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spk11: Welcome to the LGI Homes fourth 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. I'll now turn the call over to Josh Fatter, Vice President of Investor Relations. Please go ahead.
spk03: Thanks and good afternoon. I'll remind listeners that this call contains forward-looking statements, including management's views on LGI Home's business strategy, outlooks, plans, objectives, and guidance for future periods. Such statements reflect management's current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause those expectations to prove to be incorrect. You should review our filings with the SEC 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 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 annual report on Form 10-K for the period ended December 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 today by Eric Lieber, LGI Homes Chief Executive Officer and Chairman of the Board, and Charles Murdian, Chief Financial Officer and Treasurer. I'll now turn the call over to Eric. Thanks, Josh.
spk02: Good afternoon, and welcome to our earnings call. We are pleased to report that we delivered a strong fourth quarter that successfully achieved all of our operational and financial guidance targets for the full year. We also laid the foundation for considerable community account growth and continued profitability for many years to come. As we prepared for today's call, we reflected on original full year guidance from February of last year. Looking back, it's worth highlighting how well our teams across the country navigated the headwinds executed our strategy, and outperformed our initial expectations. At the beginning of last year, we expected to close between 6,000 and 7,000 homes. We delivered 6,729 homes, the high end of our original guidance, and an increase of 1.6% year-over-year. We expected ASPs between $335,000 and $350,000, and we exceeded that range. We generated revenue of $2.4 billion, an increase of over 2 percent compared to last year, making us one of the few public homebuilders who delivered year-over-year growth in both closings and revenue in 2023. The trend of outperformance continued when it came to our profitability targets. At this time last year, we expected gross margin to range between 21 and 23 percent, and our actual result was at the top end of that range. We expected adjusted gross margin between 22.5% to 24.5%. Through a continued focus on improving profitability throughout the year, we exceeded the high end of that range, delivering 24.7%. We averaged 5.4 closings per community per month last year, an industry-leading pace that demonstrates the effectiveness of our systems, processes, and people in a challenging and uncertain market. Our top five markets this year were Dallas-Fort Worth with 9.1 closings per community per month, Charlotte with 8.6, Northern California with 8.3, Fort Pierce with 8.1, and Las Vegas with 7.3. Congratulations to the teams in these markets on your outstanding results. In 2023, our geographic footprint continued to grow. We added a new market and a new state to our map with our first closings in Salt Lake City, Utah. At the time of our initial public offering in 2013, we were operating just eight markets across four states. Since then, we've successfully replicated our systems and culture across the country and are now active in 36 markets across 21 states. Salt Lake City marks another significant milestone in the growth of our company, and we look forward to providing more updates on future calls. Throughout 2023, we made considerable progress growing our community count and ended the year with 117 active communities, an increase of 18.2% year-over-year. And we're not slowing down. Expanding community count remains at the forefront of our objectives. While the land required to drive our growth for the next several years is already owned and under development, there's more work to do. We continue to invest in our long-term growth and are taking advantage of opportunities as they arise. Before handing the call over to Charles, I'll share one additional highlight. The success of our business model has been clearly demonstrated by a number of impressive metrics, but I'll draw your attention to one in particular. Despite expanding our operational footprint significantly, quadrupling our closings, and increasing our community count by a factor of nearly seven times, we have never taken an inventory impairment, not as a public company and not as a private company before that. Even with the challenges and uncertainty of the last 18 months, the conservative and disciplined framework of our acquisition strategy has proven extremely dependable at selecting and delivering lots that meet or exceed our profitability and return metrics, and we expect that to remain the case in the future. With that, I'll turn the call over to Charles for additional color on our financial results.
spk05: Thanks, Eric. Here are more details on our fourth quarter results. Revenue was $608.4 million, an increase of 24.6 percent year-over-year, reflecting a 21.4 percent increase in closings to 1,758 homes, and a 2.6 percent increase in our average selling price to $346,083. Our ASP was 1.9 percent lower sequentially, reflecting a higher level of incentives offered in the fourth quarter as mortgage rates climbed into the mid-sevens in October and November. We closed 298 homes through our wholesale business in the fourth quarter, representing 17% of our total closings, compared to 431 homes, or 29.8% of our total closings in the fourth quarter of last year. Gross margin as a percentage of sales in the fourth quarter was 23.4%, compared to 20.7% in the same period last year. I'll remind listeners that during the fourth quarter of 2022, we decided to move older, higher-cost inventory, resulting in lower overall margins. The 270 basis point improvement was also driven by our continued focus this year on improving the incremental profitability on every home sold and fewer wholesale closings. Gross margins were 230 basis points lower sequentially primarily due to higher financing incentives offered to buyers in the fourth quarter. Adjusted gross margin in the fourth quarter was 25.1%. Adjusted gross margin excludes $8.9 million of capitalized interest charged to cost of sales and $981,000 related to purchase accounting, together representing 170 basis points. Combined selling general and administrative expenses were 13.6% of revenue, Selling expenses were $49.8 million, or 8.2% of revenue, compared to 6.8% of revenue in the fourth quarter of 2022. The increase as a percentage of revenue was driven by increased spending on advertising and higher outside commissions. General and administrative expenses totaled $33 million, or 5.4% of revenue in the fourth quarter, compared to 5.5% of revenue in the same period last year. Pre-tax net income for the fourth quarter was $68.5 million, or 11.3% of revenue. Fourth quarter net income was $52.1 million, or $2.21 per basic share and $2.19 per diluted share. Highlighting a few full-year results, revenue was $2.4 billion, an increase of 2.3%, driven by a 1.6% increase in home closings, and a 0.7% increase in our full-year average sales price to $350,510. During the year, we closed 679 homes through our wholesale business, representing 10.1% of our total closings and generating $202.3 million in revenue. We currently expect our wholesale business will represent approximately 5% of our total closings in 2024. Our full year gross margin was 23% and adjusted gross margin was 24.7%, both in line with the guidance we provided on our last call. Combined selling general and administrative expenses were also in line with our guidance at 13.1%. Our pre-tax net income for the year was $261.8 million or 11.1% of revenue. Our effective tax rate last year was 23.9% in line with the guidance we provided on our last call. And finally, our 2023 net income was $199.2 million, or $8.48 per basic share and $8.42 per diluted share. Fourth quarter gross orders were 1,561. Net orders were 971. and the cancellation rate during the quarter was 37.8% compared to 37.5% during the same period last year. The full year cancellation rate was 25.4%, generally in line with our historical average. We ended the year with 590 homes in backlog valued at $224.9 million. Decrease in homes was primarily due to fewer wholesale contracts included in our backlog at the end of this year compared to last. Turning to our land position, at December 31st, we owned and controlled a total of 71,081 lots, a decrease of 1.1% year-over-year and 1.4% sequentially. We ended the quarter with 55,331 owned lots, a decrease of 5.8% year-over-year and 1.7% sequentially. Of our owned lots, 41,155 were raw land or land under development, and approximately 25% of those lots were actively being developed, and about 46% were in engineering at year end. Of the remaining 14,176 owned lots, 10,749 were finished vacant lots. During the quarter, we started 705 homes and finished the year with 3,427 completed homes, information centers, or homes in progress. Finally, at December 31st, we controlled 15,750 lots, an increase of 19.5% year-over-year. With that, I'll turn the call over to Josh for a discussion of our capital position.
