Q4 2022 LGI Homes Inc Earnings Call

February 21, 2023

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Yeah.

Hello, and welcome to the L. G I homes fourth quarter 2022 conference call.

Today's call is being recorded and a replay will be available on the company's website at www Dot L. G at home Dot com.

After management's prepared comments, there would be an opportunity to ask questions.

I'll now turn the call over to Josh better Vice President of Investor Relations you may begin.

Thanks, and good afternoon.

I'll remind listeners that this call contains forward looking statements, including management's views on <unk> business strategy outlook plans objectives and guidance for 2023.

Such statements reflect management's current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause managements expectations to prove to be incorrect.

You should review our filings with the SEC for a discussion of the risks uncertainties and other factors that could cause actual results to differ from those presented today.

All forward looking statements must be considered in light of those related risks and you should not place undue reliance on such statements, which reflect management's current viewpoints and are not guarantees of future performance.

On this call. We'll also 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 annual report on Form 10-K for the fiscal year ended December 31, 2022 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.

I'm joined on today's call by Eric Lieber, LTI Homes', Chief Executive Officer, and Chairman of the Board Charles Meridian, Chief Financial Officer, and Treasurer, I'll now turn the call over to Eric.

Thanks, Josh Good afternoon, everyone and welcome to our 2022 earnings call and.

In preparation for today's call. We took a look at last year's commentary and it's remarkable what a difference a year makes when we spoke last February we were talking about over 10000 closings phones ringing off the hook waiting list of people wanting to buy investors lining up the purchase multiple homes in fact.

Demand was so strong we turned off marketing and.

We made it clear at that time, we are taking advantage of the high demand environment, because we knew it wasn't last in two.

<unk> 2022 is a much different year.

Let's look at some of the numbers.

Home closings last year were 6621.

This was not the goal we set and to be Frank we were disappointed we missed our guidance by such a narrow margin.

We're in the affordable housing business and during the year affordability got constrained.

Supply chain tightened cost inflated and home prices went up.

Beginning of January mortgage rates, starting to slowly increase but quickly accelerated as the year went on.

By September they surpassed 6% for the first time since November of 2008.

One month later rates exceeded 7% for the first time in over 20 years.

As affordability tightened buyers pause in the market decelerated and as it did we got back to basics, we expanded our marketing.

We got back to training.

We had to work for every sale, we invested time and resources to make certain our people were on process building selling and closing homes <unk>.

As a result, we had a number of notable achievements last year.

For example, let's talk about absorptions for the ninth consecutive year, we averaged at least six closings per community per month and industry, leading results that demonstrate the success of our systems processes and people.

Going deeper here are number one market last year was Dallas Fort worth with 11 closings per community per month.

San Antonio was second with $9 three.

Third with Charlotte with $9 one.

Houston delivered eight eight and rounding out the top five was Raleigh was seven nine closings per community per month.

Graduations to the teams in these markets on your outstanding result.

We finished the year at the high end of the guidance, we issued last quarter with 99 active communities.

We delivered one of our most profitable years ever our gross margin for the full year was over 28% and adjusted gross margin was over 29%.

Our pre tax margin was more than 18% and our net income margin was more than 14%.

Each of these metrics represent a new full year company record.

On the inventory side, we reduced our total owned and controlled lots by almost 22% and as we projected on our last call. We've right sized our completed and in progress inventory to align with demand and ended the year with approximately 3300 homes.

We focus on cash flow and preserving capital ending the year with a net debt to capital ratio below 40%.

Representing a 250 basis point improvement over the third quarter.

While delivering the positive results, we still found opportunities to get back to our local communities.

At September 22nd we held our annual service impact a voluntary over 7500 hours and contributing more than $260000.

In support of 61 organizations in 19 states.

We're proud to announce the completion of the LTI homes education, and visitor center for the sire therapeutic equestria et cetera.

This new facility represents a $750000 commitment from LTI homes and are specifically designed to support the special needs of <unk> riders and their families.

It's a privilege to support <unk> mission and we are grateful for the important work they are doing in the community.

<unk>, giving initiatives enabled us to make meaningful positive impact across the country last year.

With that I'll turn the call over to Charles more details on our record financial results.

Thanks, Eric.

<unk> with the fourth quarter.

Our revenue was $488 3 million a decrease of 39% year over year, primarily due to a 42, 7% decrease in closings to 1448 homes and partially offset by a six 3% increase in our average selling price.

To $337198.

Our average selling price decreased four 6% from the third quarter due to incentives and lower sales prices and to a lesser extent, a heavier weighting of closings and lower priced markets in the fourth quarter.

We closed 431 homes through our wholesale business in the fourth quarter, representing 29, 8% of our total closings compared to 369 homes or 14, 6% of our total closings in the fourth quarter last year.

Gross margin as a percentage of sales in the fourth quarter was 27% compared to 26, 4% in the same period last year.

570 basis point decrease was due to incentives and lower sales prices as well as higher input costs working through vertical inventory.

Adjusted gross margin in the fourth quarter was 22, 1%.

Adjusted gross margin excludes $5 $4 million of capitalized interest charged to cost of sales and $1 $4 million related to purchase accounting together, representing a 140 basis points.

Combined selling general and administrative expenses were 12, 3% of revenue for the fourth quarter.

Selling expenses were $33 3 million or six 8% of revenue compared to $42 6 million or five 3% of revenue in the fourth quarter of 2021.

The increase as a percentage of revenues was driven by increased investment in advertising and was partially offset by lower variable expenses such as sales commissions.

General and administrative expenses totaled $26 9 million or five 5% of revenue in the fourth quarter compared to $27 9 million or three 5% of revenue in the same period last year.

Pre tax income for the fourth quarter was $46 9 million or nine 6% of revenue.

Fourth quarter net income was $34 $1 million or $1 46 per basic share and $1 45 per diluted share.

Highlighting a few full year 2022 results.

Revenue was $2 3 billion.

A decline of 24, 4%, primarily due to a 36, 6% decrease in closings offset by a 19, 2% increase in our full year average sales price to $348052.

During the year, we closed 1233 homes through our wholesale business, representing 18, 6% of our total closings and generating $346 million in revenue.

We currently expect our wholesale business will represent between five and 10% of our total closings in 2023.

Our full year gross margin was 28, 1% and adjusted gross margin was 29, 2% both New company Records.

Combined selling general and administrative expenses were 11, 1% for the full year.

Our pre tax net income represented 18, 1% of revenue also a new company record.

Our effective tax rate last year was 21, 9% and we estimate our rate for 2023 will range between 23, 5% and 24, 5%.

Finally, our net income was $326 6 million or $13 90 per basic share and $13 76 per diluted share.

Fourth quarter gross orders were 1431 net orders were 895 and the cancellation rate during the quarter was 37, 5% full.

Full year cancellation rate was 24, 4%.

We ended the year with 702 homes in backlog valued at $252 million.

Turning to our land position.

At December 31, we own and control the total of 71940 lots.

A decrease of 21, 7% year over year and 6% sequentially.

We ended the quarter with 58720 owned lots an increase of 7% year over year, but a decrease of three 1% sequentially.

Of our owned lots 47857.

Raw land or land under development and approximately 30% of those lots were actively being developed at year end.

Of the remaining 10863 owned lots 7555 were finished vacant lots.

We target approximately six months of expected full year closings in vertical construction at any one time.

During the quarter, we continued to release starts at a pace chosen to right size our inventory.

And in the fourth quarter, we started 646 homes compared to 1653 in the same period last year and 840 last quarter.

As a result at December 31, we had 3003.

308 completed homes information centers or homes in progress.

This was a decrease of 19, 5% from the third quarter and aligns our vertical inventory with our outlook for 2023 closings.

At year end, we controlled 13184 lots a decrease of 64, 3% year over year and 16, 7% sequentially.

The decrease was the result of pausing our land acquisitions activities in the second half of the year and our decision to walk from deals that no longer met our criteria or where we believe similar opportunities might be available at more compelling values or terms in the future.

Turning to the balance sheet, we ended the quarter with $32 million of cash approximately $2 9 billion of real estate inventory and total assets of over $3 1 billion.

Total debt at the end of the quarter was $1 1 billion.

And our debt to capital ratio at year end was 45% and our net debt to capital ratio was 39, 8% representing sequential improvement of $290 and 250 basis points respectively.

We ended the year with $268 $6 million of total liquidity, including cash on hand, and $236 6 million available to borrow under our revolving credit facility.

Similar to last quarter, we pause stock repurchases in the fourth quarter, focusing instead on maintaining liquidity and investing to develop the land that will drive our community count growth.

We ended the quarter with over $1 6 billion and total book equity a 17, 7% increase year over year and our book value per share increased 28% to $70 47 per share as of December 31.

At this point I will turn the call back over to Eric.

Thanks, Charles we're pleased with our results in 2022.

In spite of the challenges, but because of them.

Times are available we're made of and I'm proud of I look around and see the character and commitment of our employees.

Our success in 2022 reflects the effectiveness of our systems and people and gives us confidence as we head into 2023.

While news headlines continue to focus on layoffs were in hiring mode. On February six we welcomed 106, new sales professionals to our corporate headquarters for training.

This was our largest sales training class to date.

We are starting to see opportunities on the land side of the business for five months, we didn't approve a deal however.

However in January and February we approved three new finished lot deals that will deliver closings over the next 12 months to 18 months.

We're still highly selective on new deals and expect that most of our focus will be on developing land, we already own to drive community count growth.

Our marketing team is doing an incredible job connecting with new customers in the fourth quarter, we generated over 90000 leads.

And so far in 2023, it has gotten even better in January alone, we generated more than 50.

It's averaging over 500 leads per community. This trend continued into February .

As a result, our weekly retail net sales pace over the first eight weeks of the year is up approximately 150% over our weekly pace in the fourth quarter to frame. It another way in the first eight weeks of 2023, we generated seven two net sales per community compared to the two.

90, net sales we averaged in Q4.

While we are excited by these achievements, we know that a positive trend over a period of weeks, it's no guarantee of a great year.

We're approaching 2023 with tempered optimism and managing our business conservatively.

We're matching our vertical inventory to closings or working with our trade partners and suppliers to reduce costs.

And we're allocating capital to fund our long term growth.

With those points in mind, here's our current outlook for 2023.

We expect to close between 6000.

7000 homes this year at an average sales price between 335 and $350000.

New communities are coming online and we expect to end 2023 with between 115 and 125 active selling communities within an additional 20% to 30% growth in community count expected in 2024.

We expect full year gross margins between 21, and 23% and adjusted gross margins between 22, and a half and 24, 5%.

Finally, we expect that full year SG&A expense as a percentage of revenue will range between 11, five and 12, 5% as we invest in advertising to drive leads and increased head count to support our community count growth objectives.

Those by thanking all of our employees for their commitment and enthusiasm this past year.

Our positive results are proof of our ability to successfully manage through uncertain times I am excited about all of that will accomplish together in 2023.

Now I will open the call for questions.

Thank you.

As a reminder to ask the question you will need to press star one on your telephone.

To withdraw your question Press Star one again.

Standby, while we compile the Q&A roster.

Our first question comes from the line of Michael Rehaut with Jpmorgan. Your line is open.

Okay.

Great. Thanks.

Thanks very much.

I appreciate all the guidance and the commentary.

Okay.

Wanted to hopefully trying to get a little finer.

Granularity on how you're thinking about the first quarter obviously.

If you look at your fourth quarter your gross margins were.

Below your fiscal 'twenty three.

Our guidance range.

And so I'm curious if you know.

As you, perhaps continuing to rightsize inventory or youre in a little bit about.

The current environment, maybe a little more challenging.

If we should be expecting the first quarter to be similar to the fourth quarter.

And how to think about.

Gross margins as the year progresses, and your confidence or what's driving the view that.

Things will be improving from <unk> levels as you progressed in 'twenty three.

Yes, Mike This is Eric Great question, and I'll start with yes, we expect Q1 gross margins to be similar to Q4.

And when interest rates spiked up to 7% in Q4, and our sales were slower we focused on cash we focused on moving the standing inventory.

A spec builder that turns inventory quicker.

Quicker than most builders, we didn't have as much of a backlog. So most of our backlog had been closed.

Led to our record breaking gross margins for the year and then we just need to find the price associated with move in inventory and a lot of our peer group have talked about that.

That price led to a lower gross margin, but also is working from a sales standpoint, so really excited about the <unk>.

First seven or eight weeks here of sales averaging seven two retail net sales per community and we've been raising prices as we go as our gross margin applies implies for the year.

We plan on raising increasing gross margin through a combination of both raising prices and also the homes that are closing in Q4 and also in Q1 were built at the most expensive house costs. So every time, we close a house.

The price of the same gross margins will be improving.

That's helpful. Eric I appreciate it makes sense.

I guess.

Secondly.

You mentioned the.

The sales pace for the first.

Seven I think.

February weeks, correct me, if I'm wrong.

So far this year.

Wanted to view, though.

Sometimes we're able to give us a little sense of how you expect February to shape up from a closing standpoint.

And.

Maybe just a little clarity when you talk about.

Retail sales case.

Our net sales pace, obviously, theres a wholesale component.

Just wondering if the overall.

Yeah.

Total consolidated net sales pace.

Can we think of that as a similar type of number.

Yes, the wholesale component last year, it was a larger percentage of our business.

First quarter, we anticipate it being about 10% of our closings and then we guided to 5% to 10% for the year.

February closings, we expect to close approximately 450 for the month of February so a pretty significant increase over the $3 31 from.

From January and then we expect these first week.

Weeks of the year, improving in March as well, having a good start to the year. We said eight weeks in the first week, we're counting the week ending January one I believe in our number which was even even make seven two even more positive because that last week of the year wasn't as strong, but we went ahead and included that number as well.

Great appreciate it thanks and best of luck.

Alright, Thanks, Mike.

Thank you ladies standby for our next question.

Our next question comes from the line of Truman Patterson with Wolfe Research. Your line is open.

Hey, good morning, guys. Thanks for taking my questions.

Eric just wanted to follow up on that.

Gross margin guide and your comments around raising prices.

<unk> actually been able to start raising prices here early in the year.

Or is there some sort of maybe mix effect as you all pulled back on wholesale.

Yes. There is there is a mix factor in our gross margin guide gross margins. The west we've had to do more discounting in the western United States. So there's a mix component we did raise prices in a number of different communities in February .

Because we've seen accelerated demand.

We believe we found the price floor and a lot of our communities set that has led to increase absorptions and now at seven two net orders per month that said that we should be raising prices from here. The big Astros on that is what is rates doing rates spiked again last week.

Our raising prices will be conjunction of keeping an eye on affordability keep an eye on rates are doing and keep an eye on the monthly payment.

We are seeing a lot of demand we talked about the amount of leads we're getting 10000, plus people every week and acquiring about homeownership.

But they need to qualify and higher rates plus prices makes it makes them more harder to qualify in some cases.

Okay got you on that and then just for clarity the seven two net absorption order absorption.

The monthly level for January and February not the two months combined right.

I'm asking because the midpoint of your 23 closings guide.

Of 6500 implies like five closing absorptions per month.

Trying to understand whether.

That metric is capped in any way due to the level of developed lots or spec availability you all intentionally pausing starts in the fourth quarter and anything any color there would be helpful.

Yes, I think a couple of points first that's the blended rate between January and February . The 7.2, we can get back down what the differences, but it's been strong strong absorptions of retail net sales for both months. The other thing I would talk about in our guidance Youre correct. Our guidance implies a slower absorption rate hopefully that is conservative but we.

We want to be conservative, we don't know what rates are going to be and our gross margin.

We plan on raising prices, which should should slow absorption as we go and the other factor is the January and February closings, which was based on fourth quarter sales at $2 nine will have an impact. So the seven two sales. We're starting is going to help in February but have a bigger impact in March and April throughout.

The year. So blended together is how we came up with our closing guidance.

Okay perfect. Thank you all.

Youre welcome.

Thank you please standby for our next question.

Our next question comes from the line of call Richard with <unk>. Your line is open.

Good morning, everyone. Good afternoon.

Eric.

120 communities at the year end target the midpoint of the range. You gave what is your your net openings that closings for the year of communities in your plan.

We may have to get back to you on that.

Carl but just a looking at the board in my office, which you are familiar with.

Yes.

Net wise, we're opening 20, but we're probably closing out.

40 to 50.

Now closing now opening 40% to 50 and closing out to one year 30 is probably pretty.

Pretty accurate statements.

Super Thank you and then.

You talked about raising prices as you said it.

And you've got you've found the price floor in some of your markets do you have a sense, Eric as to roughly all in including incentives.

Base price cuts or however, you look at it what do you think the peak to trough decline in asking price was for LTI.

That is a.

Great question, because there's a mix component there Karl showed masking it back with you on that but we are seeing.

Customers select smaller plans for.

For the same monthly payment instead of selecting the 16 or $18 square foot House, we're seeing a lot of 13 or 14 Hunter square foot houses selected are purchased.

Also working on.

New floor plans.

Smaller square Footages thats not a trigger we can pull in a lot of communities, but some communities are rolling out smaller square footage plans to help with affordability.

So it's really a community by community as far as that absolute trough.

We don't have a lot of similar communities with similar floor plans, but we could probably get back with you on that okay. I think I would say, 10% to 15, 10% to 15% would probably be a really good estimate okay. Super. Thank and then just last real quick roughly what percentage do you expect <unk> to be pure closings in 'twenty three.

Approximately 5%, 9% great. Thanks, so much appreciate it.

Thank you.

Please standby for our next question.

Our next question comes from the line of Jay Mccanless with Wedbush. Your line is open.

Hey, good afternoon, everyone. Thanks for taking my questions.

So.

Just wanted to check some math here if net orders are running seven two for the first eight weeks and it looks like net net closings are you closing absorption.

Around four if you blend in January and February is that about the right fallout rate that youre, taking that many orders, but youre still seeing a pretty high cancellation rate on them.

Now no.

The $7 two as already have the cancellation there thats a net orders number.

Sure Ash closings youre talking about Thats, because sales were slower in Q4.

Okay. So we should see.

There is assuming you hit the $4 50 for February .

Acceleration of almost one turn so I guess that makes sense, yes.

Now if they were in and the business of giving monthly guidance, but we should see March closings at six to seven per community per month.

Okay.

Alright, thank you.

And then I guess my next question if Youre looking at those net orders what percentage of those net orders or new leads as of 2023 versus people, who may have had to cancel when rates spiked back in November and now youre getting them back into a home.

Yes.

Very very large percentage I would be very comfortable saying, 90% of our lead that have come in very recently and we sell them within 30 days.

That's correct.

And then I guess the other question I had.

I think you said that you guys bought three finished lot deals during <unk>.

I guess number one what is what if anything is going to be the gross margin impact of that I mean, its only three communities but.

And is there more opportunities now to buy some finished lot deals to make up for.

Slower conditions in terms of getting your own owned land developed.

Yes, well the gross margin will be a factor and that's part of our guidance on gross margin based on historical as we do plan on having more finished lot opportunities, which we forecasted a lower gross margin than if we're developing and the land and believe we should make the developer profit as well trod is going to be a bigger percentage.

<unk> of our business, maybe have more opportunity to try it out we forecast a lower gross margin on our Toronto business and it really is a question Jay whats going to happen in the market interest rates Spike last week, we will see what happens throughout the year, we'll see how challenging the market is.

I believe based on what we're seeing.

Lot of builders, particularly on the private side are struggling right now they are committed to takedown schedules. They probably don't like their renegotiating with developers or section sizes are probably too large. So that's why we really wanted to focus on clearing some of our inventory, creating some dry powder, we think theres going to be tremendous opportunities and then were.

Also thinking about the business long term the more challenging the market gets in 2023, the more opportunities that's going to create for LTI over the long term to buy more deals if rates go back down the market gets better not as many opportunities, but obviously that's better in the short term.

Alright.

And then just one other sorry.

Just wanted to sneak this one in.

Could you talk again about gross margins and what the factors are for them to be lower than the historical averages. This year I know part of it is just resetting the base pricing, but maybe the top three things.

That are pushing the gross margins below the historical norms for 'twenty three.

I think the biggest thing is affordability, Jay and seeing the price floor. We also have to deal with appraisals and what other builders are doing unnecessarily hasn't flowed through our base gross margin yet, but we believe most builders are pricing to normalized gross margins are below to clear some inventory our costs are still very much.

They came down from the peak, but if you compare our cost to build a house compared to where it was pre pandemic. It is very much elevated.

30% higher approximately from pre pandemic. So that's more a lot more than just standard inflation that we should see.

Got you okay, great. Thanks for taking my questions.

Thank you.

<unk>.

Please standby for our next question.

Our next question comes from the line up Alex Barron with housing Research Center. Your line is open.

Yes.

Thank you very much.

Yes, I wanted to ask about the.

I wanted to ask about the.

Interest incurred versus expense.

Basically right now.

Idea of that.

The amount of interest that going through the cost of goods sold will remain.

Similar to what it's been or is there a chance that some of the extra interest could come through the expense line below.

Yes, Great question, Alex This is Charles so.

So we averaged about 110 basis points for the fourth quarter. So our interest cost incurred just with interest rates going up have have elevated however, having said that theyre getting capitalized against a number of communities under development. So I think over time that will tick up slightly.

Lee, but it's going to take a.

A couple of years as those projects are developed and brought online to work their way through the income statement. So I think we'll see it.

<unk> implies that it'll be slightly up from where we're at today.

But it will come in over a long period of time as those lots come through the income statement.

Okay that makes sense very helpful.

I also wanted to ask about your build time.

To what extent, that's kind of come back to normal will require recall I think pre pandemic you guys were.

Building houses and something like 63 days or something some number like that.

I'm, just curious to what extent.

Your build time has gone back to normal because that.

And that obviously makes the.

Whenever your backlog is less relevant because you guys are able to kind of go from order to closing pretty quickly.

So I was curious if you could help us out on that and also I'm not sure. If you gave the starts number for the quarter.

Yes. This is Charles again, I think we saw our build times nationwide increased by 30 days last year.

I would say that the shorter build times.

Mentioned 60 days or so theres, a few markets, where we're we can accomplish that but it really depends on the area of the country. It's a pretty wide range. We're also are tarata product will take a little bit longer build times in the traditional.

<unk> product as well.

But I would say build times are coming in slightly.

I would not say necessarily dramatically, but the way we are handling that as just managing starts.

Starts in a way so that we can project or our deliveries of our completed houses that may just be a little bit further out whether it's putting more permits in the queue to be ready to start and then we can adjust very quickly. So that is one thing that we've done historically very well.

Be able to adjust to conditions in a pretty quick timeframe.

And then fourth quarter starts were around 650 646 starts for the quarter.

Okay. So whats the total number of homes under construction that whether they're sold in October .

Yes. So we had just the 3300 total which includes our information centers. So we had about 1900 completed houses to end the quarter at about <unk> hundred.

In work in progress.

Okay very helpful. Best of luck guys. Thank you.

Thank you you're welcome.

Thank you.

Please standby for our next question.

We have a follow up from the line of Truman Patterson with Wolfe Research. Your line is open.

Hey, guys just wanted to follow up on Alex's question.

Regarding interest expense is there any way.

Given the movement in short term rates as they are in the annual dollar amount.

That is actually getting capitalized are incurred in 2023, you can help us out with and then.

Could you just discuss capital allocation priorities in 2003 between share buyback debt reduction reinvesting in the company.

Yes, sure Chairman so I don't have an annual estimate in front of me, but it's going to vary since we manage the business through the revolving credit facility. So it's really going to be dependent on how much we have out.

Outstanding at any one point in time, we're running.

About just a little bit north of 6% right now on the on the revolving credit facility and then we have the high yield notes at 4%.

And so.

So that will.

If you assume in your balance sheet model kind of similar.

Level of debt, then you can kind of back into that way.

And then can you repeat the second part of the question.

Just capital allocation priorities.

Yes, so great question, so similar to what we've talked about in the past, we obviously mentioned in our scripted comments that we're focused on bringing on our new communities we mentioned.

Our community count guidance for this year, but then we also mentioned we expect community count to increase in 2024 by 20% to 30% as well. So I think the primary focus is working through.

Our lots that are currently under development about one third of our lots that are that are not already allocated to finish towards the houses are currently under development. So that's the main priority. We also as Eric mentioned, we want to make sure that we've got some dry powder ready to go to take advantage of finished lot.

Opportunities and we're starting to see that as well so those opportunities are likely to be most beneficial in places where development timeline is taking a little bit longer or in some cases, where we're gapping out in our submarkets. So ideally the best opportunities are those that we can use those to fill in.

<unk>.

If our next community isn't coming for a little bit further out we.

We can take advantage of that finish line opportunity to backfill not unlike what we used to do.

<unk> years ago.

And then we have share repurchases as a consideration I think our sense right now is that as more opportunistic as we continue to kind of focus on liquor.

The liquidity and where we are currently allocating dollars to land development and acquisitions.

But certainly opportunistic from that standpoint.

And maintaining our debt to capital ratio.

In the general area of 40%, where we landed for the end of the year.

Okay. Thank you and then.

You will have reduced pricing destination of 10% to 15% from peak levels and I imagine with.

Some mortgage REIT Paydowns, you all might be able to reduce our monthly mortgage payment by I don't know 20%.

Or greater rate.

From peak levels, so I'm, hoping to understand across your either specific metro or just kind of nationwide could you discuss the mortgage payment for one of your homes versus an equivalent rent payment.

Because clearly.

Rents have been a little bit stickier, maybe a little bit of softening, but not to the same degree.

Yes, Truman this is Eric I mean, it varies by community, obviously, where that where the sales prices and the amount of incentives as community by community as well, but generally speaking if we pick a standard community entry level across the country. One of the metrics we have been using us.

For a monthly payment that somebody asked qualify with our taxes and insurance and everything all in kind of pre pandemic that number's about $1800 a month and you needed to make about 5400, a month to qualify for that mortgage about three extra payment.

At the peak, which would be about Q4.

This past quarter that number with prices still elevated and interest rates getting to seven.

That got up to about $2800, a month, which meant you had to.

To make $8400 amounts of 54% to 8400 is a big dollar amount.

Interest rates Spike back up last week, but generally in the six five range, where we've kind of been averaging six in a quarter of six and a half over the first eight weeks of the year.

We take about 2400, a month apples to apples, so that's better than that $400, a month decrease through mortgages and pricing up its peak.

We believe it has made a difference.

In our business.

And that is certainly higher than.

Most people can rent a single family four or an apartment, but thats always been the case, but that spread is probably more elevated you've got some of the national staff that you have access to but it's more elevated than normal the difference between running an ownership.

Okay got you. Thank you.

Youre welcome.

Thank you.

At this time im not showing any further questions I would now like to turn the call back over to Eric <unk> for closing remarks.

Thank you everyone for participating on the call and for your interest in <unk> homes, we look forward to sharing our achievements throughout the year have great day.

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

The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.

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Hello, and welcome to the <unk> homes fourth.

Fourth quarter 2022 conference call.

Today's call is being recorded and a replay will be available on the company's website at www dot ALG at homes Dot com.

After management's prepared comments, there will be an opportunity to ask questions.

I'll now turn the call over to Josh <unk>, Vice President of Investor Relations you may begin.

Thanks, and good afternoon.

I'll remind listeners that this call contains forward looking statements, including management's views on <unk> business strategy outlook plans objectives and guidance for 2023.

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.

On this call. We'll also 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.

This filing will be accessible on the SEC's website and in the Investor Relations section of our website.

Thanks, Josh Good afternoon, everyone and welcome to our 2022 earnings call and.

Demand was so strong we turned off marketing.

And we made it clear at that time, we are taking advantage of the high demand environment, because we knew it wouldn't last and added two.

<unk> 2022 is a much different year.

Let's look at some of the numbers.

Home closings last year were 6621.

This was not the goal we set and to be Frank we were disappointed we missed our guidance in by such a narrow margin.

We're in the affordable housing business and during the year affordability got constrained.

Supply chain tightened cost inflated and home prices went up.

Beginning in January mortgage rates started to slowly increase but quickly accelerated as the year went on.

By September they surpassed 6% for the first time since November of 2008.

One month later rates exceeded 7% for the first time in over 20 years.

As affordability tightened buyers pause in the market decelerated and as it did we got back to basics, we expanded our marketing.

We got back to training.

Had to work for every sale, we invested time and resources to make certain our people were on process building selling and closing homes <unk>.

As a result, we had a number of notable achievements last year.

Going deeper here are number one market last year was Dallas Fort worth with 11 closings per community per month.

San Antonio was second with nine three.

Third with Charlotte with $9 one.

Houston delivered eight eight and rounding out the top five was Raleigh was seven nine closings per community per month.

Graduations to the teams in these markets on your outstanding results.

We finished the year at the high end of the guidance, we issued last quarter with 99 active communities.

We delivered one of our most profitable years ever our gross margin for the full year was over 28% and adjusted gross margin was over 29%.

Our pre tax margin was more than 18% and our net income margin was more than 14%.

Each of these metrics represents a new full year company record.

On the inventory side, we reduced our total owned and controlled lots by almost 22% and as we projected on our last call. We right sized our completed and in progress inventory to align with demand and ended the year with approximately 3300 homes.

We focus on cash flow and preserving capital ending the year with a net debt to capital ratio below 40%.

Representing a 250 basis point improvement over the third quarter.

While delivering these positive results, we still found opportunities to give back to our local communities.

September 22nd we held our annual service impact a voluntary over 7500 hours and contributing more than 260.

In support of 61 organizations in 19 states.

We're proud to announce the completion of the LTI homes education, and visitor center for the sire therapeutic equestria et cetera.

This new facility represents a $750000 commitment from LTI homes and are specifically designed to support the special needs of sires riders and their families.

It's a privilege to support <unk> mission and we are grateful for the important work they are doing in the community.

<unk>, giving initiatives enabled us to make meaningful positive impact across the country last year.

With that I'll turn the call over to Charles more details on our record financial results.

Thanks, Eric.

<unk> with the fourth quarter.

Our revenue was $488 3 million a decrease of 39% year over year, primarily due to a 42, 7% decrease in closings to 1448 homes and partially offset by a six 3% increase in our average selling price.

The $337198.

Gross margin as a percentage of sales in the fourth quarter was 27% compared to 26, 4% in the same period last year.

570 basis point decrease was due to incentives and lower sales prices as well as higher input costs working through vertical inventory.

Adjusted gross margin in the fourth quarter was 22, 1%.

Adjusted gross margin excludes $5 $4 million of capitalized interest charged to cost of sales and $1 $4 million related to purchase accounting together, representing a 140 basis points.

Combined selling general and administrative expenses were 12, 3% of revenue for the fourth quarter.

Selling expenses were $33 3 million or six 8% of revenue compared to $42 6 million or five 3% of revenue in the fourth quarter of 2021.

The increase as a percentage of revenues was driven by increased investment in advertising and was partially offset by lower variable expenses such as sales commissions.

General and administrative expenses totaled $26 9 million or five 5% of revenue in the fourth quarter compared to $27 9 million or three 5% of revenue in the same period last year.

Pre tax income for the fourth quarter was $46 9 million or nine 6% of revenue.

Fourth quarter net income was $34 1 million or $1 46 per basic share and $1 45 per diluted share.

Highlighting a few full year 2022 results.

Revenue was $2 3 billion.

A decline of 24, 4%, primarily due to a 36, 6% decrease in closings.

Set by a 19, 2% increase in our full year average sales price to $348052.