Landsea Homes Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 10 speakers on the call.

Operator

Good day, everyone, and welcome to today's Landsea Homes Corporation Second Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode. Later, you will have an opportunity to ask questions during the question and answer session. Please note that this call may be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn today's call over to Drew McIntosh, Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, and welcome to Landsea Homes' Q2 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. Lansing 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 Lansing Homes in its filings with the Securities and Exchange Commission. We do not undertake any obligation to update forward looking statements.

Speaker 1

Additionally, reconciliation of non GAAP financial measures discussed on this call to the most comparable GAAP measure 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 Boursome, President and Chief Operating Officer and Chris Porter, Chief Financial Officer. With that, I'd like to turn the call over to John.

Speaker 2

Thanks Drew and good morning to everyone. Lansing Homes delivered strong top line growth in the Q2 of 2024, generating revenue of $431,000,000 which represented an increase of 47% over the Q2 of 2023. New home deliveries totaled 760 units, well ahead of our stated guidance as our teams did an excellent job of accelerating build schedules and closing homes in a timely manner. This allowed us to achieve a fully adjusted home closing gross margin of 21.1 percent producing adjusted net income of $13,300,000 and adjusted earnings per share of $0.36 We continue to see solid demand trends during the quarter, driven by positive housing fundamentals in our markets. Though we did experience an increase in home inventory from record low levels in some markets, we do not feel these are a competitive threat at this stage.

Speaker 2

We generated 760 net new orders for the quarter, 35% more than the Q2 of 2023 on a sales pace of 3 homes per community per month. Financing incentives remain an important selling tool at our communities to help ease affordability concerns and drive monthly payments down. While these incentives spurred demand in the quarter, they continue to weigh on our home sales gross margin, which came in a little below our expectations. The strong year over year growth we experienced in both sales and closings this quarter was a direct result of our strategic efforts to grow our company, achieve greater economies of scale. Average community count for the quarter was up 47% year over year.

Speaker 2

Thanks to the investments we've made in our markets and the acquisitions we've done to grow our company. We are committed to growing the size and scale of our homebuilding platform, so that we realize better fixed cost leverage and receive better terms on the labor and materials that go into building our homes. Benefits of this strategy can be seen in our SG and A ratio in the Q2, which came down 220 basis points on a year over year basis to 13%. We are a much bigger and more diversified company than we were a year ago. We expect to reap the benefits of our larger homebuilding platform as our volume increases.

Speaker 2

While volume growth is an important part of our long term strategy, we realized that doing so in a capital efficient and risk averse manner is equally important. That is why we have established relationships with land bankers and other capital partners to take some of the upfront cost and risk off our balance sheet. We want to continue to concentrate our efforts on the business of building and selling homes, not speculating on land. Sourcing lots from 3rd parties on a just in time basis will allow us to do that, while also giving us some downside protection should the market conditions soften. Balancing out our growth objectives is our commitment to maintaining a strong financial position.

Speaker 2

We have made great progress over the last few quarters, improving our balance sheet by obtaining fixed rate debt and strengthening our relationships with the lenders in our revolving credit facility. We are now on much more solid footing with respect to our access to capital and feel that we have entered a new phase in our company's evolution as a result of these actions. We ended the 2nd quarter with a net debt to cap ratio of 45.4%, which we expect to continue to go down as we generate significant cash flow through the end of the year. As we look to the back half of twenty twenty four, I am pleased with how our company is positioned. Most of the heavy lifting associated with integration of our recent acquisitions has been completed.

Speaker 2

We look forward to realizing the benefits of those efforts. We have a solid backlog in place that will help us achieve our delivery goals for the year and bring our leverage ratio down from where it is today. We also have a product profile in our high performance homes that continues to resonate with our buyers. As a result, I remain confident that Landsea is on track to achieve its long term goals. Now I'd like to turn the call over to Mike, who will provide more color on our operational performance this quarter.

Speaker 3

Thanks, John, and good morning to everyone. Landsea posted year over year delivery growth of 41% in the Q2, as we benefited from faster cycle times and a higher community count relative to last year's Q2. In terms of regional contributions, Florida led the way followed by Arizona and California. Built conditions have improved significantly since the beginning of the year and we're seeing much better labor and trade availability to keep our operations running smoothly. This dynamic has also resulted in lower stick and brick cost inflation and in some instances a decline in cost as is the case with lumber.

Speaker 3

We believe lower lumber costs will be a margin tailwind for our company in the coming quarters, so much of it may be offset by higher land costs. Order activity was solid during the quarter with weekly traffic fluctuations being dictated by movements in mortgage rates. We made the strategic decision to stay competitive in the marketplace and maintain sales momentum in an effort to stay on track to achieve our delivery goals and cash generation targets for the year. We are committed to delevering the company's balance sheet from current levels as we will be in a position to redeploy capital into higher return projects by year end. Our operations in California, Colorado, Arizona and Florida all achieved sales paces excess of 3.0 homes per community per month for the quarter, while our operations in Texas achieved 1.5 per month.

Speaker 3

We see the pace in Texas improving in the 3rd and 4th quarters as we have the normal ramping up activities with transitioning and acquisition to our platform behind us. As has been widely reported, we have seen an increase in home inventory in Texas and Florida, and this has marginally impacted demand in these markets. We believe this is a natural occurrence following several quarters of scarce inventory and home price appreciation and does not change the long term outlook for these markets, which should continue to benefit from outsized job growth and in migration. Additionally,

Speaker 4

most of

Speaker 3

these homes are significantly older and we would not consider them competition for our homes. Most buyers are looking for new, modern and up to date homes and our high performance homes continue to stand out as a superior value in our markets. Additionally, new home buyers can take advantage of our mortgage incentives that existing home sellers cannot offer. It is also important to note that while home inventory levels have trended higher recently, they still remain well below historical norms. Overall, I feel good about the current state of our industry and Landseeds positioning.

Speaker 3

The lock in effect of lower mortgage rates for existing homeowners remains in place, while the need for affordable new housing persists, creating an ideal opportunity for new homebuilders to take the market share. Our access to capital as a public company gives us distinct competitive advantages over many of our smaller private builders in our markets, while our quality design and unique product offerings allow us to differentiate ourselves from many of the larger competitors. In short, I believe the homebuilding industry and Landsea Homes continue to have a bright future ahead. 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.

Speaker 5

Thank you, Mike. Landse Homes reported net income of $2,900,000 or $0.08 per share for the Q2 compared to $4,900,000 or $0.12 per share in the Q2 of 2023. We reported a 9% increase in fully adjusted net income of $13,300,000 or $0.36 per share compared to $13,000,000 or $0.33 per share in the same period last year. Additionally, during the quarter, we had several transactions that created one time items that impacted our net income and will not recur, including a $2,600,000 in transaction costs associated with our Antares acquisition, dollars 5,200,000 in deferred financing cost write offs associated with the recast of our revolving credit facility with stronger credit banks, and $1,400,000 in restructuring costs associated with our reduction in force initiatives. We also booked $8,600,000 in purchase price accounting in the quarter.

Speaker 5

As Mike mentioned, we had 760 deliveries, which was 41% higher than Q2 of 2023 and our $550,000 average selling price was 2% over last year, both exceeding the high end of our guidance and produced a 43% increase in home sales revenue to $418,200,000 Total revenue increased 47% over 2023 to $431,100,000 Our gross margin of 14 0.9% came in just below the low end of our guidance as our purchase price accounting was larger than expected at $8,600,000 or an impact of 2.1 percent to our gross margin. We booked $52,200,000 in total step up on the Antares acquisition reflecting the fair value of the balance sheet assets we acquired. We expect roughly $4,000,000 of the Antares purchase price accounting to burn off in Q3 and Q4 each and approximately $12,500,000 in 2025 and the remainder through 20262027. We also have $21,000,000 in purchase price accounting remaining on our Florida acquisition and expect roughly $7,000,000 to burn off for the balance of 20 24. Our purchase price accounting estimates are highly dependent on the specific homes we are able to close during those periods.

