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. I will now turn the call over to Josh Fattor, Vice President of Investor Relations. Please go ahead.

Thanks, and good afternoon. I'll remind listeners that this call contains forward-looking statements, including management's views on LGI Homes' 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 Lipar, LGI Homes' 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. We are pleased to report that we delivered a strong fourth quarter and successfully achieved all of our operational and financial guidance targets for the full year. We also laid the foundation for considerable community count growth and continued profitability for many years to come. As we prepared for today's call, we reflected on our original full-year guidance from February of last year. Looking back, it's worth highlighting how all 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% 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%, and our actual result was at the top end of that range. We expected adjusted gross margin between 22.5% and 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 5 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 in just 8 markets across 4 states. Since then, we 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 7x, 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.

Thanks, Eric. Here are more details on our fourth quarter results. Revenue was $608.4 million, an increase of 24.6% year-over-year, reflecting a 21.4% increase in closings to 1,758 homes and a 2.6% increase in our average selling price to $346,083. Our ASP was 1.9% lower sequentially, reflecting a higher level of incentives offered in the fourth quarter as mortgage rates climbed into the mid-7s 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. The 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 31, 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 own 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 blocks. 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 31, 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.

Thanks, 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, 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 billion 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 31, 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%. 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.

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 leaves, fewer wholesale closings, the closeout of some higher-performing communities and newly opened communities 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 weeks as 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 the 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 count 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 a 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 expense is 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 on 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 will accomplish together in 2024.

Our first question will be coming from Paul Przybylski of Wolfe.

I guess, first of all, your guidance for this year on closing implies about 4.2 absorptions at the midpoint. Typically, I think your goal was better around 6%. Is that a change in your strategic thinking, demand environment focus, price over pace? Any color you can add there?

Yes, 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. Our pace in 2023 was 5.4, which we're pretty excited about because our ASP 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, a good comparison. We think we're going to be in an affordability-challenged market, similar to what we were in 2023. And if we did 5.4 in 2023, we're 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 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 LGI leading 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 that all of these new communities will see a slower absorption pace. 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.

Okay. Fair enough. And then going to your gross margin guide. Obviously, it's flat to up year-over-year. I think some of your peers are talking down those expectations given your higher land costs flowing through. I guess what's different about your current setup that would allow you to buck those trends?

Yes, I think a couple of things, Paul. First of all, we do a lot of development work. 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. 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 the gross margin, midpoint of a range being higher in 2024 than 2023, plus all the community count growth.

And one last question. You have experienced significant community count growth this year. How does that position you as you look towards 2025? Will you be able to sustain this growth in community counts, or are you preemptively pulling some initiatives forward? Any insights or guidance would be appreciated.

Yes. No pulling of forward from a standpoint. I would 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 constructions have 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.

Our next question will be coming from Ken Zener of Seaport Research.

Your comments about not having impairments are noteworthy. It sounds impressive, and I wasn't aware of that before, so good for you. I'm curious about why we are seeing better SG&A leverage since it appears to be flat year-over-year. You're selling, right? It seems like you're absorbing a significant portion of the increase. Do you not expect that to decrease much in your SG&A guidance? It seems you're achieving more leverage with the communities you have been investing in. Please elaborate on that dynamic.

Yes, that's a great question, Ken. This is Charles. We are planning to spend more on advertising this year compared to 2023. We began this trend of increased spending around the middle of last year, especially in the second and third quarters, which carried into the fourth quarter. Additionally, we are increasing our community count, which means we are investing in growth. As Eric mentioned, the absorption rate for new communities tends to outpace revenue generation, so we will be investing ahead of the actual closings. Those are the two main points I wanted to highlight.

Is the advertising increase expected to offset your 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.

Sure. Yes. So in terms of the incentive assumptions, the incentives are flowing into net revenues, 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.

Good. I have another question regarding the balance sheet and your self-development of lands. Your comments about impairments provide some context for this approach. I'm trying to understand your balance sheet better. Specifically, with your inventory units at around 3,500, where do you think this number will settle? It was as high as 4,800 in the second quarter of 2022. Considering your lot count represents an eight-year supply right now, but you’ve run out of land, has your pace declined? Do you anticipate your lot count will remain relatively stable while you pick up your closing pace? Consequently, will your owned lot supply decrease? Additionally, I’m curious about the units currently under construction, as that is another element of your balance sheet. Could you share your expectations for where that might be by the end of the year?

Certainly. Out of our $3.1 billion in inventory, approximately $2.1 million is allocated to raw land, land under development, and finished lots. When we analyze the 55,000 owned lots, we find that 41,155 are either in a raw state or under development. This includes lots that are either completely undeveloped or in the engineering stage, which is a cost-effective way to prepare for future active development. Only about 25%, or roughly 10,000 of our owned lots, are currently under development. We believe we are well-positioned to manage the delivery of these lots to meet anticipated demand for not just 2024 but also 2025, as we transition engineered lots into active development to align with our projected closing results over the next couple of years. Additionally, regarding vertical inventory, we maintain approximately six months' worth, with just over 3,400 units, which is near the midpoint of our guidance. Although we experienced a slower start to the year as noted by Eric, we expect this pace to improve as we launch new communities throughout the year. The $800 million invested in vertical inventory represents a six-month supply aligned with our expected closing trajectory.

And our next question will be coming from Michael Rehaut of JPMorgan.

I wanted to focus on the closings and the pace of community openings in 2024. Eric, you have provided guidance indicating a growth rate range of 4% to 19%. You described your outlook for closings growth this year as being in the double digits. I'm curious if this was specifically referring to the midpoint of your guidance or if you anticipate achieving the upper half of that range. I would like to understand your level of confidence in reaching the target of 7,500 to 8,000. Additionally, you mentioned that community openings are weighted toward the second half of the year. How should we consider reaching the goal of 150 openings by midyear?

Yes, great question, Michael. I appreciate you asking it. A couple of comments. First of all, I think we agree with you. We hope our closing guidance is conservative. And that's the way we believe it always should be. So yes, when we're talking about double-digit growth, that was referring to the midpoint. Community count growth, we do expect to be back-end loaded. As an example, one of the exciting things that the team is 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. Those are a couple of exciting things. And yes, if we perform the way we're supposed to, leads are up, sales last week were really positive. The midpoint to the high end of the guidance range is certainly possible, and that's the goal.

Great. Great. And then on the community count, 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, I know that in an earlier question, you just said growth, but I think you've been more explicit in other calls and kind of looking at getting to that 180 mark or better?

Yes. Another great question, Michael. We chose not to say 180 specifically for community count growth the following year. Part of the reason is we are very opportunistic and very selective on new acquisitions. We talked about never taking an inventory impairment in our life of LGI, which is a hats off to the acquisitions and development teams across the nation for pulling that feat off, and we're very proud of that. So we're cautious in our buying right now. And that being said, it really depends on what new acquisitions look like for the next 6 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.

I appreciate that. I have a couple of quick questions if I may. First, could you provide an update on how February is performing in terms of closings for the month, with about 10 days left? Secondly, regarding the interest amortization, it's typically in the low 1s, but based on guidance, it appears to be around 2%. I want to confirm that I have this information correct.

Yes, I can take the first part of the question on closings for February. 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, in the last couple of 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.

Yes, and I can take the interest question for you, Mike. 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.

Our next question will be coming from Jay McCanless of Wedbush.

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?

Yes. I think we just didn't see that, Jay. I think part of this, we were really focused on ending the year strong and getting to that over 6,700 closings last year, which we are proud of. That's what we said we were 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 that around the holidays, 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.

Can you discuss any new incentives or affordability strategies you might implement for customers? Additionally, with a considerable amount of multifamily supply entering the market this year, what strategies do you have in place to maintain your core customer base in LGI neighborhoods?

Yes. I think a couple of things there is, Jay, we're always going to be talking to our customers about the advantage of homeownership versus renting. I mean, if there's more supply of rental houses out there or rental units or 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 to 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 of previous calls. A percentage of houses under 1,500 square feet that we sold in 2021 was 21% of our houses, and 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.

And our next question will be coming from Alex Barron of Housing Research Center.

Yes, I was hoping you guys could share how many homes you guys have under production and how many of those are completed specs?

Yes, sure. We've got about 1,400 that are homes in progress and 1,850 completed homes.

Okay. So a total of 3,250?

Yes. And then the rest would be information centers to get to a 3,427.

Okay. Great. And then I guess, just philosophically speaking, given everything that's going on right now, are you guys more inclined to try to preserve margins or try to preserve a sales pace to maintain volume even if that affects margins?

Yes, Alex, that's a great question. It really depends on which margin you're referring to. We're cautious with our gross margin because we want to keep up our sales pace. For us, that involves looking at mortgage incentives and increasing our advertising spend. We aim to maintain our sales pace while also keeping our adjusted gross margin high, although right now we are more focused on the margin. We're beginning to see some appraisal challenges across the United States, but it's still a very small issue. We're confident in our sales prices and believe we're providing good value to our customers. However, we are monitoring the situation and will adjust accordingly if necessary.

And in terms of incentives, roughly, how much are they as a percentage of your sales price?

Yes. I think there's a couple of different factors there. 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.

And at this time, I'm not showing any further questions. I would like to hand the call back to Eric for closing remarks.

Thank you to everyone for participating in the call today and for your interest in LGI Homes. Have a great day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference.