LGI Homes, Inc. Q3 FY2025 earnings call

• Teams focused on driving leads, managing inventory, and providing customer service, leading to positive third quarter results in line with prior guidance.
• Closed 1,107 homes, with 1,065 contributing to revenue; gross margin and adjusted gross margin within guidance ranges.
• Maintained margins through thoughtful financing incentives, competitive pricing, avoiding extreme lot takedowns, and self-developing lots.
• Top markets by closing per community: Charlotte (5.7%), Las Vegas (4.7%), Raleigh (4.2%), Greenville (3.7%), Denver (3.5%).
• Significant increase in net orders and backlog; net orders up 8% y-o-y and 44% q-o-q; backlog up 20% y-o-y and 62% q-o-q.
• Land portfolio had 62,564 owned and controlled lots, with 53,148 owned and 9,416 controlled; 895 homes under construction at quarter end.
• SG&A expenses totaled $63.6 million (16% of revenue), with selling expenses up and G&A flat y-o-y.

In the third quarter, LGI Homes closed 1,107 homes. Of this, 1,065 homes contributed to revenue of $397 million. The wholesale channel generated $54.5 million in revenue from 163 home closings, which was 15.3% of total closings (up from 9.1% in the same period last year). Gross margin was 21.5%, and adjusted gross margin was 24.5%. Revenue in the third quarter totaled $396.6 million, down 39.2% compared to the prior year due to a 39.4% decline in closings. The average selling price of homes closed was $372,424, influenced by geographic mix and incentive levels.

• Expect to close between 1,300 and 1,500 homes in the fourth quarter, a 26% increase from the third quarter.
• Average sales price in the fourth quarter expected to range between $365,000 and $375,000.
• Community count at year-end expected to be approximately 145; 10%-15% growth in community count by end of 2026.
• Fourth quarter gross margin expected to range between 21% and 22%, adjusted gross margin between 24% and 25%.
• SG&A expenses expected to fall between 15% and 16%, tax rate expected to be approximately 26%.

• Market volatility affecting affordability for entry-level buyers due to mortgage rate fluctuations.
• Challenges in aligning pricing expectations with institutional buyers for wholesale transactions.
• Risks associated with inventory management, including potential issues with aging inventory and rebalancing in select markets.

Q: First question is on the acceleration in orders of more than 40% sequentially. Can you talk about which of those do you think was the biggest driver of the acceleration? And then should we view this as a strategy shift to lean into more volume? Or were some of the actions or a reflection of a desire to move some of the aged inventory that you guys had?

A: Yes. This is Eric. I want to look at it as a strategy shift to start with. I think what we've been talking to investors about and talking throughout the call, we're in the affordable housing business focused on an entry-level buyer. And we talked about rates are very important in that affordable monthly payment. And rates, the headline rates as the lowest has been in the last 12 to 18 months is that 10-year pop below 4%. And as rates went down, our sales went up, not a surprise to us, just offering a more affordable monthly payment. There are things that's happened when rates have come down, where our incentives and the value that we're providing, not necessarily spending more money, but being able to offer a 3.99% promotional rates is something we never offered before, and that's new for the quarter. We continue to lean into advertising dollars when appropriate. And this quarter, we were able to increase our advertising, drive more leads because it was working to drive those payments. And also the team in the field is doing a great job. We're hiring more salespeople. The field is taking more on more responsibility and training our new sales reps and doing a great job with that. So all those in combination is really more, I think, market-driven and affordability driven, not a shift in strategy.

Q: So the commentary around 10% to 15% community count growth, 2 aspects. First, given your selling and training process, which is unique to you guys. Can you talk about how much of that, I guess, the G&A is in your fourth quarter guidance as we think about modeling that community count growth? And then is that community count growth, could you give us like a first half, second half lift? Or is it steady?

A: Yes, Ken. Yes. No, good question, Ken. This is Eric. I can talk about the community counts and then Charles can talk about the G&A part of that. But community count, I think is going to be spread equally through 2026. One of the notes I made is the state that will be primarily driving the increase in community count are Florida, Texas and California, but they'll be spread equally through 2026. They're all bought, they're in process, and we're confident with that number. Charles Merdian: Yes, Ken, as far as SG&A goes, I'll start with G&A. I mean, we've been averaging around $30 million in quarterly G&A expense going all the way back to the beginning of 2024. So we feel pretty comfortable that we've pretty well established the overhead side from a G&A perspective. And then as we bring in new community counts, we have the incremental dollars that we're going to have in terms of installing our information centers, hiring new sales staff, our office managers and our sales managers. So incrementally, those come in as a similar percentage of our expected revenue. So we don't think there's any front-ending, if you will, on this coming up next 12 months of community count. We're in the same geographic areas. So we're not expanding into any new markets. So our leadership infrastructure is in place, so that should be limited additional costs related to that.