LGI Homes, Inc.

Q1 2023 Earnings Conference Call

5/2/2023

spk04: Welcome to the LGI Homes first quarter 2023 conference call. Today's call is being recorded and a replay will be available on the company's website at www.lgihomes.com. After management's prepared comments, there will be an opportunity to ask questions. Just press star 1-1 on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, press star 1-1 again. At this time, I'll turn the call over to Josh Fatter, Vice President of Investor Relations and Capital Markets.
spk08: Thanks and good afternoon.
spk05: I'll remind listeners that this call contains forward-looking statements, including management's views on our business strategy, outlook, plans, objectives, and guidance for 2023. Such statements reflect management's current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause management's expectations to prove to be incorrect. You should review our filings with the FDC for a discussion of the risks, uncertainties, and other factors that could cause actual results to differ from those presented today. All forward-looking statements must be considered in light of those related risks, and you should not place undue reliance on such statements which reflect management's current viewpoints and are not guarantees of future performance. On this call, we'll discuss non-GAAP financial measures that are not intended to be considered in isolation or as substitutes for financial information presented in accordance with GAAP. Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the press release we issued this morning and in our quarterly report on Form 10-Q for the quarter ended March 31st, 2023, that we expect to file with the SEC later today. This filing will be accessible on the SEC's website and in the investor relations section of our website. I'm joined on today's call by Eric Lieber, the LGI Homes Chairman and Chief Executive Officer, and Charles Murdian, Chief Financial Officer and Treasurer. I'll now turn the call over to Eric. Thanks, Josh.
spk07: Good afternoon and welcome to our earnings call. Before we get into the details of the first quarter, I want to take a moment to talk about our history. As a company, we've achieved many milestones and accomplishments, and we recently celebrated one of our biggest, our 20th anniversary as a home builder. Twenty years ago, we identified an unaddressed need in the housing market. Throughout the country were thousands of renters who desired the comfort and safety of a home, but believed it was beyond their reach. We founded LGI in the belief that there was a superior way to build and sell homes. Our idea was straightforward, build an affordable product, market directly to renters, and making the buying process simple and transparent. Based on that idea, we started our first community, Somerset Estates. We opened for sales in March of 2003, and the response was overwhelming. Almost immediately, all the homes were under contract, And on April 17th, we closed our first home. Our convictions were validated and the results proved we found a better way to build, market, and sell homes. We averaged 20 closings a month in our first year and closed all 337 homes by our second year. For the next two decades, the success and scalability of our business model has enabled us to become one of the nation's largest and most recognized home builders. Today, we operate in 99 communities, 35 markets, and 20 states, and we're proud to say we've closed over 64,000 homes. We're honored to have played a part in the lives of so many families, and we're grateful they chose LGI to build the place they call home. Looking back, I'm most proud of the people who have joined our organization and committed themselves to help families become homeowners. The work we do here is important. It has the power to improve lives and build better communities. Thank you to our dedicated employees for offering your time, talent, and energy to help make our customers' dreams a reality. Now to our results. The LGI Homes team delivered solid first quarter results and laid the groundwork for a successful year. In the second half of 2022, as rates spiked and demand slowed, Our focus shifted to moving inventory and generating cash through a combination of increased advertising, incentives, price discovery, slowing starts, and reducing home costs. That work is now complete. We closed 1,366 homes and generated over $487 million in revenue, despite starting with limited homes and inventory and our lowest backlog in four years. Company-wide, we averaged 4.7 closings per community per month, which was only slightly below our pre-pandemic first quarter average of 5.1 closings per community per month. Northern California was our top performer with an impressive 9.2 closings per community per month. Seattle was second with 8.1, followed by Dallas-Fort Worth with 6.5, Raleigh with 6.3, and Las Vegas with six closings per community per month. Congratulations to the teams in these markets for an outstanding performance this quarter. In the first quarter, we pivoted from cash generation to driving new orders as demand increased and buyers responded to modest rate incentives, smaller product offerings, lower, more stable interest rates, and our targeted marketing. Our targeted marketing is a point we're spending a minute on. Our marketing team continues to do an outstanding job connecting with new customers. In the first quarter, we generated over 130,000 leads. This is the most leads we've ever generated and is a testament to our ability to connect with interested buyers. As a result, we saw a 12% increase in net sales compared to last year and 148% increase in net orders sequentially. Our pace of net orders in the first quarter was 7.6 homes per community per month, the highest pace we've seen since the first quarter of 2021. In response to the strength and consistency of these demand trends, we started construction on over 1,700 homes. We also began increasing prices in many of our communities as we now pivot to increasing gross margins throughout the rest of the year. I'll now turn the call over to Charles for more details on our financial results.
spk06: Thanks, Eric. During the quarter, we closed 1,366 homes, a decline of 14.6% compared to last year, primarily related to lower absorptions. Other drivers included the lower backlog at the beginning of the year and limited completed homes available to close in March as a result of fewer starts in the third and fourth quarters of last year. The decline was partially offset by a 9.7% increase in our average communities to 97.7. Of our total closings, 103 were through our wholesale channel representing 7.5% of total closings compared to 213 homes or 13.3% of total closings in the same quarter last year. Our West and Northwest segments made up a larger proportion of our closings and revenue during the quarter due to our decision to move existing higher-cost inventory in those markets through a combination of incentives, reduced selling prices, and increased marketing. Revenue in the first quarter was $487.4 million, a decrease of 10.7% compared to last year's strong comp, driven by fewer home closings and partially offset by a 4.5% increase in our average selling price to $356,777. The increase in selling price was attributable to geographic mix, specifically the higher proportion of homes sold in our west segment, higher selling prices overall in our central, southeast, and Florida segments, and the impact of fewer wholesale closings compared to last year. Our first quarter gross margin and adjusted gross margin came in at 20.3% and 22.1% respectively. Adjusted gross margin excludes $6.8 million of capitalized interest charged cost of sales and $2 million related to purchase accounting, together representing 180 basis points. As we guided to on our last call, margins this quarter were similar to what we delivered in the fourth quarter due to our decision to maintain lower prices in some markets, the impact of incentives on selling prices, and to a lesser extent, higher capitalized interest. We expect our gross margin to increase by approximately 100 basis points in the second quarter due to price increases, the benefits of lower overall costs, and expected operating leverage. Combined selling, general, and administrative expenses for the first quarter were $72.8 million, or 14.9% of revenue compared to 11.5% last year. Selling expenses were $42.8 million or 8.8% of revenue compared to 6.3% last year. The increase as a percentage of revenue was related to higher advertising spend and increased headcount and training to support community count growth. General and administrative expenses totaled $30 million or 6.1% of revenue compared to 5.2% last year. The increase as a percentage of revenue was primarily driven by the decrease in revenue relative to last year. Pre-tax net income was $32.3 million, or 6.6% of revenue. Our effective tax rate was 16.7% compared to 21% last year. This was lower than our annual expected rate, primarily due to deductions in excess of compensation costs for share-based payments and federal energy efficient home tax credits, offset by slightly higher state taxes resulting from shifts in our geographic mix. We continue to expect that our full year effective tax rate will range between 23.5% and 24.5%. Our first quarter reported net income was $27 million, or $1.15 per basic share and $1.14 per diluted share. First quarter growth orders were 2,637 and net orders were 2,219. The 12.5% increase in net orders over last year's strong comp was driven by buyers responding to our targeted marketing, incentives, lower prices, and the lower, more stable mortgage rate environment during the quarter. Our cancellation rate for the first quarter was 15.9% compared to 15.6% last year. At March 31st, our backlog consisted of 1,555 homes valued at $561.4 million. Of those homes, 130 or 8.4% of total backlog were related to contracts with single family rental partners down from 374 homes or 15.4% of total backlog at this time last year. Turning to our land position. At March 31st, our portfolio consisted of 69,724 owned and controlled lots, a decrease of 25.2% year over year and 3% sequentially. Of those lots, 57,636 or 82.7% were owned, a decrease of 2.4% year over year and 1.8% sequentially. Of our owned lots, 46,633 were raw land or land under development, with 28% of those lots in active development. Of the remaining 11,003 of our owned lots, 7,349 were finished vacant lots. We closely monitor demand at each community and remain focused on balancing our vertical and completed inventory to align with our current sales pace. As a result, we started construction on 1,712 homes during the quarter. This was a decrease of 26.5% year-over-year, but an increase of 165% sequentially as we quickly ramped up our pace to meet current demand levels. At quarter end, we had a total of 1,628 completed homes, including our information centers, and 2,026 homes in progress. Finally, at quarter end, we controlled 12,088 lots, a decrease of 64.6% year-over-year, and 8.3% sequentially. The decrease primarily resulted from ongoing assessments of our pipeline and continued patience and discipline when evaluating new deals. With that, I'll turn the call over to Josh for a discussion of our capital position.
