LGI Homes, Inc.

Welcome to the LGI Homes Fourth Quarter 2024 Conference Call. Today's call is being recorded and a replay will be available on the company's website at .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, Executive Vice President.

Thanks, and good afternoon. I'll remind listeners that this call contains forward-looking statements including management's views on LGI Homes business strategy, outlook, 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 today's 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. Reconciliation 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, 2024 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 Leeper, LGI Home's Chief Executive Officer and Chairman of the Board, and Charles Merdian, Chief Financial Officer and Treasurer. I'll now turn the call over to Eric. Thanks, Josh.

Good afternoon and welcome to our earnings call. Before getting into the details of the fourth quarter, I wanted to begin by highlighting the significant progress we made on many of our objectives in 2024. Looking back, the year proved more challenging than anyone expected. The anticipated relief and mortgage rates never materialized. Instead, rates exceeded their climb after the Fed began cutting, further straining affordability. Year-end uncertainties around the economy and potential policy shifts only compounded these challenges, heightening concerns about rising input costs and the persistence of inflation. Despite this, we met and even exceeded many of our key strategic goals for 2024, including expanding our gross margins and increasing our community count. Additionally, we delivered full-year closings, community count, ASP, margins, and SG&A in line with our latest guidance, and our full-year margins and record-breaking ASP significantly exceeded the guides provided at the beginning of the year. Finally, we continued making strategic investments to drive our growth in the years ahead. This progress in the face of mixed macroeconomic backdrop and continued challenges to affordability is a testament to our team's relentless pursuits of our long-term growth and profitability goals. Our commitment to driving growth and profitability was again evident in our fourth quarter results. During the quarter, we delivered 1,636 homes. Included in this number was the bulk sale in November of 103 fully leased single-family homes within an established community here in Houston. This sale was factored in the guidance we provided on our last call and is included in our 6,131 total closings for the year. Excluding the bulk sale, fourth quarter closings were 1,533 homes, resulting in full-year closings of 6,028 homes. At an average sales price of over $365,000, these closings resulted in total revenue of over $2.2 billion in 2024. We averaged 3.8 closings per community per month last year. The lower pace compared to the prior year in our historical results reflects the current challenges around affordability. However, we continue to see strength in key geographies. Our top five markets this year were Charlotte and Las Vegas with 7.4 closings per community per month. Washington, D.C. and surrounding areas with 6.7. Raleigh with 6.3 and Fort Pierce with 5.5. Congratulations to the teams in these markets on your outstanding results. Another major highlight this year was community count growth. We installed and opened 80 new communities in 2024, 46 of which replaced existing information centers, and 34 additional communities that brought the total to a record-breaking 151 active communities. This represented a -over-year increase of 29% over the 117 at the end of last year. We're excited about these new communities and the opportunities they bring. To support these new openings, we've invested in recruiting, hiring and training a talented group of eager individuals. These new hires will require time to fully adopt our systems and processes, and we're excited to see their success materialized over the coming year. Regarding profitability, our full-year gross margin and adjusted gross margin were up 120 and 160 basis points respectively, and our pre-tax net income margin was up 70 basis points from the prior year. I'll wrap up by noting that the outlook for the current year is anything but certain, and the challenging dynamics experienced in 2024 are likely to continue. Therefore, we remain focused on what we can control, hiring talented people, connecting with qualified buyers through targeted marketing, managing costs, starting affordable, -in-ready homes, and maintaining our strong balance sheet. Longer term, our outlook for the housing market remains optimistic. Resilient employment, persistent undersupply of homes, and strong demographic trends point to a favorable demand environment for many years to come. We continue to make investments in land, inventory, and operating platforms to support the affordability of our homes and drive sustainable growth into the future. With that, I'll turn the call over to Charles for additional information on our fourth quarter financial results.