Speaker 5

Incentives and discounts for the quarter continued to be elevated and were roughly 6% of revenue, reflecting the volatility of interest rates in the quarter. We did begin to see an improvement in this cost starting in July as the 10 year treasury dropped below 4.5%. We ended the quarter with 84 average selling communities, up 47% from the Q2 of last year. During the quarter, we opened 7 communities, closed 6 communities and added 20 from our Antares acquisition for a total ending community count of 85. Backlog ended the quarter with 6 94 homes for a total value of 391,100,000 dollars or an average selling price of $564,000 Our SG and A expense was 13% of home sales revenue quarter, including our $2,600,000 in acquisition related costs.

Speaker 5

This is a 220 basis point improvement from the Q2 of 2023. During the quarter, we took efforts to gain efficiencies in the operations through both headcount reduction as well as streamlining our reporting structure. We eliminated 30 positions for an annual run rate savings of approximately $5,000,000 We believe we are on path to be more aligned with our peers and operate in the range of 11% to 12% next year. Our tax rate in the quarter was 29.8%, but we do expect a full year tax rate between 22% 24%. Turning to our balance sheet, we ended the quarter with $330,000,000 in liquidity, dollars 106,000,000 in cash and cash equivalents and $224,000,000 in availability under our revolving credit facility.

Speaker 5

During the quarter, we completed the recast of our revolver led by Bank of America, U. S. Bank and Truist that broadened and strengthened our bank rate and extended the term into 2027. Our capacity is $455,000,000 with an accordion feature to increase up to $850,000,000 should we need the capacity. Additionally, we updated our pricing to a grid pricing.

Speaker 5

We now have no debt maturities until 2027. Our leverage ratios increased as expected with the acquisition of Antares ending the quarter at 52.8 percent debt to total capital and 45.4 percent net debt to total capital. Our focus remains on generating cash flow from the acquisition and reducing leverage back to within our stated policies of 45% total debt to capital. Now looking forward to the back half of the year, we anticipate our new home deliveries to be between 625,700 in the 3rd quarter and between $1,011 100 in the 4th quarter. Average selling prices should be between $495,000 $510,000 for both quarters with a relatively consistent mix of our division's performance.

Speaker 5

Adjusted gross margins should be in the range of 20% to 21% in the 3rd quarter and in the 4th quarter between 23% 24%. Our GAAP gross margins are expected to remain relatively consistent in the 3rd quarter and improved to between 18% 19% in the 4th quarter. These sales and gross margins reflect our best estimate as of today with current market conditions as inflation, incentives and interest 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.

Operator

We will take our first question from Matthew Boulett with Barclays. Please go ahead.

Speaker 6

Good morning, everyone. Thank you for taking the questions. Just kind of looking at the pieces of the guidance over the next couple of quarters, looks like you're guiding to something like 1700 plus closings over the next two quarters. There's around 700 homes in backlog. So I guess presumably looking to build and sell a fair bit of spec homes over the next couple of quarters and sounded like you're expecting Texas to pick up.

Speaker 6

So just kind of curious how you're thinking about starts and spec production given a pretty dynamic market here and sort of how you build to that delivery guide? Thank you.

Speaker 2

Yes. Hey, Matt. This is John Ho. I'll start it off and then I'll hand it over to Mike to talk about some of the specifics around the build in sales. For us as we've said, we've invested in these markets that we think have long term really strong prospects.

Speaker 2

I think in the Q2 really demonstrated that with both Florida and Texas coming online and the number of new communities that we have opened now, that's really driving significant orders for us with actively selling communities that we have now and then being able to deliver that in the second half of the year. So we feel pretty confident that there is really strong demand out there. The use of the incentives have been very effective as you can tell. We will continue to see that I think in the second half of the year. Mike?

Speaker 3

Yes, sure. Hey, Matt. Great question. Something we're thinking about a lot here, but we have prepared ourselves achieving this number that we set forth here in this guidance. That being said, we're a little bit into the Q3 already and we're really happy with the performance around our sales rate.

Speaker 3

Our backlog is actually larger than what you were hearing right now because that's a second quarter ending backlog. So currently as of right now, we're over 75% of the way in terms of closings we have against the backdrop the backlog that we have currently against the plan that we're trying to achieve. So to be in July and be roughly 75%, 80% of the way there going into what we call sort of the fall bump that we normally get. We're excited and we're particularly excited because we really haven't had the contribution out of our DFW team through the Antares acquisition. That closed a little bit later than had anticipated.

Speaker 3

It was in April. We were pretty well through the spring selling season at that point. So we missed some of that opportunity. But now being fully online, pretty much 100% integrated, having all those communities available to us and what we've been seeing out of Dallas in the last couple of weeks, we're feeling really good about our prospects of meeting our hit meeting or meeting our goals here for the end of the year.

Speaker 6

Perfect. Super helpful there. Secondly, maybe sticking with the guide, just kind of noticeable to look at the adjusted gross margin guide. I think the Q3 to Q4 jump of about 300 basis points. So I'm thinking ex purchase accounting, the adjusted gross margin, What are the pieces to that bridge?

Speaker 6

I mean, it sounded like maybe incentives have been ticking lower here into Q3. But between incentives, lower lumber costs, kind of what gets a lot better in the margin in the Q4 relative to the Q3? Thank you.

Speaker 2

Hey, Matt, this is John. I'll take a stab at that and then other members of my team can add on. It's a combination of incentives, but really the contribution from different parts of our business. We're seeing some of the communities that have been hit with some higher costs. We're really pushing that through the business that you can see that's why we really deliver on the high end or exceeded our deliveries in the Q2.

Speaker 2

We're going to have new communities opening up. Some of those communities do have some lower expenses, costs associated with them and they'll be coming through the second half of this year. We'll also see some significant contribution from the opening average selling communities in Texas as well. So it's really a combination of the geographic mix that's coming through our business as well as some of those lower costs.

Speaker 3

Sure. Matt, it's Mike again. I might add also that as we pivot out of Northern California business and increase our areas of contribution throughout the country, the distortion that comes from the BMR below market rate units that we're pushing through in the first half of the year against the average sales price that these BMR units are a part of, that's going to be going away. So I think we'll also see just sort of organically that getting better as we go through it. We're also very excited about some of the new open communities that we have now.

Speaker 3

They are performing very well, taking less incentives, rates are going down. We're actually still raising prices in some of our locations particularly in Northern Orlando and in some cases even in Arizona and places where we can continue to thoughtfully and precisely raise prices to offset or even better beat some of the incentives that we have embedded into the numbers you're seeing right now. So we're feeling pretty good again that we're going to see that come through and team is working really hard to make that happen.

Speaker 6

Awesome. Thanks for the color. Good luck guys.

Operator

Thanks. Thank you. We'll take our next question from Carl Reichardt with BTIG. Please go ahead.

Speaker 7

Thanks. Hey, guys. Hope you're doing well. Just on this particular quarter, I think you beat your delivery guide on a unit basis, was it 22% at the midpoint, that's a ton. What were the drivers of that outperformance?

Speaker 7

I'm going to guess that you weren't really sure on Antares and what you'd get out of it and you got a lot more out of it than you thought. But can you sort of fill me in on why the beat was so significant?

Speaker 3

Well, it's Mike. I got the finger point. It landed on me Carl. So we have really, really been working hard with our sales proposition out in our local markets against the inventory that we have and really working with our mortgage affiliate and targeting the houses that needed to get moved. We are strong believers that this is a business of momentum.

