environment for our industry.

Fortunately, we believe Landsea has several distinct advantages that will allow us to compete effectively for buyers in this new environment. First, our company has established a presence in some of the strongest markets in the country, with healthy job department ratios, expanding employment basis and favorable in migration patterns.

These solid housing fundamentals should mute impact of macro headwinds over time. Second, we have intentionally focused our land acquisition efforts on the more affordable segments of the market in prime locations, positioning our company at the upper end of the entry-level segment.

We believe this buyer segment is one of the strongest from a demographic perspective, and to show more resiliency relatively to other buyer segments.

Third, our investments in new home technology, innovation through the creation of our high-performance Home Series, give us a distinct selling advantage against the competition and provide a real value proposition for buyers in the market.

While no builder is immune to the broader market forces that are currently impacting our industry, we believe Landsea has the right product and the right locations to navigate these uncertain times better than rest. Supplementing our strong market position is our well-capitalized balance sheet and our risk-averse land life strategy.

In terms of our land position, we increased our lot count by 52% on a year-over-year basis, during the quarter to just over 13,000 owned and controlled lots. This growth was driven by a 150% increase to our controlled lot count as our owned lot count actually decreased by 9%.

End of the second quarter, 63% of our lots were controlled and 37% were owed. This trend is consistent with our land life strategy, which emphasizes optionality and capital efficiency as a means to improve returns while limiting our exposure to market risk during periods of uncertainty.

We believe our current land position puts Landsea in a great position to continue on its current growth trajectory to selling conditions improve and limits our downside exposure should our markets stay choppy for an extended period of time. In second quarter, we acquired 5.1 million shares at an average price of $7.07.

This includes purchasing 4.4 million shares from our controlling shareholder. This represents approximately 11% of our prior quarter's outstanding share count. I believe this was an attractive use of our capital, given our undervalued stock price. Quarter end, we had $10 million remaining on our share repurchase program authorization.

Additionally, we retired all 5.5 million outstanding private warrants. The time of the warrants will be beneficial in cleaning up the company's capital structure. We move large fluctuations caused by the warrants and reporting earnings quarter-to-quarter and remove any dilutive overhang on the stock.

Going public last year, we have been focused on creating shareholder value and a retirement of the private warrants is another step in that direction. Furthermore, this event will result in a cleaner capital structure that will provide a positive backdrop for investors and shareholders.

We accomplished these measures with virtually no impact to our leverage profile. The great land position, strong balance sheet and a favorable product profile, Landsea Homes is poised to navigate these uncertain times for our industry.

In addition, our companies led by homebuilding veterans, who have experienced previous downturns, who know how to operate effectively during periods of market dislocation.

Long-term outlook for our industry has not been diminished by a recent slowdown, thanks to the favorable demographic trends and lack of existing supply that should drive the new need for new housing. As a result, we remain optimistic about the future of Landsea Homes.

With that, I'd like to turn the call over to Mike, who will provide more detail on our operational results for the second quarter..

Thanks, John. The second quarter of 2022 was marked by strong revenue growth and solid gross margin gains for our company as well as continued challenges with supply chain issues and a slowdown in order activity as the quarter progressed.

We ended the quarter with an average 54 selling communities, a 73% increase over 2Q 2021, primarily through the growth in Florida. ASPs were up between 6% and 21% across each of our divisions, reflecting the strong pricing advantage over the year last year.

Order activity was fairly consistent across our more established markets of Arizona, California and Florida, with each generating an absorption pace of 3.4 or better for the quarter. However, as John mentioned, the combination of higher mortgage rates and lower consumer confidence impacted our sales efforts starting around June and carried into July.

In some markets, such as Inland Empire, the slowdown was more affordability driven, as potential buyers were suddenly priced out of the market due to the sharp move higher in mortgage rates.

In other markets, such as in Phoenix and Central Florida, the slowdown seems to be more psychological, as potential buyers pause to assess whether now is the right time to buy.

What is consistent across our homebuilding platform is that there is a sustained desire to own a home and that potential homeowner interest level remains high, though it may take some time to see this desire translate into better order conversion until buyers and builders adjust to this new reality.

To that end, we have been proactively addressing potential buyers' affordability concerns by offering mortgage finance incentives such as rate buydowns and rate locks, while also making sure the buyers already in backlog are still comfortable moving forward with their purchase. Our cancellation rate for the quarter was 11%.

And most of those buyers were from those who had purchased their home in the last 30 to 45 days. With the recent improvement in mortgage rates, we think some of these buyers may come back to the table in the fall. For the remaining homes to be delivered in the year, all have been started and over 80% are already in our backlog.

We finished June with 1,571 homes in backlog with a total dollar value of $902.1 million at an average sales price of $574,000. This represents a 31% growth in volume and a 43% in total dollars compared to the second quarter of last year.

The credit profile of our buyers and backlog that use our mortgage affiliate, Landsea Mortgage remains incredibly strong. Across all divisions, the credit score is 737, while we still see the majority of loans going conventional, the market is starting to trend towards more government buyers.

A majority of our subdivisions across all divisions will fit into the FHA loan limits to accommodate these buyers. It's a demographic that has largely been blocked and distant franchise from buying due to heavy demand for conventional buyers. We feel this will be a strong opportunity and provide a competitive edge in the future.

Loan-to-value ratios are coming in at 82% across all divisions, with the lowest being in Northern California at 74% and the highest being in Arizona at 86%. This is translating to an average cash down payment of roughly $95,000. The average household income of these buyers is roughly 163,000. As of July, 40% of the backlog is rate locked.

That will continue to rise as the closing dates are solidified. We are consistently running stress tests on the backlog to ensure that we hit out any potential issues by being proactive with our buyers to lock them in if they run the risk of not qualifying due to rising rates.

In terms of the supply chain, we continue to see difficult operating environment, particularly with the materials and trade base needed to finish a home. Several of our scheduled closings for the second quarter were pushed into the third quarter as a result of these issues.

Though it is important to note that this is a timing issue and not an instance where the revenue was lost. On a positive note, we have seen an increase in the availability of front-end trades such as framing and foundations, which should help curb input costs in the future and reduce cycle times.

We believe supply chain issues will start to ease as the effects of this recent slowdown worked their way through the system. Overall, I am pleased with how our teams executed during the quarter and how they adapted to the changes in selling conditions. We have several tools at our disposal to spur demand.

And as John has mentioned, we already provide a great value proposition to our buyers in our markets given the location, price point and quality of our homes. With that, I'd like to turn the call over to Chris, who will provide more detail on our financial results this quarter and relate some guidance for the coming quarter.

Chris?.

Thanks, Mike. Good morning, everyone. We are pleased to have delivered second quarter pretax income of $23.2 million and net income of $14.9 million or $0.34 per share compared to $0.23 in the same period last year.

During the quarter, we recorded nonrecurring losses of $1.8 million from the fair value of warrant liabilities and $2.5 million from an early extinguishment of debt, and we incurred $12.8 million in purchase price accounting. Excluding these items, our adjusted net income was $31.5 million, and our adjusted earnings per share was $0.71.

This is up from $0.38 per share in the second quarter of last year or 87%. Our per share earnings benefited from a 40% growth in net income, driven by our strong ASP growth, increased profitability through our margin expansion and the successful execution of our stock buyback program.

Our SG&A as a percentage of home sales revenue increased year-over-year as we worked during the quarter to rightsize the integration of our Hanover acquisition, including creating synergies through combining our Florida operations, transitioning from the Hanover founders to a new division President, rebranding all of the communities to Landsea Homes and ensuring staffing and marketing are appropriate for the closing schedule for the balance of the year.

These moves created roughly $2.5 million and onetime charges during the quarter, and set us up to improve our G&A leverage to a more historical level similar to 2021, especially with our anticipated fourth quarter revenue, which is typically our largest. For the second quarter, our tax rate was 36%, compared to 28.5% last year.

This increase was primarily a result of the non-deductibility of our warrant revaluation, the mix of revenue by state and the benefits of the federal energy tax credits that we received last year that were not renewed for 2022. Turning to the balance sheet.

We ended the quarter with $215.1 million in liquidity, including $104.4 million in cash and $110.7 million in availability under our revolver. Availability under our unsecured revolver increased this quarter as we expanded our bank grade and increased our capacity $70 million.

With the retirement of the private warrants, we also eliminated the corresponding liability on our books and the potential future valuation swings. On the leverage side, at the beginning of the quarter, we fully repaid the last construction loan outstanding with the draw under our credit facility.

With closings beginning to occur in New York, this repayment will allow us increased flexibility as we have access to utilize the full cash from the proceeds rather than pay down the secured loan. Additionally, the interest cost on our revolver is significantly less than the previous one.

We incurred a $2.5 million charge for debt retirement during the quarter associated with this payoff. Overall, we were able to repurchase shares, retire the private warrants and repay the outstanding construction loan, while maintaining our targeted leverage ratios and discipline on our balance sheet.

We finished the quarter with $534.6 million in total debt and net debt of $430.3 million. Our ratio of debt to capital at the end of the quarter was 44.6% and net debt to net book capitalization ratio was 39.3%.

We believe our conservative balance sheet and ample liquidity give us the financial flexibility to operate from a position of strength in any market environment and take advantage of strategic expansion acquisition opportunities should they arise. Now I'd like to provide some guidance for the third quarter and full year.

As Mike said earlier, all of our homes we need to deliver for the year are started, and we have less than 20% of our targeted deliveries to sell.

With the recent changes in interest rates and change in sales pace, we anticipate third quarter new home deliveries to be in the range of 550 to 630 units and delivery ASPs to be in the range of $550,000 to $575,000 and recognizing the impact of New York into the portfolio.

For the full year, we are updating our guidance in anticipation of current market conditions and now expect the new range of new home deliveries to be between 2,500 and 2,700 homes delivery ASPs to be in the range of $525,000 to $550,000 and home sales gross margins to be in the range of 20% to 22% on a GAAP basis or 24% to 26% on an adjusted basis.

Now I'll turn the call back over to John for some closing remarks.

John?.

Thanks, Chris. We have a lot to be proud of this quarter, both in terms of our profitability and how we've positioned our company as we head into the back half of this year. It was a significant year-over-year increases to both our top and bottom line results for the quarter and ended the period with a sold backlog valued at more than $900 million.

We also grew our lot position in some of the most attractive markets in the country, doing so in a capital-efficient and risk-averse manner. While industry is currently facing several macro headwinds, we believe we have the right strategy, leadership and product focus to compete effectively in this new environment.

Finally, I would like to thank the entire Landsea team for their efforts this quarter. Market conditions changed dramatically over the last few months, and I am proud of the way you responded to these challenges.

We have built a strong entrepreneurial culture at our company, and this is reflected in the obstacles we've been able to overcome the success we've been able to achieve. Thanks for all your hard work. That concludes our prepared remarks. Now we'd like to open the call up for questions..

We will now begin the question-and-answer [Operator Instructions] First question comes from Alex Rygiel, B. Riley Securities. Please go ahead. .

Good morning, gentlemen. This is actually Min Cho for Alex. Congratulations on the quarter. Just a couple of questions for you.

Could you provide just some more updates on the July trends in terms of traffic and sales pace? Obviously, it sounds like it's kind of continued from the end of June, but anything that you want to highlight and thoughts about do you expect this to continue? Obviously, the third quarter will be challenged due to seasonality, but do you expect kind of an improvement in the fourth quarter, or expect these types of trends to continue for the rest of the year?.

Hi, Min Cho, It’s Mike.

Can you hear me?.

Yes..

Let me take that question.

We see generally a rough stabilization at the numbers right now that we're experiencing in terms of current absorption rates, net current absorption rates as we're moving through the summertime, which you suggested that is being somewhat affected by some seasonality, as well as those conditions that we highlighted in the call.

So I think that we'll probably over the next few months, focus in, again, on looking to find competitive differentiation through our mortgage offering products that we've developed through our relationship and Landsea mortgage and well as doing periodic different incentives as the homes move closer to completion.

I will say, though, for us, we have very little inventory that's near completion, that needs to be delivered by the end of the year. As Chris stated, we really only have roughly 20% left to go in terms of sales.

So from the standpoint, we have a little bit of optionality and time to find different ways to continue to keep our absorption rate up as opposed to having to do any kind of real sells to get product moved.

With that being said, is that we do anticipate with the way that we still see strong interest around our communities by way of traffic and through our website traffic investigating our communities that there'll probably again be a bit of a fall bump that we usually experience right around that time.

