There might be some part of his mind that registered Varian's words, but it's the emotions he feels through Luz that helped to really bring those words home. First he feels her returning to herself, feels her humanity, and feels the same desire to stay by her side that he felt when she was still a beast. Then she hugs him, and he feels all those feelings coming from her, backing up everything Varian said.

He begins to shrink. At first, that's the only change that happens, but as he gets smaller, his form becomes more humanoid, first becoming him in his sea monster form. He returns the hug, in that moment just being grateful to have Luz by his side. Then, the dry air automatically triggers his transformation back to human, and as the cold air hits him, he realizes they're standing naked in the middle of town. He pulls back.

"Um...we should probably head back. Before someone sees us."