Speaker 3

We really wanted to push as much inventory that we had available to us to close within the quarter because we wanted to get also in front of what we can see possibly coming down the pipe as our competitors, larger competitors also have some inventory that they're going to be pushing here in the next couple of months. And so it was really a targeted effort by the team over the last 3 to 4 months essentially and with some increased contributions that we got from Texas. But really Arizona has stepped up incredibly. Jeff and his team in Florida are really doing great. Megan, our sales leader there is tremendous.

Speaker 3

They've really identified the sweet spots of where we need to be pricing incentives and we have houses we can deliver. And so that's really what came through.

Speaker 7

Okay. Thank you for that, Mike. And then to talk a little bit about, well, I guess really 2 things. 1, if you could help a little bit with the store count over the course of the rest of the year and maybe into 25 in terms of net new openings? That would be helpful.

Speaker 7

And then just as a side note, you talked a little bit about July. I am curious, it sounds like the elasticity to changes in rates is still really impacting traffic and turnover. I'm curious how July has been in that regard and whether or not the objections you hear from consumers are still really mathematical, meaning I can't afford it or I don't want to pay this price or whatever versus being psychological. I'm afraid to buy. I'm worried about my job, the election, whatever.

Speaker 7

So two very different questions, but if you guys could address those. Thanks.

Speaker 5

Yes. Carl, let me start with the community count. Think you saw the impact from the DFW area this quarter. And if you look at versus year end, we were at 7.7 percent organic growth and then added on the Orlando or sorry, the DFW segment as well. We had said that we would be in that 10% to 15% organic growth and then add on DFW, I think we'll still be in that range, which would put us in that kind of 4th quarter average right around the 90 ish communities.

Speaker 5

And then although we're not giving guidance at this stage of the game on 2025, I would definitely see our historical pattern continuing. So in that low double digits, high single digit organic growth throughout 2024 as an average.

Speaker 1

Great. Thanks, Chris.

Speaker 3

So to follow-up on that, Carl, the other part of your question was, I think the psychology, the vibe that's out there and the narrative that's coming off of our sales force as it relates to rates and where rates are today. I believe and what we're seeing is that essentially that the market in which we're markets in which we're competing against and the competitors that are there that we're competing against For the most part, everybody has some buy down program to the point that it's now become ubiquitous and it's just the same. And what we're really appreciating through that is that we can really now go back to differentiating ourselves by way of the products that we're building, our value proposition through HVH strategy and just being a separator again where they can see the overall value proposition beyond the rates because for the most part everybody is down in that kind of teaser rate in that $4.99 and it kind of comes up and everybody seems to be in that sweet spot about 5, 5.5, 3 year fixed. This is big generalization, but that's kind of gets you to where you need to get to.

Speaker 3

And that's moving homes. The homes that are moving are again are the ones that people can clearly see that there's a superior value to them against whoever else we're being judged by. So we like that because we're really proud of what we're building, how we're building them and the value that we're creating. So that seems to be working. There seems to be a bit of a capitulation in terms of just we're waiting things out.

Speaker 3

We're nervous. I think we've gotten along now. There's enough life change into the demand profile that we have out there that people do need to move. Their houses are getting bigger. They're maybe shrinking.

Speaker 3

Whatever it is that is coming back into the purpose of which they're coming to look at homes. And so, it does kind of go up and down a little bit, but it seems like we can modulate that with our buy downs as we're going through as long as we're kind of hitting that number. It still is about a monthly payment. And I just don't see like a lot of real concern or fear or we're going to wait some we're going to wait for it to go lower. We're going to wait and see what happens to the election.

Speaker 3

We're going to be it's just do you have a house that is a house that can be delivered in the next 60 days that you're providing me with a long term fixed mortgage rate that's going to make me hit a payment? Is that house superior to the other houses that I'm looking at? And if you can win that proposition, you're going to move houses and we're doing that.

Speaker 7

Very comprehensive. Thanks so much guys. Really appreciate it.

Operator

Thanks. Thank you. We'll take our next question from Alex Rygiel with B. Riley. Please go ahead.

Speaker 8

Thanks and good morning gentlemen. One of your business priorities is to drive higher returns with improvements in cycle time and a focus on additional cost reductions. Where does your cycle time stand today and where might it go? And on the cost reduction side, can you provide us with a few of the larger opportunities that you see developing over the next 6 months?

Speaker 3

Sure. Alex, it's Mike. Thanks for the question. We're really proud of what we've been able to accomplish year over year in terms of reductions of our cycle time. A year ago, we were roughly around 9 months on average.

Speaker 3

And keep in mind that we build a variety of homes attached and detached. So it's a pretty big spectrum. But today, currently, we're averaging around 135 days or 7 months. And in some cases, in Arizona and Florida, we're going from start of foundation to final inspection in 4.5 months. So it's almost a 50% well close to it increase in cycle times, which is allowing us to do almost 2 inventory turns per year per house.

Speaker 3

So for us that is a really exciting thing for us in terms of where we want to go in terms of execution and production capacity. Obviously that draws down on the interest from holding those lots and keeping that width because we're going quicker. It's also allowing us to have more velocity, more volume in the communities and get our starts going, which then allows us to get better pricing because we're going to the trades and we're able to commit a certain amount of starts per month per week actually and getting again better pricing, better performance, better activity in our communities. So from that standpoint, I think it's all organic and interconnected. Again, as I said earlier, we really believe this is a business that demands velocity and also scale is super important.

Speaker 3

And so we're also driving collectively now as we've gotten bigger and bringing Ontarities online and the size of our business and the growth of our business, we're able to on our national purchasing exact more concessions and rebates that are becoming very, very helpful. In fact, we are right now around $2,500 a home in terms of rebates that are coming through. That goes right to the bottom line and we're very excited about that as well. So there's a lot of things that are in motion here for us. And again, as we've always said, we are on this journey of growth and scale and that all those attributes that come with it and the benefits come with it, we're starting to kind of see B coming into our business as we go forward.

Speaker 2

Then Alex, this is John. The one item I would add to what Mike said is with that scale we're also always looking to improve our efficiency over our fixed costs and our SG and A. Chris talked about this in his prepared remarks and we've consolidated our operations in California with the relocation of our headquarters to Dallas, consolidating a lot of our corporate operations here as well. We've did a reduction in force that will result in about $5,000,000 in annual savings as well to the company. So all those things are going to help us to drive higher returns as we continue to grow and scale and maturity as a business.

Speaker 8

Very helpful. And then, can you talk a little bit more about the increase in inventory in certain communities, particularly in Texas?

Speaker 5

A part of me wants

Speaker 8

to think that that actually might be a positive given that you could have inventory available as we go into a more improved rate cycle later in the year with the expectation that that's catalyst demand. But maybe you can comment on sort of that inventory position?

Speaker 3

Sure. It's Mike again. I'll take a stab at this first and anybody can follow-up if they want to. But Alex what story goes on is as much as we are driving towards even flow production there are certain waves that go through the business in terms of when you start to sell and then bringing communities online and where they are in terms of the yearly cycle. So what we are seeing right now is a bit of a bulge of some whip coming through on starts that we started in the 1st and second quarter getting ready for the Q3, getting definitely ready for the Q4.

Speaker 3

And with that, what is happening is in the market today is that a good portion if not 70% roughly of our closings are closings of which the sales took place about 45 to 60 days prior. That is generally the dynamic of the business today, which is kind of the opposite of what it was years ago, decades ago, where you basically started a house that you sold and sort of built into that order. Effectively, what is happening today is that the new home build industry is really replacing the resale inventory that's out there. And that buyer is a buyer that needs to move into a house between 60 days, 45 days. So you have to have that kind of buildup of inventory to have it ready to be in a position to be able to transact and close in that period of time.

Speaker 3

So that's you're just kind of seeing that little bulge coming through.

Speaker 8

Very helpful. And then lastly, as it relates to sort of your M and A strategy, at least in the near term, understanding Antares' big acquisition, is it safe to assume that sort of M and A and kind of between now year end is probably off the table as you integrate, but next year is sort of a new year with a white slate of M and A opportunities?

Speaker 2

Alex, this is John. We are a company that is growth oriented. So we are opportunistic, but we're also very disciplined about it. As we've proven in the past 5, 6 years, we think out these opportunities that we think are good opportunities for us to be in. Dallas is somewhere we wanted to be in and that's why Antares was so instrumental in establishing this position for us.

Speaker 2

We are very focused as we said on generating cash flow, reducing our debt. At the same time, our stock continues to remain below our book value, while it could cap capital towards share distributions shareholder distributions as well. We've also demonstrated that we can really grow the company, 45% growth year over year in terms of deliveries, I think is a demonstration of that. We're happy within in all the markets that we're in, but there are certainly other areas in Texas that we like to expand to as well as Florida. So we'll be quite opportunistic in that nature and very select.

Speaker 2

Thank you.

Operator

Thank you. We'll take our next question from Jay Canlis with Wedbush. Please go ahead.

Speaker 9

Hey, good morning everyone. So with all the acquisitions this year, maybe could you level set us on what you think your product mix looks like right now between first time and move up?

Speaker 3

Sure. Jay, it's Mike. Currently, we're roughly around 45% to 47% first time homebuyer. We want to move that up into the 60s, high 60s. And then the tailing 30% would be half half between first time move up and then we'd like to have usually in any of our markets, a more of a luxury position.

Speaker 3

We think it's really good for brand building and helps us to be thoughtful and future thinking around new products are coming through and that can permeate back into our businesses in our attainable pricing products. So we are moving in that direction, particularly with Dallas coming online, increasing our activities in Arizona and in the Orlando market, Orlando team. So you're going to start to see that percentage increasing over time. Organically, it's not going to really take an acquisition to do it. So that's the movement.

Speaker 3

So roughly right now, I would say, I think I'm just looking at right here is about 47.3% of our current buyers are first time homebuyers and then the rest is kind of mixed through.

Speaker 9

All right. That's great, Mike. And then following up on that, I guess, you talked about land cost potentially coming up and offsetting the savings on lumber. I guess, what are you seeing from land cost inflation right now? And then also what can you buy from a lot perspective or move up in luxury lots more available or what are you seeing in the land market at this

Speaker 3

point? Yes. So unfortunately, with our ability and I guess our industry's ability to continue to drive volume through incentives and mortgage buy downs, Everybody's keeping a pretty healthy pace in the communities of which they're building in. Land sellers see that. They don't think there's a problem.

Speaker 3

They don't really see or understand what it's taking I think from us and our competitors to continue to sell homes and get them done. So there's been a stickiness to being able to recalibrate land pricing against the backdrop of higher costs that associated with some sticks and bricks, but mostly around incentives and buy downs. So what that is forcing a lot of to do is to go further into the development profile. In other words, where you're finding better value as land that is entitled and maybe partially developed or you're going to be doing your own development. And so that's where you're trying to kind of make those offsets.

Speaker 3

That though is a longer timeline and you have to be thoughtful and you've got to be able to work those in a timely way. So they synchronize in a way which that it is consistent with what we want to do with our deliveries. If you are late in getting a community open because you didn't develop it in a timely way, you may find yourself gapping and that then forces you to go into the retail spot market for finished lots and master planned communities and that's really expensive. There's a big delta between a finished lot out there today and then a entitled but raw piece of land. And so you're trying to do the best that you possibly can to be in a position whereby you can not find yourself in a hole and you have to be forced to go out there and fill it with finished lots.

Speaker 9

Okay. And then John, I think you talked in the prepared comments about wanting to be more land light. It looks like option blocks were 57% of the total this quarter, which was up, if I'm reading the numbers right, a little bit over last year, I guess. Where do you want to go with this longer term and how does that play into getting your leverage down?

Speaker 2

Yes. I think it's a combination of we've been growing pretty rapidly and we've always stated that really need land and own land and have it willing to have it on a balance sheet if we can get on it and build a house and deliver it into the next 12 18 months. Beyond that, we really want to control land. And as we continue to grow, particularly in the geographies like Texas and Florida and also in California as well too, we're going to want to use land bankers. We're going to want to structure them as options because that allows us to be more asset light, allows us to drive higher returns, which we know continue will drive share prices well too.

Speaker 2

So they're connected and it is a strategy that we think particularly in the markets that we're in will be highly successful for us.

Speaker 9

Okay, great. And then the last one I had, on the last call, you guys talked about being able to raise prices in the majority of your communities. Could you talk about how that trended in the second quarter? And then also, what type of price increases have you been able to implement in July?

Speaker 3

Yes. So we continue to be anywhere between 3% to 7% Jay depending upon the releases that are going out. We're not getting this exponential jump in pricing that we've seen before coming out of the pandemic. So it's a steady price increase around specific homes that we're trying to drive. We're also using price increases in ways of which we're getting better pricing or we're able to get price increases around dirt starts versus inventory that's out there.

Speaker 3

So we're kind of using that to move people more towards the inventory. If they want to do a dirt start, if they want to have the home more built towards their customization, we're able to get in the higher pricing range around 7% to 10% in that regard. So it's again targeted, it's dynamic, it's very focused. We're also doing price increases around lot premiums, view premiums, other ways of gathering overall price increases not just at the absolute pricing that we're marketing it at.

Speaker 9

That sounds great. Thanks for taking my questions.

Speaker 2

Thank you.

Operator

Thank you. We'll take our next question from Alex Barron with Housing Research Center. Please go ahead.

Speaker 4

Yes. Thanks, gentlemen. I joined a little bit late, so I apologize if maybe you already answered this. But can you provide updated thoughts on share buybacks given the price of the stock versus the book value? That's my first question.

Speaker 2

Yes. This is John Ho. As I mentioned, we've been growing the company and we've been very successful in doing that. Our leverage is a little bit higher than our state policies. And usually when we make an acquisition like this within 12 months, we're looking to reduce debt.

Speaker 2

At the same time, in the second half of the year, our guidance does point to significant cash flow generation. The stock is below the book value, which it is. We'll look to opportunities to use our share buyback program to buy back stock. And then lastly, we'll continue to focus on opening new communities in the markets that we're in as well. So we can continue to grow our economies of scale in our homebuilding platform.

Speaker 4

Okay, thanks. And the other question, it was, I'm trying to, I guess, understand the sequence you guys are expecting between 3rd and 4th quarter for deliveries. And the 4th quarter number seems a bit high compared to previous history. And are you expecting to get a ton of orders that can close quickly in the next few months? Or what would drive that sequential jump in the Q4 to that extent?

Speaker 2

Yes. It's really how our business is growing. I think Mike mentioned this earlier is that so we closed on Antares acquisition April 1. We got our Q1 being in this market. We see a lot more contribution from that business as well as Florida as well too coming into the second half of this year.

Speaker 2

So it's really about our business and the organic growth that we experienced, but also all these new communities that we've opened. Our average selling communities increased over 40% year over year. So we have a lot more storefronts now. And with that, in the momentum that we're driving through the business in terms of increased orders, the use of incentives, we do see strong order growth absorption in the second half of the year that's going to allow us to deliver on those deliveries.

Speaker 4

Okay. All right. Thank you very much.

Operator

And there are no further questions at this time. I'll turn the call back over to remarks.

Speaker 2

Thank you all for joining us on our Q2 earnings call. We look forward to speaking with you all next quarter.

Operator

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.

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Earnings Conference Call
Landsea Homes Q2 2024
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