Landsea Homes rounded out a “banner year” for the company with record revenue and significant year-over-year increases in homes closed and home sales gross margin in 2022.
Revenue increased 41.4% on a year-over-year basis in 2022 to $1.4 billion, and home sales gross margin increased 290 basis points to 20.4%, primarily reflecting improved margins in Landsea Homes’ California and Florida market segments.
Despite a challenging environment that affected new-home orders in the third and fourth quarters of 2022, new-home orders for the full fiscal year increased from 1,471 homes in 2021 to 1,520 homes in 2022, with an average selling price of $631,000 and a monthly absorption rate of 2.4 sales per active community. The home builder attributed the year-over-year increase primarily to growth in Landsea Homes’ Florida division.
New-home orders in the fiscal fourth quarter decreased 80% compared with the fourth quarter of 2021 to 88. President and chief operating officer Mike Forsum said the lower net new-home orders reflected the builder’s strategy of prioritizing backlog preservation and conversion during the quarter.
Chief financial officer Chris Porter added that the slowdown in net orders during the fourth quarter was reflected in the quarterly absorption rate of 0.5 homes per community. The absorption pace for Landsea Homes increased to 1.8 in January 2023 and to 2.8 in February, according to CEO John Ho.
“We believe [the decrease in net orders in the second half of 2022] is a natural reaction to the sudden change in affordability brought by the rise in interest rates, and have taken action through the use of incentives and price adjustments to regain momentum on the sales front,” Ho said during the company’s fourth quarter earnings call. “Fortunately, we have begun to see some improvement in market conditions starting in December that carried into the new year. We expect near-term demand conditions to remain volatile and subject to changes in mortgage rates and other macro factors. However, we are encouraged by our sales efforts to start the year.”
Primarily as a result of buyer hesitation, Forsum said the home builder saw an “extraordinarily high” cancellation rate in the fiscal fourth quarter. The cancellation rate across the home builder’s markets ranged from as low as 10% to around 70% in its Arizona markets. However, Forsum said the cancellation rate has “normalized” in the new year to a range between 9% and 15% in response to the company’s pricing and incentive structure.
Forsum said the company has worked to address the affordability needs of prospective buyers through a combination of base price reductions and financing incentives. Porter said financing incentives primarily involve mortgage rate buydowns, and, through its Landsea Mortgage subsidiary, the home builder has been able to help buyers achieve 30-year fixed mortgage rates at or below 5%.
“We believe that [the success of price adjustments and incentives] is a clear sign that there is demand elasticity in our markets and that there continue to be motivated new home buyers at the right price,” Forsum said. “We have recently seen an uptick in buyers coming from single-family rentals who now want to own their home. Typically these buyers want a quick close, and we have enough inventory within our communities that are at or near completion to satisfy this demand.”
After offering incentives and price adjustments in response to high cancellation rates, Forsum said Landsea Homes has begun decreasing incentives in 2023, with continued success due to strong demand from buyers. Consumers are beginning to adjust to the new mortgage rate environment, Forsum said, and demand has remained strong through the first two months of the year.
Cost Reductions and Headquarters Relocation
Ho said in response to the uncertain demand environment, Landsea Homes placed an emphasis on cost reductions, balance sheet strength, and cash flow generation. The company cut headcount by 8% in the fourth quarter.
The company is also “proactively negotiating” with suppliers, vendors, and contractors. Cycle times have reduced nearly 30 days since their peak, and Forsum said this improvement has positively impacted the front-end construction process and shorter lead times on key product categories needed to close homes.
Ho said Landsea is remaining “disciplined” with its land acquisition efforts and is walking away from transactions that no longer meet the company’s hurdle rates. The company plans to reduce land acquisition and development spend relative to 2022 in the upcoming calendar year by between 20% to 25%. Ho said the reduction in land spend will reflect both the company’s disciplined strategy and a pullback after a strong expansion year in 2022, particularly in Florida markets.
The home builder also announced its relocation of its corporate headquarters to Dallas from Newport Beach, California.
“This move should provide cost savings over time and will allow us to operate more effectively as a national home builder,” Ho said. “This move should also signal our commitment to growing our home building presence in [Texas].”
