LGI Homes, Inc. Q3 FY2025 Earnings Call

Welcome to the LGI Homes Third Quarter 2025 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. At this time, I'll turn the call over to Joshua Fattor, Executive Vice President of Investor Relations and Capital Markets.

Thanks, and good afternoon. 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 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 a substitute 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, 2025, that we expect to file with the SEC later today. This filing will be accessible on the SEC's website and on 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. During the quarter, our teams remained focused on driving leads, managing inventory and supporting our customers by delivering exceptional customer service and providing a seamless road to homeownership. Thanks to our outstanding efforts, we delivered positive third quarter results that were in line with the guidance provided on our last call. During the quarter, we closed 1,107 homes. Of this total, 1,065 homes contributed directly to our reported revenue of $397 million. The remaining 42 were currently or previously leased homes, the profits of which were reflected in other income. Gross margin came in at 21.5%, and adjusted gross margin was 24.5%, both in line with the guidance range we provided. We've been successful in maintaining the overall strength of our margins even while operating in the most challenging segment of the market. That's on purpose and it's worth spending a few moments discussing why. First, we take a thoughtful approach to financing incentives. With higher mortgage rates driving affordability challenges, buydowns and other financing tools are among the most effective ways to help buyers reach the closing table, and we continue to lean into offering the most competitive buydowns possible. However, going to extremes with buydowns just to move a few incremental homes is something we're working hard to avoid. Second, we continue to price all of our homes competitively, and we use price adjustments selectively, focusing on aging inventory while maintaining or raising prices in high-performing communities. Third, we prefer not to sacrifice margins to institutional land bankers. As a result, we don't have a pipeline of lot takedowns pressuring us to start homes prematurely, heavily discounting them to keep the system moving, or to renegotiate takedown schedules which leads to higher future lot costs. Avoiding these situations gives us the freedom to be patient and make smart long-term decisions that will benefit our shareholders. Our best land banking partner has been, and will continue to be, the seller. Finally, because we primarily self-develop our lots, our margins include the profit a developer would have earned. This adds several hundred basis points to our margins and sets our performance apart from other builders who rely on purchasing finished lots. It's also a key reason we have never taken an inventory impairment. In short, our margins reflect disciplined execution, not elevated pricing. We do everything possible to manage costs and deliver high-quality beautiful homes at a price that enables as many first-time buyers as possible to achieve the dream of homeownership. During the third quarter, our top markets on a closing per community basis were Charlotte at 5.7%, Las Vegas at 4.7%, Raleigh at 4.2%, Greenville at 3.7%, and Denver at 3.5% closings per community per month. Congratulations to the teams in these markets on their performance last quarter. Another highlight of our results was a significant increase in net orders and backlog. As we noted on our last call, sales trends improved in the back half of June, continuing into July, as mortgage rates declined from their midyear highs. These trends continued into August and September, driven by continued relief in rates and sales initiatives connected to our year-end Make Your Move National Sales Event. Because mortgage rates remain the key pressure point for entry-level buyers, we introduced exceptional financing options, including a forward rate buy-down commitment, which has a meaningful impact on improving affordability for many buyers. Additionally, we're offering price discounts of up to $50,000 on select older inventory. Together, these initiatives jump-started sales activity, demonstrated by an 8% increase in net orders compared to the same period last year and a 44% increase compared to the second quarter. As a result, our backlog at quarter end was up 20% year-over-year and 62% sequentially. We're encouraged by the momentum these initiatives have generated and view them as a positive step forward as we head into the fourth quarter. Before I hand the call over to Charles, I'll note that our long-term view of the housing market remains solidly optimistic. The underlying demographic trends continue to support our strategy, while the widening supply gap makes the attainable housing options LGI provides more valuable than ever. With that, I'll invite Charles to provide additional details on our financial results.

