Landsea Homes (LSEA) - 2023 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Unaudited Financial Statements This section presents the unaudited consolidated financial statements for Landsea Homes Corporation as of March 31, 2023, and for the three months ended March 31, 2023 and 2022, including Balance Sheets, Statements of Operations, Statements of Equity, Statements of Cash Flows, and accompanying notes Consolidated Balance Sheets As of March 31, 2023, total assets were $1.428 billion, a slight decrease from $1.440 billion at year-end 2022, primarily due to reduced real estate inventories and cash held in escrow, while total liabilities decreased to $715.5 million and total equity increased slightly to $712.6 million Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $136,785 | $123,634 | | Real estate inventories | $1,080,877 | $1,093,369 | | Total assets | $1,428,082 | $1,440,496 | | Liabilities & Equity | | | | Notes and other debts payable, net | $516,929 | $505,422 | | Total liabilities | $715,464 | $730,177 | | Total equity | $712,618 | $710,319 | Consolidated Statements of Operations For the three months ended March 31, 2023, total revenues decreased to $241.7 million from $316.2 million in the prior-year period due to lower home sales, resulting in net income attributable to Landsea Homes Corporation falling significantly to $3.2 million, or $0.08 per diluted share, compared to $13.1 million, or $0.28 per diluted share, in Q1 2022 Q1 2023 vs Q1 2022 Statement of Operations (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total revenues | $241,740 | $316,227 | | Home sales revenue | $240,625 | $297,966 | | Total gross margin | $43,973 | $65,154 | | Income from operations | $4,785 | $23,420 | | Net income attributable to Landsea | $3,218 | $13,065 | | Diluted EPS | $0.08 | $0.28 | Consolidated Statements of Cash Flows In Q1 2023, net cash provided by operating activities was $5.5 million, a significant improvement from the $32.1 million used in Q1 2022, mainly due to favorable changes in real estate inventories, while net cash used in investing activities was minimal at $1.6 million compared to $261.6 million in the prior year, and net cash from financing activities was $9.2 million Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $5,477 | $(32,141) | | Net cash used in investing activities | $(1,563) | $(261,568) | | Net cash provided by financing activities | $9,237 | $27,314 | | Net increase (decrease) in cash | $13,151 | $(266,395) | Notes to the Consolidated Financial Statements The notes detail the company's accounting policies, the 2022 acquisition of Hanover Family Builders, segment reporting, debt structure, and stockholder's equity, including organization into five reportable segments, a $675.0 million credit facility, and a stock repurchase program authorized in March 2023 - The company's operations are organized into five reportable segments: Arizona, California, Florida, Metro New York, and Texas[20] - In January 2022, the Company acquired 100% of Hanover Family Builders for an aggregate cash purchase price of $262.6 million, adding approximately 3,800 lots owned or controlled[29] - The Company has a senior unsecured credit facility with a borrowing capacity of up to $675.0 million, maturing in October 2025. As of March 31, 2023, $525.0 million was outstanding at an interest rate of 8.01%[48] - In March 2023, the Board of Directors authorized a stock repurchase program for up to $10.0 million worth of common stock, expiring December 31, 2023[92] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Q1 2023 financial results, highlighting a decrease in home sales revenue and net income compared to Q1 2022, driven by higher mortgage rates impacting demand and affordability, with the company responding through sales incentives affecting gross margins, and covering operational metrics, segment performance, liquidity, and non-GAAP financial measures Business Overview and Strategy Landsea Homes designs and builds homes across Arizona, California, Florida, Metro New York, and Texas, focusing on first-time homebuyers, and is navigating a market challenged by rising interest rates by emphasizing affordability, managing inventory, and leveraging its partnership with NFM Lending for mortgage services, with long-term goals including expanding community count, focusing on entry-level products, and becoming a top-ten US homebuilder - Recent increases in federal interest rates have put downward pressure on demand by reducing affordability for homebuyers across all markets[111] - The company is responding to the market by focusing sales efforts on affordability and interest rates, providing purchase incentives like mortgage interest rate buydowns[113] - Long-term strategic objectives include expanding in current markets, focusing on entry-level offerings, geographic expansion, and becoming a top-ten homebuilder in the United States[120] Results of Operations For Q1 2023, home sales revenue decreased 19% to $240.6 million, and home deliveries fell 14% to 472 units year-over-year, primarily due to decreased demand from higher mortgage rates, while net new orders decreased 22% to 498 homes, home sales gross margin declined to 18.1% from 20.9% in Q1 2022 due to increased sales discounts and incentives, and backlog value decreased 55% to $422.9 million Net New Home Orders - Q1 2023 vs Q1 2022 | Segment | Q1 2023 Homes | Q1 2022 Homes | % Change | | :--- | :--- | :--- | :--- | | Arizona | 152 | 139 | 9% | | California | 164 | 174 | (6%) | | Florida | 178 | 307 | (42%) | | Total | 498 | 637 | (22%) | Home Deliveries - Q1 2023 vs Q1 2022 | Segment | Q1 2023 Homes | Q1 2022 Homes | % Change | | :--- | :--- | :--- | :--- | | Arizona | 170 | 143 | 19% | | California | 85 | 128 | (34%) | | Florida | 212 | 271 | (22%) | | Total | 472 | 552 | (14%) | - Home sales gross margin decreased by 280 basis points to 18.1% for Q1 2023, primarily due to additional