Welcome to LGI Homes Third 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. After management's prepared remarks, there will be an opportunity to ask questions. At this time, I'll turn the call over to Joshua Fattor, Executive Vice President of Investor Relations and Capital Markets. You may begin.

Thanks, Latania, and good afternoon. Before we begin, I'll remind listeners that this call contains forward-looking statements, including management's views on 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 shouldn't 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, which 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 September 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 LGI Homes' earnings call. We're pleased to report another strong quarter, driven by sustained demand for new homes across the country. Despite continued affordability challenges, we delivered outstanding financial results that reflect our focus on operational excellence and a commitment to maximize profitability on every home sold. As highlighted in our press release this morning, we delivered 1,757 homes in the third quarter. Those closings combined with a record-high ASP of more than $371,000 resulted in revenue of $652 million, an increase of 5.6% compared to last year and the highest revenue we've reported since the second quarter of 2022. For the last several years, we've made considerable progress in acquiring and developing attractive land positions across the country. Over the last year, you've seen many of these communities come online and we're extremely pleased to have ended the third quarter with 138 communities, a noteworthy 30% increase over the prior year in our sixth consecutive quarter of community count expansion. Additionally, this was the largest absolute number of communities that we've added in any single year. Given when we acquired these communities, the capital invested in their development and the rising cost of replacement projects, their inherent value is substantial. In light of this, simply maximizing absorptions at the expense of margins and shortening the economic lifespan of these assets in the process does not yield the optimal returns we believe are achievable with a little patience and a disciplined approach to pricing and incentives. Therefore, we continue to focus on driving profitability on every home we sell, even if the result is a pace that is below our historical average. This strategy reflects our commitment to maximizing long-term profitability rather than focusing solely on immediate output. Further, it ensures we sustain our strong margins and generate value for shareholders over a longer period, balancing today's performance with tomorrow's opportunities. The success of the strategy played out again during the third quarter as we delivered an adjusted gross margin of 27.2%, up 20 basis points from the prior quarter and in line with our standout result from the same period last year. Additionally, we delivered a pre-tax net income margin of 14.1%, up 130 basis points sequentially and significantly higher than our pre-pandemic average of 12.8%. These and other achievements contributed to diluted earnings per share of $2.95, representing an increase of 4% year-over-year and 19% sequentially. During the quarter, we averaged 4.4 closings per community per month. Our top markets on a closings per community basis were Las Vegas with 9.9, Nashville with 9, Charlotte with 8.9, Dallas-Fort Worth with 6.4, and Tampa, also with 6.4 closings per community per month. Congratulations to these teams in these markets and their outstanding performance last quarter. One final highlight, we were proud to be recognized by Newsweek for the second consecutive year as one of the world's most trustworthy companies. This award underscores our commitment to integrity and excellence with our customers, with our employees, and with our investors. This recognition highlights the strength of our culture and the integrity of our employees who provide exceptional customer service as they help families across the country achieve the dream of home ownership. With that, I'll invite Charles to provide additional details on our financial results.

Thanks, Eric. As mentioned earlier, our revenue in the third quarter increased 5.6% year-over-year to $651.9 million. During the quarter, we closed 1,757 homes, slightly higher on a year-over-year basis and 6.2% higher sequentially. We closed 160 homes through our wholesale business, representing 9.1% of our total closings compared to 7.9% last year. Those closings resulted in revenue of $49.5 million, an increase of 14.2% compared to last year. Our average sales price was a record $371,004, an increase of 5.2% over the same period last year, and 1.9% sequentially. The increase was primarily driven by our decision to maintain profitability through price increases in the majority of our markets, as well as a larger percentage of closings in markets with higher average price points, particularly our West and Northwest segments, and was partially offset by a slightly higher percentage of wholesale closings. Our gross margin performance again reflected the balanced use of financing incentives and our ability to offset the financial impact of these tools by raising prices and taking a disciplined approach to the absolute level of rate buy-downs. As a result, our third-quarter gross margin was 25.1% and our adjusted gross margin was 27.2%. As Eric mentioned, adjusted gross margin improved 20 basis points sequentially and was in line with the prior year result, and our pre-pandemic average. Adjusted gross margin excluded $13 million of capitalized interest charged to cost of sales, and $1.2 million related to purchase accounting, together representing 210 basis points compared to 150 basis points last year. Combined selling, general and administrative expenses for the third quarter were $83.2 million or 12.8% of revenue. Selling expenses were $55.2 million or 8.5% of revenue compared with 8.1% in the same period last year. The increase was primarily related to higher advertising spend, and to a lesser extent increased personnel costs related to new community openings. General and administrative expenses totaled $28 million or 4.3% of revenue, in line with the same period last year. Based on our performance to date, we now expect our full-year SG&A expense as a percentage of revenue to range between 14% to 14.5%. Pre-tax net income was $91.9 million compared to $89.4 million during the same period last year. Pre-tax net income as a percentage of revenue was 14.1% compared to 14.5% last year and 12.8% in the second quarter. Our effective tax rate was 24.3% compared to 25.1% last year. Given our performance to date, we expect our full-year tax rate will be approximately 24.5%. Overall, we generated net income of $69.6 million or $2.96 per basic share and $2.95 per diluted share. Gross orders in the third quarter were 1,967, net orders were 1,452 and our cancellation rate was 26.2%, down slightly compared to last year. We ended September with 1,088 homes in our backlog, representing $417.8 million. At September 30, our land portfolio consisted of 68,564 owned and controlled lots. Of those lots, 54,029, or 78.8% were owned and 14,535 lots, or 21.2% were controlled. Of our owned lots, 38,734 were classified as raw land and land under development with less than 30% of those lots in active development. Of the remaining 15,295 owned lots, 10,827 were finished vacant lots, 2,491 were completed homes and information centers. And during the quarter, we started 1,554 homes and had 1,977 homes in progress at quarter end. 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 $863.3 million drawn on our revolver, resulting in a debt-to-capital ratio of 43.6% and net debt-to-capital ratio of 42.7%. Total liquidity was $375.4 million including $60.9 million of cash and $314.5 million available to borrow on our credit facility. Our stockholders' equity at September 30th was $2 billion and our book value per share was $84.93. On October 9th, we successfully amended our credit agreement and we're pleased to have several lenders who had previously planned to exit in April of next year choose to extend their capital commitments through April of 2028. Their decision to extend for the full duration of the facility offsets $125 million of the $245 million reduction in capacity that we previously expected in April. Therefore, under the terms of the new agreement, we will maintain our total capacity of $1.205 billion through April 2025 and have $1.085 billion of capacity through April of 2028. At this point, I'll turn the call back over to Eric.

Thanks, Josh. We're pleased with the strong results we delivered in the third quarter and all of our accomplishments year to date. Turning to the current sales environment, I'll provide our thoughts on the fourth quarter to date and briefly discuss our updated guidance. Later today, we plan to report that we closed 526 homes in October, down slightly from the prior year, while leads and traffic in October were similar compared to September. We did experience a moderation of sales activity in October, a trend that appears to have been broadly experienced across the industry. Part of this is certainly related to our growth and the time it takes to get new hires trained and selling the LGI way, as well as the impact of higher rates on affordability. We believe this is a near-term dynamic and not a new normal. The fundamentals of the housing market are strong, supported by continued household formations, years of underproduction, and limited supply of resale homes. Finally, the U.S. economy continues to grow and remains productive, resulting in a resilient labor market and historically low unemployment. In short, the long-term outlook is undeniably positive. Based on recent demand trends, our results to date and outlook for the next two months, we now expect to close between 6,100 and 6,400 homes this year at an average selling price between $360,000 and $370,000. Margins in the fourth quarter are expected to be similar to slightly lower than what we delivered in the third quarter, depending on geographic, product, and retail versus wholesale mix, as well as the cost of incentives offered during an annual make-remove sales event. Based on those variables and our strong performance today, we are raising our full-year margin guidance by 50 basis points at both the low and the high ends, and now expect to deliver gross margins between 24% and 25% and adjusted gross margins between 26% and 27%. As I highlighted at the beginning, community count continues to grow. Community count held steady at 138 in October, and we have 12 new community openings planned for November. We continue to expect to end 2024 with approximately 150 active communities. Additionally, we expect another 10% to 20% growth in our community count in 2025. In conclusion, I want to thank our employees. Your hard work, dedication, and execution on our strategy were essential to our success in the third quarter. Thanks to your outstanding efforts, we are well-positioned to continue delivering profitable results and creating long-term value for our shareholders. We'll now open the call for questions.

Our first question will come from Trevor Allinson of Wolfe Research. Your line is open, Trevor.

First one on gross margin performance, which was really impressive in the quarter. You raised your full year gross margin expectation and what most builders are describing as a challenging incentive environment. Can you talk about what came in better than what you were anticipating and sort of bridges from your prior guide to your updated guide?

Yeah, Trevor, this is Eric. I can start. It's really just what we're seeing as far as updating the guidance with our results from Q3 and then anticipating what it's going to be in Q4, and the overall yearly guidance needed to be upgraded. I think it goes back to that pace versus price initiative. Like other builders, we have to put a margin on top of our costs and we are looking at incentives closely. We're looking at the value of our land underneath every house we build and certainly houses that are complete, we need to incentivize, but we've been avoiding wholesale price reductions because in most cases just reducing the prices doesn't necessarily increase your pace. There's other things we look at like marketing, product, and training. We have a lot of new hires right now while we're weighing all of those incentives.

And then Eric, I wanted to follow up on a comment you made in your prepared remarks about near-term dynamics not necessarily representing a change for the industry. We've heard a lot of builders talk about non-rate impacts to demand conditions; a lot of people cite the election. So is it your view that once we get past the election into early next year that even if rates remain elevated you could still see some improvement in demand into the spring selling season? Or do you think that's truly going to be dictated by rates and affordability? And perhaps your view is that where rates are currently isn't going to be sustained as we move through 2025. Thanks.

Yeah. I think, Trevor, for us it's—we look at demand as the number of leads that we have coming in. The demand for homeownership and what we're seeing in the field remains strong. Over 8,000 individual leads last week inquired about homeownership. So we don't believe the election has anything to do with demand. The challenge with our pace right now and what we're working through every day in the offices nationwide is entry-level affordability. Affordability is challenged right now. The combination of rates being higher and the average price, as we stated in our prepared remarks, average sales price this quarter was the highest in company history. Those two are leading to affordability challenges and the amount of income it takes to qualify for an entry-level house. We have essentially eliminated the customer that makes $60,000 to $100,000 a year in combined income from the market just from a qualification standpoint relative to current ratios. So that's the challenge we have on a pace standpoint, but that is about the only component that is cautious right now. Absorption pace is challenged, but gross margins are strong, demand is strong, community count growth is strong—a lot of positive things happening in our business.

And one moment.

I appreciate all the color. Thank you and good luck moving forward.

Thanks, Trevor.

Our next question will go to Andrew at JPMorgan. Andrew, your line is open.

Hi, everyone. This is DeRose on for Mike. Congrats on the quarter. Appreciate you taking my questions. Just to go again on the gross margins: in your view, what's allowing you to maintain this level of margin and hold it relatively steady as compared to your peers? And how should we think about the next two to three quarters as you adjust prices of new communities and their openings?

Yeah. Andrew, I'll answer it another way as well from a belief on how we price our homes, but also we tend to do a lot of land development at LGI, a lot of self-development. Our gross margin from a company standpoint has to capture both the development profit and the homebuilding profit. So our gross margin should be higher than our peers because we need to capture that development profit. The other item is there is a lot of value in the land that we develop, and we're financing that more on balance sheet than off balance sheet. Relative to our peer group, who have really gone all in on land banking, land banking is expensive. There is a lot of value to land banking as it relates to certain metrics like return on equity, but it is a headwind to gross margin. We have a cost advantage as it relates to gross margin and our lot cost because we are keeping everything on balance sheet rather than doing off-balance sheet land banking. I think that's also an important point.

Got it. I appreciate that. And then kind of in terms of land inflation, what are you seeing in terms of land contracted today? And maybe help us understand the difference between development versus the actual land purchases. Any color there would be helpful.

Yeah, Andrew, it's different in every market. Generally speaking, land prices are not coming down; still strong demand for land. The bigger component for us because it's a larger percentage of the finished lot is the development cost—development costs remain elevated. We don't see a lot of relief in development costs, including doing business with cities and counties and platting fees. We believe costs are going to continue to go up for our development. We are starting to see, because of challenges for private builders, more opportunities to buy finished lots on a take-down basis or buy opportunities where capital wasn't available for a builder—not necessarily at distressed pricing levels, but it may create more opportunities to grow our community count in the future as well.

And one moment for our next question. Our next question will be coming from Carl Reichardt of BTIG. Your line is open, Carl.

Just one housekeeping question for you, Charles. The other income this quarter relative to our number was basically all the difference between our EPS estimate and what you produced—what was that this quarter? And then do you have a sense of the run rate going forward into the fourth quarter and into next year on what that might be?

Yeah, Carl, this quarter we had about $4.5 million related to land sales compared to last quarter's $2.7 million. So the majority of the delta this quarter over last was related to some additional lot sales. We expect it to be lumpy going into the fourth quarter and into the future. So don't really have specific guidance for you in terms of what we think fourth quarter or 2025 will be.

I thought that might be it. And then for you, Eric, I think I may have asked this before, so I want to touch on it again. If I look at your absorption rates per community, you're down about 33% from where you were in 2022. Your ASP is up about 5% from there. If I look at the midpoint of your year-end guide, how are you changing compensation structure for sales to focus more on margin if absorptions per sales person are falling? How do you incent them to focus on that dynamic as opposed to turnover?

Yeah, it's a great question, Carl. The focus is really leaving that commission percentage the same. We believe we pay one of the highest commission rates to our salespeople in the industry. We know we do. Having that same percentage on a higher ASP, even though the unit volume may be down on a per-community basis, the overall revenue that an individual salesperson creates or a community creates is very similar to what it was a few years ago. So the income is still attractive because they're paid on the revenue part of it.

One moment for our next question. The next question will come from Jay McCanless of Wedbush. Your line is open, Jay.

Hey, guys. A couple of questions. First, Eric, that comment you made about households with a $60k to $100k income being priced out of the market now—how many households, how many potential customers do you think you're talking about that now can't look at home ownership?

I don't have that answer off the top of my head, Jay, but I think it's a pretty significant number. I was in the sales office this last weekend and I try to get to the field as much as I can, and there's a lot of customers in that range that are right now forced to keep renting or they have to save up more money for a down payment or reduce debt. Our team does an exceptional job of working with these customers and helping them get into position where they can buy. But household income constraints because of rates and ASP make it more difficult than it used to be. That difference between owning a home and paying rent is wider now than it has been in the past. Also, a lot of our customers over the years have used various bond programs put out by state and local agencies. With those local bond programs, you don't have the ability to do a forward commitment and buy down rates. So many of those programs today have a market rate of 7% to 7.5%, which is completely different than it was three or four years ago.

And I know you aren't ready to give 2025 guidance yet, but in terms of pace, how are you thinking about the right pace? Closings have missed your mark the last couple of years and with all the communities you're bringing online, if rates don't go down from here, should we expect a pace in line with what we saw in the back half of 2024? How are you thinking about it, especially with all the communities you're bringing out of the ground?

It's a good question, Jay. We're looking at pace and also at revenue per community, ASP, gross margins, etc. We're not giving 2025 guidance today. From our perspective, if the selling dynamics remain similar to 2024, a similar pace in 2025 would still result in a very positive year for LGI. ASP has room to continue to go higher. We just talked on the call about an additional 10% to 20% in community count growth next year, strong gross margin, and increasing EPS. One factor in our favor is that sales representatives and managers typically perform substantially better in their second year. We've had significant community expansion and many new hires, so I'm excited about those individuals getting into their second year in 2025, and that should have a positive impact on the company.

So on affordability and plan size, do you feel like there's more opportunity to bring down the size of plans? Or have you hit a point where reducing square footage further compromises product quality—where it becomes an ADU rather than a house?

I think we're near that point because we've been focused on affordability and our plan mixes for a while. On new communities we're always looking at that. We want to build quality, affordable homes. We'll look at square footage as the primary driver to reduce overall cost and improve affordability, but we won't chase square footage down to the absolute bottom. Some competitors are building product without garages or with one-car garages. That's not the product we'll build at LGI; we want to be proud of what we build. Nationwide, our houses have hard surface countertops, and while there are components we could reduce to save a few thousand dollars, we want the product to be great for our customers to move into.

Understood. One more: you have Terrata and move-up price points seem to be selling well. Is it a thought to convert some communities to Terrata to capture move-up demand until rates come down?

Certainly, depending on the market and community. We do a lot of development and have many larger communities. In some communities we'll have both Terrata and LGI Homes product within the same community. Terrata is going well for us and we expect continued growth. Since our first Terrata closing in 2017, Terrata closings have increased every year, and we'll continue to do more Terrata product on a community-by-community basis.

Our next question will be coming from Alex Barron of Housing Research Center. Your line is open.

I wanted to ask along the lines of Dave's questions. Most of your homes are single-family. I don't recall you doing much attached product, but is that something you're considering as a way to make houses more affordable?

We do have a number of attached product offerings across the United States and we continue to consider attached product as part of our community mix. Part of our community count growth next year will include attached product as well.

Got it. And my other question was the SG&A ratio, which you indicated is in the 14% range. Many larger public builders are now below 10%. Is there anything you're working on to try to bring down the SG&A ratio?

Nothing specific to announce, Alex. We break SG&A into selling expenses and G&A. Selling expenses are predominantly advertising spend, commissions to both inside and outside salespeople, and running our offices. As community count continues to grow, we continue to invest in new community openings and information centers. G&A is more corporate overhead and support operations and we've been running around an average of about $30 million a quarter; this third quarter came in slightly under that average. We continue to monitor overhead to make sure we're supporting the field efficiently. Right now we're focused more on community count growth and getting these new communities opened in our existing markets so we can leverage established overhead going forward.

Okay. And if I could ask one last one: any thoughts around issuing more fixed-rate debt to swap out revolver draws?

It's always on the radar. We evaluate those opportunities and are constantly informed by our syndicate where rates are and how our current bonds are trading. We want to make sure it's an attractive transaction and that there's a good use for the capital, but it is something we continually consider.

One moment for our next question. The next question will come from Kenneth Zener of Seaport. Your line is open.

A few questions. I understand you don't want to give full 2025 guidance yet, but could you illuminate your returns on capital or equity goals so we could understand how you are balancing margin versus asset efficiency? Also, as your land has been in development on the balance sheet and capitalized interest has been picking up, is that expected to increase next year as these longer-dated land positions come on through the income statement?

Ken, I can start and Charles can add specifics. Generally, when we underwrite a deal, we're targeting roughly a 20% ROE. Over the last couple of years we've made significant investments in land and development for the communities we're bringing online. Those investments have weighed on current returns because a lot of the capital is deployed but not yet generating revenue. We expect our ROE to increase over the next couple of years as those communities come into production. Regarding margins, without getting into specific guidance, we expect similar gross margin ranges to this year, assuming similar variables like wholesale versus retail mix, geography, and incentives.

Appreciate that. And on capitalized interest, is it reasonable to assume that will be in the same range, or is it going to increase as these longer-dated land positions come online?

Ken, we've been running around 180 to 200 basis points of capitalized interest in terms of what gets excluded from adjusted gross margin. I would say we're likely to be somewhere around that 200 basis point range as we go into 2025, but we'll provide more color as we get closer to giving guidance for next year.

Excellent. One last question on development specifics: can you comment on your land cost as a percent of sales versus your variable development costs? I assume development costs are more similar to other builders due to common trades and infrastructure requirements.

I can start. Our average finished lot cost as a percentage of ASP has been close to around 20%, just under, for quite some time. That is part of how we think about pricing and achieving returns. When you're buying finished lots, that number can push up. From a development standpoint, the raw land portion is somewhere around 10% of the total finished lot cost. Most variability comes from infrastructure requirements—off-sites required, municipal requirements, detention, and yield constraints. The vast majority of replacement costs come from development spend rather than raw land acquisition.

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

Thanks, everyone, for participating on today's call and your continued interest in LGI Homes. Have a great rest of the day.

This concludes LGI Homes Third Quarter 2024 Conference Call. Have a great day.