LGI Homes, Inc. (LGIH) Q3 2026 Earnings Call Transcript

Welcome to the LGI Homes Third Quarter 2026 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 Vatter, Executive Vice President of Finance and Capital Markets.

Thanks, Tanya, 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 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 views and are not guarantees of future performance. On this call, we'll discuss non-GAAP financial measures. These measures are not intended to be considered in isolation or substitutes for financial information I'm joined today by Eric Lieber, LGI Homes Chief Executive Director, Thanks, Josh. Good afternoon, and thank you for joining us.

During the third quarter, our team continued to execute well in today's highly competitive housing market where affordability is stretched. We grew closings, total revenue, and home building revenue compared to last year while maintaining strong profitability, expanding our community count, and strengthening our balance sheet. We delivered 1,222 homes in the quarter, up over 10% from the prior year. Year-to-date, we delivered 3,578 homes, up over 4% compared to last year. Our average selling price was $368,000, down slightly from the prior year, primarily due to wholesale closings and geographic mix. Because of higher closings, home building revenue and total revenue each increased 10% over the prior year. Profitability remains strong throughout the quarter. Our on-balance sheet, predominantly owned land strategy, together with our in-house development capabilities, reflects the long-term decisions we've made to set LGI apart from much of the industry. It remains a competitive advantage, generating strong margins while giving us flexibility to adapt to changing market conditions. Homebuilding gross margin was 20.2%, and adjusted homebuilding gross margin was 23.7%. Both were up 40 basis points over the prior quarter, in addition to being above the midpoint of the full-year ranges we raised in August. Additionally, adjusted home building gross profit dollars increased nearly 7% compared to last year, reflecting higher closings, higher revenue, and our continued focus on balancing profitability and affordability. Our teams did an excellent job managing costs while continuing to support future growth. SG&A expenses declined in absolute dollars from the prior year and improved 180 basis points relative to revenue. These results reflect the benefits of our scale, disciplined cost management, and focus on operating efficiency across the business. Community growth is a key driver of our results and an important part of our long-term strategy. In August, we reached an all-time high of 153 active communities, and we ended the quarter with 151, an increase of over 7% compared to last year. That increase helped drive our year-over-year growth in closings and revenue and remains one of the best indicators of future growth because it expands our ability to serve more customers and increase earnings over time. During the quarter, we averaged 2.6 home closings per community per month. Our top markets by closings per community were Atlanta at 7.3, Charlotte at 3.7, Austin at 3.6, Fort Pierce in Southern California, each at 3.4 closings per community per month. These markets reflect strong execution by our local teams across both our retail and wholesale channels and our focus on delivering value to our buyers. We also continue to strengthen our balance sheet. During the quarter, we paid down over $36 million on our credit facility and reduced our net debt-to-capital ratio by 100 basis points sequentially, bringing the total reduction to 420 basis points over the last year. In October, we completed an amendment and extension of our revolving credit facility, which extends key lender support through 2030. Josh will cover more details later in the call. As expected, the market became more challenging as the quarter progressed, and affordability remained in the defining story of the quarter. Net orders were 609 homes, down from 1,570 homes last year. Our buyers make purchasing decisions based on the monthly payment, so affordability is always front and center. At today's payments, a smaller pool of buyers can qualify, and those who do often need time to verify income, sell their existing home, or save for their down payment. We remain confident in the long-term desire for homeownership. Our focus is on balancing sales pace and profitability, and we are committed to doing both. To make homeownership attainable to the largest pool of buyers, we are leaning into incentives across our regions, including closing cost assistance, buy-downs, and forward rate commitments. We'll use these tools with discipline, but we won't give up margins simply to chase volumes. We also see a growing competitive advantage in our spec home model. As other builders move away from the spec business, we're well-positioned with move-in-ready homes that give buyers certainty on price, payment, and timing, and our scale and in-house development capabilities allow us to keep delivering them at profitable margins. Through our direct-to-consumer model, we work closely with buyers throughout the home-buying journey, and we expect many of them to close over time. Some buyers work with our teams for months to get through the process and into their new home. We continue to see interest in home ownership, and our job is to remain disciplined while adapting our sales and financing strategies, production plans, and product offering to current conditions. While affordability matters, we are not simply stripping features from our homes to cut prices. We continue to deliver high-quality homes with strong fit and finish, backed by best-in-class customer service from interaction through closing and beyond. We believe this commitment contributes to high customer satisfaction, low warranty costs, and long-term value for customers and shareholders alike. We're also placing renewed emphasis on the experience beyond the home itself from the moment you arrive at one of our communities to the green space, amenities, and walkability that make it a place to call home. We're pleased with the financial results we delivered in the third quarter, and we are focused on achieving our full-year closings objective while maintaining strong profitability in this challenging environment. With that, I'll turn the call over to Charles to discuss our financial results in greater detail.

Thank you, Eric, and good afternoon. Our third quarter results reflect strong operating execution. Growth in closings, revenue, and earnings, along with meaningful margin and cost improvements, demonstrate the strength of our model, even as higher interest rates weighed on current period orders. We delivered a total of 1,222 homes in the quarter, an increase of 10.4% compared to last year. Of these homes, 1,189 were new homes, an increase of 11.6% from last year. The remaining 33 closings were currently or previously leased homes, the gains from which were reflected in other income. Home building revenue was $437.5 million at an average sales price of $367,962. Including a combined $7 million from lot sales and leasing operations, total revenue was $444.5 million, an increase of 10.2%. Wholesale revenue during the quarter was $80.8 million, up 48.3% from $54.5 million in the same period last year. Our third quarter home building gross margin was 20.2%. An adjusted home building gross margin was 23.7%, both above the midpoint of the full year ranges we raised in August, and both up 40 basis points compared to the prior quarter. Adjusted home building gross margin excludes $14.7 million of capitalized interest and $449,000 related to purchase count. Cost discipline was a continuing theme during the quarter. Combined selling, general, and administrative expenses totaled $62.1 million, or 14% of total revenue, a 180 basis point improvement over the prior year. Our ongoing initiatives allowed us to grow total revenue more than 10% while reducing SG&A expenses by 2.5% in absolute dollars. Selling expenses were $35.8 million, or 8% of total revenue, down 80 basis points from the same period last year. The improvement was primarily due to higher revenue and lower operating costs, partially offset by higher commissions and increased spending on advertising to drive leads. General and administrative expenses were $26.3 million, a decrease of 6% year-over-year and 8% sequentially. The decrease is primarily due to ongoing efficiency initiatives. As a percentage of revenue, G&A expenses decreased 100 basis points to 5.9% compared to the same period last year. Other income was $6.2 million, driven primarily by income from our joint ventures and gains on the sale of currently or previously leased homes. Adjusted EBITDA totaled $52.7 million, or 11.9% of total revenue, up 150 basis points year-over-year, and 50 basis points sequentially. Pre-tax income was $33.3 million, or 7.5% of total revenue, and net income was $24.6 million, up 24.6% year-over-year, and we delivered $1.05 per basic and diluted share, compared to $0.85 last year. Net orders in the third quarter were 609 homes, down 61.2% from 1,570 homes during the same period last year. The year-over-year decline reflects the increase in affordability pressures during the quarter, compounded by the significant strength in sales activity during the third quarter of last year. Our cancellation rate was 53.8% compared to 33.6% last year. And as we've discussed on prior calls, the elevated cancellation rate reflects ongoing affordability pressures, the timing effect of slower sales activity this quarter compared to the prior quarter, and a broader sales funnel as we work to generate incremental orders. We ended the quarter with 685 homes in backlog, valued at $273.7 million, representing decreases of 47.5% and 45.1% respectively. Turning to our land position, our land strategy continues to emphasize flexibility. As of September 30th, total owned and controlled lots were 58,400, down 6.7% year-over-year and up 1.7% sequentially. Our owned lot position declined for the sixth consecutive quarter to 50,270, down from a peak of 61,893 in the second quarter of 2022. Controlled lots increased 18.1% sequentially to $8,130 as we identified more attractive land opportunities, including finished lot deals available on takedowns and smaller projects that meet our underwriting criteria at today's absorption levels. In total, dollars invested in real estate inventory decreased $160 million year-over-year, primarily due to a 23.3% reduction in the number of completed homes, reflecting active inventory management and balanced home starts. We recorded no inventory impairments during the third quarter. We continue to evaluate our communities each quarter based on sales pace, pricing, incentives, margins, and other relevant market conditions. And based on these assessments, the values remain in line with the amounts carried on our balance sheet. The primary reason for this is our lot basis. Most of our land is self-developed and was acquired selectively. Of our own lots, 34,119, or approximately two-thirds, are in raw or underdevelopment, and 79% of those are in engineering or held as undeveloped land, Where little capital is invested. A significant proportion of our inventory dollars are concentrated in the lots closest to sale. For example, completed homes and homes under construction make up just 7.5% of our owned lots, but 28% of our $3.5 billion of inventory. Of the remaining 16,151 owned lots, 12,378 were finished vacant lots, and 2,147 were related to completed homes and information centers. We started 1,205 homes in the third quarter and finished September with 1,626 homes under construction. I'll now turn the call over to Josh for a discussion of our capital position.

Thanks, Charles. Our capital position continued to strengthen during the quarter, supported by debt reduction, improved leverage metrics, and the recast of our revolving credit facility. We ended the quarter with $1.54 billion of debt outstanding, including $411 million drawn on our revolver. As Eric highlighted, our debt-to-capital Our net debt-to-capital ratio decreased to 41.7%, and our net debt-to-capital ratio was 40.6%. Compared to the same time last year, our net debt-to-capital ratio was down 420 basis points, further strengthening our balance sheet and enhancing our flexibility to opportunistically pursue WAN and other strategic investments that we believe will drive future shareholder value. The recent amendment and extension of a revolving credit facility established total commitments of approximately $1.2 billion and extended key lender support through October of 2030. Following the amendment, approximately $96 million of commitments mature in 2028, $215 million mature in 2029, and the remaining $855 million are now committed through 2030. Along with extending the duration, the amendment also improved the facility through several favorable borrowing base and covenant changes. Most notably, it brings our interest coverage covenant in line with current market terms. This more flexible framework enhances the overall utility of the facility to support our long-term strategy while maintaining our disciplined approach to balance sheet management. We ended the quarter with $447.7 million of liquidity, including $69.4 million cash on hand and $378.3 million available to borrow on our facility. As of September 30th, our stockholder's equity was approximately $2.2 billion, and book value per share was $92.84. At this point, I'll turn the call back over to Eric.

Thanks, Josh. We're pleased with our financial performance this quarter and remain confident in our ability to navigate the current market. Buyers continue to inquire about homeownership and engage with our sales teams, even with mortgage rates still at elevated levels. Our focus remains on maintaining profitability, balance sheet strength, disciplined capital allocation, and growing our community count, while helping more families achieve the dream of homeownership as we close out the year. Pending verification of fundings, we expect to announce that we closed approximately 300 homes in October. Based on these latest results, we are narrowing our full-year closing guidance to between 4,600 and 4,800 homes. The revised range reflects the closings currently in backlog, our inventory available to close, and our current expectations for sales and cancellation activity during the balance of the year. Outside of closings, we are reaffirming the rest of our full-year guidance. We continue to expect full-year average selling price to range between $360,000 and $370,000, SG&A as a percentage of revenue between 15% and 16%, home building gross margin between 19% and 21%, and adjusted home building gross margin between 22.5% and 24.5%. We continue to expect to end the year with 150 to 160 active communities. Looking further out, based on our current view of the communities we expect to open over the next year, we expect to be active in more than 180 communities by the end of 2027, an increase of approximately 20% compared to our community count today. These openings deepen our geographic footprint and expand our selling capacity, but we will continue to pace development and home starts based on market-level demand and expected returns. Much of the capital needed to support these openings has already been invested, which should allow us to grow our community count without requiring incremental debt specifically to fund these openings. These communities were underwritten at today's absorption pace, and we expect them to deliver similar absorptions and margins to what we're experiencing today. Lionel and I like to recognize our employees for their continued hard work and commitment to our customers. Earlier this quarter, LGI Homes was recognized by U.S. News and World Report as one of the best companies to work for. This recognition reflects the culture we have built over many years and the dedication of our employees across the country. Great customer experiences begin with engaged employees who take pride in their work. The quality of our homes, the experience we provide our customers, and the strength of our operating performance all start with our people. As we head into the final stretch of 2026, our priorities are clear. Protecting profitability, managing inventory and starts, and ensuring a great customer experience. With a growing community base and experienced teams across our markets, we believe LGI Homes is well-positioned to navigate current conditions and create long-term value. We'll now open the call for questions.

As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. Our first question will come from the line of Trevor Allenson of Wolf Research. Your line is open, Trevor.

Hi, good afternoon. Thank you for taking my questions. It's good to see you guys are maintaining your full-year gross margin guidance, but the full-year number does imply a pretty wide range as you get to 4Q, so please help us dial in that number a little more closely. How are you expecting 4Q gross margin compared to 3Q? And then how many of your roughly 1,300 4Q closings do you guys need to sell and close intra-quarter 4Q?

Yeah, thanks, Trevor. This is Eric. I can talk first about the sales. You know, orders, as expected, slowed in September. So, October closings, like we talked about, or approximately 300. So, we'll need a similar sales pace, which has been fairly slow to get the low end of our closing range, 46 to 4,800. So, we're comfortable in that number. And I think At this point, you know, we wanted to keep a wide range on gross margin. We still have sales yet to make. The wholesale is a percentage of how many closings. It's still a little bit to be determined, but I think overall we expect gross margins to be similar in Q4 to Q3.

Okay, thanks for that, Eric. And then a second question kind of around pace and price. You talked about leaning back into incentives. Clearly, orders were pressured in the quarter, but then you also mentioned protecting profitability a number of times. So how should we think about the balance there? Is there a certain absorption pace that you guys are trying to get back to? Just trying to think about, you know, what you think is the right balance of pace and price for you guys here and what is a more challenging environment with higher rates?

Yeah, great question, Trevor. I think all of us are looking at this issue, and we, like a lot of others, are really looking at it community by community. You know, our sales pace is strong in some of our communities, and in some of our communities, we like to have a stronger pace. I think overall, you know, we have been leaving into incentives all along, and with the interest rate spike we saw over the last 60 days, it's just more expensive to get the same rate. So that's what we're balancing community by community across the country.

Thanks to all for color. Good luck looking forward. Thank you.

And our next question will come from the line of Alex Regal of Texas Capital Securities. Your line is open, Alex.

Thank you. A nice quarter, gentlemen. A couple quick questions here. First, for clarification, you just mentioned you could be active in 180 communities by the end of 2027. Evan, is that sort of like the gross number or the net number? How many communities might you be closing out of such that kind of a year-end, 2027? What is sort of that active community count number on a net basis?

Great question, Alex. This is Eric. I can start. Charles is going to add to it or Josh if they choose to, but the 180 is probably considered a net number. I don't have in front of me how many communities will be closing out, but we expect to end 2026 with between 150 and 160 active selling communities, and in 2027, we are very confident having more than 180 active communities opening at the end of 2027, and that does not include any other finish line opportunities we buy over the next corridor or two, and we're starting to see more and more of those opportunities and also doesn't include any M&A that would happen. over the next 12 months.

Sorry, Alex, I'd just add, right, a lot of those we emphasized in the scripted portion, just a lot of those dollars have already been invested. So those are dollars that are sitting on our balance sheet for the vast majority of that upfront infrastructure on a lot of these projects or development deals that were purchased a few years back and are now coming to fruition.

And then secondly, the cadence of those, do you see it sort of being equally weighted throughout the year, or is there a greater weighting either on the front end or the back end of the year?

No, we think it's going to be pretty equally weighted throughout the year.

And then secondly, have you seen any competitors pull back on their spec strategy, and is that what's kind of giving you increased confidence here?

Yeah, Alex, this is Eric. I don't know if We've seen it in the field more so than hearing about it through the builder's commentary on earnings calls, et cetera. We are very confident in the spec strategy. With our customer being the first-time homebuyer, the majority of that customer base is currently paying rent, and we have found over the years when that customer is looking to inquire about home ownership is usually at the end of a lease, maybe getting out of a roommate or a parent situation, and having available homes for that customer to move into is the correct strategy of the first-time homebuyer market, and we're comfortable. Well, that.

Perfect. Thank you. Good luck.

Thank you. Thank you.

And as a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. Our next question will come from the line of James McCandless of Citizens Bank. Your line is open.

Hey, good afternoon, everyone. First question, just if we could talk about the decline in orders versus last year, I mean, it sounds from the outside looking in that you guys got a little more aggressive in terms of opening the funnel and just had some bad timing maybe with the higher mortgage rates hitting at the same time you were trying to increase the orders. Is that the right That's the right way to look at that.

That is, Jay. Yeah, last year was a robust Q3, got aggressive in writing orders. You know, I guess that strategy worked, and we're still fairly aggressive today and want to have as many orders as we possibly can. But, yeah, last quarter was a challenge from an orders perspective. I think somewhat as expected because of the higher rates. Yes.

Okay. All right. I just wanted to make sure we're thinking about that the right way. Second question, and you kind of talked about this earlier, Eric, but maybe could you talk about how old the current communities are that are in the field, like what percentage maybe of them were underwritten to the current incentives and levels and some of the pricing actions you're having to take? Just trying to get a sense of, you know, maybe 40, 50 percent of the communities have been underwritten to current standards and what that might look like at that 180 communities next year.

Yeah, it's a great question, Jay. We may have to, you know, handle that on a follow-up call and get some more information as far as the older age of the communities, and Charles and Josh can certainly add to that. You know, I'd say, you know, the communities we bought that are larger communities that were very heavily doing land development were very comfortable in the gross margin. I think the slower absorption pace really impacts return on equity, and the newer communities that are opening as community council really is, they're underwrote to today's gross margin and today's absorption pace, and a very respectful return on equity, let's say. But yeah, the large land development projects, the IRR return on equity has been impacted, but we're still very comfortable in overall gross margin.

Jay, I think I'd add on that that some of the adjustments that we can make, even though the dollars spent on acquiring the land up front and maybe developing Section 1 and some of the up front infrastructure have all been in place, but we've done a really good job of adjusting our future section sizes as we go through the engineering and development phase to adjust the original projected cash flows have now been paced back out, which is helping to offset Some of that slower absorption pace that we may have underwrote to at a higher pace.

Got it. Okay. And then the next question I had, demand from the single family for rent community, how is that trending? And are you seeing that pick up as the 10 years come back in some from the highs we saw in mid-October?

Yeah, I think it's getting better, Jay. They're all engaging with us. Once we got clarity, legislative clarity, over the last 12 months, it was pencils down for the first half of the year. Now we're engaging with those buyers and really working through the bid-ask spread and working on orders for Q4 in 2027.

Okay, great. That's all I had. Thanks, guys.

You bet.

And our next question is coming from the line of Alex Barron of Housing Research Center. Your line is open, Alex.

Yes, thank you. Good morning, gentlemen. Afternoon, I guess. Yeah, I wanted to ask, so regarding the orders and the current situation, have you guys adjusted anything since the quarter began, And either like in incentives or in pricing to try to, you know, boost your orders for the fourth quarter?

Well, I think, Alex, you know, a couple things. One is we all want more orders. We are focused on making that decision community by community. We're also focused on taking a long-term approach, not rash, short-term decisions with the interest rates spiking day-to-day. And the orders that are in the path, that's reflective in our adjusting guidance. So we have built that into our $4,600 to $4,800. And then the orders coming currently in what we sell over November, December is really going to be building on 2027. And we'll get back with everybody on our expectations for 27. Right now, we expect it to be more of the same, 27 compared to 2026 overall.

Okay. And in terms of the new communities that you guys are rolling out to get to the 180, is there anything different about them? You know, is there more concentration in a certain geography? Is there a lower price point or higher price point, or are they pretty much similar to what your current portfolio?

I think from a price point, it's going to be similar. You know, looking at the schedule of openings, you know, quite a few in Texas, quite a few in California, quite a few in Atlanta. You know, some of our top performing markets are where we're opening new communities and going deeper in those markets. So that probably balances out as far as ASB goes. I think the other difference is a lot of these are finish line opportunities that we didn't necessarily develop that we're buying from developers. And also looking at, you know, all these communities, always looking at our product, working on improving our product, make sure the product is appropriate for the market and the community that we're going into.

Okay. Best of luck. Thanks. All right. Thank you. Thank you.

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

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

And this concludes today's program. Thank you for participating. You may now disconnect.