Landsea Homes Q2 2024 Earnings Report

Landsea Homes EPS Results

• Actual EPS: $0.36
• Consensus EPS: $0.32
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: $0.33

Landsea Homes Revenue Results

• Actual Revenue: $431.14 million
• Expected Revenue: $336.20 million
• Beat/Miss: Beat by +$94.94 million
• YoY Revenue Growth: N/A

Landsea Homes Announcement Details

• Quarter: Q2 2024
• Date: 8/1/2024
• Time: Before Market Opens
• Conference Call Date: Thursday, August 1, 2024
• Conference Call Time: 10:00AM ET

Landsea Homes (NASDAQ:LSEA) engages in the design, construction, marketing, and sale of suburban and urban single-family detached and attached homes in the United States. The company develops homes and communities; builds suburban, single-family detached and attached homes, mid-and high-rise properties, and master-planned communities. The company was incorporated in 2013 and is based in Dallas, Texas. Landsea Homes Corporation operates as a subsidiary of Landsea Holdings Corporation.

Landsea Homes Q2 2024 Earnings Call Transcript

Key Takeaways

• Landsea delivered $431 million in Q2 revenue (+47% YoY) with 760 home deliveries and achieved a 21.1% adjusted home closing gross margin, driving $13.3 million in adjusted net income and $0.36 EPS.
• Secured 760 net new orders (+35% YoY) at a sales pace of three homes per community per month; financing incentives helped sustain demand but modestly pressured home sales gross margins.
• Expanded scale with a 47% increase in average communities and achieved a 13% SG&A ratio (220 bps improvement YoY) by using land-banking partnerships to remain capital-efficient and shift land risk off the balance sheet.
• Strengthened its financial position with $330 million liquidity, a net debt-to-capital ratio of 45.4%, new fixed-rate debt and an extended revolver (no maturities until 2027), positioning the company for cash-flow-driven deleveraging.
• Guided Q3 deliveries of 625–700 homes and Q4 deliveries of 1,011–1,100 homes, with ASPs of $495K–$510K and adjusted gross margins of 20–21% in Q3 and 23–24% in Q4, while reaffirming confidence in its long-term objectives.

Presentation

[Operator]

Good day, everyone, and welcome to today's Landsea Homes Corporation second quarter 2024 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. You may register to ask a question at any time by pressing star one on your telephone keypad. 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. Please go ahead.

[Drew Mackintosh, Investor Relations at Landsea Homes]

Good morning, and welcome to Landsea Homes second quarter of 2024 earnings call. Before the call begins, I would like to note that this call will include forward-looking statements within the meaning of the federal securities laws. 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. We do not undertake any obligation to update forward-looking statements. 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 Forsum, President and Chief Operating Officer, and Chris Porter, Chief Financial Officer.

[Drew Mackintosh, Investor Relations at Landsea Homes]

With that, I'd like to turn the call over to John.

[John Ho, CEO and Director at Landsea Homes]

Thanks, Drew, and good morning to everyone. Landsea Homes delivered strong top-line growth in the second quarter of 2024, generating revenue of $431 million, which represented an increase of 47% over the second quarter 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%, producing adjusted net income of $13.3 million 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.

[John Ho, CEO and Director at Landsea Homes]

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. We generated 760 net new orders for the quarter, 35% more than the second quarter 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 and achieve greater economies of scale.

[John Ho, CEO and Director at Landsea Homes]

Average community count for the quarter was up 47% year-over-year, 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 home building 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&A ratio in the second quarter, 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 home building platform as our volume increases.

[John Ho, CEO and Director at Landsea Homes]

While volume growth is an important part of our long-term strategy, we realize 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 third 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. 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.

[John Ho, CEO and Director at Landsea Homes]

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 second 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 2024, I am pleased with how our company is positioned. Most of the heavy lifting associated with integration of our recent acquisitions has been completed, and 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.

[John Ho, CEO and Director at Landsea Homes]

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.

[Michael Forsum, President and COO at Landsea Homes Corporation]

Thanks, John, and good morning to everyone. Landsea posted year-over-year delivery growth of 41% in the second quarter, as we benefited from faster cycle times and a higher community count relative to last year's second quarter. In terms of regional contributions, Florida led the way, followed by Arizona and California. Build conditions have improved significantly since the beginning of the year, and we're seeing a 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. We believe lower lumber costs will be a margin tailwind for our company in the coming quarters, though much of it may be offset by higher land costs.

[Michael Forsum, President and COO at Landsea Homes Corporation]

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 in excess of 3.0 homes per community per month for the quarter, while our operations in Texas achieved 1.5 per month. We see the pace in Texas improving in the third and fourth quarters as we have the normal ramping up activities with transitioning and acquisition to our platform behind us.

[Michael Forsum, President and COO at Landsea Homes Corporation]

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, most of 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.

[Michael Forsum, President and COO at Landsea Homes Corporation]

Overall, I feel good about the current state of our industry and Landsea's positioning. 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, ideal opportunity for new home builders 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 home building 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.

[Christopher Porter, CFO at Landsea Homes]

Thank you, Mike. Landsea Homes reported net income of $2.9 million, or $0.08 per share, for the second quarter, compared to $4.9 million, or $0.12 per share, in the second quarter of 2023. We reported a 9% increase in fully adjusted net income of $13.3 million, or $0.36 per share, compared to $13 million 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 $2.6 million dollar in transaction costs associated with our Antares acquisition, $5.2 million in deferred financing cost write-offs associated with the recast of our revolving credit facility with stronger credit banks, and $1.4 million in restructuring costs associated with our reduction in force initiatives.

[Christopher Porter, CFO at Landsea Homes]

We also booked $8.6 million in purchase price accounting in the quarter. As Mike mentioned, we had 760 deliveries, which was 41% higher than second quarter 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 $418.2 million. Total revenue increased 47% over 2023 to $431.1 million. Our gross margin of 14.9% came in just below the low end of our guidance, as our purchase price accounting was larger than expected at $8.6 million, or an impact of 2.1% to our gross margin.

[Christopher Porter, CFO at Landsea Homes]

We booked $52.2 million in total step up on the Antares acquisition, reflecting the fair value of the balance sheet assets we acquired. We expect roughly $4 million of the Antares purchase price accounting to burn off in third quarter and fourth quarter each, and approximately $12.5 million in 2025, and the remainder through 2026 and 2027. We also have $21 million in purchase price accounting remaining on our Florida acquisition and expect roughly $7 million to burn off for the balance of 2024. Our purchase price accounting estimates are highly dependent on the specific homes we are able to close during those periods. 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.

[Christopher Porter, CFO at Landsea Homes]

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 second quarter 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 694 homes for a total value of $391.1 million, or an average selling price of $564,000. Our SG&A expense was 13% of home sales revenue this quarter, including our $2.6 million in acquisition-related costs. This is a 220 basis point improvement from the second quarter of 2023.

[Christopher Porter, CFO at Landsea Homes]

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 million. We believe we are on path to be more aligned with our peers and operate in the range of 11%-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 million in liquidity, $106 million in cash and cash equivalents, and $224 million in availability under our revolving credit facility.

[Christopher Porter, CFO at Landsea Homes]

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 group and extended the term into 2027. Our capacity is $455 million, with an accordion feature to increase up to $850 million, should we need the capacity. Additionally, we updated our pricing to a grid pricing. 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% debt to total capital and 45.4% 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.

[Christopher Porter, CFO at Landsea Homes]

Now, looking forward to the back half of the year, we anticipate our new home deliveries to be between 625 and 700 in the third quarter and between 1,000 and 1,100 in the fourth quarter. Average selling prices should be between $495,000 and $510,000 for both quarters, with a relatively consistent mix of our divisions' performance. Adjusted gross margins should be in the range of 20%-21% in the third quarter, and in the fourth quarter, between 23% and 24%. Our GAAP gross margins are expected to remain relatively consistent in the third quarter and improve to between 18% and 19% in the fourth quarter. These sales and gross margins reflect our best estimate as of today with the current market conditions.

[Christopher Porter, CFO at Landsea Homes]

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]

Certainly. At this time, if you would like to ask a question, please press star one on your telephone keypad. You may withdraw your question at any time by pressing star two. Again, that is star and one for your questions. We'll pause a moment to allow any questions to queue. We will take our first question from Matthew Bouley with Barclays. Please go ahead.

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

Morning, everyone. Thank you for taking the questions. Just kind of looking at the pieces of the guidance over the next couple quarters. Looks like you're guiding to something like 1,700 plus closings over the next 2 quarters. I think there's, you know, around 700 homes in backlog. So I guess presumably looking to build and sell a fair bit of spec homes over the next couple quarters, and sounded like you're expecting Texas to pick up. 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.

[Christopher Porter, CFO at Landsea Homes]

Yeah. 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 and sales. You know, for us, as we've said, we've invested in, you know, the markets that we think have long-term really strong prospects. I think in the second quarter 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 the 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.

[Christopher Porter, CFO at Landsea Homes]

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?

[Michael Forsum, President and COO at Landsea Homes Corporation]

Yeah, sure. Hey, Matt. Great question. Something we're thinking about a lot here, but we have prepared ourselves operationally by the fact that we do have a very strong group of individuals running our teams out there with their goals and objectives around achieving this number that we set forth here in this guidance. That being said, we're a little bit into the third quarter already, and we're really happy with the performance around our sales rate. 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.

[Michael Forsum, President and COO at Landsea Homes Corporation]

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 we had anticipated. It was in April. We were pretty well through the spring selling season at that point, so we missed some of that opportunity.

[Michael Forsum, President and COO at Landsea Homes Corporation]

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 or beating our goals here for the end of the year.

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

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, you know, ex purchase accounting, the adjusted gross margin. You know, what are the pieces to that bridge? I mean, it sounds like maybe incentives have been ticking lower here, you know, into Q3. But between incentives, lower lumber costs, kind of what gets, you know, a lot better in the margin in the fourth quarter relative to the third quarter? Thank you.

[John Ho, CEO and Director at Landsea Homes]

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, you know, 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. So you can see that's why, you know, we really deliver on the high end or exceeded our deliveries in the second quarter. We're gonna 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.

[John Ho, CEO and Director at Landsea Homes]

We'll also see some significant contribution from the opening average, you know, the 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, lower costs.

[Michael Forsum, President and COO at Landsea Homes Corporation]

Sure. Matt, it's Mike again. I might add also that as we pivot out of our 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 gonna be going away. So I think we'll also see just sort of organically, that getting better as we go through it. We also are very excited about some of the new open communities that we have now. They are performing very well, taking less incentives. Rates are going down.

[Michael Forsum, President and COO at Landsea Homes Corporation]

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, we're feeling pretty good again, that we're gonna see that come through, and team's working really hard to make that happen.

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

Awesome. Thanks for the color. Good luck, guys.

[John Ho, CEO and Director at Landsea Homes]

Thanks.

[Michael Forsum, President and COO at Landsea Homes Corporation]

Thanks.

[Operator]

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

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

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, what, what were the drivers of that, of that outperformance? I'm gonna 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?

[Michael Forsum, President and COO at Landsea Homes Corporation]

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. 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 pike as our competitors, larger competitors, also have some inventory that they're gonna be pushing here in the next couple of months.

[Michael Forsum, President and COO at Landsea Homes Corporation]

And so it was really a targeted effort by the team, over the last 3-4 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. They've really, you know, have 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.

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

Okay. Thank you for that, Mike. And then, to talk a little bit about, well, I guess really two things. One, if you could help a little bit with the community count over the course of the rest of the year and maybe into 2025 in terms of net new openings, that would be helpful. 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 wanna pay this price," or whatever, versus being psychological, "I'm afraid to buy.

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

I'm worried about my job, the election," whatever. So two very different questions, but if you guys could address those. Thanks.

[Christopher Porter, CFO at Landsea Homes]

Yeah, Carl, let me start with the community count. I think you saw the impact from the DFW area this quarter. And if you look at, you know, versus year-end, we were at a 7.7% organic growth, and then added on the DFW segment as well. You know, we had said that we would be in that 10%-15% organic growth, and then add on DFW. I think we'll still be in that range, which would put us in that, you know, kind of fourth quarter average, right around the 90-ish communities. And then, although we're not giving, you know, guidance at this stage of the game on 2025, I would definitely see, you know, our historical pattern continuing.

[Christopher Porter, CFO at Landsea Homes]

So in that, you know, low double digits, high single digit, organic growth throughout 2024 as an average.

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

Great. Thanks, Chris.

[Michael Forsum, President and COO at Landsea Homes Corporation]

Mm-hmm. So, to follow up on that, Carl, the other part of your question was, I think the psychology, the buy that's out there and the narrative that's coming off of our sales floors as it relates to rates and where rates are today. I believe, and what we're seeing is that essentially, that, the markets in which we're competing against, in, are in, 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.

[Michael Forsum, President and COO at Landsea Homes Corporation]

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 rate-based 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, you know, kind of teaser rate, in that 4.99, then it kind of comes up. And everybody seems to be in that sweet spot of about 5, 5.5, three-year fix. This is a big generalization, but that's kind of gets you to where you need to get to, and that's moving, moving homes. The homes that are moving, 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.

[Michael Forsum, President and COO at Landsea Homes Corporation]

So we like that, 'cause 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. 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. Whatever it is, that is coming back into the purpose of which they're coming to look at homes. So, it does kind of go up and down a little bit, but it seems like, you know, we can modulate that with our buy downs as we're going through, as long as we're kind of hitting that number.

[Michael Forsum, President and COO at Landsea Homes Corporation]

It still is about a monthly payment. And I just don't see, like, a lot of real concern or fear or, we're gonna wait for it to go lower, or we're gonna wait and see what happens to the election. We're gonna 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 gonna make me hit a payment? And is that house superior to the other houses that I'm looking at? And if you can win that proposition, you're gonna move houses, and we're doing that.

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

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

[Christopher Porter, CFO at Landsea Homes]

Yeah.

[Michael Forsum, President and COO at Landsea Homes Corporation]

Thanks.

[Drew Mackintosh, Investor Relations at Landsea Homes]

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

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

Thanks, Anne. 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 six months?

[Michael Forsum, President and COO at Landsea Homes Corporation]

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 nine months on average, 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 seven months, and in some cases, in Arizona and Florida, we're going from start a foundation to final inspection in four and a half 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.

[Michael Forsum, President and COO at Landsea Homes Corporation]

So for us, that is a really exciting thing, for us in terms of where we wanna go in terms of execution and production capacity. You know, obviously that draws down on the interest from holding those lots and, and keeping that WIP, 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, you know, again, better, better pricing, better performance, better activity in our communities. So, from that standpoint, I think it's all organic and interconnected.

[Michael Forsum, President and COO at Landsea Homes Corporation]

Again, as I said earlier, we really believe this is a business that demands velocity, and also scale is super important. And so we're also driving collectively now, as we've gotten bigger, and bringing on Antares online and the size of our business and the growth of our business, we're able to, on our national purchasing, extract 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.

[Michael Forsum, President and COO at Landsea Homes Corporation]

So there's a lot of things that are in motion here for us, and again, I, you know, 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 becoming into our business as we go forward.

[John Ho, CEO and Director at Landsea Homes]

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, you know, fixed costs and our SG&A. Chris talked about this in his prepared remarks, and, you know, we've consolidated our operations in California, you know, 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 million in annual savings as well to the company. So all those things are gonna help us to drive higher returns, as we continue to grow and scale and maturity as a business.

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

Very helpful. And then, can you talk a little bit more about the increase in inventory in certain communities, particularly in Texas? And, you know, a part of me wants 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 a catalyst to demand. But maybe you can comment on sort of that inventory position.

[Michael Forsum, President and COO at Landsea Homes Corporation]

Sure. Mike, again. I'll take a stab at this first, and anybody can follow up if they want to. But you know, 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, 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 WIP coming through on starts that we started in the first and second quarter, getting ready for the third quarter, getting definitely ready for the fourth quarter.

[Michael Forsum, President and COO at Landsea Homes Corporation]

And with that, what is happening is, in the market today, is that a good portion, if not, you know, 70% roughly, of our closings are closings of which the sales took place about 45-60 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 building 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, you know, 60 days, 45 days.

[Michael Forsum, President and COO at Landsea Homes Corporation]

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

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

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

[John Ho, CEO and Director at Landsea Homes]

Alex, this is John. You know, 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 five, six years, seek 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. We are very focused, as we said, on generating cash flow, reducing our debt. At the same time, if our stock continues to remain below book value, while it could cap capital towards share distributions, shareholder distributions as well.

[John Ho, CEO and Director at Landsea Homes]

We've also demonstrated that we can really grow the company, 45% growth year-over-year in terms of our deliveries, I think is a demonstration of that. We're happy within, we're in all the markets that we're in, but there are certainly other areas in Texas that we'd like to expand to, as well as Florida. So we'll be quite opportunistic in that nature and very selective.

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

Thank you.

[Operator]

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

[Jay McCanless, Senior Vice President and Equity Research Analyst at Wedbush]

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?

[Michael Forsum, President and COO at Landsea Homes Corporation]

... Sure, Jay, it's Mike. Currently, we're roughly around 45%-47% first-time homebuyer. We want to move that up into the 60s, high 60s. And then the tailing 30% would be 50/50 between first-time move up, and then we'd like to have, usually in any of our markets, a more of a luxury position. We think it's really good for brand building and helps us to be thoughtful and future thinking around new products that are coming through, and that can permeate back into our businesses in our attainable pricing product. So, we are moving in that direction, particularly with Dallas coming online, increasing our activities in Arizona and in the Orlando market, the Orlando team. So you're gonna start to see that percentage increasing over time.

[Michael Forsum, President and COO at Landsea Homes Corporation]

Organically, it's not gonna really take an acquisition to do it. So that's the movement. So roughly right now, I would say, I think we're just looking at it right here, is about 47.3% of our current buyers are first-time homebuyers, and then, the rest is kind of mixed through.

[Jay McCanless, Senior Vice President and Equity Research Analyst at Wedbush]

Hmm. All right. That's great, Mike. And then, following up on that, I guess, you know, you talked about land costs 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? Is or move up in luxury lots more available, or what are you seeing in the land market at this point?

[Michael Forsum, President and COO at Landsea Homes Corporation]

Yeah. So unfortunately, with our ability, and I guess our industry's ability, to continue to drive volume through incentives and mortgage buydowns, you know, everybody's keeping a pretty healthy pace in the communities of which they're building in. Land sellers see that. They don't, they don't think there's a problem. They don't really see, you know, or understand what it's taking, I think, from us and our competitors to continue to, you know, 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 were associated with, you know, some sticks and bricks, but mostly around incentives and buydowns. So what that is forcing a lot of us to do is to go further into the development profile.

[Michael Forsum, President and COO at Landsea Homes Corporation]

In other words, where you're finding, better value, is land that, you know, is entitled and maybe partially, you know, developed, where you're gonna be doing your own development. And so that's the way you're trying to kind of make those offsets. 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 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.

[Michael Forsum, President and COO at Landsea Homes Corporation]

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.

[Jay McCanless, Senior Vice President and Equity Research Analyst at Wedbush]

I got it. And then, John, I think you talked in the prepared comments about wanting to be more land light. It looks like option lots for 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?

[John Ho, CEO and Director at Landsea Homes]

Yeah. I think it's a combination of, you know, we've been growing pretty rapidly, and we've always stated that we really need land, and control and own land, and we're 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 and 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 gonna wanna use land bankers. We're gonna wanna structure them as options, because that allows us to be more asset light, allows us to drive higher returns, which we know will continue to drive share price as well, too.

[John Ho, CEO and Director at Landsea Homes]

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.

[Jay McCanless, Senior Vice President and Equity Research Analyst at Wedbush]

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?

[Michael Forsum, President and COO at Landsea Homes Corporation]

Yeah. So we continue to be anywhere between 3%-7%, Jay. We're not getting sort of 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.

[John Ho, CEO and Director at Landsea Homes]

... versus inventory that's out there, 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%-10% in that regard. So, you know, 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, we're marketing it at.

[Jay McCanless, Senior Vice President and Equity Research Analyst at Wedbush]

That sounds great. Thanks for taking my questions.

[John Ho, CEO and Director at Landsea Homes]

Thank you.

[Drew Mackintosh, Investor Relations at Landsea Homes]

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

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

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, you know, given the, the price of the stock versus the book value? That's my first question.

[John Ho, CEO and Director at Landsea Homes]

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

[John Ho, CEO and Director at Landsea Homes]

And then lastly, we'll continue to focus on, you know, opening new communities in the markets that we're in as well, so we can continue to grow our economies of scale as in our home building platform.

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

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

[John Ho, CEO and Director at Landsea Homes]

Yeah. It's really how our business has grown, and I think, Mike mentioned this earlier, is that, so we closed on Antares acquisition April first. We got our first quarter, being in this market. We see a lot of more contribution from that business as well as, Florida as well, too, coming into the second half of this year. So it's really about our business and the organic growth that we've experienced, but also all these new, communities that we've opened. You know, our average selling communities increased over 40% year-over-year. So we have a lot more, storefronts now.

[John Ho, CEO and Director at Landsea Homes]

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 gonna allow us to deliver on those deliveries.

[Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays]

Okay. All right. Thank you very much.

[Drew Mackintosh, Investor Relations at Landsea Homes]

There are no further questions at this time.

[John Ho, CEO and Director at Landsea Homes]

Thank you.

[Drew Mackintosh, Investor Relations at Landsea Homes]

I'll turn the call back over to the management for closing remarks.

[John Ho, CEO and Director at Landsea Homes]

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

[Drew Mackintosh, Investor Relations at Landsea Homes]

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

Participants

Executives

• Christopher Porter, CFO
• Drew Mackintosh, Investor Relations
• John Ho, CEO and Director
• Michael Forsum, President and COO

Analysts

• Jay McCanless, Senior Vice President and Equity Research Analyst at Wedbush
• Matthew Bouley, Managing Director and Senior Equity Research Analyst at Barclays