Thanks, Eric. Revenue in the fourth quarter was $557.4 million, a decrease of .4% year over year, driven by a .8% decrease in closings of 1,533 homes, and partially offset by a .1% increase in our average selling price to $363,598. Average selling prices were down 2% sequentially, reflecting higher levels of incentives on homes delivered in the fourth quarter. We closed 173 homes through our wholesale business in the fourth quarter, representing .3% of our total closings compared to 298 homes, or 17% of our total closings in the fourth quarter last year. Gross margin as a percentage of sales in the fourth quarter was 22.9%, down just slightly from the same period last year, but in line with our expectations given the higher level of incentives offered this year compared to last. Adjusted gross margin in the fourth quarter was 25.2%, up 10 basis points from the same period last year. Adjusted gross margin excluded $11.9 million of capitalized interest charged cost of sales and $900,000 related to purchase accounting, together representing 230 basis points. Combined selling, general, and administrative expenses were .7% of revenue. Selling expenses were $50.8 million, or .1% of revenue, compared to .2% of revenue in the fourth quarter of 2023. The increase as a percentage of revenues was driven primarily by increased spending on advertising, and to a lesser extent, higher personnel expenses due primarily to an increase in community count and a lower percentage of wholesale home closings. General and administrative expenses totaled $31.2 million, or .6% of revenue in the fourth quarter, compared to .4% of revenue in the same period last year, driven by higher overhead and operating costs due to community count growth. Included in other income is the sale of 103 leased homes, resulting in a $14 million gain during the quarter. Pre-tax net income for the fourth quarter was $67.1 million, or 12% of revenue, compared to .3% in the same period last year. Fourth quarter net income was $50.9 million, or $2.16 per basic share, and $2.15 per diluted share. Highlighting a few full-year results. Revenue was $2.2 billion, a decrease of .6% driven by a .4% decrease in home closings and offset by a .2% increase in the full-year average sales price to $365,394. During the year, we closed 552 homes through our wholesale business, representing .2% of our total closings and generating $164.1 million in revenue. Given market conditions, we expect our wholesale business will represent approximately 10% of our total closings in 2025. Our full-year gross margin was 24.2%, and adjusted gross margin was 26.3%, representing -over-year increases of 120 basis points and 160 basis points, respectively. Combined selling general and administrative expenses were .6% of revenue, an increase of 150 basis points compared to 2023, driven primarily by higher advertising spending. Our pre-tax net income for the year was $258.9 million, or .8% of revenue, up 70 basis points from the prior year. Finally, our 2024 net income was $196.1 million, or $8.33 per basic share, and $8.30 per diluted share. Fourth quarter gross orders were $1,450, net orders were $1,044, and the cancellation rate during the quarter was 28%, compared to .8% during the same period last year. For the full year, gross orders were $7,816, net orders were $6,037, and the cancellation rate was 22.8%, slightly lower than our historical average. We ended the year with 599 homes and backlog, valued at $236.5 million. The sequential decrease in the number of homes and backlog was primarily due to the closeout and transition between communities and a softer demand environment in the fourth quarter, resulting from higher mortgage rates. Turning to our land position, at December 31st, we owned and controlled a total of 70,899 lots, a slight decrease year over year, but a .4% increase sequentially, as more lots were brought under control in the fourth quarter. We ended the quarter with 53,317 owned lots, a decrease of .6% year over year, and .3% sequentially. Of our owned lots, 37,432 were raw land or land under development, of which approximately 30% were in active development and 40% were in engineering. Of the remaining 15,885 owned lots, 11,842 were finished vacant lots, and 2,685 were completed homes and information centers. During the quarter, we started 1,108 homes and ended the year with 1,358 homes in progress. Finally, at December 31st, we controlled 17,582 lots, an increase of .6% year over year. With that, I'll turn the call over to Josh for discussion of our capital position.

Thanks, Charles. We ended the year with nearly $1.5 billion of debt outstanding, including $401.9 million drawn on a revolver, resulting in a debt to capital ratio of .1% and a net debt to capital ratio of 41.2%. Total liquidity was $323.7 million, including $53.2 million of cash on hand, and $270.5 million available to borrow under our revolving credit facility. In November, we issued $400 million of 7% senior unsecured notes and used the net proceeds to pay down borrowings on our revolver. The notes mature in 2032 and are callable beginning in 2027. During the year, we repurchased 307,867 shares of our common stock for $30.8 million and had $180.7 million remaining on our current authorization at year end. Finally, the book value of our equity exceeded $2 billion and our book value per share was $87.07. At this point, I'll turn the call over to Eric. Thanks,