Thanks, Eric. Revenue in the third quarter totaled $396.6 million, down 39.2% compared to the prior year, driven by a 39.4% decline in closings. The average selling price of homes closed was $372,424, up slightly from last year, primarily driven by geographic mix and lower magnitude of incentives, and was partially offset by a higher percentage of wholesale closings in the third quarter. The wholesale channel remains a compelling way to balance our home inventory. Our wholesale operation generated $54.5 million of revenue, resulting from 163 home closings or 15.3% of total closings compared to 9.1% of total closings in the same period last year. Our gross margin was 21.5% compared to 25.1% in the same period last year; the decline was primarily driven by a particularly strong comp last year, along with higher lot costs and capitalized interest as a percentage of revenue and a higher mix of wholesale closings. Adjusted gross margin was 24.5% compared to 27.2% in the same period last year. Adjusted gross margin excluded $11 million of capitalized interest charged to cost of sales and $1 million related to purchase accounting, together representing 300 basis points compared to 210 basis points last year. We expect capitalized interest to remain elevated due to higher borrowing costs and have reflected such in our fourth quarter guidance. Combined selling, general and administrative expenses totaled $63.6 million or 16% of revenue, in line with our guidance. Selling expenses were $35.7 million or 9% of revenue, up slightly from 8.5% in the same period last year. General and administrative expenses were flat year-over-year at $28 million. As a percentage of revenue, G&A expenses were 7.1% compared to 4.3% in the same period last year. Both selling and general and administrative expenses were higher as a percentage of revenue due to lower volumes. Other income in the quarter was $5.2 million, primarily resulting from the gain on sale of leased homes, finished lots, other land held for sale, and LGI living lease income. Pretax net income was $26.7 million or 6.7% of revenue. Our effective tax rate was 26.2% compared to 24.3% in the same period last year. And for the quarter, we generated net income of $19.7 million or $0.85 per basic and diluted share. Order metrics improved materially in the third quarter with net orders coming in at 1,570 homes, an increase of 8.1% over the same period last year and 43.9% sequentially. Our cancellation rate in the third quarter was 33.6%, similar to the prior quarter of this year. Backlog at quarter end totaled 1,305 homes, up 19.9% year-over-year, and 61.5% sequentially. The value of our backlog at quarter end was $498.7 million. Of the homes under contract, 60 were tied to contracts with institutional buyers representing 4.6% of total backlog compared to 212 or 19.5% of backlog in the same period last year. Currently, we're seeing continued interest from our wholesale partners and we're well positioned for increased engagement from institutional buyers seeking to acquire scaled portfolios of finished inventory. However, the ability to transact continues to depend on alignment around pricing expectations. Turning to our land position, at September 30, our portfolio consisted of 62,564 owned and controlled lots, a decrease of 8.8% year-over-year and 3.4% sequentially. Of our total lots, 53,148 or 84.9% were owned, and 9,416 lots or 15.1% were controlled. Of our owned lots, 36,316 were raw land and land under development, 25% of which were in active development that we expect to deliver over the next few years. The remaining 16,832 owned lots were finished. Of those, 13,136 were vacant and 3,696 were related to completed homes or homes under construction. We had 895 homes under construction at quarter end, down 40.8% sequentially and 54.7% year-over-year as we continue to focus on rebalancing inventory in select markets to meet current sales trends. The value of our portfolio of owned lots continues to be a competitive advantage for LGI Homes, with an average finished lot cost of approximately $70,000 and lot costs representing just over 20% of our ASP in the third quarter, our land position provides a meaningful cost advantage that supports margin stability even in a volatile market. This low basis enables us to offer competitive pricing to buyers while preserving profitability, and it reflects years of disciplined land acquisition and development. During the quarter, we started 725 homes. We expect to continue to balance starts in the coming quarters, primarily focusing on new and high-performing communities while slowing or pausing starts in communities where there is unsold existing inventory. I'll now turn the call over to Josh for a discussion of our capital position.

Thanks, Charles. We ended the quarter with $1.75 billion of debt outstanding, including $623.6 million drawn on our revolver. We remain focused on reducing leverage, ending the quarter with a debt-to-capital ratio of 45.7% and a net debt-to-capital ratio of 44.8%. As inventory levels decreased and development spend moderates, leverage will continue moving toward the midpoint of our targeted range of 35% to 45%. Total liquidity at the end of the quarter was $429.9 million, including $62 million of cash and $367.9 million available under our credit facility. Our liquidity was up by over $107 million compared to the prior quarter, over $54 million compared to the same period last year. As of September 30, our stockholders' equity was $2.1 billion, and our book value per share was $90.10. With that, I'll turn the call back to Eric.

Thanks, Josh. Rates are down and sales were up. This recent increase in the pace of sales is an encouraging sign and our October closings demonstrate that the fourth quarter is off to a strong start. Tomorrow, we plan to issue a press release announcing that we closed between 390 and 400 homes in October, pending verification of funding. This is our best month since June and reflects early signs of momentum coming from our sales initiatives. Community count at the end of October was 141 communities. We're continuing to write contracts in a market where many of our buyers need additional time to save for a down payment, make modest improvements in their credit, or sell existing homes. This dynamic results in longer times between contract and close. Based on our current backlog, recent pull-through trends, October closings, and current sales trends, we currently expect to close between 1,300 and 1,500 homes in the fourth quarter. At the midpoint of this range, that would represent a 26% increase in closings compared to the third quarter. We remain focused on affordability and meeting buyers at a monthly payment where they are able and willing to transact. We expect an average sales price in the fourth quarter to range between $365,000 and $375,000. Community count at year-end is expected to be approximately 145. Looking ahead, we expect community count at the end of 2026 to increase by 10% to 15%, reflecting continued investment in growing community count in our existing markets. Fourth quarter gross margin is expected to range between 21% and 22% and adjusted gross margin between 24% and 25%, similar to the results we delivered in the third quarter. Finally, SG&A expenses are expected to fall between 15% and 16%, and our tax rate is expected to be approximately 26%. We're pleased with our third quarter results and proud of the hard work our teams have put in to build up the backlog and position us for success in the quarters ahead. Their efforts drive our results and lay the groundwork for future opportunities, and I want to thank them for their continued focus and dedication to our company and to our customers. We'll now open the call for questions.

Our first question will be coming from Trevor Allinson of Wolfe Research.

First question is on the acceleration in orders of more than 40% sequentially. So clearly much better than normal seasonal trends. You talked about the benefit of lower rates, but since you also talked about some company-specific initiatives. Can you talk about which of those you think was the biggest driver of the acceleration? And then should we view this as a strategy shift to lean into more volume? Or were some of the actions or a reflection of a desire to move some of the aged inventory that you guys had?

Yes. Thanks, Trevor. Great question. I want to look at it as a strategy shift to start with. I think what we've been talking to investors about and discussing throughout the call, we're in the affordable housing business focused on an entry-level buyer. As we talked about, rates are very important in that affordable monthly payment. Rates have been at their lowest in the last 12 to 18 months at a 10-year pop below 4%. As rates went down, our sales went up; not a surprise to us, just offering a more affordable monthly payment. Several things have happened when rates have come down, where our incentives and the value that we're providing have improved. We're offering competitive rates like our 3.99% promotional rates, something we never offered before and that's new for the quarter. We continue to lean into advertising dollars when appropriate. In this quarter, we were able to increase our advertising, driving more leads because it was working to drive those payments. Our team in the field is doing a great job; we're hiring more salespeople, and the field is taking on more responsibility in training our new sales reps. All of those combined are market-driven and affordability-driven, not a shift in strategy.

That was very informative. I would like to discuss your land position. You mentioned the advantages of holding your own land, and although your orders have increased, it seems the overall market remains sluggish for much of the industry. You still have control over about 10 years' worth of land. Are you considering significantly reducing your land holdings? If you have started to do this, how has the interest been from other builders in acquiring more land?

Yes. Trevor, this is Charles. I can take that one first. We're constantly looking at our land supply in terms of current absorptions and timing our development. We have 13,000 finished vacant developed lots, which is a bit heavier than we typically would like to have. Given that we started development on a number of these communities beginning back in 2021 and 2022, we have several communities that have been in either entitlements or active development for years and are just now coming to fruition for sales. We feel very confident about our basis in those finished lots. Of our 13,000 finished lots, we have an average lot cost basis in the $70,000 range, which we believe is a great value to maintain stability in margins, providing a cost advantage when considering our land inventory and when to bring it on. We're managing our future development spend, which is sequentially coming down. We had about 9,000 lots in active development that will come into operation over the next couple of years. As we focus on absorptions and work through the vacant developed land, we think we will reach a position where our land inventory becomes rightsized and aligned with our expectations. Regarding the availability of land, we have some communities where we have excess finished vacant developed lots which we are looking to monetize where appropriate. We did not have a lot of activity this quarter, but we continue to evaluate that and make decisions regarding whether to monetize those finished lots or put them in the queue for future home construction.

And our next question will be coming from Kenneth Zener of Seaport.