sales discounts and incentives. Adjusted home sales gross margin (excluding interest, impairments, and purchase price accounting) decreased 710 basis points to 21.9%[136][135] - Total backlog decreased 57% in units to 696 homes and 55% in value to $422.9 million as of March 31, 2023, compared to the prior year, reflecting high cancellation rates in the second half of 2022[138] Segment Performance In Q1 2023, Florida was the most profitable segment with $8.2 million in pretax income, a significant increase from the prior year which was impacted by Hanover acquisition costs, while Arizona and California saw substantial declines in pretax income to $0.2 million and $2.9 million respectively due to lower ASPs and increased incentives, and the Corporate segment's loss narrowed primarily because Q1 2022 included a $5.6 million loss on warrant remeasurement Pretax Income (Loss) by Segment (in thousands) | Segment | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Arizona | $183 | $5,142 | | California | $2,937 | $25,337 | | Florida | $8,227 | $72 | | Metro New York | $(603) | $(542) | | Texas | $(1,320) | $(14) | | Corporate | $(3,684) | $(11,867) | | Total | $5,740 | $18,128 | Liquidity and Capital Resources As of March 31, 2023, the company had $139.5 million in cash and cash equivalents, with principal capital sources being cash from operations and a $675.0 million credit facility, of which $525.0 million was outstanding, and the company was in compliance with all financial covenants, including maintaining a leverage ratio of 38.5% (against a <60% requirement) and a minimum liquidity of $289.5 million (against a $50 million requirement), with cash flow from operations turning positive at $5.5 million for the quarter - As of March 31, 2023, the company had $139.5 million of cash, cash equivalents, restricted cash, and cash held in escrow[157] - The company has a credit facility with $675.0 million total capacity and $150.0 million in additional borrowing capacity as of March 31, 2023[162] Financial Covenant Compliance as of March 31, 2023 | Covenant | Actual | Requirement | | :--- | :--- | :--- | | Minimum Liquidity | $289,545 thousand | $50,000 thousand | | Interest Coverage Ratio | 4.39 | 2.00 | | Tangible Net Worth | $643,979 thousand | $394,253 thousand | | Maximum Leverage Ratio | 38.5% | <60% | - Net cash provided by operating activities was $5.5 million in Q1 2023, compared to net cash used of $32.1 million in Q1 2022[170] Non-GAAP Financial Measures The company uses several non-GAAP measures to provide additional insight into its performance, with Adjusted EBITDA at $16.2 million for Q1 2023, down from $50.4 million in Q1 2022, Adjusted Net Income at $7.1 million compared to $32.8 million in the prior-year period, and the ratio of net debt to total capital at 30.7% as of March 31, 2023 Net Debt to Total Capital Ratio | Metric (in thousands) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total notes and other debts payable, net | $516,929 | $505,422 | | Less: Cash and cash held in escrow | $139,545 | $140,735 | | Net debt | $377,384 | $364,687 | | Ratio of net debt to total capital | 30.7% | 30.0% | Adjusted EBITDA Reconciliation (in thousands) | Line Item | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net income | $4,123 | $13,061 | | EBITDA | $11,711 | $26,140 | | Purchase price accounting in cost of home sales | $4,485 | $17,738 | | Transaction costs | $15 | $948 | | Loss on remeasurement of warrant liability | $— | $5,555 | | Adjusted EBITDA | $16,211 | $50,381 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate fluctuations and inflation, with interest rate risk stemming from its variable-rate credit facility, and inflation adversely impacting costs for land, labor, and materials, potentially leading to higher mortgage rates that affect homebuyer affordability - The company's main market risk exposure is to interest rate changes associated with its variable-rate credit facility (SOFR plus 3.35%)[188] - Inflation can adversely impact operations through higher land, financing, labor, and material costs, and can also lead to higher mortgage rates that reduce home affordability[189] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of March 31, 2023, and concluded they were effective, with no material changes to the company's internal control over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023[190] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[191] PART II - OTHER INFORMATION Legal Proceedings The company is involved in various legal actions in the ordinary course of business, including a notable dispute with insurers over reimbursement for a $14.9 million settlement paid on the company's behalf in a wrongful death suit, with the outcome of this and other proceedings currently uncertain - 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 in a wrongful death suit. The company is unable to estimate the outcome[52] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to risk factors were reported since the last Annual Report on Form 10-K[193] Unregistered Sales of Equity Securities and Use of Proceeds In March 2023, the Board of Directors authorized an extension of the stock repurchase program, allowing for the repurchase of up to $10.0 million of common stock through December 31, 2023, with no shares repurchased under this new authorization as of March 31, 2023 Stock Repurchase Program Status as of March 31, 2023 | Period | Total Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that may yet be Purchased (in millions) | | :--- | :--- | :--- | :--- | | Jan 1 - Mar 31, 2023 | — | $— | $10.0 | - The Board authorized a $10.0 million stock repurchase program in March 2023, which expires on December 31, 2023[195] Exhibits This section lists the exhibits filed with the Form 10-Q, including the company's certificate of incorporation, bylaws, CEO and CFO certifications, and financial statements formatted in Inline XBRL