spk03: Thank you, Charles. We ended the year with over $3.1 billion of real estate inventory and total assets of over $3.4 billion. In November, we issued $400 million of 8.75% senior notes and used the net proceeds to pay down borrowings on our revolver. The new notes mature in 2028 and are callable beginning late next year. Concurrent with the new issuance, we successfully amended our credit agreement, returning a previously non-extending lender back into our bank group and increasing total commitments on the facility from $1.1 to $1.2 billion through 2025 and extending the maturity for $960 million of those commitments through 2028. Taken together, these two transactions create additional depth and flexibility within our capital structure and provide significant additional liquidity to support our long-term profitability-focused growth. As of December 31st, our total debt was $1.25 billion, resulting in a debt-to-capital ratio of 40.2% and a net debt-to-capital ratio of 39.3%. The total liquidity was $403.8 million, including $49 million of cash on hand and $354.8 million available to borrow under our revolving credit facility. Finally, we ended the quarter with nearly $1.9 billion in total book equity and a book value per share of $78.71. With that, I'll turn the call back over to Eric.
spk02: Thanks, Josh. We're pleased with the strong results we delivered in 2023. It was a challenging year, but our success in meeting or exceeding all of our operational and financial targets reflects the effectiveness of our systems and people and gives us confidence as we head into 2024. Before sharing our outlook, I'll provide some color on what we're currently seeing in the market. As shown by our January closings, the first quarter got off to a slower start. There were several contributing factors, including pronounced seasonality in December leads, fewer wholesale closings, the closeout of some higher-performing communities, and new openings that are still in the early stages. However, I'm pleased to say since the beginning of February, we've seen a significant increase in leads and traffic. We remain focused on keeping homeownership affordable, utilizing our expertise in reaching and serving the first-time homebuyers. Through the first three weekends of February, our leads are up an average of over 73% compared to the prior two months, and last weekend was the best sales week of the year, driven by our investment in targeted advertising and introduction of new solutions to combat affordability headwinds for our customers. With those points in mind, I'll share our outlook for 2024. Our plan remains anchored in our strategy of driving affordability, increasing profitability, and building on the significant groundwork we laid in 2023 for community account growth over the next several years. For the full year, we expect closings to be up by double digits, and plan to deliver between 7,000 and 8,000 homes. Once again, community count will be up significantly this year. We expect to grow community count by 25% to 30% and end 2024 with approximately 150 active selling communities. Selling prices will be higher this year as we balance affordability and focus on increasing margins and offsetting expected cost inflation. Based on our backlog, planned product mix and expected community openings, we are guiding to a full-year average sales price between $350,000 and $360,000. While few builders have set out a full-year gross margin target, we once again plan to increase margins. We currently expect full-year gross margins between 23.1% and 24.1%, and adjusted gross margins between 25% and 26%. SG&A expenses are expected to range between 12.5% and 13.5% as we invest in personnel, training, and advertising to support our growing number of communities. Finally, we expect the full-year tax rate will range between 24% and 25%. Similar to this time last year, our guidance targets reflect our current view of the market and what we believe is attainable if conditions remain the same for the rest of the year. As a result, we have complete confidence in our ability to meet or exceed all the metrics we've presented. I close by thanking our employees for their commitment and enthusiasm this past year. At the end of the day, our achievements are the results of our people and their dedication to our company. We thank them for their excellent performance last year and look forward to all that we'll accomplish together in 2024. Operator, please open the call for questions.
spk11: Certainly. As a reminder, to ask a question, please press star 1-1 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. And one moment for our first question. Our first question will be coming from Paul Prabilski of Wolf. Your line is open.
spk06: Thank you. I guess, first of all, your guide for this year on closing supplies about you know, 4.2 absorptions at the midpoint. You know, typically I think your goal has been around six. Is that a, you know, change in your strategic thinking, you know, demand environment, focus, so, you know, price over pace, any color you can add there?
spk02: Yeah, Paul, this is Eric. It's a great question. I think our numbers are a little bit different from yours, and I'll talk through that. You know, our pace in 2023 was 5.4, which we're pretty excited about because our ASB being the highest it's ever been and opening a lot of new communities. And when we looked at guidance for 2024, Starting the year, you know, a good comparison, we think we're going to be in an affordability challenge market similar to what we were in 2023. And if we did 5.4 in 2023, confident in our community count growth to 150 active communities, we do believe it's going to be back-end loaded. So the average community count is probably a little bit higher or, excuse me, lower than what you're thinking. And we think a range of 4.5 to 5.3 is actually where our guidance is. based on how we think the community count is going to flow. Also another factor in that is LGIs living our wholesale business. Our expectation is that's about half of the volume it was in 2023. And then with all the new communities opening, our expectations are all of these new communities, the absorption pace is slower. So 5.4 last year, a range of 4.5 to 5.3 this year. We think it's a very good way to start the year with guidance.
spk06: Okay, fair enough. You know, and then going to your gross margin guide, obviously it's flat to up year over year. I think, you know, some of your peers are talking down those expectations given, you know, higher land costs flowing through. I guess what's different about your current setup that would allow you to buck those trends?
spk02: Yeah, I think a couple things, Paul. First of all, we do a lot of development work. You know, we think it's important to capture that development profit. We think we need to incentivize the customers through incentives to get that mortgage rate and buy downs as low as possible. But we don't think that needs to be more than we have been doing in 2023. And I think we need to take a cautious approach to that. You know, these finished lots and the inventory that we have around the country, those are very valuable assets. So I think we're going to be cautious about discounting them too much. And certainly, if we did a lot of discounting and threw even more incentives at the customer, that pace per community would probably increase. But I think we need to be protective of our gross margin. And that's one of the positive things about LGI right now is we're anticipating gross margin midpoint of a range being higher in 2024 than 2023, plus all the community count growth.
spk06: Okay. And one last one. You've got nice community count growth this year. How does that set the stage going into 2025? Will you be able to maintain community count growth, or are you kind of pulling some stuff forward? Any color or guidance?
spk02: Yeah, no pulling it forward from a standpoint of we still expect community count growth in 2025. The 150 communities are somewhat baked in. Almost all of those are completely developed. A lot of those construction has begun on the site. So we expect those 150 communities to have closings by the end of the year. And then we expect community count growth again next year as well. Thank you. Appreciate it. You're welcome.
spk11: And one moment for our next question. And our next question will be coming from Ken Zinner of Seaport Research. Your line is open.
spk09: Hello, everybody.
spk13: Good morning.
spk16: Your comments about not having impairments, that's worthwhile making. I mean, I have to think about it, but it is an impressive statement. I'm not sure I was aware of that, so good for you guys. Why aren't we seeing perhaps better SG&A leverage? Because it looks like it's kind of flat year over year. And with your, I believe you're selling, right? It's where you're absorbing kind of a lot of the increase. It doesn't seem like you're really expecting that to go down much, or are you in your SG&A guidance? Because you're getting more leverage on your communities than you've been investing for, I assume. So talk to that dynamic, if you would.
spk05: Yeah, great question, Ken. This is Charles. So a couple of things. One is we're spending more on advertising this year or expect to this year than we did in 2023. So that trend started to increase mid-year last year as we started in the second and kind of third quarters and increased into the fourth quarter. We also are increasing community count as well. So we're investing in growth in people, The community count comes faster, to Eric's point about the absorption, than the revenue does. So we'll be investing ahead of the closings as well. So those are really the two biggest pieces.
spk16: Is the advertising increase expected to offset your revenue? absorption from the people that you've already invested in? And where does that leave your incentive assumption? I guess that's where I'm kind of thinking about those three pieces working together.
spk05: Sure. Yeah. So in terms of the incentive assumptions, the incentives are flowing into net revenues. So not in the SG&A line. So that affects the average sales price. So the assumptions on ASP increasing incentives. And we would expect overall incentives to generally be similar in 2024 as they were to the average for 2023. And then in terms of personnel growth, advertising spend, we're investing in driving leads. So our marketing team is actively monitoring what we're spending and where we're spending it. to drive leads to our communities. So we're just budgeting in that we're expecting to use our full budget this year. In some years in the past, we haven't had to use it. For example, during the COVID years, we saw a lot of favorable results in that spend because we didn't need to spend it. But for 2024, we're expecting that we're going to spend our full budget.
spk16: Good. And if I could ask, I guess, more of another question. It goes to the balance sheet. And you guys, you know, self-developed land, I think your statement around impairments backs why you do that up a lot. And I'm just trying to set your balance sheet. So one of the ways I think about that is, you know, your units and inventory at about $3,500 or $3,427. Where do you think... if you can help us understand your kind of thinking process, like where do you think that would be? Cause I mean, that was, you know, as high as 4,800 and two Q 22. And I'm asking relative to your own lot count, which is like eight years supply right now, but you ran out of land. So, you know, your pace came down. Do you think your own lots are going to be basically the same and you're just picking up your closing pace? So your own lines loans own lot supply will go down. And I, asked about the units under construction, because that's obviously another part of your balance sheet, if you could address that in terms of where you think that might be at the end of the year. Thank you very much, guys.
spk05: Yeah, sure. Ken, I can take this one as well to start with. So out of our $3.1 billion in inventory, about $2.1 of it is invested in raw land, land under development, and finished lots. So really when you break down the owned lots, we do that in the prepared remarks of breaking the 55,000 lots down, 41,155 of them are in either a raw stage or under development. That would include either truly raw, still the cornfield, future sections, that type of status, or in engineering, which is a low-cost investment way to be ready for future active development. Only 25% or roughly about 10,000 of our owned lots are under development. So we think we are in good shape in terms of managing the delivery of those lots to be able to satisfy the expected demand in terms of what we think for not just 2024, but going into 2025 and bring the engineered lots into active development so that we can pace that accordingly with what we think our closing results are going to be for the next couple of years. And then shifting over to vertical, we managed to about six months worth of inventory. So just over 3,400 units from an implied midpoint or low point of our guidance would be just shy of six months. So a slower start to the year that Eric mentioned that pace is expected to increase in terms of the start pace as we introduce new communities later on throughout the year. But the way we think about it is the $800 million we have invested in vertical represents a six-month supply of where we think closings are going. Thank you.
spk11: You bet. One moment for our next question. And our next question will be coming from Michael Rahal of JPMorgan. Your line is open, Michael.
spk12: Thanks. Good afternoon, everyone. Good afternoon. First, I wanted to kind of just dial in a little bit on the closings and the pace of community openings in 24. Um, Eric, you know, and you're, you know, you have the guidance out there of, of, uh, growth rate range of, uh, four to 19%. And, you know, Eric, I don't know if it was intentional or not, or you're just referring to the midpoint, but you kind of described your outlook for community. I'm sorry. Closings growth this year is double digit. Um, so I don't know if that was just referring to the midpoint or, you know, your. maybe higher conviction of kind of hitting the upper half of that range. I don't know if that's kind of one way to look into that. But wanted to get a sense for, you know, your level of conviction, let's say, of hitting the upper half, if indeed you really do expect kind of to hit that, you know, let's say 7,500 to 8,000 range, let's say. And, you know, how does the community count openings? You said it was back half-weighted. how should we think about that, you know, getting to 150? You know, where would we be, let's say, mid-year?
spk02: Yeah, it's a great question, Michael. Appreciate you asking it. A couple comments. You know, first of all, I think we agree with you. We hope closings, our closing guidance is conservative, you know, and that's the way we believe it always should be. So, yes, when we were talking about double-digit growth, that was referring to the midpoints. Community count growth, we do expect to be back unloaded. As an example, one of the exciting things that the team's gearing up for here is we've got 18 new community sales openings in the month of March. And we would expect all 18 of those to be active communities in Q2 of this year, and then adding in Q3 and Q4. So February community count is probably going to be similar to January community count. So really ramping up throughout the rest of the year. primarily in the back half. So those are a couple of exciting things. And yeah, if we perform the way we're supposed to, leads are up, sales last week were really positive, you know, midpoint to high end of the guidance range is certainly possible. And that's the goal.
spk12: Great, great. And then, you know, on the community count, you know, I think previously you had talked about getting to above 180 by the end of 25, is that still kind of the goal there? Or, you know, I know that in an earlier question you just said growth, but, you know, I think you've been more explicit in other calls and kind of looking at getting to, you know, that 180 mark or better.
spk02: Yeah, another great question, Michael. We chose not to say 180 specifically for community count growth, the following year. Part of the reason is, you know, we are very opportunistic, very selective on new acquisitions. You know, we talked about never taking an inventory impairment in our life of LGI, which is hats off to the acquisitions and development teams across the nation for pulling that feed off, and we're very proud of that. So we're cautious in our buying right now. And that being said, you know, it really depends on what new acquisitions look like, you know, for the next six to 12 months. So 180 is possible, but we would have to buy some new deals and keep adding community count to hit that number the year after.
spk12: Okay. I appreciate that. A couple of other quick ones, if I can squeeze in. I wanted to know, number one, if you could give us any sense of how February is tracking in terms of closings for the month. um you know about another 10 days or so or eight days perhaps eight nine days to close out um and also you know the interest amortization um usually it's in the low ones um and it looks like based on guidance you're looking more like two percent uh ish and just wanted to make sure you know i had that right as well yeah i can take the the first part of the questions on closings for february um
spk02: January sales were not as robust as we'd like, Mike. So January closings were lighter. In February, we expect to close probably around 350, which is up from January down from last year's February. And then sales last couple weeks have been very strong in the month of February, and that will lead to March. And we believe we can increase closings year over year in the month of March.
spk05: And I can take the interest question for you, Mike, is, you know, we expect a lot of these new communities were projects that we developed. So as interest rates increased over the last year or so, that interest has been capitalized against these development projects, and we expect them to start coming through the income statement. So we do expect interest to tick up both just from the sheer volume of development communities plus a higher cost of debt capital. And then purchase accounting is a small factor into that delta in the guidance as well. And we would expect that absolute number to generally be about the same year over year. So it will be a smaller portion. So a little bit higher on the interest coming through and a little bit smaller on purchase accounting. Great. Thanks so much. You bet.
spk11: And one moment for our next question. And our next question will be coming from Jay McCandless of Wedbush. Jay, your line is open.
spk15: Hey, good afternoon, everyone. So my first question, Eric, when you were talking about the sales decline in January, you said that December leads were pretty soft, which I was surprised to hear because most of your competitors talked about volume and interest levels really picking up in December. So maybe if you could give us some more depth on that, please.
spk02: Yeah, I think we just didn't see that, Jay. I think part of it is we were really focused on ending the year strong and getting to that over 6,700 closings last year, which we were proud of. That's what we said we're going to do. It allowed us to increase closings year over year. And we just didn't see the strong sales pace in December. It's very typical for us, certainly around the holidays and the first year for sales and orders to slow down. But that's just what we saw. It's been a lot better in February.
spk15: And then I think part of what you talked about also is maybe some new incentives and or affordability plays that you guys could have with the customers. Maybe talk more about that. And then to take it a step further from that, there is a significant amount of multifamily supply that's going to be hitting the market this year. You know, what is the strategy or strategies to defend against that and continue to pull in what I still believe is your core customer into the LGI neighborhoods?
spk02: Yeah, I think a couple things there is, Jay, we're always going to be talking to our customers about the advantage of a homeownership versus renting. I mean, if there's more supply of rental houses out there or rental units, apartments, we're still going to continue to talk about the value of homeownership. Right now, affordability is strained. The gap between the monthly payments that get into homeownership compared to renting an apartment is probably the widest it's ever been, or certainly the widest over the last 12 months or so. And that's a challenge for us, and that goes back to a lot of the previous discussions that we've had. How do you combat that challenge? Well, you spend more money on advertising. You drive more leads to our communities, because we're probably going to have to talk to more people in order to get customers that are qualified. We're also working on smaller square footage houses. We've talked about that on a couple previous calls. A percentage of houses under 1,500 square foot that we sold in 2021, that was 21% of our houses were under 1,500 square feet. In 2023, that was 29%. And that trend is likely to continue into 2024. So that's some of the tools that we have. It's increased spending on marketing, doing more training, looking at smaller square footage in order to keep that absorption pace up.
spk13: Okay. Okay, that's all I had. Thank you. Thanks, Jay.
spk11: And one moment for our next question. And our next question will be coming from Alex Barron of Housing Research Center. Your line is open.
spk08: Yes, thank you.
spk14: Yeah, I was hoping you guys could share how many homes you guys have under production and how many of those are completed specs.
spk05: Yeah, sure. We've got about 1,400 that are homes in progress and 1,850 completed homes.
spk04: Okay, so a total of $32.50? Yeah, and then the rest would be information centers to get to a $34.20.
spk14: Okay, great. And then I guess, you know, just philosophically speaking, given everything that's going on right now, are you guys more inclined to, you know, try to preserve margins or try to, you know, preserve a sales pace? you know, to maintain volume, even if that affects margins?
spk02: Yeah, Alex, it's a great question. I think it's what margin you're talking about. And we're protective of gross margin. You know, we want to maintain our sales pace. And for us, that means, you know, looking at mortgage incentives, it also means spending more money on advertising. So because we'd like to maintain the pace and also keep our adjusted gross margin high as well, but probably more towards the margin right now. We're starting to see some appraisal challenges across the United States, but it's still a very minimal amount. So we're comfortable at our sales prices that we're getting good value to our customers. But we're watching that and we'll have to adjust accordingly. The market dictates that we do so.
spk14: And in terms of incentive, roughly how much, you know, are they as a percentage of your sales price?
spk02: Yeah, I think there's a couple different factors there. You know, we've done big forward commitments before. Our typical incentive, I'd say on average, is 2% to 3% of the sales price, and you're really just focused on getting that monthly payment as low as possible. But that would be a good average.
spk07: Got it. All right. Well, best of luck then.
spk02: Thanks, Alex.
spk11: Thank you. And at this time, I'm not sharing any further questions. I would like to hand the call back to Eric for closing remarks.
spk02: Thank you to everyone for participating on the call today, and for interest in LGI homes, have a great day. Thank you.
spk11: Ladies and gentlemen, thank you for participating in today's conference. Thank you. music music
spk00: Thank you Welcome to the LGI Homes Fourth Quarter 2023 Conference Call.