spk05: Thanks, Charles. We diligently manage our balance sheet and believe it's well positioned with the required flexibility to navigate the evolving environment. We ended the quarter with total liquidity of $358.8 million, including $43 million of cash on hand and $315.8 million of available capacity under our unsecured revolving credit facility. Last Friday, we successfully amended our revolving credit agreement to provide for a $1.13 billion facility, an increase of $30 million through 2025, and extended the maturity for $775 million through 2027. The amendment leaves pricing unchanged, includes a carve out of our single family rental business that will provide up to $100 million of additional borrowing capacity, and includes a $170 million accordion. Our debt to capital ratio was 38.4% at the end of March, with just over $1 billion of notes payable outstanding. our debt-to-capital ratio net of cash was 37.5%. This marked our second consecutive quarter of deleveraging. Since September, we've paid down over $184 million on our revolver and reduced our total leverage by 500 basis points. Finally, at March 31st, our stockholders' equity was $1.7 billion, and our book value per share was $71.14, an increase of 18.2% compared to last year. With that, I'll turn the call back over to Eric.
spk07: Thanks, Josh. We're pleased with the results of our first quarter and encouraged to see that demand trends appear to be returning to normalized levels. The second quarter is off to a strong start. Pending verification of fundings, we expect to announce that we closed 556 homes in 103 active communities in April. Based on our results to date, visibility into our backlog and the ongoing momentum and sales activity, we are increasing our full-year closing and selling price guidance. We now expect to close between 6,300 and 7,100 homes at an average selling price between $345,000 and $360,000. We are focused on increasing margins throughout 2023 and maintain our prior guidance for full-year gross margins between 21% and 23% and adjusted gross margins between 22.5% and 24.5%. We continue to invest in advertising to drive leads and expect to increase our spending as we open new communities. As a result, we now expect our full year SG&A ratio to be in a range between 12.5% and 13.5%. New communities are coming online as demonstrated by the additional four net communities that delivered closings in April. Our continued progress allows us to maintain guidance for between 115 and 125 communities at year end and our expectation that community count will increase an additional 20% to 30% in 2024. I'll close by saying again how proud we are of the incredible people who make up our organization. 20 years of home building excellence is a great achievement, and we thank each of you for your continued dedication to our customers and to our business. Many important goals and milestones still lie ahead, and we look forward to achieving all of them together. We'll now open the call for questions.
spk04: Thank you. At this time, we'll conduct the question and answer portion of our session. As a reminder, to ask a question, you need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
spk08: Our first question comes from Michael Riolo of JPMorgan.
spk04: Your line is open.
spk02: Thanks. Good afternoon, everyone. First question, I just wanted to zero in on the community count growth goals that you've reiterated. Obviously, your lock count has come down significantly over the last year and a half. And if anything, demand has improved, at least from a market level, over the last few months. So how do you see your ability to hit either the low end or the high end of this year, and how much of your growth next year is predicated on perhaps rebuilding some of your lock counts over the next couple quarters?
spk07: Good afternoon, Mike. This is Eric. I can take that question on community counts. Yeah, as far as this year, you know, those communities are already under development. We're very confident in hitting that. You know, four additional communities came online in April, like we said in our prepared remarks. And all of those communities, really the low end of the top end just really depends on how many we get opened and have closings in Q4. But we'll be at the top end of the range in Q1 if it doesn't happen in Q4. And similar for next year, the growth and community count for 2024, we're confident in that 20% to 30% number, because all those communities we already own, most of those are already under development. If they're not under development, they're starting any day. They're getting through engineering as we speak. So our overall lot count being lower has no impact on 2024. Why that's reduced? One, it's because of closings, and also we We canceled or walked from some larger land positions that really would have affected 26, 27, even 2028 closings. And what we're seeing in the market is we're seeing opportunities for smaller lot positions, finish lot opportunities on takedowns. So overall reduction, overall lot count, but more strength and communities coming online sooner.
spk02: Okay. No, that's helpful. Appreciate that, Eric. I guess, secondly, moving to the SG&A guidance, you raised it by 100 bps to 12.5 to 13.5. You know, when I go back and I look at your history, I mean, the last time you did, you know, 13% SG&A was in 2016 when you had revenues of, about 840 million. So just trying to get a sense for, you know, how you're thinking about SG&A in the current environment. Obviously, you know, you're putting a lot more effort into, you know, sales and marketing than, you know, obviously last year where, or the last year and a half where, you know, you didn't need to do that. What's kind of a normalized run rate for SG&A, and would we expect to see any type of leverage next year to the extent you have your return to growth?
spk06: Hey, Mike, this is Charles. I can start. So, yeah, I think you're definitely right that we're spending the additional dollars to invest in advertising as interest rates continue to be on the higher end. And I think, you know, historically we've We've always said that when interest rates tend to rise, our first reaction is going to be to invest more dollars on a per community basis to drive leads. And I think what we've shown this quarter is that that theory is working and driving orders. I think the other piece right now that we're seeing that we haven't seen in the last couple years is that community count is growing fairly aggressively in the near term. As we continue to add new communities back, that's an increase in headcount. I think during the pandemic years, we'll look back and we were more efficient in terms of generating orders on a per headcount basis just because demand was stronger. We didn't need as many people in each individual office. So we're rebuilding our offices from a headcount standpoint. That also is resulting in some additional Training costs, travel costs, we still bring everybody here to Houston for training, so that certainly some inflationary type costs in there related to just it's more expensive to do that than it has been in the past. And I think, you know, as we're thinking about it long-term, you know, where do we see long-term SG&A is I think we look at it in the two components from a selling standpoint, You kind of look at it in that 7% to 8% range is what we would consider kind of our normalized long-term rate. And then from a G&A standpoint, you're going to be in that 4%, 4.5% to 5%, 5.5% range. And it's going to be a timing issue to some extent in terms of periods of higher community count growth. We're going to see that percentage on the higher end of the range. And then as we see the results of leverage, like you mentioned, that will come. So we think SG&A will trend down for the rest of the quarter as a percentage of revenue, typically highest in the first quarter. Guidance implies that SG&A as a percentage of revenue will see some leverage throughout this year, and then we'll kind of reevaluate as we get through the year.
spk02: Great. Thanks so much. You bet.
spk04: Thank you. One moment for our next question. This question comes from Jay McCandless of Wedbush. Your line is open.
spk03: Hey, good afternoon. Thanks for taking my questions. The first one I had, looking at the land bank financing you guys took out starting in 3Q22, it increased to like I think 142 million in the fourth quarter. Maybe where was that balance this quarter and what type of near-term or medium-term gross margin impacts is that type of financing going to have?
spk06: Yeah, great question, Jay. This is Charles. We have about 153 million on the books. That's in our inventory not owned category. You'll see that in the queue. So we've purchased or sold some during the first quarter, but we're not looking to really use that as a meaningful capital tool in the short term. And then we'll reevaluate. I think we have a couple more communities to go that we're looking at. As far as the impact to gross margins, it'd be really nominal in the short run. Those costs are being capitalized against our work in progress and our land under development. So it takes a while for those dollars to ultimately show up through the P&L. And then obviously that would determine what happens with pricing. So we think it will be a nominal effect overall to our capitalized interest.
spk03: All right, thanks. And then the second question I had, it sounds like the consumer demand is coming back pretty strong. Would you say the same thing for your single-family rental partners, and what have you been hearing from those buyers recently?
spk07: Yeah, Jay, this is Eric. Great question. I would say it's as strong on the wholesale single-family rental side. We're still having a bid-ask discovery phase, if you will, where because of the higher rates, the investors aren't willing to meet our price in most cases, but there are signs of that starting to come back. And the other component of that is that the retail business has been so strong that we don't have a lot of inventory to sell to the wholesale operators. So we anticipate wholesale closings being about 5% to 10% of our closings this year.
spk03: And then just the last question I had, we know lumber prices have come down pretty dramatically versus last year. What, besides some of the savings you might be seeing on lumber, any of the other building material costs that are moving in LGI's favor?
spk06: No, no, it's not meaningful, right? I think we would describe our current cost structure as flattish over the last several months. I mean, I think we mentioned on the last call that we, you know, certainly the run-up from pre-COVID to peak, you know, went from that 45% to 60% range in terms of cost acceleration. They have decelerated, but we see certainly in the 25% to 30% range of costs being higher than where they were pre-COVID, and our expectation is that costs will generally remain flat to build the houses from here on out for this year.
spk03: Okay, great. Thanks for taking the questions.
spk04: Yeah, thanks. Thank you. One moment for the next question. As a reminder, to ask a question, please press star 1-1 to your telephone and wait for your name to be announced. Our next question comes from Craig Reichert of BTIG. Your line is open.
spk01: Thanks. It's Carl, but that's okay. Hey, guys. Hope you're doing well. Thanks for the time. Eric, you talked a bit about price increases, and I'd like you to expand on that in terms of the breadth and magnitude of those price increases, whether or not you're able to accelerate them during the quarter, and maybe some particular markets where you're finding pricing power most strong right now.
spk07: Yeah, great question, Carl. Yeah, we're increasing prices nationwide pretty consistently. All markets are seeing strong absorptions, relatively speaking, getting back to normalized levels. Now, we're having to pay for that. You know, we talked a lot about the marketing spend. Charles commented on that and our SG&A expense. But the great news is those dollars that we spend are working, you know, driving 7.6 orders per community. That's been consistent across the country. We talked about our standout markets and the prepared remarks with Northern California at 9.2 and Seattle at 8.1, so certainly strong closings in the West. But pretty consistently raising prices across nearly all of our communities because of the demand. It's pretty simple. We look at how demand is and if most of our houses are under contract in a particular community. We raise prices, and it's gradually, and that's what everybody sees in our gross margin guidance, essentially guiding to a 100 basis point increase in gross margins every quarter to get to our annual guidance.
spk01: So in terms of magnitude, Eric, so what would this be on an average price? How many, you know, what's the dollar count that you were able to raise during one Q?
spk07: Yeah, I think it's 1% to 2% per quarter. We're increasing prices. That's going to flow through. Assuming costs are relatively stable, that's going to flow through to about a 1% increase in gross margins. So 1% to 2% per quarter.
spk01: Okay, super.
spk07: Thank you.
spk01: And then my follow-up is on the community mix. Texas has been shrinking as a percentage of total. You talked about getting more aggressive on moving some units through some higher-priced markets. So where do you sit today as you look out the rest of the year and look at your closings guides and your ASP guide, are we expecting a mixed shift back to Texas on absorptions and therefore lower ASPs, or you've found the pricing, obviously you think you can move units in? Just sort of help me understand the balance between where the units will come from and what the pricing will be. Thanks.
