Description

No need for an overly detailed writeup on what we believe is a pretty simple story. Please feel free to request additional detail in the VIC comments section. 

Landsea Homes (LSEA) is a classic set up for value investors.

1. It trades at a deep discount to both intrinsic and tangible book value

2. Its discounted valuation is a function of being orphaned rather than due to some misstep or disappointment that caused investors to flee

3. It operates in an industry institutional investors care about and offers enough float and market cap for investors to get involved

4. It has a secular and cyclical wind at its back

5. It possesses very strong balance sheet allowinh it to pursue its business model without needing access to the capital markets

Landsea is a homebuilder focused on entry-level and move-up purchasers.

• It is focused on attractive growth markets, specifically Silicon Valley and Arizona.
• It offers high performance homes at an affordable price including a unique partnership with Apple (AAPL) to pushdown home automation to entry-level homes.
  • For what it’s worth it also builds homes highly rated for sustainability including enhanced energy efficiency and low-waste building practices that have been an effective inducement for millennial purchasers.
• It’s net debt-to-cap is just ~20% despite the fact that it already owns or controls the lots necessary to pursue its growth plan over the next several years.
• It owns and/or controls all the lots necessary to pursue robust growth over the next several year.  

Given these attributes, we might find Landsea an interesting growth story if it traded at a peer average valuation, although we would not consider it worthy of a VIC writeup. However, at just 73% of tangible book we can strongly reccomend accumulating shares before this, as of now totally ignored builder, attracts the attention of investors looking for a high quality, low cost way to play the de-urbanization trend. 

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So what’s the hitch as there is always at least one? Landsea was acquired by a SPAC and just recently de-SPAC’d. Given the newly public company’s price performance out of the gate, it appears the sponsors did a less than adequate job of building pent up demand for the builder once it came public. As such, there may be some SPAC-taint to overcome. We are ok with this as we suspect it is the reason the opportunity exists.

Prior to the closing of the SPAC transaction we had several meetings with management and posed as buyers at two distinct Landsea developments. We were impressed both by the detailed growth plan management laid out. In particular, we view COO Michael Forsum as one of LSEA's most valuable assets. Mr. Forsum has successfully executed similar strategies at Taylor Morrison, Ryland Homes and KB Homes. We strongly suggest investors schedule a call with CEO John Ho and Mr. Forsum to fully understand the wash, rinse, repeat nature of their go to market strategy. Further, we have toured two distinct Landsea developments (posing as potential) and came away impressed by the modern aethetic of the homes and even more so by the pace at which the homes/lots we toured went under contract.  

Importantly, we believe LSEA currently possesses all the resources necessary to pursue its growth plan. With 2-3 years of lots owned and controlled the company has the land inventory to deliver the 4,500-5,000 homes we expect over the next two years. Further, at just ~20% net debt-to-cap, it has more than ample dry powder to continue to organically grow in its current markets through land and lot acquisitions and selectively roll out its innovative product to new growth markets (think Texas and Florida) partially through tuck-in acquisitions. We would find the value far less compelling if the model was contingent on access to the equity market even if it were several years down the road.

What’s it worth? We don’t like to assume deeply discounted equities are simply going to re-rate to peer valuations to generate our expected return. Rather, we prefer the margin of error of the assumption that an asset can remain undervalued and still drive an attractive return. As such, we view a valuation framework of just 1.0x 2022 tangible book value and/or 7x 2022 EBITDA to be sufficiently conservative given LSEA’s superior growth profile and attractive niche. These metrics lead us to a fair value range of $14 (7x EV/EBITDA) to $15 (2022 tangible book value) or a total return of 56-68%. This seems more than sufficient given balance sheet strength and our line of sight on deliveries over the next 24 months.          

Catalyst

1. Research coverage

2. Q4 results showing strong orders momentum

3. Insider purchases given the discounted valuation