spk11: 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. I'll now turn the call over to Josh Fatter, Vice President of Investor Relations. Please go ahead.
spk03: Thanks and good afternoon. I'll remind listeners that this call contains forward-looking statements, including management's views on LGI Home's business strategy, outlooks, plans, objectives, and guidance for future periods. Such statements reflect management's current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause those expectations to prove to be incorrect. You should review our filings with the SEC 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 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 annual report on Form 10-K for the period ended December 31, 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 today by Eric Lieber, LGI Homes Chief Executive Officer and Chairman of the Board, and Charles Murdian, Chief Financial Officer and Treasurer. I'll now turn the call over to Eric.
spk02: Thanks, Josh. Good afternoon, and welcome to our earnings call. We are pleased to report that we delivered a strong fourth quarter that successfully achieved all of our operational and financial guidance targets for the full year. We also laid the foundation for considerable community account growth and continued profitability for many years to come. As we prepared for today's call, we reflected on original full year guidance from February of last year. Looking back, it's worth highlighting how well our teams across the country navigated the headwinds, executed our strategy, and outperformed our initial expectations. At the beginning of last year, we expected to close between 6,000 and 7,000 homes. We delivered 6,729 homes, the high end of our original guidance, and an increase of 1.6% year-over-year. We expected ASPs between $335,000 and $350,000, and we exceeded that range. We generated revenue of $2.4 billion, an increase of over 2 percent compared to last year, making us one of the few public homebuilders who delivered year-over-year growth in both closings and revenue in 2023. The trend of outperformance continued when it came to our profitability targets. At this time last year, we expected gross margin to range between 21 and 23 percent, and our actual result was at the top end of that range. We expected adjusted gross margin between 22.5% to 24.5%. Through a continued focus on improving profitability throughout the year, we exceeded the high end of that range, delivering 24.7%. We averaged 5.4 closings per community per month last year, an industry-leading pace that demonstrates the effectiveness of our systems, processes, and people in a challenging and uncertain market. Our top five markets this year were Dallas-Fort Worth with 9.1 closings per community per month, Charlotte with 8.6, Northern California with 8.3, Fort Pierce with 8.1, and Las Vegas with 7.3. Congratulations to the teams in these markets on your outstanding results. In 2023, our geographic footprint continued to grow. We added a new market and a new state to our map with our first closings in Salt Lake City, Utah. At the time of our initial public offering in 2013, we were operating just eight markets across four states. Since then, we've successfully replicated our systems and culture across the country and are now active in 36 markets across 21 states. Salt Lake City marks another significant milestone in the growth of our company, and we look forward to providing more updates on future calls. Throughout 2023, we made considerable progress growing our community count and ended the year with 117 active communities, an increase of 18.2% year-over-year. And we're not slowing down. Expanding community count remains at the forefront of our objectives. While the land required to drive our growth for the next several years is already owned and under development, there's more work to do. We continue to invest in our long-term growth and are taking advantage of opportunities as they arise. Before handing the call over to Charles, I'll share one additional highlight. The success of our business model has been clearly demonstrated by a number of impressive metrics, but I'll draw your attention to one in particular. Despite expanding our operational footprint significantly, quadrupling our closings, and increasing our community count by a factor of nearly seven times, we have never taken an inventory impairment, not as a public company and not as a private company before that. Even with the challenges and uncertainty of the last 18 months, the conservative and disciplined framework of our acquisition strategy has proven extremely dependable at selecting and delivering lots that meet or exceed our profitability and return metrics, and we expect that to remain the case in the future. With that, I'll turn the call over to Charles for additional color on our financial results.
spk05: Thanks, Eric. Here are more details on our fourth quarter results. Revenue was $608.4 million, an increase of 24.6 percent year-over-year, reflecting a 21.4 percent increase in closings to 1,758 homes, and a 2.6 percent increase in our average selling price to $346,083. Our ASP was 1.9 percent lower sequentially, reflecting a higher level of incentives offered in the fourth quarter as mortgage rates climbed into the mid-sevens in October and November. We closed 298 homes through our wholesale business in the fourth quarter, representing 17% of our total closings, compared to 431 homes, or 29.8% of our total closings in the fourth quarter of last year. Gross margin as a percentage of sales in the fourth quarter was 23.4%, compared to 20.7% in the same period last year. I'll remind listeners that during the fourth quarter of 2022, we decided to move older, higher-cost inventory, resulting in lower overall margins. The 270 basis point improvement was also driven by our continued focus this year on improving the incremental profitability on every home sold and fewer wholesale closings. Gross margins were 230 basis points lower sequentially primarily due to higher financing incentives offered to buyers in the fourth quarter. Adjusted gross margin in the fourth quarter was 25.1%. Adjusted gross margin excludes $8.9 million of capitalized interest charged to cost of sales and $981,000 related to purchase accounting, together representing 170 basis points. Combined selling general and administrative expenses were 13.6% of revenue, Selling expenses were $49.8 million, or 8.2% of revenue, compared to 6.8% of revenue in the fourth quarter of 2022. The increase as a percentage of revenue was driven by increased spending on advertising and higher outside commissions. General and administrative expenses totaled $33 million, or 5.4% of revenue in the fourth quarter, compared to 5.5% of revenue in the same period last year. Pre-tax net income for the fourth quarter was $68.5 million, or 11.3% of revenue. Fourth quarter net income was $52.1 million, or $2.21 per basic share and $2.19 per diluted share. Highlighting a few full-year results, revenue was $2.4 billion, an increase of 2.3%, driven by a 1.6% increase in home closings, and a 0.7% increase in our full-year average sales price to $350,510. During the year, we closed 679 homes through our wholesale business, representing 10.1% of our total closings and generating $202.3 million in revenue. We currently expect our wholesale business will represent approximately 5% of our total closings in 2024. Our full year gross margin was 23%, and adjusted gross margin was 24.7%, both in line with the guidance we provided on our last call. Combined selling, general, and administrative expenses were also in line with our guidance at 13.1%. Our pre-tax net income for the year was $261.8 million, or 11.1% of revenue. Our effective tax rate last year was 23.9% in line with the guidance we provided on our last call. And finally, our 2023 net income was $199.2 million, or $8.48 per basic share and $8.42 per diluted share. Fourth quarter gross orders were 1,561. Net orders were 971. And the cancellation rate during the quarter was 37.8% compared to 37.5% during the same period last year. The full year cancellation rate was 25.4%, generally in line with our historical average. We ended the year with 590 homes in backlog valued at $224.9 million. Decrease in homes was primarily due to fewer wholesale contracts included in our backlog at the end of this year compared to last. Turning to our land position, at December 31st, we owned and controlled a total of 71,081 lots, a decrease of 1.1% year-over-year and 1.4% sequentially. We ended the quarter with 55,331 owned lots, a decrease of 5.8% year-over-year and 1.7% sequentially. Of our owned lots, 41,155 were raw land or land under development, and approximately 25% of those lots were actively being developed, and about 46% were in engineering at year end. Of the remaining 14,176 owned lots, 10,749 were finished vacant lots. During the quarter, we started 705 homes and finished the year with 3,427 completed homes, information centers, or homes in progress. Finally, at December 31st, we controlled 15,750 lots, an increase of 19.5% year-over-year. And with that, I'll turn the call over to Josh for a discussion of our capital position.
spk03: Thank you, Charles. We ended the year with over $3.1 billion of real estate inventory and total assets of over $3.4 billion. In November, we issued $400 million of 8.75% senior notes and used the net proceeds to pay down borrowings on our revolver. The new notes mature in 2028 and are callable beginning late next year. Concurrent with the new issuance, we successfully amended our credit agreement, returning a previously non-extending lender back into our bank group and increasing total commitments on the facility from $1.1 to $1.2 billion through 2025 and extending the maturity for $960 million of those commitments through 2028. Taken together, these two transactions create additional depth and flexibility within our capital structure and provide significant additional liquidity to support our long-term profitability-focused growth. As of December 31st, our total debt was $1.25 billion, resulting in a debt-to-capital ratio of 40.2% and a net debt-to-capital ratio of 39.3%. The total liquidity was $403.8 million, including $49 million of cash on hand and $354.8 million available to borrow under our revolving credit facility. Finally, we ended the quarter with nearly $1.9 billion in total book equity and a book value per share of $78.71. With that, I'll turn the call back over to Eric.
spk02: Thanks, Josh. We're pleased with the strong results we delivered in 2023. It was a challenging year, but our success in meeting or exceeding all of our operational and financial targets reflects the effectiveness of our systems and people and gives us confidence as we head into 2024. Before sharing our outlook, I'll provide some color on what we're currently seeing in the market. As shown by our January closings, the first quarter got off to a slower start. There were several contributing factors, including pronounced seasonality in December leads, fewer wholesale closings, the closeout of some higher-performing communities, and new openings that are still in the early stages. However, I'm pleased to say since the beginning of February, we've seen a significant increase in leads and traffic. We remain focused on keeping homeownership affordable, utilizing our expertise in reaching and serving the first-time homebuyers. Through the first three weekends of February, our leads are up an average of over 73% compared to the prior two months, and last weekend was the best sales week of the year, driven by our investment in targeted advertising and introduction of new solutions to combat affordability headwinds for our customers. With those points in mind, I'll share our outlook for 2024. Our plan remains anchored in our strategy of driving affordability, increasing profitability, and building on the significant groundwork we laid in 2023 for community account growth over the next several years. For the full year, we expect closings to be up by double digits, and plan to deliver between 7,000 and 8,000 homes. Once again, community count will be up significantly this year. We expect to grow community count by 25% to 30% and end 2024 with approximately 150 active selling communities. Selling prices will be higher this year as we balance affordability and focus on increasing margins and offsetting expected cost inflation. Based on our backlog, planned product mix and expected community openings, we are guiding to a full-year average sales price between $350,000 and $360,000. While few builders have set out a full-year gross margin target, we once again plan to increase margins. We currently expect full-year gross margins between 23.1% and 24.1%, and adjusted gross margins between 25% and 26%. SG&A expenses are expected to range between 12.5% and 13.5% as we invest in personnel, training, and advertising to support our growing number of communities. Finally, we expect the full-year tax rate will range between 24% and 25%. Similar to this time last year, our guidance targets reflect our current view of the market and what we believe is attainable if conditions remain the same for the rest of the year. As a result, we have complete confidence in our ability to meet or exceed all the metrics we've presented. I close by thanking our employees for their commitment and enthusiasm this past year. At the end of the day, our achievements are the results of our people and their dedication to our company. We thank them for their excellent performance last year and look forward to all that we'll accomplish together in 2024. Operator, please open the call for questions.
spk11: Certainly. As a reminder, to ask a question, please press star 1-1 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. And one moment for our first question. Our first question will be coming from Paul Probilsky of Wolf. Your line is open.
spk06: Thank you. I guess, first of all, your guide for this year on closings implies about you know, 4.2 absorptions at the midpoint. You know, typically I think your goal has been around six. Is that a, you know, change in your strategic thinking, you know, demand environment, focus, so, you know, price over pace, any color you can add there?
spk02: Yeah, Paul, this is Eric. It's a great question. I think our numbers are a little bit different from yours, and I'll talk through that. You know, our pace in 2023 was 5.4, which we're pretty excited about because our ASB being the highest it's ever been and opening a lot of new communities. And when we looked at guidance for 2024, Starting the year, you know, a good comparison, we think we're going to be in an affordability challenge market similar to what we were in 2023. And if we did 5.4 in 2023, confident in our community count growth to 150 active communities, we do believe it's going to be back-end loaded. So the average community count is probably a little bit higher or, excuse me, lower than what you're thinking. And we think a range of 4.5 to 5.3 is actually where our guidance is. based on how we think the community count is going to flow. Also another factor in that is LGIs living our wholesale business. Our expectation is that's about half of the volume it was in 2023. And then with all the new communities opening, our expectations are all of these new communities, the absorption pace is slower. So 5.4 last year, a range of 4.5 to 5.3 this year. We think it's a very good way to start the year with guidance.
spk06: Okay, fair enough. You know, and then going to your gross margin guide, obviously it's flat to up year over year. I think, you know, some of your peers are talking down those expectations given, you know, higher land costs flowing through. I guess what's different about your current setup that would allow you to buck those trends?
spk02: Yeah, I think a couple things, Paul. First of all, we do a lot of development work. You know, we think it's important to capture that development profit. We think we need to incentivize the customers through incentives to get that mortgage rate and buy downs as low as possible. But we don't think that needs to be more than we have been doing in 2023. And I think we need to take a cautious approach to that. You know, these finished lots and the inventory that we have around the country, those are very valuable assets. So I think we're going to be cautious about discounting them too much. And certainly, if we did a lot of discounting and threw even more incentives at the customer, that pace per community would probably increase. But I think we need to be protective of our gross margin. And that's one of the positive things about LGI right now is we're anticipating gross margin midpoint of a range being higher in 2024 than 2023, plus all the community count growth.
spk06: Okay. And one last one. You've got nice community count growth this year. How does that set the stage going into 2025? Will you be able to maintain community count growth, or are you kind of pulling some stuff forward? Any color or guidance?
spk02: Yeah, no pulling it forward from a standpoint. We still expect community count growth in 2025. The 150 communities are somewhat baked in. Almost all of those are completely developed. A lot of those construction has begun on the site. So we expect those 150 communities to have closings by the end of the year. And then we expect community account growth again next year as well. Thank you. Appreciate it. You're welcome.
spk11: And one moment for our next question. And our next question will be coming from Ken Zinner of Seaport Research. Your line is open.
spk09: Hello, everybody.
spk13: Good morning.
spk16: Your comments about not having impairments, that's worthwhile making. I mean, I have to think about it, but it is an impressive statement. I'm not sure I was aware of that, so good for you guys. Why aren't we seeing perhaps better SG&A leverage? Because it looks like it's kind of flat year over year. And with your, I believe you're selling, right? It's where you're absorbing kind of a lot of the increase. It doesn't seem like you're really expecting that to go down much, or are you in your SG&A guidance? Because you're getting more leverage on your communities than you've been investing for, I assume. So talk to that dynamic, if you would.
spk05: Yeah, great question, Ken. This is Charles. So a couple of things. One is we're spending more on advertising this year or expect to this year than we did in 2023. So that trend started to increase mid-year last year as we started in the second and kind of third quarters and increased into the fourth quarter. We also are increasing community count as well. So we're investing in growth in people, that the community count comes faster, to Eric's point about the absorption, than the revenue does. So we'll be investing ahead of the closings as well. So those are really the two biggest pieces.
spk16: Is the advertising increase expected to offset your revenue? absorption from the people that you've already invested in? And where does that leave your incentive assumption? I guess that's where I'm kind of thinking about those three pieces working together.
spk05: Sure. Yeah. So in terms of the incentive assumptions, the incentives are flowing into net revenues. So not in the SG&A line. So that affects the average sales price. So the assumptions on ASP increasing incentives. And we would expect overall incentives to generally be similar in 2024 as they were to the average for 2023. And then in terms of personnel growth, advertising spend, we're investing in driving leads. So our marketing team is actively monitoring what we're spending and where we're spending it. to drive leads to our communities. So we're just budgeting in that we're expecting to use our full budget this year. In some years in the past, we haven't had to use it. For example, during the COVID years, we saw a lot of favorable results in that spend because we didn't need to spend it. But for 2024, we're expecting that we're going to spend our full budget.
spk16: Good. And if I could ask, I guess, Morris, another question. It goes to the balance sheet. And you guys, you know, self-developed land, I think your statement around impairments backs why you do that up a lot. And I'm just trying to set your balance sheet. So one of the ways I think about that is, you know, your units and inventory at about $3,500 or $3,427. Where do you think... if you can help us understand your kind of thinking process, like where do you think that would be? Cause I mean, that was, you know, as high as 4,800 and two Q 22. And I'm asking relative to your own lot count, which is like eight years supply right now, but you ran out of land. So, you know, your pace came down. Do you think your own lots are going to be basically the same and you're just picking up your closing pace? So your own lines loans own lot supply will go down. And I, asked about the unit center construction, because that's obviously another part of your balance sheet, if you could address that in terms of where you think that might be at the end of the year. Thank you very much, guys.
spk05: Yeah, sure. Ken, I can take this one as well to start with. So out of our $3.1 billion in inventory, about $2.1 of it is invested in raw land, land under development, and finished lots. So really when you break down the owned lots, we do that in the prepared remarks of breaking the 55,000 lots down, 41,155 of them are in either a raw stage or under development. That would include either truly raw, still the cornfield, future sections, that type of status, or in engineering, which is a low-cost investment way to be ready for future active development. Only 25% or roughly about 10,000 of our owned lots are under development. So we think we are in good shape in terms of managing the delivery of those lots to be able to satisfy the expected demand in terms of what we think for not just 2024, but going into 2025 and bring the engineered lots into active development so that we can pace that accordingly with what we think our closing results are going to be for the next couple of years. And then shifting over to vertical, we managed to about six months worth of inventory. So just over 3,400 units from an implied midpoint or low point of our guidance would be just shy of six months. So a slower start to the year that Eric mentioned that pace is expected to increase in terms of the start pace as we introduce new communities later on throughout the year. But the way we think about it is the $800 million we have invested in vertical represents a six-month supply of where we think closings are going. Thank you.
spk11: You bet. One moment for our next question. And our next question will be coming from Michael Rahal of JPMorgan. Your line is open, Michael.
spk12: Thanks. Good afternoon, everyone. Good afternoon. First, I wanted to kind of just dial in a little bit on the closings and the pace of community openings in 24. Um, Eric, you know, and you're, you know, you have the guidance out there of, of, uh, growth rate range of, uh, four to 19%. And, you know, Eric, I don't know if it was intentional or not, or you're just referring to the midpoint, but you kind of described your outlook for community. I'm sorry. Closings growth this year is double digit. Um, so I don't know if that was just referring to the midpoint or, you know, your. maybe higher conviction of kind of hitting the upper half of that range. I don't know if that's kind of one way to look into that. But wanted to get a sense for, you know, your level of conviction, let's say, of hitting the upper half, if indeed you really do expect kind of to hit that, you know, let's say 7,500 to 8,000 range, let's say. And, you know, how does the community count openings? You said it was back half-weighted. how should we think about that, you know, getting to 150? You know, where would we be, let's say, mid-year?
spk02: Yeah, it's a great question, Michael. Appreciate you asking it. A couple comments. You know, first of all, I think we agree with you. We hope closings, our closing guidance is conservative, you know, and that's the way we believe it always should be. So, yes, when we were talking about double-digit growth, that was referring to the midpoints. Community count growth, we do expect to be back unloaded. As an example, one of the exciting things that the team's gearing up for here is we've got 18 new community sales openings in the month of March. And we would expect all 18 of those to be active communities in Q2 of this year, and then adding in Q3 and Q4. So February community count's probably gonna be similar to January community count. So really ramping up throughout the rest of the year. primarily in the back half. So those are a couple exciting things. And, yeah, if we perform the way we're supposed to, leads are up, sales last week were really positive, you know, midpoint to high end of the guidance range is certainly possible, and that's the goal.
spk12: Great, great. And then, you know, on the community count, you know, I think previously you had talked about getting to, above 180 by the end of 25, is that still kind of the goal there? Or, you know, I know that in an earlier question you just said growth, but, you know, I think you've been more explicit in other calls and kind of looking at getting to, you know, that 180 mark or better.
spk02: Yeah, another great question, Michael. We chose not to say 180 specifically for community count growth, the following year. Part of the reason is, you know, we are very opportunistic, very selective on new acquisitions. You know, we talked about never taking an inventory impairment in our life of LGI, which is hats off to the acquisitions and development teams across the nation for pulling that feed off, and we're very proud of that. So we're cautious in our buying right now. And that being said, you know, it really depends on what new acquisitions look like, you know, for the next six to 12 months. So 180 is possible, but we would have to buy some new deals and keep adding community count to hit that number the year after.
spk12: Okay. I appreciate that. A couple of other quick ones, if I can squeeze in. I wanted to know, number one, if you could give us any sense of how February is tracking in terms of closings for the month. um you know about another 10 days or so or eight days perhaps eight nine days to close out um and also you know the interest amortization um usually it's in the low ones um and it looks like based on guidance you're looking more like two percent uh ish and just wanted to make sure you know i had that right as well yeah i can take the the first part of the questions on closings for february um
spk02: January sales were not as robust as we'd like, Mike. So January closings were lighter. In February, we expect to close probably around 350, which is up from January down from last year's February. And then sales last couple weeks have been very strong in the month of February, and that will lead to March. And we believe we can increase closings year over year in the month of March.
spk05: And I can take the interest question for you, Mike, is, you know, we expect a lot of these new communities were projects that we developed. So, as interest rates increased over the last year or so, that interest has been capitalized against these development projects, and we expect them to start coming through the income statement. So, we do expect interest to tick up both just from the sheer volume of development communities plus a higher cost of debt capital. And then purchase accounting is a small factor into that delta in the guidance as well. And we would expect that absolute number to generally be about the same year over year. So it will be a smaller portion. So a little bit higher on the interest coming through and a little bit smaller on purchase accounting. Great. Thanks so much. You bet.
spk11: And one moment for our next question. And our next question will be coming from Jay McCandless of Wedbush. Jay, your line is open.
spk15: Hey, good afternoon, everyone. So my first question, Eric, when you were talking about the sales decline in January, you said that December leads were pretty soft, which I was surprised to hear because most of your competitors talked about volume and interest levels really picking up in December. So maybe if you could give us some more depth on that, please.
spk02: Yeah, I think we just didn't see that, Jay. I think part of it is we were really focused on ending the year strong and getting to that over 6,700 closings last year, which we were proud of. That's what we said we're going to do. It allowed us to increase closings year over year. And we just didn't see the strong sales pace in December. It's very typical for us, certainly around the holidays and the first year for sales and orders to slow down. But that's just what we saw. It's been a lot better in February.
spk15: And then I think part of what you talked about also is maybe some new incentives and or affordability plays that you guys could have with the customers. Maybe talk more about that. And then to take it a step further from that, there is a significant amount of multifamily supply that's going to be hitting the market this year. You know, what is the strategy or strategies to defend against that and continue to pull in what I still believe is your core customer into the LGI neighborhoods?
spk02: Yeah, I think a couple things there is, Jay, we're always going to be talking to our customers about the advantage of a homeownership versus renting. I mean, if there's more supply of rental houses out there or rental units, apartments, we're still going to continue to talk about the value of homeownership. Right now, affordability is strained. The gap between the monthly payments that get into homeownership compared to renting an apartment is probably the widest it's ever been, or certainly the widest over the last 12 months or so. And that's a challenge for us, and that goes back to a lot of the previous discussions that we've had. How do you combat that challenge? Well, you spend more money on advertising. You drive more leads to our communities, because we're probably going to have to talk to more people in order to get customers that are qualified. We're also working on smaller square footage houses. We've talked about that on a couple previous calls. A percentage of houses under 1,500 square foot that we sold in 2021, that was 21% of our houses were under 1,500 square feet. In 2023, that was 29%. And that trend is likely to continue into 2024. So that's some of the tools that we have. Increased spending on marketing, doing more training, looking at smaller square footage in order to keep that absorption pace up.
spk13: Okay, that's all I had. Thank you. Thanks, Jay.
spk11: And one moment for our next question. And our next question will be coming from Alex Barron of Housing Research Center. Your line is open.
spk08: Yes, thank you.
spk14: Yeah, I was hoping you guys could share how many homes you guys have under production and how many of those are completed specs.
spk05: Yeah, sure. We've got about 1,400 that are homes in progress and 1,850 completed homes.
spk04: Okay, so a total of $32.50? Yeah, and then the rest would be information centers to get to a $34.20.
spk14: Okay, great. And then I guess, you know, just philosophically speaking, given everything that's going on right now, are you guys more inclined to, you know, try to preserve margins or try to, you know, preserve a sales pace? you know, to maintain volume, even if that affects margins?
spk02: Yeah, Alex, it's a great question. I think it's what margin you're talking about. And we're protective of gross margin. You know, we want to maintain our sales pace. And for us, that means, you know, looking at mortgage incentives, it also means spending more money on advertising. So because we'd like to maintain the pace and also keep our adjusted gross margin high as well, but probably more towards the margin right now. We're starting to see some appraisal challenges across the United States, but it's still a very minimal amount. So we're comfortable at our sales prices that we're getting good value to our customers. But we're watching that and we'll have to adjust accordingly. The market dictates that we do so.
spk14: And in terms of incentive, roughly how much, you know, are they as a percentage of your sales price?
spk02: Yeah, I think there's a couple different factors there. You know, we've done big forward commitments before. Our typical incentive, I'd say on average, is 2% to 3% of the sales price, and you're really just focused on getting that monthly payment as low as possible. But that would be a good average.
spk07: Got it. All right. Well, best of luck. Thanks.
spk02: Thanks, Alex.
spk11: Thank you. And at this time, I'm not sharing any further questions. I would like to hand the call back to Eric for closing remarks.
spk02: Thank you to everyone for participating on the call today, and for interest in LGI homes, have a great day. Thank you.
spk11: Ladies and gentlemen, thank you for participating in today's conference.
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