Greetings. Welcome to the Landsea Homes Corporation Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this event is being recorded. I will now to turn the conference over to Drew Mackintosh. Thank you.

You may begin..

Good morning and welcome to Landsea Homes' fourth quarter and full year 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..

Good morning, and thank you for joining us today as we go over our results for the fourth quarter, provide a recap of our accomplishments in 2023, discuss the current state of our homebuilding operations, and our outlook.

Landsea Homes delivered another quarter of strong profitability in the fourth quarter, generating net income of $12.5 million or $0.33 per diluted share. We came in above our stated guidance for full year deliveries, thanks to a strong fourth quarter push by our construction teams to get homes closed by year-end.

We also experienced a significant year-over-year improvement in order activity and this momentum has carried into the new year, with orders up 28% for the first eight weeks of 2024 compared to the same period in 2023. I realize that most of you on this call are more focused on our company's future performance rather than our past accomplishments.

I think it's worth reviewing some of our achievements from 2023 as they provide the foundation of what's to come for our company. In February, we launched Landsea Title, which along with Landsea Mortgage, allows us to offer our homebuyers a comprehensive suite of financial services when purchasing their home.

It also enables us to maximize efficiencies throughout the home buying experience by controlling the quality and timing of the title and closing process. Having a broader array of financial services to offer to virus is crucial during this era of mortgage rate uncertainty and getting Landsea Title up and running was a key component of this.

In March, we announced the relocation of our company's headquarters to Dallas, a move that put us in a better position logistically to manage our expanding homebuilding footprint, and as signaled our intention to grow Landsea's presence in the state of Texas.

We follow through on this intent earlier this year by entering into a definitive agreement to buy Dallas-Fort Worth-based, Antares Homes, which will give us 19 actively selling communities and a strong pipeline of almost 3,000 lots in the market.

We expect Antares will be a transformative transaction for our company and credit our relocation to the area as being an important factor in sourcing and closing this deal. In the summer, we completed a series of capital markets transactions that greatly benefited our company.

We executed two secondary share offerings on behalf of large shareholders, one in June and one in August that reduced the level of concentration in our shareholder base and increase the float of our stock. Both offerings were well received by the market, and we successfully placed the shares with a stable base of traditional institutional investors.

In July, we entered into a note purchase agreement with various investors, including BlackRock and Angelo Gordon that provided for the private placement of $250 million aggregate principal amount of senior notes due in 2028.

This transaction provided us with much needed capital to pursue our growth initiatives while limiting our exposure to the fluctuation in interest rates. In October, we established a presence in Colorado for the acquisition of certain assets of Ridgefield Homes.

Colorado has been one of our top new market targets for some time and to acquire a successful homebuilding operation with a solid management team was a real win for us. Throughout the year, we also allocated a portion of our capital to buying back stock.

In total, we repurchased roughly 3.6 million shares at an average price of $9.46 thereby reducing our shares outstanding by 9% as compared to the end of 2022.

All these actions we took in 2023 were aligned with our goals of rapidly scaling our operations in a profitable manner, establishing a path to better returns and creating value for our shareholders. Our year-end book value per share was $17.88, and our tangible book value per share was $16, an increase of 11.4% from a year ago.

We believe we are in a good position to take advantage of the positive housing fundamentals we see in our markets today. I am proud of what we achieved in 2023 and believe we are on a path to greater success in the future. With that, I'd like to turn the call over to Mike, who will provide more detail on our operations this quarter..

Thanks John. We made great strides in the fourth quarter of 2023, both in terms of selling and closing homes, and this momentum has carried into 2024. Net new orders for the fourth quarter were up 352% year-over-year on a sales pace of 2.2 homes per community per month.

Since the start of the new year, our sales pace has accelerated to 2.8% in January and 3.1% through the first two weeks of February. Incentives peaked during the month of October and have been steadily declining ever since, currently trending at 3% to 5% of base prices.

While this is higher than historical norms, we do see incentives trending lower in our markets. For the full year of 2023, orders were up 28% to 1,947 and the dollar value increased 16% to $1.1 billion. Also, we increased our average selling community count year-over-year 12% organically to 59.

We would expect to see the similar organic growth of 10% to 15% in our existing divisions before adding the Antares Homes acquisition. We continue to see healthy demand in all of our markets and across our demographics, driven by lack of existing supply and a resilient economy.