Josh. The softness experience at the end of 2024 continued into January and the first quarter has gotten off to a slower start. The increase in mortgage rates in October and November impacted our year end backlog. With mortgage rates exceeding 7% in January, both orders and closings were down compared to last year. While orders have incrementally improved in February, the trend is still subdued compared to this time last year. With those points in mind, I'll share our outlook for 2025. For the full year, we expect to close between 6,200 and 7,000 homes and to end 2025 with 160 to 170 active selling communities. While the range is higher than our actual closings last year, it does infer an absorption rate of around 3.5 at the midpoint. Behind this assumption is our current view on the market, including our muted closings in January and what we believe is attainable if conditions were to remain similar for the duration of the year. Selling prices will be similar to last year as we focus on sustaining margins in the face of expected cost inflation while still offering the most affordable product to our customers. Based on our backlog, product mix, and expected community openings, we are guiding to a full year average sales price between $360,000 and $370,000. We continue to monitor the potential impacts that policy changes may have on costs. Similar to our experience during the supply chain disruptions during COVID, we believe our position as an entry-level spec builder gives us room to substitute product offerings in real time, mitigating extensions of our construction cycle times, and minimizing inconveniences for our customers. To address affordability challenges confronting our entry-level buyers, we will continue to lean into incentives, including closing costs and interest rate incentives, discounts to older inventory, and reducing prices in select neighborhoods. We are currently investing around 5 to 6 points, or approximately $20,000 per home on average, to offer these incentives to our customers. However, even with the impact of these incentives, we currently expect full year gross margin between .2% and .2% and adjusted gross margin between .5% and 26.5%. Part of what is keeping this guidance in line with our historical results is the fact that the majority of our communities were self-developed projects that were underwritten at higher margins that captured the developer's profit. This would naturally result in higher overall margins that are at or near the top of the peer group, even while using these tools to support affordability. SG&A expense is expected to range between 14 and 15%. And finally, we expect the full year tax rate to be approximately 24.5%. In conclusion, I want to thank our team members again for their dedication and congratulate them on the successful outcomes they delivered against a challenging economic backdrop. This year, we are staying the course and remain committed to maintaining profitability through operational discipline and to positioning LGI homes for sustainable long-term growth. I'm confident in the talent and expertise of our team and believe we are well positioned to navigate whatever challenges arise in 2025. Operator, please open the line for questions.

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. Our first question will be coming from Trevor Allenson of Wolf Research. Your line is open, Trevor.

Hi. Good afternoon. Thank you for taking my questions. Eric, I want to start there on gross margins. The midpoint of your full year 2025 gross margin guide implied margins are down only modestly, despite probably coming into the year here quite a bit lower than where we came into 2024. So, just trying to get a feel for some of the moving parts there. Are there any offsets, whether that be from pricing or anything else, perhaps reduced incentives as the year goes on that would offset some of these cost implications you're likely seeing from land and potentially any vertical costs?

Yeah, Trevor. Thanks for the question. It's – yeah, gross margin would be expected to be similar year over year. You know, we do expect costs to continue to go up, whether that's labor-related, sticks and bricks costs, land development costs, our fees, and cost of doing business with different municipalities across the United States. We believe we're going to have to offset those costs through pricing. Then also our incentives to customers as well. Right now we're running 5 to 60 percent, like we said in our prepared remarks, $20,000 on average for our average house cost. But yeah, we think with all the development we're doing, being in a historical range around that 25 percent adjusted gross margin is where we need to be to capture that developer profit even though we're offering a lot of incentives to our customers to help with rate buy-downs.

Yeah, makes a lot of sense. And then second question would be on your 3Q call, you guys have talked about not expecting to see pace slow in 2025. Clearly here your absorption target is a bit lower on a -over-year basis. Can you talk about what's changed in your view since that time? Is that just the move higher in rates making affordability even tougher or are you seeing competitors be more aggressive on incentives? Any commentary there would be helpful. Thanks.

Yeah, it's a great question, Trevor. And hopefully as a conservative guide we are anticipating sales pace being a little slower in 25 versus 24, a couple factors. One is we're off to a slower start this year compared to last year that has certainly been contributed to higher rates but also a lot of new community openings. You know, one of the highlights of last year was opening up 30 percent new communities. But that of course means a lot of new sales rep score in the organization, a lot of new managers. And taking the first year and getting those individuals up to speed and really learning our processes and our system, you know, that's going to be a headwind for 2025. I think it's really going to pay off in 2026, 2027 and the later years. So I think that's another reason we're conservative on absorption. But yeah, a little bit lower on absorption but strong community count growth this year, strong margins, similar ASP and should be an outstanding year in 2025.

Thanks for all the color and good luck moving forward. Thanks, Trevor. Appreciate it.

Thank you. One moment for our next question. Our next question will be coming from Kenneth Zinner. Analyst, your line is open.

Good afternoon, everybody.

Good

afternoon. Good afternoon. Apologies. Could you outline the units under construction? I think I got one of the numbers but not all. So what did you end up in the fourth quarter with? Units that are under construction, uncompleted and started and not sold?

Sure. Ken, this is Charles. We had just over 4,000 total units in inventory. We had 2,500 roughly completed, about 1,360 homes in progress and the rest were information centers.

Great. Really appreciate that. And then in regards to the start level, I think Charles, you might have mentioned a pace of three. Was that regarding starts orders, which can be the same, or was that for starts or what was that number referring to specifically?

Sure. We had about 1,100 starts in the fourth quarter, which was less than what we closed during the quarter. So we brought our inventory down by a few hundred units, so bringing it down from about 4,400 down to just over 4,000.

Okay. And then when you think about the – you talked about incentives, obviously. How does the relationship work between the incentives, efficiency, i.e., pulling people in, leaning in that more, as opposed to – there's obviously been a confluence of consumer data saying strength, weakness. But have you seen the efficiency of those mortgage buy-downs at the entry level be less efficient because the people are just less confident on jobs? Or is that why you're seeing less demand, you think, or is it something else?

Yeah, Ken, this is Eric. I can take it. And I think demand is still there because what we do is we focus on the leads that are coming in and calling and walking in and emailing and having interest in our LGI community. So those are the customers that's not worried about their jobs. They have jobs. They're interested in homeownership. And the number one challenge for LGI, and I think it resonates through the rest of our peer group, is affordability. And affordability, whether it's become ASP or from rates, is our biggest headwind, especially for the first-time homebuyer that's currently in a rental situation, primarily an apartment, looking to buy their first home. So affordability is still challenging and getting that customer qualified for a mortgage. So incentives is a broad word. Obviously, we incentivize more for the homes that are finished, that we are looking to move, whether it's price or interest rates, buy-downs. And of course, when you pay more on behalf of the customer to buy down the rate, that lowers the monthly payment and in theory should qualify more people for the house. But it is a balance between the expense of paying for those incentives and how many people you are bringing into the pool. And we're looking at that at a community by community, market by market across the United States.

Thank you very much.

You're welcome.

And one moment for our next question. Our next question will be coming from Willem Rooney of BTIG. Your line is open.

Hey, everyone. Thanks for taking my questions. First, I want to ask about the guidance as a whole. You mentioned that there's some conservatism within it. I'm curious if there's any particular aspects of the guide that you would highlight as being the most conservative in terms of where you might have the greatest amount of flexibility or what do you think would be easiest or surpass if conditions were to improve beyond what you're currently seeing today? Thanks.

Yeah, I think probably ASP. I think we're going to see some cost inflation here in 2025. And our backlog ASP is a little bit higher than our guidance. So that's likely probably the most conservative of it. We like to think that our sales and closings guidance is also conservative because we believe that demand is going to be there in 2025. It's just a balance where rates go, where incentives go. But ASP, I point to, is probably the most likely because we believe we're going to have to continue to raise price to offset those costs.

Okay, thanks. Appreciate that. And then for my follow-up, community health guidance, I believe, is 9% growth at the midpoint. Just curious if you're expecting stores to come online to be if it's weighted towards the front or the back half of 2025 or if it's more equally split. Just wondering about the cadence there. Thank you.

Yeah, since we had a lot of ramp up to 151 at the end of 2024 and then we went down to 148, I would say probably more weighted to the back half of the year.

All right, great. Thanks so much. That's all from me.

You're welcome. Thank you.

And as a reminder, to ask a question, please press star, 1, 1, and wait for your name to be announced. And our next question will be coming from Jay McCandless of Wedbush. Your line is open.

Hey, good afternoon, guys. Thanks for taking my questions. Eric, you called out Washington, D.C. as one of the better markets in 2024. Just wondering if you guys are seeing any impact from all the layoffs and the headlines that we've seen around that and around the D.C. area.

Yeah, not necessarily, Jay. I mean, Washington, D.C. for us is not necessarily, you know, it's not the individuals working for the government that are commuting back and forth or working in the district. It's more the further out locations. Actually, I have a real successful community in West Virginia that's primarily driving that number. So I would say, you know, not yet and haven't seen anything.

Okay. That's good to hear. And then I guess the second question I had, knowing that affordability is a big challenge, how much harder is it this year to pull that core multifamily customer into either the sales center or to get them to look at the website, I guess? What do you, how are you seeing that customer respond to some of the incentives and the things you're putting out there?

Yeah, I think the demand is there. I think the demand for home ownership and going from a rental situation will always be there. I think it's relevant to our SG&A expense line item. We are having to spend more dollars than we ever had to, and it's expensive to get that customer. And we have to go through more customers, if you will, to find individuals that qualify because that gap between what the customer is paying for rent and what their monthly payment will be on a mortgage, that gap has really never been wider. That's kind of industry-known that it's more challenging now. So we're spending additional money on marketing to drive those additional leads to make sure we hit an acceptable absorption pace and maintain our margins of profitability.

Okay. Got it. Thank you. And then the last one I wanted to ask about is, in terms of the community expansion this year, are you guys going to keep focusing on the MSAs where you've already got your SG&A on the ground or are you looking to some new markets to expand this year?

Now, really focusing on the markets we're in, you know, 35 markets across the country is a lot. We've got great leadership in place in all those markets and focusing on going deeper in those markets through community health. Here exactly. Right on.

Okay. Great. Thanks, guys.

Thanks, Jay.

Thank you. At this time, I'm not showing any further questions. I would now like to turn the call back to Eric for closing remarks.

Thank you. And thanks, everyone, for participating on the call today and your interest in LJ homes. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect.