Welcome to the LGI Homes, Inc. fourth 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 comments, there will be an opportunity to ask questions. I'll now turn the call over to Joshua Fattor, Executive Vice President. Thanks, and good afternoon. I'll remind listeners that this call contains forward-looking statements including management's views on LGI Homes, Inc.'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 related risks, and you should not place undue reliance on such statements which reflect management's current viewpoints and are not guarantees of future performance. On today's call, we'll discuss non-GAAP financial measures that are not intended to be considered in isolation or as substitutes for financial information presented in accordance with GAAP. Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the press release we issued this morning and in our annual report on Form 10-K for the period ended December 31, 2024, which we expect to file with the SEC later today. This filing will be accessible on the SEC's website in the Investor Relations section of our website. I'm joined today by Eric Lipar, LGI Homes, Inc.'s Chief Executive Officer and Chairman of the Board, and Charles Merdian, Chief Financial Officer. I'll now turn the call over to Eric.

Thanks, Josh. Good afternoon, and welcome to our earnings call. Before getting into the details of the fourth quarter, I want to begin by highlighting the significant progress we made on many of our objectives in 2024. Looking back, the year proved more than anyone expected. The anticipated relief in mortgage rates never materialized. Instead, rates continued their climb after the Fed began cutting further straining affordability. Year-end uncertainties around the economy and potential policy shifts only compounded these challenges, heightening concerns about rising input costs and the persistence of inflation. Despite this, we met and even exceeded many of our key strategic goals for 2024, including expanding our gross margins and increasing our community count. Additionally, we delivered full-year closings, community count, ASP, margins, and SG&A in line with our latest guidance. And our full-year margins and record-breaking ASP significantly exceeded the guidance provided at the beginning of the year. Finally, we continued making strategic investments to drive our growth in the years ahead. This progress in the face of a mixed macroeconomic backdrop and continued challenges to affordability is a testament to our team's relentless pursuit of our long-term growth and profitability goals. Our commitment to driving growth and profitability was again evident in our fourth-quarter results. During the quarter, we delivered 1,636 homes. Included in this number was the bulk sale in November of 103 fully leased single-family homes within an established community here in Houston. This sale was factored into the guidance we provided on our last call and is included in our 6,131 total closings for the year. Excluding the bulk sale, fourth-quarter closings were 1,533 homes, resulting in full-year closings of 6,028 homes. At an average sales price of over $365,000, these closings resulted in total revenue of over $2.2 billion in 2024. We averaged 3.8 closings per community per month last year. The lower pace compared to the prior year and our historical results reflects the current challenges around affordability. However, we continue to see strength in key geographies. Our top five markets this year were Charlotte and Las Vegas, with 7.4 closings per community per month. Washington DC and surrounding areas were 6.7, Raleigh was 6.3, and Fort Pierce was 5.5. Congratulations to the teams in these markets on your outstanding results. Another major highlight this year was community count growth. We installed and opened 80 new communities in 2024, 46 of which replaced existing information centers, and 34 additional communities that brought the total to a record-breaking 151 active. This represented a year-over-year increase of 29% over the 117 at the end of last year. We are excited about these new communities and the opportunities they bring. To support these new openings, we've invested in recruiting, hiring, and training a talented group of eager individuals. These new hires will require time to fully adapt to our systems and processes, and we're excited to see their success materialize over the coming year. Regarding profitability, our full-year gross margin and adjusted gross margin were up 120 and 160 basis points, respectively. And our pretax net income margin was up 70 basis points from the prior year. I'll wrap up by noting that the outlook for the current year and the challenging dynamics experienced in 2024 are likely to continue. Therefore, we remain focused on what we can control: hiring talented people, connecting with qualified buyers through targeted marketing, managing costs, starting affordable move-in-ready homes, and maintaining our strong balance sheet. Longer term, our outlook for the housing market remains optimistic. Resilient employment, persistent undersupply of homes, and strong demographic trends point to a favorable demand environment for many years to come. We continue to make investments in land, inventory, and operating platforms to support the affordability of our homes and drive sustainable growth into the future. With that, I'll turn the call over to Charles for additional information on our fourth-quarter financial results.

Thanks, Eric. Revenue in the fourth quarter was $557.4 million, a decrease of 8.4% year over year, driven by a 12.8% decrease in closings of 1,533 homes, and partially offset by a 5.1% increase in our average selling price to $363,598. Average selling prices were down 2% sequentially, reflecting higher levels of incentives on homes delivered. We closed 173 homes through our wholesale business in the fourth quarter, representing 11.3% of our total closings compared to 298 homes or 17% of our total closings in the fourth quarter last year. Gross margin as a percentage of sales in the fourth quarter was 22.9%, down just slightly from the same period last year but in line with our expectations given the higher level of incentives offered this year compared to last. Adjusted gross margin in the fourth quarter was 25.2%, up 10 basis points from the same period last year. Adjusted gross margin excluded $11.9 million of capitalized interest charged to cost of sales and $900,000 related to purchase accounting together representing 230 basis points. Combined selling, general, and administrative expenses were 14.7% of revenue. Selling expenses were $50.8 million or 9.1% of revenue, compared to 8.2% of revenue in the fourth quarter of 2023. The increase as a percentage of revenues was driven primarily by increased spending on advertising and to a lesser extent, higher personnel expenses due primarily to an increase in community count and a lower percentage of wholesale home closings. General and administrative expenses totaled $31.2 million or 5.6% of revenue in the fourth quarter, compared to 5.4% of revenue in the same period last year. Driven by higher overhead and operating costs due to community count growth. Included in other income is the sale of 103 leased homes resulting in a $14 million gain during the quarter. Pretax net income for the fourth quarter was $67.1 million or 12% of revenue compared to 11.3% in the same period last year. Fourth-quarter net income was $50.9 million or $2.16 per basic share and $2.15 per diluted share. Highlighting a few full-year results, revenue was $2.2 billion, a decrease of 6.6% driven by a 10.4% decrease and offset by a 4.2% increase in the full-year average sales price to $365,394. During the year, we closed 552 homes through our wholesale business representing 9.2% of our total closings and generating $164.1 million in revenue. Given market conditions, we expect our wholesale business will represent approximately 10% of our total closings in 2025. Our full-year gross margin was 24.2% and adjusted gross margin was 26.3% representing year-over-year increases of 120 basis points and 160 basis points respectively. Combined selling, general, and administrative expenses were 14.6%, an increase of 150 basis points compared to 2023 driven primarily by higher advertising spending. Our pretax net income for the year was $258.9 million or 11.8% of revenue, up 70 basis points from the prior year. Finally, our 2024 net income was $196.1 million or $8.33 per basic share and $8.30 per diluted share. Fourth-quarter gross orders were 1,450, net orders were 1,044, and the cancellation rate during the quarter was 28% compared to 37.8% during the same period last year. For the full year, gross orders were 7,816, net orders were 6,037, and the cancellation rate was 22.8%, slightly lower than our historical average. We ended the year with 599 homes in backlog, valued at $236.5 million. The sequential decrease in the number of homes in backlog was primarily due to the closeout and transition between communities, in a softer demand environment in the fourth quarter resulting from higher mortgage rates. Turning to our land position. At December 31, we owned and controlled a total of 70,899 lots. A slight decrease year over year, but a 3.4% increase sequentially. More lots were brought under control in the fourth quarter. We ended the quarter with 53,317 owned lots, a decrease of 3.6% year over year and 1.3% sequentially. Of our owned lots, 37,432 were raw land, land under development of which approximately 30% were in active development, and 40% were in engineering. Of the remaining 15,885 owned lots, 11,842 were finished vacant lots, and 2,685 were completed homes and information centers. During the quarter, we started 1,108 homes and ended the year with 1,358 homes in progress. Finally, at December 31, we controlled 17,582 lots, an increase of 11.6% year over year. With that, I'll turn the call over to Josh for a discussion of our capital position.

Thanks, Charles. We ended the year with nearly $1.5 billion of debt outstanding, including $401.9 million drawn on a revolver, resulting in a debt-to-capital ratio of 42.1% and a net debt-to-capital ratio of 41.2%. Total liquidity was $323.7 million, including $53.2 million of cash on hand and $270.5 million available to borrow under our revolving credit facility. In November, we issued $400 million of 7% senior unsecured notes and used the net proceeds to pay down borrowings on our revolver. The notes mature in 2032 and are callable beginning in 2027. During the year, we repurchased 307,867 shares of our common stock for $30.8 million and had $180.7 million remaining on our current authorization at year-end. Finally, the book value of our equity exceeded $2 billion and our book value per share was $87.07. At this point, I'll turn the call over to Eric.

Thanks, Josh. The softness experienced at the end of 2024 continued into January, and the first quarter has gotten off to a slower start. The increase in mortgage rates in October and November impacted our year-end backlog. With mortgage rates exceeding 7% in January, both orders and closings were down compared to last year. While orders have incrementally improved in February, the trend is still subdued compared to this time last year. With those points in mind, I'll share our outlook for 2025. For the full year, we expect to close between 6,200 and 7,000 homes and to end 2025 with 160 to 170 active selling communities. While the range is higher than our actual closings last year, it does infer an absorption rate of around 3.5 at the midpoint. Behind this assumption is our current view on the market, including our muted closings in January, and what we believe is attainable if conditions were to remain similar for the duration of the year. Selling prices will be similar to last year, as we focus on sustaining margins in the face of expected cost inflation while still offering the most affordable product to our customers. Based on our backlog, product mix, and expected community openings, we are guiding to a full-year average sales price between $360,000 and $370,000. We continue to monitor the potential impacts that policy changes may have on costs. Similar to our experience during the supply chain disruptions during COVID, we believe our position as an entry-level spec builder gives us room to substitute product offerings in real-time, mitigating extensions of our construction cycle times and minimizing inconveniences for our customers. To address affordability challenges confronting our entry-level buyers, we will continue to lean into incentives including closing costs and interest rate incentives, discounts to older inventory, and reducing prices in select neighborhoods. We are currently investing around five to six points or approximately $20,000 per home on average to offer these incentives to our customers. However, even with the impact of these incentives, we currently expect full-year gross margin between 23.2% and 24.2% and adjusted gross margin between 25.5% and 26.5%. Part of what is keeping this guidance in line with our historical results is the fact that the majority of our communities were self-developed projects that were underwritten at higher margins that capture the developer's profit. This should naturally result in higher overall margins that are at or near the top of the peer group even while using these tools to support affordability. SG&A expense is expected to range between 14% and 15%. And finally, we expect the full-year tax rate to be approximately 24.5%. In conclusion, I want to thank our team members again for their dedication and congratulate them on the successful outcomes they delivered against a challenging economic backdrop. This year, we are staying the course and remain committed to maintaining profitability through operational discipline and to positioning LGI Homes, Inc. for sustainable long-term growth. I'm confident in the talent and expertise of our team and believe we are well-positioned to navigate whatever challenges arise in 2025. Operator, please open the line for questions.

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

Hi. Good afternoon. Thank you for taking my questions. Eric, I wanted to start there on gross margins where you kind of left off. The midpoint of your full-year 2025 gross margin guide implies margins are down only modestly despite probably coming into the year here quite a bit lower than where we came into 2024. So just trying to get a feel for some of the moving parts there. Are there any offsets whether that be from pricing or anything else perhaps reduced incentives as the year goes on, that would offset some of these cost inflations you're likely seeing from land and potentially any vertical cost?

Trevor, thanks for the question. Yes, gross margin will be expected to be similar year over year. We do expect costs to continue to go up. Whether that's labor-related, sticks and bricks costs, land development costs, our fees, and the cost of doing business with different municipalities across the United States. We believe we're going to have to offset those costs through pricing and also our incentives to customers as well. Right now, we're running five to six percent, as we said in our prepared remarks, about $20,000 on average for our average house cost. But we think with all the development we're doing, being in a historical range around that 25% adjusted gross margin is where we need to be to capture that developer profit even though we're offering a lot of incentives to our customers to help with rate buy-downs.

Yeah. Makes a lot of sense. And then second question would be on your 3Q call, you guys talked about not expecting to see pace slow in 2025. Clearly here, your absorption target is a bit lower on a year-over-year basis. Can you talk about what's changed in your view since that time? Is that just move higher in rates making affordability even tougher? Or are you seeing competitors be more aggressive on incentives? Any commentary there would be helpful. Thanks.

Yeah. It's a great question, Trevor. And, hopefully, it's a conservative guide. We are anticipating sales pace being a little slower in 2025 versus 2024 for a couple of factors. One is we're off to a slower start this year compared to last year. That certainly then contributed to higher rates, but also a lot of new community openings. One of the highlights of last year was opening up 30% new communities. That, of course, means a lot of new sales reps in their organization, a lot of new managers. Taking the first year and getting those individuals up to speed and really learning our processes and our systems is going to be a headwind for 2025, but should pay off in 2026, 2027, and later years. So I think that's another reason we're conservative on absorption. But yeah, a little bit lower on absorption, but strong community count growth, similar ASP, and it should be an outstanding year in 2025.

Thank you for all the color, and good luck moving forward.

Thanks, Trevor. Appreciate it.

Thank you. One moment for our next question. Next question will be coming from Kenneth Zener, analyst. Your line is open.

Good afternoon, everybody. Good afternoon, Eric. Apologies. Could you outline the units under construction? I think I got one of the numbers, but not all. Like, so what did you end up in the fourth quarter with units under construction, uncompleted, and started, not sold?

Sure. Again, this is Charles. We had just over 4,000 total units in inventory. We had roughly 2,500 completed. About 1,360 homes in progress and the rest were information centers.

Great. Really appreciate that. And then in regards to the start level, I think Charles, you might have mentioned a pace of three. Was that regarding orders, or was that for starts or what was that number referring to specifically?

Sure. We had about 1,100 starts in the fourth quarter, which was less than what we closed during the quarter. So we brought our inventory down by a few hundred units. So bringing it down from about 4,400 down to just over 4,000.

Okay. And then when you think about the incentives, obviously how does the relationship work between the incentives efficiency, i.e., pulling people in leaning into that more, as opposed to there's obviously been a confluence of consumer data saying strength or weakness, but have you seen the efficiency of those mortgage buy-downs at the entry level be less efficient because the people are just less confident on jobs? Or is that why you're seeing less demand, you think? Or is it something else?

I can take that. I think demand is still there because we focus on the leads that are coming in—calls, walk-ins, emails—customers that have interest in our communities. Those customers are not worried about their jobs; they have jobs and are interested in homeownership. The number one challenge for LGI Homes, Inc., and across our peer group, is affordability. Affordability, whether driven by ASP or mortgage rates, is our biggest headwind, especially for the first-time homebuyer in a rental situation. Affordability is still challenging and obtaining a mortgage is difficult. Incentives is a broad term. We incentivize more for homes that are finished and we are looking to move, whether via price or interest rate buy-downs. When you pay more on behalf of the customer to buy down the rate, that lowers monthly payment and should qualify more people for the house, but it is a balance between the expense of paying for those incentives and how many people you are bringing into the pool. We're evaluating that on a community-by-community and market-by-market basis across the United States.

Thank you very much.

One moment for our next question. Our next question will be coming from William Rooney of BTIG. Your line is open.

Hey, everyone. Thanks for taking my questions. First, I wanted to ask about the guidance as a whole. You mentioned that there's some conservatism within it. I'm curious if there's any particular aspects of the guide that you would highlight as being the most conservative in terms of where you might have the greatest amount of flexibility or what do you think would be easiest to surpass if conditions were to improve beyond what you're currently seeing today? Thanks.

I think probably ASP. We expect some cost inflation in 2025. Our backlog ASP is a little bit higher than our guidance, so ASP is probably the item where we are most conservative. We also believe our sales and closings guidance is conservative because we expect demand to be present in 2025; it's just a balance of where rates go and where our incentives go. But ASP is the most likely area to be higher than guidance because we may need to continue to raise price to offset costs.

Thanks. Appreciate that. And then for my follow-up, community health guidance, I believe, is 9% growth at the midpoint. Just curious if you're expecting stores to come online to be weighted towards the front or the back half of 2025 or if it's more equally split. Just wondering about the cadence there. Thank you.

Since we had a lot of ramp up to 151 at the end of 2024, and we went down to 148, I would say the growth is probably more weighted to the back half of the year.

Alright. Great. Thanks so much. That's all for me.

Wait for your name to be announced. And our next question will be coming from Jay McCanless of Wedbush. Your line is open.

Hey. Good afternoon, guys. Thanks for taking my questions. Eric, you called out Washington DC as one of the better markets in 2024. Just wondering if you guys are seeing any impact from all the layoffs and the headlines that we've seen around that and around the DC area?

Not necessarily, Jay. Washington DC for us includes some farther-out locations and actually a successful community in West Virginia that's primarily driving that number. So we have not seen a clear impact from those headlines yet.

Okay. That's good to hear. And then I guess the second question I had: knowing that affordability is a big challenge, how much harder is it this year to pull that core multifamily renter customer into either the sales center or get them to look at the website? How are you seeing that customer respond to some of the incentives and the things you're putting out there?

I think the demand is there. The demand for homeownership will always be there. It is just more expensive to acquire that customer now, and we have to go through more customers to find individuals that qualify because the gap between rent and mortgage payments has widened. We're spending additional money on marketing to drive leads and hit acceptable absorption while maintaining margins and profitability.

Okay. Got it. Thank you. And then the last one I wanted to ask about is in terms of the community expansion this year, are you guys going to keep focusing on the MSAs where you've already got your SG&A on the ground, or are you looking to some new markets to expand this year?

We're really focused on the markets we're in. Thirty-five markets across the country is a lot, and we have great leadership in those markets. We're focused on going deeper in those markets through community count.

Okay. Great. Thanks, guys.

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

Thank you, and thanks everyone for participating on the call today and your interest in LGI Homes, Inc. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect.