I’ve been following U.S. residential homebuilder Landsea Homes (NASDAQ: LSEA) closely and I’ve written six articles about the company on SA so far. The latest of them was in August 2023 and in it I said that the Q2 2023 results were strong but that the Q3 2023 guidance looked weak.
On November 2, Landsea Homes released its Q3 2023 results, and I think they were decent as new home deliveries were around the middle of the guidance while EPS came in at $0.30 as the average sales price (ASP) was above the guidance. In addition, the order backlog improved for the fourth consecutive quarter. That being said, I’m concerned that Landsea Homes said during its earnings call that there was some selling softness as the quarter progressed and the guidance for Q4 home deliveries is in a wide range. I’m concerned that that orders could dry up over the coming months due to high mortgage rates and I’m keeping my rating on the stock at neutral. Let’s review.
Overview of the Q3 2023 financial results
In case you’re not familiar with Landsea Homes or my earlier coverage, here’s a brief description of the business. The company was established in 2013 by Hong Kong-listed Landsea Green Properties and it focuses on the development of entry-level and move-up residential properties. In 2021, Landsea Homes listed on NASDAQ via a merger with a special-purpose acquisition company (SPAC). In May 2021, it bought Florida- and Texas-based Vintage Estate Homes for $54.6 million while and Florida-focused Hanover Family Builders was acquired for $264.2 million in January 2022. The core markets of Landsea Homes include Arizona, California, Florida, and Texas, with total lots owned or controlled at 11,201 across the four states as of September 2023.
In October 2023, Landsea Homes announced that it’s setting foot in Colorado with the acquisition of the assets and lot inventory of Richfield Homes for an undisclosed amount. I was surprised by this deal as the company’s capital allocation strategy during 2023 has been focused on share buybacks and free cash flow for the first nine months of the year is negative (see page 8 here).
Turning our attention to the Q3 2023 results, I think it was a decent quarter for Landsea Homes as it delivered a total of 448 homes at an ASP of $576,000. While home deliveries were at their lowest level since Q3 2021 and the ASP went down by 4% year on year, I think the company overperformed as the guidance for the quarter was for 400 to 475 homes at ASPs of $535,000 to $545,000. In addition, the order backlog improved for the fourth consecutive quarter while ASP for new orders was around $586,000.
Thanks to the high ASPs of new home deliveries in Q3 2023, the gross profit margin improved to 18.7% from 17.4% a quarter earlier. Combined with a $0.5 million quarter on quarter decrease in general and administrative expenses due to cost-cutting measures, adjusted EBITDA came in at $28.7 million compared to $27 million in Q2 2023. Yet, the financial results of Landsea Homes are still far below the levels of Q3 2023 when revenues were above $326 million and adjusted EBITDA stood at $47.4 million.
Looking at the balance sheet, the book value per share increased by $0.51 quarter on quarter to $17.28 as Landsea Homes repurchased another 1,391,867 shares for $13.7 million, bringing the total for the first nine months of the year to $21.2 million (see slide 5 here). The tangible book value per share, in turn, grew by $0.44 to $15.46. Net debt was $408 million as of September 2023, bringing the net debt to total capital ratio to 32.5%. This represents a slight improvement compared to the 34% in June, but it could be currently above that level due to the Richfield Homes acquisition. Overall, the debt level seems manageable and Landsea Homes had $245 million of available capacity under its unsecured revolving credit facility at the end of September 2023.
Looking at what to expect for the future, Landsea Homes said that it forecasts to deliver 1,900 to 2,100 new homes in 2023 at ASP in the range of $550,000 to $560,000. This means that Q4 home deliveries should be between 441 and 641 units which is a very wide range and the reason behind this could be slowing demand as the company said during its Q3 2023 earnings call that it experienced selling softness as the quarter progressed due to rising interest rates. While the ASPs are holding up for now, I’m concerned that home deliveries over the coming could be underwhelming due to slowing demand. The 30-year fixed rate mortgage rates in the USA are close to 23-year highs at the moment while mortgage demand is near 1996 levels.
While Landsea Homes is currently trading at just 0.54x price to tangible book value, I think that orders could gradually dry up over the coming months due to the high mortgage rates. It’s also possible that ASPs could start falling in the near future as it seems that the key reason home prices are staying high is a lack of supply, which could change if unemployment picks up.
Landsea Homes surpassed my expectations for Q3 2023, and its order backlog is growing. The balance sheet is in good shape and the company is valued at just above 0.5x price to tangible book value. However, I’m concerned that high interest rates are starting to negatively affect orders as mortgage applications in the USA continue to slide and I think the next few quarters could be underwhelming from a financial standpoint. In my view, risk-averse investors should avoid this stock as it could become a value trap.