LGI Homes, Inc. Price & Performance (LGIH)

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. 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 ks for the period ended 12/31/2024, that we expect to file with the SEC later today. This filing will be accessible on the SEC's website in the Investor Relations section of our website.

I'm joined today by Eric Leeper, LGI Homes' Chief Executive Officer and Chairman of the Board and Charles Merdian, Chief Financial Officer and treasure. 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 want 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 in mortgage rates never materialized. Instead, rates declined after the Fed began cutting further straining affordability. Year end uncertainties around the economy 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 and A in line with our latest 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 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 pursuit of our long term growth, and profitability goals.

Our commitment to driving growth and profitability was again evident in our fourth quarter results. [indiscernible] During the quarter, we delivered sixteen thirty six homes. Included in this number was the bulk sale in 103 fully leased single family homes within an established community [indiscernible] This sale was factored into 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 fifteen thirty three homes, resulted 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 $2,200,000,000 2024. We averaged 3.8 closings per community per month last year.

The lower pace compared to the prior year our historical results reflect 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, per community per month. Washington D. C. And surrounding areas was 6.7. Raleigh was 6.3 and Fort Pierce was 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 year 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 materialize over the coming year. Regarding profitability, our full year gross margin and adjusted gross margin were up one hundred and twenty and one hundred and sixty basis points respectively and our pre tax net income margin 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 move in ready homes and maintaining our strong balance sheet. Longer term, our outlook for the housing market remains optimistic. Resilient employment, persistent under supply 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 our fourth quarter financial results. Thanks, Eric. Revenue in the fourth quarter was $557,400,000 a decrease of 8.4% year over year driven by a 12.8% decrease in closings of fifteen thirty three homes and partially offset by a 5.1% increase in our average selling price to $363,598 Average selling prices were down 2% sequentially reflecting higher levels of incentives on homes delivered We closed 173 homes through our wholesale business in the fourth quarter representing 11.3% of our total closings compared to two ninety eight 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 [indiscernible] Adjusted gross margin in the fourth quarter was 25.2%, up 10 basis points from the same period last year. Adjusted gross margin excluded $11,900,000 of capitalized interest charged to cost of [indiscernible] and $900,000 related to purchase accounting together representing 230 basis points. Combined selling, general and administrative expense selling expenses were $50,800,000 or 9.1% of revenue compared to 8.2% of revenue in the fourth quarter of twenty twenty three. 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 $31,200,000 or 5.6% of revenue in the fourth quarter, compared to 5.4% 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 $14,000,000 gain during the quarter.

Pretax net income for the fourth quarter was $67,100,000 or 12% of revenue compared to 11.3% in the same period last year. Fourth quarter net income was $50,900,000 or $2.16 per basic share, and $2.15 Highlighting a few full year results, Revenue was $2,200,000,000 a decrease of 6.6% driven by a 10.4% decrease in home closings and offset by a 4.2% increase in the full year average sales price to $365,394 During the year, we closed five fifty two homes through our wholesale business, representing 9.2% of our total closings and generating $164,100,000 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 year over year increases of 120 basis points and 160 basis points Combined selling, general and administrative an increase of 150 basis points compared to 2023 driven primarily by higher advertising spending. Our pre tax net income for the year was $258,900,000 or 11.8% of revenue up 70 basis points from the prior year.

Finally, our 2024 net income was $196,100,000 or $8.33 per basic share and $8.3 per diluted share.

Fourth quarter gross orders were fourteen fifty net orders were ten forty four, and the cancellation rate during the quarter was 28%. Compared to 37.8% during the same period last year. For the full year, gross orders were seven thousand eight hundred and net orders were six thousand and thirty seven and the cancellation rate was 22.8% slightly lower than our historical average.

We ended the year with five ninety nine homes in backlog, valued at $236,500,000 the sequential decrease in the number of homes in 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 31, we owned and controlled a total of 70,899 lots a slight decrease year over year but a 3.4% 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 3.6% year over year and 1.3% sequentially. Of our owned lots, 37,432 were raw land, 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 eleven oh eight homes and ended the year with thirteen fifty eight homes in progress. Finally, at December 31, we controlled 17,582 lots an increase of 11.6% year over year. With that, turn the call over to Josh for a discussion of our capital position. Thanks, Charles.

We ended the year with nearly $1,500,000,000 of debt outstanding, including $401,900,000 drawn on a revolver resulting in a debt to capital ratio of 42.1% and a net debt to capital ratio of 41.2%. Total liquidity was $323,700,000 including $53,200,000 of cash on hand and $270,500,000 available to borrow under our revolving credit In November, we issued $400,000,000 of 7% senior unsecured notes and used the net proceeds to pay down borrowings on our revolver. The notes mature in 02/1932 are callable beginning in 2027. During the year, we repurchased 307,867 shares of our common stock for $30,800,000 and had $180,700,000 remaining on our current authorization at year end. Finally, the book value of our equity exceeded $2,000,000,000 and our book value per share was $87.07 At this point, I'll turn the call over to Eric.