Consumers appear to have adjusted to the new normal mortgage rates exceeding 7%, though a majority of our buyers still offer some form of financing incentives to lower their monthly payments. The lack of existing home supply remains a tailwind for our industry as buyers seek the selection and quality that the new home market affords.

Many of these buyers are looking for quick move-in options, and we have responded by increasing the amount of spec inventory that's available at our communities.

Although we have a very few standing inventory at any one time in any community, we have started the homes needed to close in the next couple of quarters and are actively selling into this production.

In terms of building conditions, we believe the worst of the supply chain issues that played our industry are behind us as build times have returned to pre-COVID levels. This improvement, coupled with our strategic shift to more spec inventory should help boost inventory turnover and cash flow generation.

We remain committed to growing our size and scale in each of our markets while remaining disciplined with our underwriting standards. We ended the year with over 11,000 lots with a breakdown of 41% owned and 59% controlled, in line with our targeted mix.

Our goal is to build on the existing momentum we have generated in Florida, Arizona, California, and Colorado, while making a big push to further establish our presence in Texas.

The recent acquisition of Antares gives us a running start in the efforts to penetrate the Dallas-Fort Worth market, while our active community pipeline in Austin continues to grow and should start contributing to sales and closings to our company's total beginning in the first quarter of this year.

In summary, I am pleased with our team's execution in the fourth quarter, and I'm proud of the milestones we hit in 2023. I concur with John on that 2023 was a transformative year for the company, and we will be reaping the benefits of these accomplishments for years to come.

With that, I'd like to turn the call over to Chris, who will provide more detail on our financial performance this quarter and give some preliminary guidance for 2024..

Thank you, Mike, and good morning, everyone. As Mike and John mentioned, we are very pleased with our performance in the quarter, achieving net income of $12.5 million or $0.33 per diluted share. This compares to net income of $25.6 million or $0.62 per diluted share last year.

For the year, we generated net income of $29.2 million or $0.75 per diluted share and $1.2 billion in revenue on 2,123 deliveries, which exceeded our stated guidance of between 2,000 and 2,100 deliveries.

Fourth quarter home sales revenue was $380 million, a 9% decrease over fourth quarter of 2022 based on 6% lower volume and 4% lower average selling price. This decline was partially attributable to a lack of contribution from New York and Texas, which added 18 homes for $29 million in the fourth quarter of 2022.

As we have been discussing in the past few calls, our Texas operations should begin deliveries from their new communities in late first quarter or early second quarter. In the quarter, we also closed on $18 million in lot sales and other revenue for a total revenue of $398 million.

We were excited to enter the Colorado market this quarter, and this new division contributed 11 closed homes for $7.4 million. During the quarter, Florida represented 44% of our deliveries and 35% of our home sales revenue.

California represented 30% of deliveries and 45% of our home sales revenue, and Arizona made up the majority of the difference with 24% of the deliveries and 19% of the home sales revenue.

In 2024, we will see ramped-up contribution from Colorado as we have a full year of deliveries and anticipate having our new DFW segment contributing starting in the second quarter, following our closing of the Antares Homes acquisition. Home sales gross margin was 15.9% for the quarter and 20.8% on a fully adjusted basis.

As the 10-year treasury spiked to 5% last fall, the cost of mortgage buydown incentives increased significantly. We saw this also decrease significantly towards the end of December, and it has remained more stable in the first quarter of this year.

Incentives during 2023 average between 5% and 6% of our home sales revenue, a sizable increase from 2022 levels. We expect incentive levels to remain elevated in 2024 with the actual cost fluctuating with the overall mortgage rate environment.

Buying down to a 5.99% level seems to be the sweet spot in today's environment and can range from 3% to 5%, depending on the underlying mortgage rate. Our SG&A expense came in at 15% of home sales revenue for the year, up 220 basis points from 2022.

As we have discussed on previous calls, we are confident that we can begin to see the leverage from the public company infrastructure we put in place as our delivery run rate grows. With both Richfield and Antares acquisition, we will leverage the existing corporate overhead and staff, and we will see an overall improvement in this ratio.

For the year, we expect an overall improvement of 150 to 200 basis points in our SG&A efficiency with this being more back-end loaded as we realize the effects of increased deliveries and volume from Colorado and DFW.