spk07: Yes. Yeah, great question, Carl. Yeah, our ASP, you know, has been very strong. A lot of closings to WAP certainly can't, you know, help that. Our ASP guide for the rest of the year, we raised it, but pretty flat is what we're assuming for the rest of the year compared to Q1. That'll put us in the range of our guidance. Two things that impact ASP is geographic mix. We do think, you know, right now from the sales standpoint leading in the closings, Florida is strong, the southeast is strong, Texas is strong. You know, that has a lower ASPP than the western United States. But it also is dependent on what floor, what rates do, what floor plans the consumers are choosing. We have seen the customers choosing the smaller floor plans in the same communities, and that leads to a lower ASP as well.
spk01: Great. I appreciate it. Thanks very much, Eric. You're welcome.
spk04: Thank you. One moment for our next question. This question comes from Truman Patterson of Wolf Research. Your line is open.
spk00: Thanks. It's actually Paul Schvilsky on. Can you help me bridge the 7.6 order absorption in the quarter versus the 4.6 that you all have for the midpoint of your closing guide for the year?
spk07: Yeah, Paul, this is Eric. I can start and Charles can add to it. The 7.6 orders is certainly very strong. And we think that will come through in the closings over the next 60, 90, 120 days. There's timing to that. You know, the first quarter closings and leading into the start of second quarter is really the pace of sales in Q4 of last year. So I think you'll see the stronger absorption come through starting over the next couple months. And then that'll lead to our annual guidance. I think the other The other part of it, you know, sales are very strong right now, but we need to get margins up. So we don't know where rates are going to go. So we're very confident our Q2 closings, we're very confident our strong sales will lead to strong closings for community over the next three or four months. And then once you get into the fourth quarter, it's really unknown. We're optimistic. Things are trending in the right direction. Our systems and processes and training we have in place is certainly working. But we have sold very few homes for Q4. So really, what's the market look like over the next 90 days? And we build in some conservatism into Q4 closings because we're not sure where rates are going to be. We're not sure what that looks like.
spk00: Is it fair to assume that given where one quarter of border resources are that you will incrementally push pricing to kind of bring that down closer to maybe the six, six and a half range? Or will you let things run for a while?
spk07: I think pricing is a component of two things. One, the absorption per community. It's also inventory, you know, where pricing and margins really come into play and what we need to do in the fourth quarter for reduction of pricing that came through with Q1 closings is, you know, you have standing inventory. You know, we're 100% spec builder. I know other builders are starting to build more spec. Our inventory is really in good shape right now. We're ramping up starts, and we'll keep raising prices as long as the orders are there. But once you get to the point where you have finished inventory sitting in a community, then that's when you have to do some price discovery and really start moving some of that inventory to generate some cash.
spk00: Okay. And good job on the debt reduction. But looking forward with the aggressive community account growth this year and you know, the WIP that you're going to be putting into those communities, how much of that, you know, do you think you'll reverse over the coming 12 months to get those communities lined up with the right inventory?
spk05: It's going to continue. Sorry, this is Josh. Paul, it's going to continue to be a balance with our priority being on that community count growth. That's always going to be our number one objective. And then second to that, it's going to be maintaining our leverage in that 35 to 45 percent range. So, There is the expectation it could move around a little bit, but obviously that depends on where sales go, where deliveries go during the quarter, and how much cash flow we're generating from that side of the business, and then anything on the land acquisition side after that.
spk00: Okay. And just a final one. Given your lower ASP, do you expect any kind of benefit from the FHFA's new loan level pricing?
spk05: We do not.
spk00: Okay. I didn't think so, but I figured I'd ask. All right. I appreciate it.
spk04: Thank you. At this time, I'm not showing any further questions in our queue, so I will turn it back over to Eric Lever for closing remarks.
spk07: Thanks for everyone participating on today's call, and have a great day in your continued interest in LGI Homes. Thank you.
spk04: This concludes LGI Homes' first quarter 2023 conference call. Do have a great day, and you may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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