So generally, I think we're coming off of this four-plus net absorption rate down into a 3.4%, 3.5%, and we see that holding steady..

Thank you. Can you also talk about -- I mean you mentioned some of your financial incentives, rate locks and rate buydowns and such.

Have you started adjusting any of your base prices yet, or have you seen competitors start to do that yet?.

We have done very, very little adjustment to base prices. As I said, we're not in a situation, whereby we have any inventory coming to the point at which they're standing inventory, and we need to move it. So we're in pretty good shape there.

For the most part, I would say, across the country, we may have had one or two price adjustments on some phasing of some houses that may have had some conditions that were not optimal and we're kind of coming in the sequence and we move along. But we – has been negligible price adjustments.

From a competitor standpoint, in places in Phoenix, Inland Empire and some in Florida. We've seen some pricing changing going on there in the landscape that hasn't really been very material. It's been very focused and targeted clearly on quarter end or year-end deliveries.

So it seems like the industry, for the most part, is staying fairly focused on driving absorptions through levels of incentives around options, giveaways and then through their mortgage financing..

Got it. Perfect. And then my last question, obviously, your land position remains strong.

Can you provide -- I'm not sure if you have in the past -- what's your kind of lot acquisition and development spending was in the quarter and kind of thoughts on that spending in the current environment for the rest of the year, given your current land position?.

Yes, this is Chris. I don't have the exact land spend for the quarter. But overall, we are being very disciplined on our land spending right now, making sure that we are meeting all of our targeted IRR hurdles.

So any new land spending goes through a very disciplined review, not that it wasn't before, but it's more focused and we're being very judicious on any land spending in this environment. And really have such a great land position that we're very comfortable with where we are and heading into 2023 and making what we have work for what our needs are..

Great. Thank you. That's it for me..

Thank you. [Operator Instructions] Our next question comes from Carl Reichardt, BTIG. Please go ahead. .

Thanks, everybody. Hope, you’re doing well. And Mike, I just -- I wanted to ask about your comment about change in psychological demand in Phoenix and Central Florida.

Is your sense this is related more to fear of changes in home prices or is this more macro sort of related to jobs in the economy?.

No, I think it's the former not the latter, Carl. What's interesting and we've had this discussion internally is that, as we sort of head into these headwinds, I don't think it's structurally around the idea that there is a fundamental problem with the economy. I mean people have jobs, people have great liquidity and savings.

People have great credit scores. There's still a very strong desire, as I said earlier, about the interest generally within our communities and what we're offering.

But I will say that there is lots of concern around what's going to be happening with home pricing? Are we buying at the high watermark in a community that see price appreciation going up 30% and how far will it retract, I think there's just sort of that, I don't want to be the last one in and sort of feel like a pool that I paid too much if pricing is going to change, it's going to change down the road? So we're doing a lot in terms of trying to educate those prospects in terms of what is going on in the market today with the lack of inventory, that rates are still relatively low.

Historically, we're offering some great entry level of mortgage products, so you keep their mortgage payments down. And just to get them comfortable that it's still a great time to buy a house and that this buying decision of sound..

Okay. And then you've talked a little bit about the financing shift to some degree.

I'm curious how consumers, especially younger consumers are reacting to arms? And I'm just -- I'm wondering if that product -- regardless of the shape of the curve, I'm wondering if that product is attractive or they think that it's attractive or if younger consumers are thinking about what happened sort of last downturn and what how ARM became a naughty word.

And I'm just sort of interested in that shift.

And if you're seeing that dynamic where folks really saying, look, just buy me down or lock me on a fixed rate?.

Yes, Carl, this is Chris. I'll take that. Just to give you a couple of stats just within our backlog that uses our mortgage affiliate, less than 10% of the backlog is priced on an ARM and actually less than 1% has anything to do, amortization less than 30 years.

So, we're seeing everything continued to be in that 30-year amortization side and really more on the fixed rate and conventional [indiscernible]..

Okay. Make sense. Great. I appreciate it. Thanks, fellows..

Thank you. .

This concludes our question-and-answer session. Now I'd like to turn the call back over to Mr. John Ho for closing remarks. Please go ahead..

Thank you all for joining us on our second quarter earnings call. We look forward to speaking with you next quarter..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..