Welcome to LGI Homes' Second Quarter 2024 Conference Call. Today's call is being recorded and a replay will be available on the company's website at www.lgihomes.com. The operator provided instructions. At this time, I would now like to turn the call over to Joshua Fattor, Executive Vice President of Investor Relations and Capital Markets. Please go ahead.

Thanks and good afternoon. I'll remind listeners that this call contains forward-looking statements, including management's views and the company's 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 those 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 quarterly report on Form 10-Q for the quarter ended June 30, 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. With me today are 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're pleased to report the strong operating results we delivered in the second quarter and to provide more details on the significant progress we've made increasing profitability and growing community count. As highlighted in our press release this morning, we delivered 1,655 homes at a record-breaking average sales price of $364,000, resulting in revenue of over $602 million. During the quarter, we opened more self-developed communities underwritten at higher margins and successfully offset the impact of mortgage buy-down incentives and cost inflation by raising prices in our higher-performing communities. Doing so allowed us to deliver gross margin of 25%, up 300 basis points from last year and adjusted gross margin of 27%, up 320 basis points from last year. These are noteworthy increases in our profitability that bring today's margins in line with pre-pandemic levels. Pretax net income for the quarter was approximately $77 million, representing a pretax profit margin of 12.8%. This was a 170-basis-point improvement over last year and like gross margins in line with our performance prior to the pandemic. These and other achievements contributed to earnings per share of $2.48, an increase of 10.2% compared to the same period last year. In May, we hit a new record of 130 communities and ended June with 128 communities, up an industry-leading 26% in the past year and more communities are coming. We just completed our July training class here in The Woodlands, which included 60 new salespeople who will be instrumental in helping us achieve our goal of 150 communities by year end. During the quarter, we averaged 4.3 closings per community per month. Our top markets on a closings per community basis were Charlotte with 8.6 closings per month, Las Vegas was 7.8, Mid-Atlantic was 6.9, Dallas-Fort Worth with 6.7, and Fort Pierce was 6.3 closings per month. Congratulations to the teams in these markets on their outstanding results last quarter. On May 9, we held our annual Service Impact Day. Nationwide, our teams volunteered more than 9,000 hours working with 73 local charities that support the most critical needs of our communities. We're grateful to our nonprofit partners for allowing us to support the transformative work they do, and we thank our employees for making this year's Service Impact Day a success. At a high level, the housing market remains healthy with demand supported by strong fundamentals, including household formations, in-migration trends, years of underproduction, and a lock-in effect limiting the supply of resale homes. Additionally, we're witnessing a resilient labor market with historically low unemployment. On the other side of this equation, constrained affordability remains the number one challenge for customers and the key limitation on higher sales and closes. With rising land and input costs compounded by higher interest rates and increased cost of insurance and property taxes, today's entry-level customer faces harder choices and has fewer options. At LGI Homes, we're making those choices easier and creating meaningful value for our customers by providing affordable-sized but feature-rich homes and offering a mix of incentives that results in the most attainable monthly payment for our buyers. Finding the effective mix of each of these levers—product type, size, amenities, ASP, and incentive levels—presents a unique set of operational challenges in every market. Our performance in the second quarter demonstrates our success at balancing these variables while still delivering outstanding margins that reflect our commitment to increasing profitability and driving higher returns. Now, I invite Charles to provide additional details on our financial results.

Thanks, Eric. As noted earlier, revenue in the second quarter was $602.5 million based on 1,655 homes closed at an average sales price of $364,047, an increase of 4.6% compared to last year. Of our total closings, 117 were through our wholesale channel, representing 7.1% of total closings compared to 7.5% last year. Our second quarter gross margin was 25% and adjusted gross margin was 27%. As Eric mentioned, gross margin improved significantly, up 300 basis points year over year and 160 basis points sequentially, while adjusted gross margins improved 320 basis points year over year and 170 basis points sequentially. Adjusted gross margin excluded $10.6 million of capitalized interest charged to cost of sales and $1.2 million related to purchase accounting, together representing 200 basis points compared to 180 basis points last year. The increase was the result of higher borrowing costs coming through cost of goods sold, partially offset by lower purchase accounting adjustments. Combined selling, general, and administrative expenses for the second quarter were $83.4 million or 13.8% of revenue. Selling expenses were $52.9 million or 8.8% of revenue compared to 7.6% in the same period last year. The increase as a percentage of revenue was primarily related to higher advertising spend this year as compared to last. General and administrative expenses totaled $30.5 million or 5.1% of revenue compared to 4.3% in the same period last year. The increase as a percentage of revenue was primarily related to higher indirect overhead expenses related to community count expansion that were allocated across lower overall closings. We continue to expect our full year SG&A expense as a percentage of revenue to range between 13% and 14%. Pretax net income was $76.9 million or 12.8% of revenue compared to 11.1% last year and 5.9% in the first quarter. The increase was the result of driving higher profitability in every home sold as well as $2.7 million related to the sale of lots in commercial land. Our effective tax rate was 23.8% compared to 25.6% last year. And we expect our full-year tax rate will be in the range between 24% and 25%. Second quarter gross orders were 2,201. Net orders were 1,713, and our cancellation rate was 22.2%. We ended the quarter with 1,393 homes in our backlog, valued at $553.6 million. Of those homes, 181 or 13% of our total backlog were related to wholesale contracts with institutional buyers. Turning to our land position, on June 30, our portfolio consisted of 69,904 owned and controlled lots. Of those lots, 54,362 or 77.8% were owned and 15,542 lots or 22.2% were controlled. Of our owned lots, 39,284 were either raw land or land under development with approximately 31% of those lots in active development. Of the remaining 15,078 owned lots, 10,407 were finished vacant lots and 2,032 were completed homes, including our information centers. During the quarter, we started 2,172 homes, and we ended the quarter with 2,639 homes in progress. With that, I'll turn the call over to Josh for a discussion of our capital position.

Thank you, Charles. We ended the quarter with $1.5 billion of debt outstanding, including $819.7 million drawn on our credit facility, resulting in a debt-to-capital ratio of 43.8% and net debt-to-capital ratio of 43%. The sequential increase in the amount drawn on our revolver was commensurate with the increase in our inventory as we started more homes in the second quarter. Total liquidity at the end of the quarter was $405.9 million, including $51 million of cash and $354.8 million available to borrow on our credit facility. We repurchased 83,763 shares for $8 million during the quarter and have $193.5 million remaining on our current authorization. Finally, at June 30, our stockholders' equity was $1.9 billion and our book value per share was $81.86, an increase of 11.3% over the same period last year. At this point, I'll turn the call back over to Eric.

Thanks, Josh. While we still have two days left for closing in July, we expect to report approximately 550 homes closed this month in a similar number of communities. Based on our performance to date, current backlog and a view of the inventory available to sell and close this year, we are updating our guidance. We now expect to close between 6,400 and 7,200 homes this year. This new range reflects our current view of the market and applies the pace in the second half of the year. That is similar to the sales pace we saw in the second quarter. As we mentioned earlier, we've been pleased with our ability to raise sales prices in most of our communities and especially in our highest-performing communities. Based on the contract value of homes in our backlog and continued outperformance compared to our original expectations, we're increasing our ASP guide to a range between $360,000 to $370,000, a $10,000 increase at both the low and high end of the range. We expect to continue to raise prices as needed, while remaining disciplined around the level of incentives required to achieve our margin targets. Based on our outperformance in the first half of the year, we are raising our gross margin guidance to a range between 23.5% and 24.5%, and adjusted gross margin to between 25.5% and 26.5%. I'll conclude by saying once more how pleased we are with our strong second-quarter performance. These achievements are thanks to our teams around the country and their tireless execution of our strategy. On the topic of our people, I'll share our financial highlights. For the second year in a row, U.S. News & World Report recognized LGI Homes as one of the best companies to work for in multiple categories. This achievement is clear evidence that we're creating an exciting workplace where our people feel valued, inspired, and positioned for long-term success. To all of our employees, I say thank you for your dedication and loyalty you continue to show to our company. I'll now open the call for questions.

The operator provided instructions. And our first question will come from Michael Rehaut of JPMorgan.

Hi everyone. This is Andrew Azzi on for Mike. I appreciate you taking the questions. Congrats on the quarter. I just wanted to get a sense of that gross margin improvement sequentially. If maybe you can bucket out the drivers of that, and how that translates over the next quarter, that would be excellent.

Hi Andrew, this is Eric. Big improvement in gross margin. I think the main point is, and we're pretty excited about it, all the development that we do—there's a lot of value in the lots that we own. There's a lot of value doing the own development. The team is doing a great job, and we're pricing our communities to market, which we need to make sure we're capturing the developer profit. And that's where I think that elevated gross margin comes from. And that's where we've been historically pre-pandemic. And that's where we need to be. We're a company that does a lot of development, we take on that development risk, it requires a lot of capital. And we need to pay for that or get paid for that and capture that development profit and have that adjusted gross margin up in that 27%, 28% range. The team is doing fantastic. So I think that's the leading driver of it.

Got it. I just want to ask also maybe on capital allocation. As we continue to grow, how you expect to manage your leverage metrics and what we could expect there in near to medium term?

Hey, this is Josh. We've typically said 35% to 45%. That will be the standard going forward for our gross debt leverage. When we look at all of the opportunities, I think for us right now it's continued land development that's bringing these new communities online. We continue to get M&A packages. Nothing is especially compelling that we've seen recently. We're a little bit more of a nuanced buyer, so that always makes that a little bit tricky for us. And then on the other side is the share repurchases. And so you saw we did about $8 million during the quarter. We got a great value on those shares. So we continue to monitor that as well.

Our next question is from Carl Reichardt of BTIG.

Thanks, everybody. Nice to talk to you. So Eric, you know that you've got your gross margin at a pre-pandemic level, and you've talked about that long-term average that you'd like to be at. Under the assumption that your current backlog or your homes under construction you haven't sold are going to run at a similar margin per your guidance, where do you start beginning to try to push absorption levels up a little bit? Do we need another 100 basis points of margin where you say we want to—now we want to focus a little more on pace. I'm trying to get a sense of where that balance is where you'd start to focus a little more on pace and be willing to give up a little margin to run the inventory turns faster?

Yeah, it's a great question, Carl. And figured that you had a question of price versus pace. Really, we've spent a lot of time analyzing the data. We're working with our leadership teams. We wish it was as simple as reducing the price and get more absorption. It really doesn't look like that. Our strongest communities—we looked at our top 10 communities that are driving the highest absorption rates—they also have the highest gross margin. So a couple of things we would point to: one, we're doing mortgage buydowns just like every other builder, and I think that's the big incentive that we offer. I think the cost of those incentives has come down a little bit or we've been able to offer a better rate over the last couple of months because the rates have moved in our favor. So we'll continuously look at the mortgage incentive program, but we're priced to market. There's a lot of value in our finished lots. So decreasing the price is likely not the answer to increasing the pace because we just don't see that's evident. Our communities tend to be larger in size, and we tend to gradually raise prices over time, and I will stay on that theory. The other thing we're seeing is on the house cost, we're starting to see some relief on house costs. It was fairly flat for cost in the last quarter. Certainly, if house costs provide some relief, we could lower ASPs, especially in newer communities and keep our gross margins similar but potentially help with the pace.

Okay, that's very comprehensive. Thank you, Eric. Actually, I was going to ask about build cost. Let me ask something different. So I think as I calculated it, you're a little bit over 11 years of land on a trailing basis. That's high even relative to you, and you've got big store count opening coming this year. I think you've talked a little bit about next year or so. So really two questions. One, can you talk a little bit about next year's plans for store openings? And when do you expect your planned land and lot spend to kind of flatten out trajectory-wise relative to what it has been to get this new store base open this year and into next? Thanks.

Yeah, I can take that community count. I'll let Charles talk about the land spend. But community count lags a little early for 2025 community count guidance yet. We plan on growing community count in 2025. We're focused on the 2024 community count getting to 150. We're still comfortable with that metric. We are at 128 last month. So a lot of new communities coming online in the back half of the year, a lot of training going on. We just hired 60 new sales reps to fill these communities. So we still feel comfortable about the 150. And then we'll see if any M&A opportunities arise, any finished lot opportunities arise because those can still be part of the community count for next year. We haven't seen as many opportunities over the last six months as we thought we might in a more challenging affordable market. But those may or may not come over the next couple of quarters. But confident in the 150 for this year. And Charles will talk about land spend.

Yeah, our owned lots are at just over 54,000 total lots. 10,400 of them are finished, so we've done a good job over the last 12 to 18 months on working through some of the pandemic-related delays and getting communities online. Certainly, they had taken longer over that period of time than we originally had expected or planned. So we feel very good about what the teams have been doing in terms of scheduling out our developments, getting those through the process. We still have 12,000 additional lots that are in development, so that's about a third of the remaining owned lots that are in some sort of land stage. So constantly monitoring the timing and delivery of those. In some markets, we're a little ahead in terms of what we have in terms of finished inventory, which will decrease the pace of development in some of those markets. In some markets, we are still working hard to get communities to deliver. I think beginning in the back half of this year, the development pace and then also the acquisition pace will certainly start to taper to where we see the replacement dollars that are coming in from the increased closings and community count increase start to exceed what we're spending on the development spend. I think we'll see that in the fourth quarter and into the first quarter of next year.

Right. Thank you so much, Charles. I really appreciate the answer, and thank you, Eric.

Our next question will be coming from Kenneth Zener of Seaport.

Hello, everybody. A couple of different questions here. Given the rate outlook, could you just level set us for where incentives are today, either like percent of ASP or kind of impact on margin specifically. And talk about how many of the buyers you're using? And if rates go down 50 basis points, what you're buying it to basically? So if rates—if you were to buy, it's a 6 or 5.5, rates go down 50 basis points, how much of a margin benefit would that be?

