Landsea Homes (LSEA) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Landsea Homes Corporation's unaudited consolidated financial statements as of September 30, 2022, detailing significant growth in revenues, net income, assets, and liabilities, largely driven by acquisitions Consolidated Balance Sheets Total assets increased to $1.47 billion by September 30, 2022, driven by real estate inventories and goodwill, while cash decreased to $110.2 million Consolidated Balance Sheet Highlights (in thousands USD) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $110,192 | $342,810 | | Real estate inventories | $1,179,418 | $844,792 | | Goodwill | $68,639 | $24,457 | | Total assets | $1,468,858 | $1,265,514 | | Notes and other debts payable, net | $585,065 | $461,117 | | Total liabilities | $784,605 | $644,117 | | Total equity | $684,253 | $621,397 | Consolidated Statements of Operations Q3 2022 total revenues rose 56.7% to $335.6 million, with net income up 85.0% to $20.0 million, driven by strong home sales and Florida operations Q3 2022 vs Q3 2021 Performance (in thousands USD, except per share data) | Metric | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $335,585 | $214,129 | 56.7% | | Gross Margin | $66,486 | $35,361 | 88.0% | | Income from Operations | $24,312 | $6,157 | 294.9% | | Net Income Attributable to LHC | $19,970 | $10,797 | 85.0% | | Diluted EPS | $0.49 | $0.23 | 113.0% | Nine Months 2022 vs 2021 Performance (in thousands USD, except per share data) | Metric | Nine Months 2022 | Nine Months 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1,020,491 | $624,822 | 63.3% | | Gross Margin | $209,725 | $96,716 | 116.8% | | Income from Operations | $74,625 | $16,010 | 366.1% | | Net Income Attributable to LHC | $47,970 | $14,387 | 233.4% | | Diluted EPS | $1.09 | $0.31 | 251.6% | Consolidated Statements of Cash Flows Net cash used in operating activities was $83.2 million, with $262.2 million used in investing for acquisitions, leading to a $233.1 million net cash decrease Nine Months Ended Sep 30, 2022 Cash Flow Summary (in thousands USD) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(83,200) | $(125,946) | | Net cash used in investing activities | $(262,211) | $(28,991) | | Net cash provided by financing activities | $112,350 | $127,249 | | Net decrease in cash | $(233,061) | $(27,688) | - The primary use of cash in investing activities was a $258.7 million payment for a business acquisition, net of cash acquired[21] - Financing activities included $361.9 million in borrowings, offset by $240.5 million in repayments. The company also spent $40.2 million on common stock repurchases and $16.5 million on warrant buybacks, while receiving $55.0 million from noncontrolling interests[21] Notes to the Consolidated Financial Statements Detailed notes cover the $262.6 million Hanover acquisition, segment performance with strong Florida growth, debt structure, and stock repurchase programs - On January 18, 2022, the Company acquired 100% of Hanover Family Builders for an aggregate cash purchase price of $262.6 million, adding approximately 3,800 lots. This resulted in a preliminary goodwill recording of $44.2 million[41][43] - The company's operations are organized into five reportable segments: Arizona, California, Florida, Metro New York, and Texas[24] Segment Revenues - Nine Months Ended Sep 30 (in thousands USD) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | Arizona | $234,927 | $202,750 | | California | $343,466 | $346,680 | | Florida | $320,358 | $59,519 | | Metro New York | $95,758 | $0 | | Texas | $25,982 | $15,873 | - In June 2022, the company repurchased 4.4 million shares from its majority shareholder, Landsea Holdings, for $30.0 million and repurchased all 5.5 million outstanding Private Placement Warrants for $16.5 million[81][122] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong revenue and net income growth from acquisitions, offset by interest rate headwinds, while highlighting improved gross margins and strategic focus on entry-level products Business Overview and Strategy The company builds homes across five states, targeting first-time buyers, with a strategy focused on geographic expansion and entry-level products despite rising interest rates - Recent increases in federal interest rates have put downward pressure on demand by reducing affordability for homebuyers across all markets[133] - The company's long-term strategic objectives include expanding community count, maintaining lot supply, focusing on entry-level offerings, geographic expansion, and becoming a top-ten US homebuilder[142] - The acquisition of Hanover Family Builders in January 2022 and Vintage Estate Homes in May 2021 are key components of the strategy to expand into new geographic markets like Florida and Texas[136] Key Operating Metrics Q3 2022 saw net new home orders decline 7% to 257 units, while home deliveries rose 43% to 543 units, and backlog increased 22% to $741.1 million, largely due to Florida Net New Home Orders - Q3 2022 vs Q3 2021 (Units) | Segment | Q3 2022 Homes | Q3 2021 Homes | % Change | | :--- | :--- | :--- | :--- | | Arizona | 38 | 98 | (61%) | | California | 68 | 142 | (52%) | | Florida | 134 | 29 | 362% | | Total | 257 | 275 | (7%) | Home Deliveries - Q3 2022 vs Q3 2021 (Units) | Segment | Q3 2022 Homes | Q3 2021 Homes | % Change | | :--- | :--- | :--- | :--- | | Arizona | 154 | 171 | (10%) | | California | 128 | 121 | 6% | | Florida | 243 | 81 | 200% | | Total | 543 | 380 | 43% | Backlog as of September 30 (Units, thousands USD) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Homes | 1,285 | 1,092 | 18% | | Dollar Value (thousands) | $741,093 | $606,237 | 22% | | ASP (thousands) | $577 | $555 | 4% | Home Sales Gross Margins GAAP home sales gross margin improved to 21.0% (up 570 bps), with adjusted gross margin at 28.4% (up 710 bps), driven by price appreciation and Florida segment growth Home Sales Gross Margin Reconciliation - Nine Months Ended Sep 30 (%) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Home sales gross margin (GAAP) | 21.0% | 15.3% | | Add: Interest in cost of home sales | 3.2% | 4.2% | | Add: Purchase price accounting for acquired inventory | 4.2% | 1.8% | | Adjusted home sales gross margin (Non-GAAP) | 28.4% | 21.3% | - The increase in gross margin was primarily due to price appreciation amid high product demand in the Arizona and California segments, and the establishment of the high-margin Florida segment[165] Liquidity and Capital Resources The company held $117.4 million in cash, with the $258.7 million Hanover acquisition being a major cash use, resulting in a 46.1% debt-to-capital ratio - As of September 30, 2022, the company had $117.4 million of cash, cash equivalents, restricted cash, and cash held in escrow, a decrease of $230.0 million from year-end 2021[187] - The company has a senior unsecured credit facility with a borrowing capacity of up to $675.0 million, maturing in October 2024. As of September 30, 2022, the interest rate was 5.95%[194] Key Leverage Ratios (%) | Ratio | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Ratio of debt to capital | 46.1% | 42.6% | | Ratio of net debt to net capital (Non-GAAP) | 40.6% | 15.5% | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on its variable-rate credit facility and inflation impacting costs and homebuyer affordability - The company's primary market risk exposure is to interest rate fluctuations associated with its variable-rate credit facility, which is based on SOFR or the Prime Rate[219] - Inflation can adversely impact operations through higher land, financing, labor, and material costs, and can also lead to higher mortgage rates, affecting homebuyer affordability[220] Item 4. Controls and Procedures Disclosure controls and procedures were ineffective as of September 30, 2022, due to material weaknesses in internal control, with remediation efforts underway - Management concluded that the Company's disclosure controls and procedures were not effective as of September 30, 2022, due to material weaknesses in internal control over financial reporting[222] - The material weaknesses identified include a lack of sufficient personnel with appropriate accounting/IT knowledge and experience, and a failure to design and maintain formal accounting policies, procedures, and controls[224][225] - The company is implementing remediation efforts, such as hiring additional personnel and improving processes and controls. A previously reported material weakness related to accounting for business combinations is now considered remediated[226][230] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in a dispute with insurers regarding a $14.9 million wrongful death settlement, with the outcome currently unknown - The company is in a dispute with insurers who are seeking reimbursement for some or all of a $14.9 million settlement paid on behalf of the company for a wrongful death suit. The outcome is currently unknown[73] Item 1A. Risk Factors No material changes to previously disclosed risk factors were reported since the last Annual Report on Form 10-K - No material changes to risk factors were reported since the last Annual Report on Form 10-K[233] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company details its stock repurchase programs, including a $10.0 million authorization expiring December 31, 2022, with no shares repurchased under it as of September 30, 2022 - The Board of Directors authorized a stock repurchase program in January 2022 for up to $10.0 million, which expired in June 2022. An extension with an additional $10.0 million capacity was authorized, expiring December 31, 2022[234]