The softness experienced at the end of twenty twenty four 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 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 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, interest rate incentives discounts to older inventory and reducing prices in select neighborhoods. We are currently investing around five points to six 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 23.224.2% and adjusted gross margin between 25.526.5%.

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 capture the developers profit.

This should 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 and A expense is expected to range between 1415%.

And finally, we expect the full year tax rate 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 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 Operator, please open the line for questions.

Our first question will be coming from Trevor Allinson of Wolfe Research. Your line is open, Trevor. Hi, good afternoon. Thank you for taking my questions.

Eric, I want to start there on gross margins where you kind of left off. The midpoint of your full year 2025 gross margin guide implies 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 from pricing or anything else perhaps reduced incentives as the year goes on that would offset some of these cost inflation that you're likely seeing from land and potentially any vertical costs?

Yes, Trevor, thanks for the question. It's Yes. Gross margin will be expected to be similar year over year. We do expect cost 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 6% like we said in our prepared remarks, 20,000 on average for our average house cost.

But we think with all the development we're doing, being in a historical range around that 25% and 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. Yes, 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 year 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. Yes. It's a great question, Trevor.

And hopefully, it's a conservative guide. We are anticipating sales pace being a little slower in '25 versus '24, a couple of factors. One is we're off to a slower start this year compared to last year. That is certainly been contributed to higher rates, but also a lot of new community openings. One of the highlights of last year was opening up 30% new communities. That of course means a lot of new sales reps who are 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 That's going to be a headwind for 2025. I guess 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 yes, a little bit lower on absorption, but strong community count growth this year. Strong margin, similar ASP and should be an outstanding year in 2025. Thanks, Trevor. Appreciate it. Thank you. One moment for our next question. Our next question will be coming from Kenneth Zener analyst. Your line is open.

Good afternoon, Apologies. Could you outline the units under numbers, but not all. Like, so what did you end up the in the fourth quarter with Yudasota Construction, uncompleted and started not sold.

Sure. Ken, this is Charles. We had just over 4,000 total units in inventory. We had 2,500 roughly completed about thirteen sixty 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. We brought our inventory down by a few hundred units, so bringing it down from about 4,400 down to just 4,000. Okay.

And then when you think about the talked about incentives, obviously.

How does the relationship work between 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, do you think? Or do you is it something else?

Yes. Again, this is Eric. I think demand is still there because what we do is we focus on the the leads that are coming in and calling and walking in and emailing and and have an interest in our LGI communities. So those are the [indiscernible] And the number one challenge for LGI and I think is 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 home buyer that's currently in a rental situation, primarily an apartment looking to buy their first home.

Affordability is still challenging and getting that customer qualified for a mortgage. So incentives is a broad word.

Obviously, where we incentivize more for the homes that are finished. That we are looking to move, whether it's price or interest rates buy downs.

Pay more on behalf of the customer to buy down the rate, that lowers 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 markets across The United States.

Thank you very much.

You're welcome.

And one moment for our next question. First, I wanted to ask about the guidance as a whole. You mentioned that there's some conservatism within it. 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? [indiscernible] Yes, 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. That's likely the probably the most conservative We like to think that our sales and closings guidance is also conservative. Five. It's just a balance to where rates go where our incentives go. But ASP I point to is probably the the most likely because we believe we have to continue to raise price to offset those costs.

And then for my follow-up, community talk 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 front or the back half of 2025, or if it's more equally split, just wondering about the cadence there. Thank you.

Yes. 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 for me.

You're welcome. Thank you. Eric, you called out Washington D. C. As one of the better markets in 2024. 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? Yes, not necessarily Jay. I mean Washington D. C. For us is not necessarily It's not the individuals working for the government that are commuting back and forth. They're working in in the district. It's more of the further out locations. Actually, I have a real successful community in West Virginia that's primarily driving that that number So I would say, 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 give them a look at the website, I guess. What are you how are you seeing that customer respond to some of the incentives and the things you're putting out there?

Yes, I think the demand is there. I think the demand for homeownership and going from rental situation will always be there. I think and it's relevant to our SG and A go through more customers, if you will, to find individuals that qualify because that GAAP between what the customer is paying for rents and what their monthly payment will be on a mortgage That gap has really never been wider. That's kind of industry industry known that is 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 and 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 SGA on the ground or are you looking to some new markets to expand this year?

No, really focus on the markets we're in. 35 markets across the country is a lot. We got great leadership in place in all those markets and focusing on going deeper in those markets through community count.

You're exactly right on. Okay, great. Thanks guys. Thanks, Jake. 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 to everyone for participating on the call today and your interest in LJ Homes. Have a great day.