The following discussion should be read in conjunction with and is qualified in its entirety by the consolidated financial statements and notes thereto included elsewhere in this document. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in the section entitled "Risk Factors" of our Annual Report on Form 10-K, filed with the
Securities and Exchange Commission(the "SEC") on March 16, 2022. This section discusses certain items in the three month periods ended March 31, 2022and 2021 and year-to-year comparisons between those periods. - 20 - --------------------------------------------------------------------------------
Consolidated financial data
The following table summarizes our unaudited operating results for the three months ended
Three Months Ended March 31, 2022 2021 (dollars in thousands, except per share amounts) Revenue Home sales
$ 297,966 $ 154,765Lot sales and other 18,261 5,654 Total revenue 316,227 160,419 Cost of sales Home sales 235,702 136,841 Inventory impairments - - Lot sales and other 15,371 4,780 Total cost of sales 251,073 141,621 Gross margin Home sales 62,264 17,924 Lot sales and other 2,890 874 Total gross margin 65,154 18,798 Sales and marketing expenses 19,148 9,931 General and administrative expenses 22,586 14,986 Total operating expenses 41,734 24,917 Income (loss) from operations 23,420 (6,119) Other income, net 264 (61) Equity in net loss of unconsolidated joint ventures (1) (21) Loss on remeasurement of warrant liability (5,555) (4,950) Pretax income (loss) 18,128 (11,151) Provision (benefit) for income taxes 5,067 (4,065) Net income (loss) 13,061 (7,086) Net loss attributable to noncontrolling interests (4) (12) Net income (loss) attributable to Landsea Homes Corporation $ 13,065 $ (7,074)Income (loss) per share: Basic $ 0.28 $ (0.16)Diluted $ 0.28 $ (0.16)Weighted average common shares outstanding: Basic 45,347,369 44,245,847 Diluted 45,508,556 44,245,847 - 21 -
Driven by a commitment to sustainability,
Landsea Homes Corporation("LHC") designs and builds homes and communities in Arizona, California, Florida, Metro New York, and Texas. We create inspired spaces for modern living and feature homes and communities in vibrant, prime locations which connect seamlessly with their surroundings and enhance the local lifestyle for living, working, and playing. The defining principle, "Live in Your Element®," creates the foundation for our customers to live where they want to live, how they want to live - in a home created especially for them. The Company's operations are engaged in the acquisition, development, and sale of homes and lots in the states of Arizona, California, Florida, New Jersey, New York, and Texas. The Company's operations are organized into five reportable segments: Arizona, California, Florida, Metro New York, and Texas. The Company builds and sells an extensive range of home types across a variety of price points but we focus our efforts on the first-time homebuyer. Our Corporate operations are a non-operating segment that supports our homebuilding operations by providing executive, finance, treasury, human resources, accounting and legal services. With the lifting of restrictions in 2021 related to the COVID-19 pandemic, we also saw significant increases in demand across our markets. We believe the increase in demand has been fueled by historically low interest rates on mortgage loans and a general tightening supply of homes for sale. Recent increases in interest rates may put downward pressure on demand and increase our financing costs, however, the current overall macroeconomic effects have allowed us to increase prices and derive additional revenue from our home deliveries. We frequently see increased revenues partially offset by higher costs associated with labor and supply shortages. In certain markets we have seen our construction cycle lengthen primarily due to supply chain constraints and in those markets we have slowed our home sales pace to more closely align with our production level. Based on the current availability of labor and materials, the stage of completion of our current homes in inventory, and production schedules, we expect to continue restricting the pace of our sales orders in some of our communities in the near term. We continue to monitor inflation and interest rate macroeconomic and geopolitical actions The Company continues to capitalize on opportunities to shift inventory and product to more affordable offerings through our recent growth in Floridaand Texasthrough acquisitions. During May 2021, we completed the acquisition of Vintage Estate Homes("Vintage"), a Florida- and Texas-based homebuilder. The Vintage acquisition added the Floridaand Texasreportable segments. During January 2022, we acquired 100% of Hanover Family Builders, LLC("Hanover"), a Florida-based homebuilder for an aggregate cash purchase price of $264.2 million. The Hanover acquisition increases our presence in Floridawith a backlog of 522 units valued at $228.1 millionas of the acquisition date. These acquisitions fit with and continue to advance our overall business strategy by expanding into new geographic and diverse markets. - 22 - --------------------------------------------------------------------------------
Our strategy is focused on maximizing stockholder returns through profitability and efficiency, while balancing appropriate amounts of leverage. In general, we are focused on the following long-term strategic objectives: •Expand community count in current markets and enhance operating returns •Maintain an appropriate supply of lots •Continue to focus on entry-level product offerings •Strengthen unique brand position through product differentiation •Continue geographic expansion and diversification into new markets •Leverage existing SG&A base to enhance stockholder returns and profitability •Become a top-ten homebuilder in
the United States
Non-GAAP Financial Measures
Non-GAAP financial measures are defined as numerical measures of a company's performance that exclude or include amounts so as to be different than the most comparable measures calculated and presented in accordance with accounting principles generally accepted in
the United States("GAAP"). The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for the Company's related financial results prepared in accordance with GAAP. We present non-GAAP financial measures of adjusted home sales gross margin, net debt to net capital, EBITDA and adjusted EBITDA, and adjusted net income in their respective sections below to enhance an investor's evaluation of the ongoing operating results and to facilitate meaningful comparison of the results between periods. Management uses these non-GAAP measures to evaluate the ongoing operations and for internal planning and forecasting.
Summary of trading results
For the three months ended
March 31, 2022, home sales revenue increased 93% to $298.0 millionfrom $154.8 millionand home deliveries increased 83% to 552 units from 301 units as compared to the same period in the prior year. The increase in home deliveries and home sales revenue year-over-year is derived primarily from our Floridasegment due to the recent acquisitions in that segment. We had 201 home deliveries generating revenue of $78.4 millionfrom our Hanover acquisition. In addition, both our Arizonaand Californiasegments have seen significant demand and price appreciation. This resulted in the average selling price ("ASP") to rise 32% and 13% in those two segments, respectively, during the three months ended March 31, 2022compared to the same prior year period. We remain focused on growth and view our leverage ratios as a key factor in allowing us to expand. Even as the Company has grown organically and through acquisitions in recent years, we remain in a position to act on our strategy and to be opportunistic about acquisitions and other growth opportunities. Our debt-to-capital ratio increased to 44.0% as of March 31, 2022compared to 42.6% as of December 31, 2021. We believe the strength of our balance sheet and operating platform have positioned us well to continue to execute our growth strategy. We anticipate the homebuilding markets in each of our operating segments to be tied to both the local economy and the macro-economic environment. Accordingly, net orders, home deliveries, and ASPs in future years could be negatively affected by economic conditions, such as rising interest rates, decreases in employment and median household incomes, as well as decreases in household formations and increasing supply of inventories. Shortages in labor or materials could also significantly increase costs, reduce gross margins, and lower our overall profitability. During 2021 and into the first quarter of 2022, we experienced increases in our production cycle times due to labor and material shortages that have caused us to reduce our absorption rate in certain markets, mainly in our Arizonasegment. Additionally, the results could be impacted by a decrease in home affordability as a result of price appreciation, increases in mortgage interest rates, or tightening of mortgage lending standards. - 23 - --------------------------------------------------------------------------------
Changes in the dollar value of net new orders are impacted by changes in the number of net new orders and the ASP of those homes. Monthly Absorption Rate is calculated as total net new orders per period, divided by the average active communities during the period, divided by the number of months per period. Three Months Ended March 31, 2022 2021 % Change Monthly Absorption Homes Dollar Value ASP Monthly Absorption Rate Homes Dollar Value ASP Monthly Absorption Rate Homes Dollar Value ASP Rate (dollars in thousands)
Arizona139 $ 74,061 $ 5334.6 283 $ 105,718 $ 3746.3 (51 %) (30 %) 43 % (27 %) California174 162,175 932 5.0 143 152,386 1,066 4.0 22 % 6 % (13) % 25 % Florida307 139,364 454 3.6 - - N/A - N/A N/A N/A N/A Metro New York13 34,316 2,640 4.3 - - N/A - N/A N/A N/A N/A Texas4 4,182 1,046 0.4 - - N/A - N/A N/A N/A N/A Total 637 $ 414,098 $ 6503.9 426 $ 258,104 $ 6065.3 50 % 60 % 7 % (26 %) For the three months ended March 31, 2022, the decrease in net new orders and dollar value in Arizonais primarily due to intentional delays in our sales process. We are experiencing constraints in our production processes due to labor and material shortages for homes currently under construction and that has extended our production cycle. We expect such delays are likely to continue in the short-term. The decrease in the dollar value of net new home orders in Arizonawas partially offset by a 43% increase in ASP during the three months ended March 31, 2022, compared to the same period in 2021. This is primarily due to price appreciation in the Arizonamarket and a larger number of homes in communities with higher-end products. For the three months ended March 31, 2022, the increase in net new orders in Californiawas primarily due to an increase in the monthly absorption rate, which was driven by entry-level communities with a lower ASP that sold at a much faster pace.