Yeah. It's a great question, Kenneth, and I'll have to give you a broad answer because incentives are really on a case-by-case, community-by-community, market-by-market basis nationwide. Certainly, incentivizing the houses that are finished and closing in the next 30 days is more common than something that is in permitting and not going to deliver for six months. A lot of that flows through our gross margin dollars, but some of the closing cost incentives also flow through SG&A. It's certainly an expense, and it's an elevated expense over where it was pre-pandemic. The positive thing is we've been able to raise prices, reduce our costs, capture development profit, and all of those savings have made up for the incentives at the current rate. In general, it costs about 1% to get a 0.25-point buydown in the rate.

Good, appreciate it. Now, this quarter with the rising gross margin and historically your DNA of doing all the self-development, could you frame out that spread that you historically associate with that? It seems to be the industry kind of talks about a 300-basis-point swing develop versus buying finished lots. Would you agree with that? Could you give us—

Yeah, that's exactly the LGI way of pricing communities. It's 300 basis points as a minimum. So I'd say 300 to 500 basis points is the typical spread. If we are going to price a community where we're buying a finished lot or pricing a community where we did the development, it should result in the same retail pricing. We're just creating greater margins because we're capturing that developer profit.

Good. And if I could—just given your SG&A rising with community expansion as you're pulling these online, could you help us think about what a more normalized SG&A level would be since you highlighted that with gross margins? Once these communities are up and you've absorbed the cost of these new hires—you just talked about 60 new hires—what would a more normalized SG&A level look like because it seems like you've been a little top-heavy there? Thank you so much.

Yeah, great question, Ken. This is Charles. Certainly in the beginning part of the year it becomes top-heavy when closings per community are typically lower in the first quarter. I think year to date, obviously our guidance implies that SG&A will continue to see some leverage as communities come online and the top line starts to increase. Historically, we've been around that 12% to 13% range. We've been spending more on advertising recently. We've been talking about that over the last several quarters, spending the money to generate the leads and driving leads to our communities. So I think that's been a little bit more elevated than what we might consider normal if you will. It depends, I think, in conjunction with where rates go and what we see in the future. We break it down into selling and then G&A. Selling is predominantly variable. That's where our commissions are recorded too. So that is the major driver for selling expense along with advertising. So I think that will stay relatively similar to or lower than where we were in the second quarter. On a long-term rate, selling is going to be 8% to 9%. And then on the G&A side, that's where we'll see the most operating leverage as we continue to grow, covering things like the corporate related costs. So that should trend down from 5% down into the 4% range.

Our next question is going to come from Jay McCanless of Wedbush.

Good afternoon, everyone. So Eric, I was surprised to hear you say that if you did cut prices that probably wouldn't drive more volume, that's essentially antithetical to what all of your competitors have been saying. Maybe could you talk about why a price cut could not work with the typical LGI customer?

Yeah. No, I think cutting price in general just gives you the monthly payment bang for the buck as it does putting money into mortgage incentives, because right now the challenge in the market is affordability. We're seeing strong demand from our customers currently living in apartments—somebody who is paying rent who wants to get into homeownership. But affordability is the challenge, driven by the combination of rates and pricing. The team is doing a great job working with customers. As a builder you can cut the price or you can work on mortgage incentives, and the mortgage incentives lead to a lower monthly payment. Cutting price in general, unless we're having appraisal challenges, doesn't make sense because the vast majority of our houses are priced based on comps in areas that tell you your price to market. There's no reason to sell houses below market. It's still a low supply environment generally across the United States, and the houses and lots we have are valuable. Discounting them to move them is generally not a great idea in our opinion.

Okay. And so looking at the new gross margin guidance, what is the downside risk and what could make gross margins go down sequentially in the back half of the year?

I think it's the mortgage incentive dollars—what it takes to make these houses affordable or get customers qualified. That's rate dependent and affects the cost of those incentives. We're not seeing a lot of relief on the cost. Even though house costs are fairly flat or showing some relief, doing business with cities—permits and fees—and development costs as new communities are coming online means new communities generally have a higher cost than the older communities that are selling out. So it remains a fairly high-cost environment where we need to raise prices just to maintain margins.

Okay. And I guess what percentage of communities were you able to raise prices this quarter?

I would say more than half for sure, just because of strong demand and to offset the cost increases that we're seeing.

Okay. And then just one more real quickly. I think I came over to Charles or Eric if you said it about not seeing the opportunities that you expected to see on the land side. Is that a function of deals not being brought to market or is that more aggressive buying from some of your competitors?

I think it's a little of both. It wasn't too long ago that we were discussing tighter bank lending for private builders and private developers; maybe you'd see some deals get dropped or have trouble getting financed in a more challenging market. Those types of markets, where financing tightens, can create more finished lot opportunities and deals. We're seeing deals out there and approving deals through our acquisitions committee. I think the comment is we just probably haven't seen as many as we thought might be coming.

I would now like to turn the conference back to Eric for closing remarks.

Yeah, thanks, everybody, for participating on today's call and for your continued interest in LGI Homes—and go Astros.

This concludes today's conference. Thank you for participating. You may now all disconnect.