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

Yes, Ken. Good question. This is Eric. I can talk about the community counts, and then Charles can address the G&A part of that. The community count growth is expected to be spread equally through 2026. The states primarily driving this increase in community count will be Florida, Texas, and California, but it will be evenly spread throughout 2026. All of these communities are already in the process, and we're confident in that number.

Yes, Ken, as for SG&A, we've been averaging around $30 million in quarterly G&A expense going back to the beginning of 2024, so we feel comfortable that we've established the overhead side from a G&A perspective. As we bring in new communities, the incremental costs related to installing our information centers and hiring new sales staff will come in as a similar percentage of our expected revenue. Therefore, we don’t anticipate any front-loading in the next 12 months for community count. We’re in the same geographic areas, so our leadership infrastructure is already in place, which should limit additional costs related to expansion.

In terms of leverage and SG&A related to units, the first quarter this year showed higher figures, but we've been around the 15% range and expect it to be slightly higher in the fourth quarter. Can you provide insights on SG&A in relation to your community count? How do you foresee the business developing? Will it maintain the current rate as we finish this year, or do you anticipate an increase in SG&A overall?

Yes, Ken, great question. Charles can add to this, but we view SG&A as being predominantly about leverage and volume. G&A is mostly fixed; the amount of marketing dollars is fixed, but the total percentage of SG&A which was 16% last quarter is entirely dependent on volume. The volume is not where we want it to be right now or where it has been over the past few years, but it’s improving in Q4. We’re excited about the orders in the backlog heading into Q4 and our guidance is for closings to be up 26%. This is why we are guiding for lower SG&A percentage in Q4, given the leverage we are expecting from closings.

Our next question will come from Alex Rygiel from Texas Capital Securities.

Can you talk a bit about the types of mortgages that your buyers are taking? Are you starting to see any use of adjustable rate mortgages?

Yes. Thanks, Alex. This is Eric. I can take that. About just over 60% of our customers are taking FHA mortgages. When combined with VA and a very small percentage of USDA, government loans make up 70% to 75% of our customers. Conventional mortgages are another 10% to 15%. We're seeing more customers taking adjustable rate mortgages simply because we are offering a 3.99% 5/1 ARM product, which is fixed for 5 years at 3.99%, and that has been very positive in the market and well-received by our customers.

Super helpful. Directionally speaking, as we look out into 2026, are there any unique dynamics that could affect your average selling price? Or should we base it upon our own views of potential price increases next year?

I believe that the ASP will have a lot of geographic components to it. Additionally, even on a community-by-community basis, the range of floor plans in available communities generally varies from $60,000 to $80,000 from the smallest to the largest floor plans, which brings variability. We've seen our average square foot decrease in a more challenging affordability market. Costs are slightly down now, which is a little bit of a tailwind for margins, but all things considered, we anticipate a lower ASP. We believe prices will keep increasing; our average sales price was $160,000 in 2019 and $240,000 in the same year. Therefore, considering costs over the next 3 to 5 years, we believe ASP will continue to rise. Over the next year, we’ll see how things unfold, and I recommend using your judgment as well.

Our next question will be coming from Andrew Azzi of JPMorgan.

Just wanted to dig in a little bit on the community count growth for next year. That was definitely helpful guidance. Is that outlook inclusive of the view that demand improves significantly from here? Or are you dedicated to that growth if current trends were to continue?

Yes, we are dedicated to that growth. The investments have already been made, and that community count will align with our current absorption pace.

Got it. And how would you compare your incentives currently, say, 6 months ago? I'm curious if there are any others in the pipeline, but I would love to hear your thoughts about adjusting these alongside your strategic initiatives.

Yes. I’d describe our incentives as relatively consistent. We have been focusing on incentives to sell and close older inventory. The overall market decline and our similar pain points, along with the low rates, have provided more value right now. You can see in our gross margin guidance remaining similar to last quarter, which isn't indicative of more current incentives. We are not planning to incentivize at current levels more than we've done. We'll see what 2026 holds. But the incentive levels have largely remained consistent in response to market conditions.

I'm showing no further questions at this time. I would now like to turn the call back to Eric for closing remarks.

All right. Thanks, everyone, for participating in today's call and your continued interest in LGI Homes. Have a great day.

This concludes LGI Homes Third Quarter 2025 Conference Call. Have a great day.