The Company started its activities in the
following the acquisition of Vintage and we have expanded our
The Metro New York segment began selling homes during the second quarter of 2021 and continued during the three months ended
March 31, 2022at its one active community. Average Selling Communities
The average selling community is the sum of communities actively selling homes each month, divided by the total number of months in the calculation period.
Three Months Ended March 31, 2022 % Change 2021 Arizona 10.0 (33 %) 15.0 California 11.7 (3 %) 12.0 Florida 28.7 N/A - Metro New York 1.0 N/A - Texas 3.0 N/A - Total 54.4 101 % 27.0 - 24 -
Home deliveries and home sales revenue
The change in revenue from home sales results from the change in the number of homes delivered and the ASP of these homes delivered. Comments on material changes for each of the segments of these measures are provided below.
Three Months Ended March 31, 2022 2021 % Change Homes Dollar Value ASP Homes Dollar Value ASP Homes Dollar Value ASP (dollars in thousands) Arizona 143
$ 62,015 $ 434182 $ 59,672 $ 328(21 %) 4 % 32 % California 128 115,552 903 119 95,093 799 8 % 22 % 13 % Florida 271 106,541 393 - - N/A N/A N/A N/A Metro New York 4 7,700 1,925 - - N/A N/A N/A N/A Texas 6 6,158 1,026 - - N/A N/A N/A N/A Total 552 $ 297,966 $ 540301 $ 154,765 $ 51483 % 93 % 5 % Our Arizonasegment delivered 143 homes and generated $62.0 millionin home sales revenue for the three months ended March 31, 2022. The decrease in home closings compared to the same periods in 2021 was primarily attributable to production delays, which was offset by an increase in ASP of 32% for the three months ended March 31, 2022over the same period in 2021. The increase was primarily due to price appreciation in the Arizonamarket and a larger number of homes delivered in communities with higher-end products. Our Californiasegment delivered 128 homes and generated $115.6 millionin home sales revenue for the three months ended March 31, 2022, an increase of 8% and 22%, respectively, compared to the corresponding period in 2021. These increases were the result of strengthening market conditions, including strong demand and rising prices in the current period.
The Company started its activities in the
following the acquisition of Vintage and we have expanded our
The Metro New York segment delivered its first homes during the three months ended
March 31, 2022. The higher price point of the segment generates a significantly higher ASP than our other offerings. As of March 31, 2022there are 46 remaining units in the currently selling project in Metro New York.
Home sales gross margins
Home sales gross margin measures the price achieved on delivered homes compared to the costs needed to build the home. In the following table, we calculate gross margins adjusting for interest in cost of sales, inventory impairments (if applicable), and purchase price accounting for acquired work in process inventory (if applicable). We believe the below information is meaningful as it isolates the impact that indebtedness and acquisitions have on the gross margins and allows for comparability to previous periods and competitors. See Note 3 - 25 - --------------------------------------------------------------------------------
– Business combinations in the notes to the consolidated financial statements for additional discussion regarding acquired work in progress inventories.
Three months completed
2022 % 2021 % (dollars in thousands) Home sales revenue
$ 297,966100.0 % $ 154,765100.0 % Cost of home sales 235,702 79.1 % 136,841 88.4 % Home sales gross margin 62,264 20.9 % 17,924 11.6 % Add: Interest in cost of home sales 6,382 2.1 % 7,013 4.5 % Add: Inventory impairments - - % - - %
Gross margin adjusted for home sales excluding interest and inventory write-downs (1)
68,646 23.0 % 24,937 16.1 %
Add: Recognition of purchase price for acquired inventory 17,738
6.0 % 2,801 1.8 %
Adjusted gross margin from home sales excluding interest, inventory write-downs and purchase price taking into account acquired inventory (1)
$ 86,38429.0 % $ 27,73817.9 % (1) This non-GAAP financial measure should not be used as a substitute for the Company's operating results in accordance with GAAP. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. We believe this non-GAAP measure is meaningful because it provides insight into the impact that financing arrangements and acquisitions have on our homebuilding gross margin and allows for comparability of our gross margins to competitors that present similar information. Home sales gross margin increased 930 basis points to 20.9% for the three months ended March 31, 2022, compared to the corresponding period in 2021 primarily due to price appreciation amid high product demand in our Arizonaand Californiasegments. Adjusted home sales gross margin excluding interest, inventory impairments, and purchase price accounting for acquired inventory increased 1,110 basis points to 29.0% for the three months ended March 31, 2022, compared to the corresponding period in 2021 primarily due to price appreciation and an increase in gross margins within our Californiasegment and the establishment of the Floridasegment with high gross margins excluding purchase price accounting. The purchase price accounting for acquired inventory is a result of the recent business combinations. Backlog Backlog reflects the number of homes, net of cancellations, for which we have entered into a sales contract with a customer but have not yet delivered the home. March 31, 2022 March 31, 2021 % Change Homes Dollar Value ASP Homes Dollar Value ASP Homes Dollar Value ASP (dollars in thousands) Arizona 419 $ 193,278 $ 461609 $ 218,978 $ 360(31) % (12) % 28 % California 302 272,999 904 266 273,704 1,029 14 % - % (12) % Florida(1) 840 376,458 448 - - N/A N/A N/A N/A Metro New York 34 77,303 2,274 - - N/A N/A N/A N/A Texas 10 10,372 1,037 - - N/A N/A N/A N/A Total 1,605 $ 930,410 $ 580875 $ 492,682 $ 56383 % 89 % 3 % (1) Backlog acquired in Floridaat the date of the Hanover acquisition was 522 homes with a value of $228,097 thousand. The increase in the number of backlog homes and value as of March 31, 2022as compared to March 31, 2021is primarily attributable to the Hanover and Vintage acquisitions which added a significant backlog in the Floridasegment. Additionally, the Metro New York segment began sales in the second quarter of 2021. The increase in value and ASP coincides with price appreciation for the net new home orders for the three months ended March 31, 2022. - 26 - --------------------------------------------------------------------------------
Lot sales and other income
Lot sales and other revenue and gross margin can vary significantly between reporting periods based on the number of lots under contract and the percentage of completion related to the development activities required as part of the lot sales and other contracts. For the three months ended
March 31, 2022, we recognized $18.3 millionof lot sales and other revenue from the sale of lots in our Arizona, Florida, and Texassegments and the subsequent development of the lots and homes under contract. For the three months ended March 31, 2021, we recognized $5.7 millionof lot sales and other revenue in our Arizonasegment. As of March 31, 2022and December 31, 2021, the Company had contract assets of $17.5 millionand $6.1 million, respectively, related to lot sales and other revenue. The contract asset balance represents cash to be received for work already performed on lot sale and other contracts. The amount of the transaction price for lot sales and other contracts allocated to performance obligations that were unsatisfied, or partially unsatisfied, as of March 31, 2022and December 31, 2021was $46.1 millionand $63.9 million, respectively. As of March 31, 2022and December 31, 2021, the Company had $1.1 millionand $4.0 milliondeferred revenue, respectively, related to lot sales and other revenue. The Company recognizes these amounts as development progresses and the related performance obligations are completed. The Company recognized $3.0 millionof lot sales and other revenue during the three months ended March 31, 2022related to the deferred revenue balance as of December 31, 2021.
Owned or controlled batches
The table below summarizes the lots owned or controlled by reportable segment as of the dates presented. Lots controlled includes lots where we have placed a deposit and have a signed purchase contract or rolling option contract. March 31, 2022 March 31, 2021 Lots Owned Lots Controlled Total Lots Owned Lots Controlled Total % Change Arizona 3,132 1,669 4,801 3,042 1,675 4,717 2 % California 762 1,016 1,778 1,136 643 1,779 - % Florida 2,048 3,138 5,186 - - - N/A Metro New York 46 - 46 50 - 50 (8 %) Texas 39 918 957 - - - N/A Total 6,027 6,741 12,768 4,228 2,318 6,546 95 %
The total number of batches held and controlled at
- 27 - --------------------------------------------------------------------------------
Operating Results and Assets by Segment
Three Months Ended March 31, 2022 2021 Pretax income (loss) (dollars in thousands) Arizona
$ 5,142 $ 1,433California 25,337 (159) Florida 72 - Metro New York (542) (831) Texas (14) - Corporate (11,867) (11,594) Total $ 18,128 $ (11,151)March 31, 2022 December 31, 2021 Assets (dollars in thousands) Arizona $ 331,960$ 360,598 California 391,675 400,292 Florida 406,611 102,158 Metro New York 127,310 124,962 Texas 36,907 35,984 Corporate 39,299 241,520 Total assets $ 1,333,762 $ 1,265,514Our Arizonasegment recorded pretax income of $5.1 millionin the three months ended March 31, 2022compared to $1.4 millionin the comparable period during 2021. The increase in pretax income in 2022 is primarily due to an increase in gross margins stemming from high demand which has allowed us to increase pricing. Our Californiasegment recorded pretax income of $25.3 millionfor the three months ended March 31, 2022compared to a pretax loss of $0.2 millionin the comparable periods in 2021. The increase was due primarily to increasing demand in the current period. This allowed us to increase pricing, even with a shift in product mix that lowered the average cost of homes delivered, both of which contributed to an increase in gross margins in California. The Company began operations in the Floridaand Texassegments in May 2021following the acquisition of Vintage, and we expanded our Floridaoperations with the acquisition of Hanover in January 2022. Included in Florida'spretax income for the three months ended March 31, 2022is $16.9 millionof purchase price accounting amortization recorded in cost of home sales for acquired inventory related to the Vintage and Hanover acquisitions. The Metro New York segment experienced a smaller pretax loss for the three months ended March 31, 2022as compared to the same prior period, which is primarily due to closings beginning at our consolidated project in this segment at the end of the first quarter in 2022, while during the comparable period in 2021 the only income-generating activities were from an unconsolidated joint venture. We have also identified our Corporate operations as a non-operating segment, as it serves to support the business's operations through functional departments such as executive, finance, treasury, human resources, accounting, and legal. The majority of the corporate personnel and resources are primarily dedicated to activities relating to the business's operations and are allocated accordingly. The Corporate non-operating segment generated a consistent pretax loss comparable to the prior period. - 28 - --------------------------------------------------------------------------------
Sales, marketing and general and administrative expenses
Three Months Ended March 31, As a Percentage of Home Sales 2022 2021 2022 2021 (dollars in thousands) Sales and marketing expenses
$ 19,148 $ 9,9316.4 % 6.4 % General and administrative expenses 22,586 14,986 7.6 % 9.7 %
Total sales, marketing and G&A expenses
14.0 % 16.1 % For the three months ended
March 31, 2022, the sales, marketing, and general and administrative ("SG&A") expense rate as a percentage of home sales revenue was 14.0%, a decrease of 2.1%, from the prior period. The decrease in general and administrative ("G&A") expenses as a percentage of home sales revenue for the three months ended March 31, 2022was primarily due to a drop in transaction costs as significant transaction costs were incurred related to the Merger in the prior comparative period. The Company also benefited from being able to leverage the existing G&A base to support more operations as the Company grows.
Provision (benefit) for income taxes
The provision (benefit) for income taxes for the three months ended
March 31, 2022was a provision of $5.1 million, as compared to a benefit of $4.1 millionfor the three months ended March 31, 2021. The effective tax rate for the three months ended March 31, 2022was 28.0%, as compared to 36.5% for the three months ended March 31, 2021. The difference between the statutory tax rate and the effective tax rate for the three months ended March 31, 2022is primarily related to state income taxes net of federal income tax benefits, estimated deduction limitations for executive compensation, and warrant fair market value adjustments. The difference between the statutory tax rate and the effective tax rate for the three months ended March 31, 2021is primarily related to state income taxes net of federal income tax benefits, estimated deduction limitations for executive compensation, warrant fair market value adjustments, and tax credits for energy-efficient homes. The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on the Company's consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of the Company's deferred tax assets. Critical Accounting Estimates Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and the estimates included in the consolidated financial statements might be impacted if we used different assumptions or conditions. There have been no material changes to our critical accounting policies and estimates as compared to those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SECon March 16, 2022. Liquidity and Capital Resources
March 31, 2022, we had $76.9 millionof cash, cash equivalents, and restricted cash, a $266.4 milliondecrease from December 31, 2021, primarily due to a net payment of $260.3 millionfor the Hanover acquisition as well as other land purchases and construction costs, partially offset by net borrowings on debt of $31.9 million. In addition, we had $8.3 millionof cash held in escrow as of March 31, 2022. - 29 -
-------------------------------------------------------------------------------- Our principal sources of capital are cash generated from home and land sales activities and borrowings from credit facilities. Principal uses of capital are land purchases, land development, home construction, repayments on credit facilities, the acquisitions of other homebuilders, and the payment of routine liabilities. Cash flows for each community depend on the community's stage in the development cycle and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of inventory and not recognized in the consolidated statements of operations until a home closes, we incur significant cash outlays prior to recognizing earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we are actively acquiring and developing lots in our markets to maintain and grow our supply of lots and active selling communities. We expect to generate cash from the sale of inventory including homes under construction. We generally intend to re-deploy the cash generated from the sale of inventory to acquire and develop strategic, well-positioned lots that represent opportunities to generate future income and cash flows by allocating capital to best position us for long-term success. When it meets with our strategic goals we may continue to purchase companies that strengthen our position in markets in a way that would not be possible with organic growth. As we continue to expand our business, we expect that our cash outlays for land purchases and development to increase our lot inventory may, at times, exceed our cash generated by operations. We intend to utilize debt as part of our ongoing financial strategy, coupled with redeployment of cash flows from operations to finance our business. As of
March 31, 2022, we had outstanding borrowings of $504.8 millionin aggregate principal, excluding deferred loan costs. We will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, the market value of our assets and the ability of particular assets, and our business as a whole, to generate cash flow to cover the expected debt service. In addition, our credit facilities contain certain financial covenants, among other things, that limit the amount of leverage we can maintain, as well as minimum tangible net worth and liquidity requirements. We believe that we will be able to fund our current and foreseeable liquidity needs with our cash on hand, cash generated from operations, and cash expected to be available from our credit facilities or through accessing debt or equity capital as needed. Credit Facilities In October 2021, the Company entered into a line of credit agreement (the "Credit Agreement"). The Credit Agreement provides for a senior unsecured borrowing of up to $585 millionas of March 31, 2022. The Company may increase the borrowing amount up to $850 million, under certain conditions. Borrowings under the Credit Agreement bear interest at LIBOR plus 3.25% or Prime Rate plus 2.75%. The interest rate includes a floor of 3.75%. As of March 31, 2022, the interest rate on the loan was 3.75%. The Credit Agreement matures in October 2024. The Credit Agreement includes terms to replace LIBOR upon its ultimate sunset with Ameribor. In addition, the Company has one project-specific construction loan. The loan has a variable interest rate of LIBOR plus 6.50% with a floor of 8.25%. As of March 31, 2022, the interest rate on the loan was 8.25%. The construction loan matures in September 2022. Subsequent to March 31, 2022, in April 2022the construction loan was repaid in full with proceeds from borrowings under the Credit Agreement. The Company's loans have certain financial covenants, such as requirements for the Company to maintain a minimum liquidity balance, minimum tangible net worth, gross profit margin, leverage and interest coverage ratios. The Company's loans are secured by the assets of the Company and contain various representations, warranties, and - 30 - --------------------------------------------------------------------------------
customary covenants for these types of agreements. From
Letters of credit and performance guarantees
In the ordinary course of business, and as part of the entitlement and development process, the Company's subsidiaries are required to provide performance bonds to assure completion of certain public facilities. As of
March 31, 2022and December 31, 2021, we had $177.1 millionand $94.7 million, respectively, in performance bonds issued and outstanding. Although significant development and construction activities have been completed related to the improvements at these sites, the performance bonds are generally not released until all development and construction activities are completed.
Our loans have certain financial covenants, including requirements for us to maintain a minimum liquidity balance, minimum tangible net worth as well as maximum leverage and interest coverage ratios. See the table below for the covenant calculations. March 31, 2022 December 31, 2021 Financial Covenants Actual Covenant Requirement Actual Covenant Requirement (dollars in thousands) (dollars in thousands) Minimum Liquidity Covenant $ 247,907 $ 50,000 $ 346,889 $ 50,000 Interest Coverage Ratio - Adjusted EBITDA to Interest Incurred 5.07 1.75 3.7 1.5 Tangible Net Worth $ 558,713 $ 356,421 $ 596,030 $ 329,182 Maximum Leverage Ratio (1) 43.7 % <60% 18.7 % <65%
(1) The calculation is the debt, net of certain amounts of cash, divided by this same net debt balance plus the tangible net worth.
The loan agreements also contain certain restrictive covenants, including limitations on incurrence of other indebtedness, liens, dividends and other distributions, asset dispositions, investments, and limitations on fundamental changes. The agreements contain customary events of default, subject to cure periods in certain circumstances, that would result in the termination of the commitments and permit the lender to accelerate payment on outstanding borrowings. These events of default include nonpayment of principal, interest and fees or other amounts; violation of covenants; inaccuracy of representations and warranties; cross default to certain other indebtedness; unpaid judgments; change in control; and certain bankruptcy and other insolvency events. As of
March 31, 2022, we were in compliance with all required covenants.
Cash flow – Quarters ended
For the three months ended
•Net cash used in operating activities was
$32.1 millionduring the three months ended March 31, 2022compared to $38.3 millionused during the same period in 2021. The decrease in net cash flows from operating activities was primarily due to proceeds from home sales, with net income growing $20.1 millioncompared to the same period in 2021. This was partially offset by an increase of cash held in escrow of $11.8 millionwhich affected the timing of our cash flows from operating activities. •Net cash used in investing activities was $261.6 millionduring the three months ended March 31, 2022, compared to $4.0 millioncash provided by investing activities during the same period in 2021. This difference was primarily related to payments of $260.3 million, net of cash received, for our acquisition of Hanover during the three months ended March 31, 2022. •Net cash provided by financing activities was $27.3 millionduring the three months ended March 31, 2022, compared to $115.0 millionduring the same period in 2021. The decrease was largely due to net proceeds - 31 - -------------------------------------------------------------------------------- of $64.4 millionfrom the Merger during the three months ended March 31, 2021. Additionally, net of paydowns, we borrowed $22.1 millionless from notes and other debts payable during the three months ended March 31, 2022as compared to the prior period in 2021. Option Contracts In the ordinary course of business, we enter into land purchase contracts in order to procure lots for the construction of homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These purchase contracts typically require a cash deposit, and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements, including obtaining applicable property and development entitlements. We also utilize option contracts with land sellers and others as a method of acquiring land in staged takedowns, to help manage the financial and market risk associated with land holdings, and to reduce the use of funds from financing sources. Option contracts generally require payment of a non-refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices. Our obligations with respect to purchase contracts and option contracts are generally limited to the forfeiture of the related non-refundable cash deposits. As of March 31, 2022, we had outstanding purchase and option contracts totaling $460.0 million, net of $57.8 millionrelated cash deposits pertaining to these contracts. The utilization of land option contracts is dependent on, among other things, the availability of land sellers willing to enter into option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local market dynamics. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.
Material cash needs
The material cash needs at the
Payments due by Periods Less than 1 More than 5 Total year 1-3 years 4-5 years years (dollars in thousands) Long-term debt maturities (1)
$ 504,814 $ 82,514 $ 422,300$ - $ - Operating leases (2) 13,654 3,738 6,145 2,775 996 Land option and purchase contracts (3) 460,030 236,257 203,317 20,456 - Total contractual obligations $ 978,498 $ 322,509 $ 631,762 $ 23,231 $ 996(1) Principal payments in accordance with the line of credit and construction loan. Total future interest payments of $43.6 millionassociated with our current outstanding debt are based on the current outstanding balance and interest rate as of March 31, 2022through maturity. (2) Operating lease obligations do not include payments to property owners covering common area maintenance charges. (3) Includes the remaining purchase price for all land option and purchase contracts, net of deposits, as of March 31, 2022. We are subject to certain requirements associated with entering into contracts (including land option contracts) for the purchase, development, and sale of real estate in the routine conduct of business. Option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties until we have determined whether to exercise our option, which may serve to reduce the financial risks associated with long-term land holdings. As of March 31, 2022, the Company had $57.8 millionof deposits, of which $0.2 millionare refundable. We expect to acquire the majority of such land within the next four years. Our performance on these contracts, including the timing and amount of purchase, if any, on the remaining purchase and option contracts is subject to change. Seasonality Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity during the spring, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes four to eight months to construct a new home, we deliver more homes in the - 32 - -------------------------------------------------------------------------------- second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the third and fourth quarters, and the majority of cash receipts from home deliveries occurs during the second half of the year. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry. Non-GAAP Financial Measures We include non-GAAP financial measures, including adjusted home sales gross margin, EBITDA and adjusted EBITDA, net debt to net capital, and adjusted net income. These non-GAAP financial measures are presented to provide investors additional insights to facilitate the analysis of our results of operations. These non-GAAP financial measures are not in accordance with, or an alternative for, GAAP and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures are not based on any comprehensive or standard set of accounting rules or principles. Accordingly, the calculation of our non-GAAP financial measures may differ from the definitions of non-GAAP financial measures other companies may use with the same or similar names. This limits, to some extent, the usefulness of this information for comparison purposes. Non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with our financial results as determined in accordance with GAAP. This information should only be used to evaluate our financial results in conjunction with the corresponding GAAP information. Accordingly, we qualify our use of non-GAAP financial measures whenever non-GAAP financial measures are presented.
Net debt at
The following table presents the ratio of debt to capital as well as the ratio of net debt to net capital which is a non-GAAP financial measure. The ratio of debt to capital is computed as the quotient obtained by dividing total debt, net of issuance costs, by total capital (sum of total debt, net of issuance costs, plus total equity). The non-GAAP ratio of net debt to net capital is computed as the quotient obtained by dividing net debt (which is total debt, net of issuance costs, less cash, cash equivalents, and restricted cash as well as cash held in escrow to the extent necessary to reduce the debt balance to zero) by net capital (sum of net debt plus total equity). The most comparable GAAP financial measure is the ratio of debt to capital. We believe the ratio of net debt to net capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. We believe that by deducting our cash from our debt, we provide a measure of our indebtedness that takes into account our cash liquidity. We believe this provides useful information as the ratio of debt to capital does not take into account our liquidity and we believe that the ratio of net debt to net capital provides supplemental information by which our financial position may be considered. - 33 - -------------------------------------------------------------------------------- See table below reconciling this non-GAAP measure to the ratio of debt to capital. March 31, 2022 December 31, 2021 (dollars in thousands) Total notes and other debts payable, net
$ 494,386$ 461,117 Total equity 630,480 621,397 Total capital $ 1,124,866 $ 1,082,514Ratio of debt to capital 44.0 % 42.6 % Total notes and other debts payable, net $ 494,386$ 461,117 Less: cash, cash equivalents and restricted cash 76,858 343,253 Less: cash held in escrow 8,349 4,079 Net debt 409,179 113,785 Total equity 630,480 621,397 Net capital $ 1,039,659$ 735,182 Ratio of net debt to net capital 39.4 % 15.5 % EBITDA and Adjusted EBITDA The following table presents EBITDA and Adjusted EBITDA for the three months ended March 31, 2022and 2021. Adjusted EBITDA is a non-GAAP financial measure used by management in evaluating operating performance. We define Adjusted EBITDA as net income before (i) income tax expense (benefit), (ii) interest expenses, (iii) depreciation and amortization, (iv) inventory impairments, (v) purchase accounting adjustments for acquired work in process inventory related to business combinations, (vi) (gain) loss on debt extinguishment, (vii) transaction costs related to the Merger and business combinations, (viii) the impact of income or loss allocations from our unconsolidated joint ventures, (ix) gain on forgiveness of PPP loan, and (x) gain (loss) on remeasurement of warrant liability. We believe Adjusted EBITDA provides an indicator of general economic performance that is not affected by fluctuations in interest, effective tax rates, levels of depreciation and amortization, and items considered to be non-recurring. The economic activity related to our unconsolidated joint ventures is not core to our operations and is the reason we have excluded those amounts. Accordingly, we believe this measure is useful for comparing our core operating performance from period to period. Our presentation of Adjusted EBITDA should not be considered as an indication that our future results will be unaffected by unusual or non-recurring items. Three Months Ended March 31, 2022 2021 (dollars in thousands) Net income (loss) $ 13,061 $ (7,086)Provision (benefit) for income taxes 5,067 (4,065) Interest in cost of sales 6,389 7,067
Equity-relieved interests in net loss (income) of unconsolidated joint ventures
35 353 Interest expense - 11 Depreciation and amortization expense 1,623 914 EBITDA 26,175 (2,806) Purchase price accounting in cost of home sales 17,738 2,801 Transaction costs 948 3,479
Equity in net income of unconsolidated joint ventures, excluding amortized interest
(34) (332) Loss on remeasurement of warrant liability 5,555 4,950 Adjusted EBITDA
$ 50,382 $ 8,092- 34 -
Adjusted net income
Adjusted Net Income to LHC is a non-GAAP financial measure that we believe is useful to management, investors and other users of our financial information in evaluating our operating results and understanding our operating results without the effect of certain expenses that were historically pushed down by our parent company and other non-recurring items. We believe excluding these items provides a more comparable assessment of our financial results from period to period. Adjusted Net Income to LHC is calculated by excluding the effects of related party interest that was pushed down by our parent company, purchase accounting adjustments for acquired work in process inventory related to business combinations, the impact from our unconsolidated joint ventures, merger related transaction costs, gain on forgiveness of PPP loan, and gain (loss) on remeasurement of warrant liability, and tax-effected using a blended statutory tax rate. The economic activity related to our unconsolidated joint ventures is not core to our operations and is the reason we have excluded those amounts. We also adjust for the expense of related party interest pushed down from our parent company as we have no obligation to repay the debt and related interest. Three Months Ended
March 31, 20222021
(in thousands of dollars) Net income (loss) attributable to
Previously capitalized related party interests included in cost of sales
1,517 2,902 Equity in net loss of unconsolidated joint ventures 1 21 Purchase price accounting for acquired inventory 17,738 2,801 Merger related transaction costs - 2,656 Loss on remeasurement of warrant liability 5,555 4,950 Total adjustments 24,811 13,330 Tax-effected adjustments (1) 19,763 8,471
Adjusted net income attributable to
(1) Our adjustments with tax effect are based on our federal rate and a blended state rate adjusted for certain discrete items.
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