Our tax expense for the fourth quarter was $5.6 million, bringing our total for the year to $11.9 million for an effective tax rate of 26.7%. This year, fewer homes qualified for the new, more rigorous 45L tax credits, but we expect to have the majority of our homes to qualify in 2024 and beyond. Turning to our balance sheet.

We ended the fourth quarter with $431 million in liquidity, $169 million in cash and cash equivalents and $263 million in availability under our revolver. Our leverage ratios remained in line with our stated policies ending the quarter at 44% debt to total capital and 30% net debt to total capital.

Now, looking forward to the first quarter, we anticipate our new home deliveries to be between 480 and 500 at an average sale price of $560,000 to $575,000 with GAAP gross margins of 15% to 16% and adjusted gross margins between 20% and 21%.

And for the full year, we anticipate new home deliveries, including our Antares acquisition, to be in the range of 2,500 to 2,900 units, which at the midpoint represents a 27% growth over 2023. We expect the ASPs of these deliveries to be in the range of $500,000 to $525,000.

Antares maintains an ASP in the low 400s, which will impact our annual ASP numbers as we add them to our portfolio. Additionally, we anticipate GAAP home sales gross margin for the full year to be in the 17% to 18% range and adjusted gross margins to be between 21% and 23% for the full year.

These gross margin ranges are dependent upon assumptions in our purchase price accounting with the Antares acquisition. We will not know the final allocations until we close the acquisition in the second quarter.

Also, this guidance is based on our best estimate as of today with the current market conditions as inflation, incentives, and interest rates continue to change, overall results could change accordingly. And that concludes our prepared remarks. And now I'd like to turn it over to the operator to open up the call for more questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Alex Rygiel with B. Riley Securities. Please proceed with your questions..

Good morning Mike, John, and Chris, very, very strong finish to the year. Congratulations..

Thanks Alex..

A couple of quick questions here. First, coming back to organic growth.

What did you say your organic community count growth would be again in 2024? And can you discuss what markets could see the greatest growth and what the average selling price of these new communities could look like?.

Sure. Let me take a stab at that, Alex. It's Mike. We talked on the recorded remarks, about 10% to 15% organic growth.

That generally will be coming from the balance of all of our communities in the markets we're in, but I would say that -- if you just put numerical numbers around that, we'll continue to grow Phoenix, the Phoenix market, bringing communities online Florida certainly and then the expansion of Austin as well.

And then we're sort of doing some bolt-ons in California. We see the average sales price still being in the range in which we talked about in our remarks. So, we don't see any big deviation around that. But as you know, from quarter-to-quarter, depending upon mix and kind of where things are running, it could move up and down around that number.

I think John has a specific number that he can share with you around that..

Hey Alex, I think our first quarter guidance is in the range of, I think, $550,000, $575,000, primarily coming from our actively selling communities through organic growth. Our expectation is that we'll close Antares Homes in the second quarter of this year. They have a lower average selling price in the low $400,000.

So, we expect our full year average selling price to be between $500,000 and $525,000..

And secondly, could you comment on your spec strategy near-term? It sounds like specs are very high demand right now. And it sounds like you're definitely focused on that.

So, maybe comment on what spec inventory looks like and how it could change?.

Sure. It's Mike again. Yes, for sure, it's an ongoing component part of our business today as the buyer profile is looking for that quick move-in because we just don't see that resell market bouncing back soon and they don't have a whole lot of options. So we're picking up a lot of that demand.

That being said, it is necessitating us to get out ahead of sales with our starts and then selling into our production. So, currently, we're running about 20% to be builts or dirt starts, as we call them, against spec starts. And then I would say, roughly, we're a third, a third, a third sales going into the production cycle.

So, another word a third of our sales would be somewhere within the first early part of the house being under construction. The second part, the last -- the middle third, obviously, in the middle and then the last third would be those that are looking for the quick move in within 60 days. So, that's generally how it breaks down..

Very helpful. Thank you very much..

Thanks Alex..

Thank you..

Thank you. Our next questions come from the line of Carl Reichardt with BTIG. Please proceed with your questions..

Thanks. Morning everybody. When in second quarter, will Antares close, do you think? And then, Chris, on the -- I think you said 20% to 23% gross margin guide for 2024 on a core and then 2017/2018 actual GAAP.

What basis points of purchase accounting are you assuming between those two? I mean I think I'm just asking, I'm assuming it's going to be back-end loaded or third quarter, fourth quarter loaded.

Can you just help us a little bit about how that will lay out?.

Yes, I'll comment on the closing timing and then Chris can address it from a purchase accounting and what our best estimate is. But our expectation is sometime April, May, when we expect to close. I think everything is on track for that.

And as it relates to our estimated sort of purchase accounting, our forecast for the full year would include deliveries that we anticipate to receive after the closing on Antares Homes. And Chris can talk about the purchase accounting..

Yes, Carl. So, the best guide right now would be kind of similar to what we did with Hanover. We had $111 million of purchase price accounting with Hanover. 45% of that bled through in the first year of closings. We did another 17% in year two.

We'll close Antares kind of midyear this year, right, April, May, is what John said, but we would anticipate kind of very similar percentages as we use because they're very similar in structure. And right now, we won't know the final purchase price accounting until we actually close and do the full analysis.

But I would anticipate it being roughly in the $80 million to $90 million range total and then kind of bleed through that way. And you're right, it would it would be more back-end loaded, and that's why you see the gross margin differences towards the back year.

And on an adjusted gross basis, that's really one of the big changes there between adjusted and--.

Yes. Okay. Understood. So, the mid-May timing, if you build that into our model would be the sort of roughly correct or conservative in terms of the timing of the close..

Yes. On a conservative basis -- yes, I think what John [Indiscernible] April, May timeframe..

Okay, perfect. All right. Thank you for that. Okay. And then my second question is -- so last year, there was some volatility homebuilding stocks in your stock, you bought back 9% of your shares.

As you look out this year, John, and you're thinking about strategically the deployment of capital, how does share repurchases fit? Would you consider them sort of more opportunistic last year or more core what you want to do -- given that you're trying to grow the business, I'm thinking that an opportunity to utilize that capital in a more levered way in the market to grow the acquisition or greenfield would make some more sense for you this year?.

Sure. Hey Carl, so last year, there was definitely an opportunity to repurchase shares we had completed two very successful secondary offerings last year, increased our liquidity profile of the stock almost 10-fold and our repurchase about 9% of outstanding shares. We repurchased them at an average price of $9.40.

So, you can see that was a pretty rewarding and very accretive to our overall company and earnings at that price. Growth for us is definitely one of our priorities as we've demonstrated in the fourth quarter when we acquired Richfield Homes and expanded into Denver, Colorado and then with the announcement of the Antares Homes acquisition, as we know.

So, we're certainly not trading growth for doing repurchases. But at the same time, we do believe that given the price of our stock at below book value, that is also a good allocation of our capital that we use.

And that's why at the last earnings call, we had announced a new $20 million repurchase program that that we will use this year, continue to use this year as one of the areas that we allocate capital to. So we do see that as a consistent use of capital to do share repurchases.

Certainly, we're -- given our price of our stock is, which is still at a discount to book value. But at the same time, we're not sacrificing it for growth.

It is a balance, but we do see our ability to be able to continue to grow the business as we've shared in our guidance for the year, and at the same time, be consistent and do some buyback as one of the tools for us as we continue to grow and help drive share price and create more shareholder value..

All right. Thank you, John, I appreciate that. I'll get back in queue..

Thanks, Carl..

Thank you. Our next questions come from the line of Jay McCanless with Wedbush. Please proceed with your question.

Jay, could you check up your self-muted, please?.

Yes. There we go. Sorry about that, guys. Good morning, everyone. So taking Carl's question a step further, given what we've seen with a lot of deals out there this year, does it make more sense to develop what you've already bought? Or are there still some compelling valuations out there to do more M&A....

Hey, Jay, it's Mike. I'll start it and maybe John or Chris can kind of backfill me on this. But I think that going forward, at the size of the company we are today and where our ambitions are, we're always going to have M&A as a part of our growth profile.

It's not the long-term solution once we've established our flags in the markets, and we can grow organically. But we've always said that this is a business of scale and we get into a market, we have to achieve a scale that makes us a player there.

We have to have a meaningful operation to attract the best trades, be in the land game in a real way, be it some level of attractiveness to our team members and people to join our team. So we definitely feel that that's going to be something we're going to continue to do as we go forward.

We think we're good at it, and we think we know how to find those nuggets that are out there. It's kind of part of, I think, what is our secret sauce that we continue to be an acquirer of choice out in those marketplaces in which we're entering.

We've established a strong reputation for a company that can deliver on these acquisitions and do a successful integration and then bringing the teams into the Lance family and expand our brand. So from that standpoint, I would expect to continue to see us -- I think John always says about once a year or so.

That doesn't mean that that's absolute, but we continue to see, as we've grown forward an acquisition at least once a year and probably will continue to do so..

Jay, I would -- one thing that I would add to that is in our acquisitions in our growth through M&A and also our organic growth when we go by land, we always maintain a very strict financial discipline. So just despite the incredible growth that we've had, we still maintain leverage ratios, mid-40s, net debt-to-cap ratios in the low 30s.

So with that growth in M&A that we look to do, we will always maintain within those stage of financial policies just because we think that's prudent. And when we acquired the Hanover family builders last year in January, we're very quickly able to reduce our leverage within 9 to 12 months, and we expect the same with in Antares Homes as well..

Okay. Great. Thank you for that. The second question I had, Chris, I lost track when you were talking about the SG&A outlook for 24.

Could you give me that guidance or where you think it might go again?.

Yeah. So I would expect overall, just kind of down and dirty about 150 to 200 basis point improvement overall on that ratio by the end of the year. So if you look at 2023 compared to 2024, I would see us being able to improve that ratio by that amount. A lot of it has to do with right, you've got the full ramp-up of Richfield coming in.

And then depending on when we close on the Antares acquisition as well, the volume from that and help offset some of those costs because we'll add additional costs in there..

Okay. That's great.

And the last one I had, Nice to see the acceleration in absorption from January into February, especially with margarines moving against you I guess, is that -- did you have to incentivize to drive that growth? Or is it just the lack of existing homes out there or pushing people into the communities?.

Jay, this is Mike. Yes, we're still incentivizing although in a decreasing way as we go into the new year. So we've been pretty excited for that result.

But there's no way of getting around it, and it's out there in the industry, and we're all doing the same in terms of our mortgage buy-downs, but we definitely have seen an active resurgence in buyer demand coming into the new year.

So we'll see it sort of as a mix between incentives mortgage buydowns and then a continuation of the fact that we're providing a solution to those that are looking for housing in a short period of time through our spec start strategy with those component parts in there to continue to go.

So it's a strong start to the selling season, and we're feeling really confident they'll continue for a bit..

Okay. That's great. Thanks for taking my question..

Thanks, Jay..

Thank you. [Operator Instructions] Our next question is come from the line of Carl Reichardt with BTIG. Please proceed with your question..

Thanks for put me in again, guys.

So Jay asked one of my questions, but the other one, Mike, can you talk about if you could differentiate between what you'd determine as sort of first-time buyer entry-level product versus your other product in your markets in fourth quarter and into first quarter so far, have you seen any kind of a significant relative alteration and absorption rate between those 2 products as one improved more than the other year-over-year? Or have they been pretty consistent in terms of their improvement..

Yes, I think they're fairly consistent. There's different ways of motivating that buyer profile, for sure, where the, what I call pure entry-level homebuyer who is seeking housing that is affordable is really being driven by strong incentives to get their monthly payments down. It's a monthly payment game in that area.

If you are trending in sort of the first time move up, it's a little bit more of a value play for them. They are less mortgage rate sensitive, but timing is important to them. They usually have a housing need that needs to be solved fairly quickly. And so that's where the spec strategy comes into play.

So for us, we have this really interesting look at our industry in terms of the dynamics from San Francisco Barria to Orlando, Florida and everything in between. And so I think they all kind of play out themselves in their local markets.

But for the most part, you're toggling between, again, actual incentives, mortgage rate buy downs and deliverability in a specific period of time. And if you can find that perfect sweet spot in there, you're continuing to drive absorptions. And again, as we've always said, is that we believe this is a business of momentum.

You have to continue to have activity at all your communities. We strive to be around 3 net per month at all of our communities. Some are lower, some are higher. But we're always pursuing kind of that absorption rate as we go forward, and it's a weekly adjustment to make sure that, that continues to happen..

Great. Appreciate that. Thank you, Mike..

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to John Ho for closing remarks..

Thank you for everyone on the call. We look forward to speaking with you next quarter..

Thank you..

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day..