Q3 2024 LGI Homes Inc Earnings Call
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I'm sorry.
Speaker Change: Welcome to LG I-Home's third quarter, 2024 conference call. Today's call is being recorded and a replay will be available on the company's website at www.lgihomes.com. After management's prepared remarks, there will be an opportunity to ask questions.
Speaker Change: At this time, I'll turn the call over to Joshua Fattor, Executive Vice President of Investor Relations in Capital Market. You may begin.
Joshua Fattor: Thanks, LaTania and good afternoon. Before we begin I'll remind listeners that this call contains forward-looking statements, including management views on the company's business strategy, outlook, plans objectives and guidance for future periods.
Speaker Change: 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.
Joshua Fattor: 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.
Joshua Fattor: All forward-looking statements must be considered in light of those related risks and you shouldn't place undue reliance on such statements which reflect management's current viewpoints and are not guarantees of future performance.
Joshua Fattor: On this call we'll discuss non-gap financial measures which are not intended to be considered an isolation or a substitute for financial information presented in accordance with Gap.
Speaker Change: Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the press release we issued this morning and in our quarterly report on Form 10-Q for the quarter ended September 30, 2024, that we expect to file with the SEC later today.
Speaker Change: This filing will be accessible on the SEC's website and in the Investor Relations section of our website.
Speaker Change: With me today are Eric Lipar, LGI Homes Chief Executive Officer and Chairman of the Board, and Charles Merdian, Chief Financial Officer and Treasurer. I'll now turn the call over to Eric.
Eric: Thanks, Josh. Good afternoon and welcome to LGI Helms Earnings Call.
Eric Lipar: We're pleased to report another strong quarter driven by sustained demand for new homes across the country. Despite continued affordability challenges, we delivered outstanding financial results that reflect our focus on operational excellence and a commitment to maximize profitability on every home sold.
Eric: As highlighted in our press release this morning, we delivered 1,757 homes in the third quarter.
Speaker Change: Those closings, combined with a record high ASP of more than $371,000,
Speaker Change: resulted in revenue of $652 million, an increase of 5.6% compared to last year, and the highest revenue we've reported since the second quarter of 2022.
Speaker Change: For the last several years, we've made considerable progress in acquiring and developing attractive land positions across the country.
Speaker Change: Over the last year, you've seen many of these communities come online, and we're extremely pleased to have ended the third quarter with 138 communities, a noteworthy 30% increase over the prior year, and our sixth consecutive quarter of community count expansion.
Speaker Change: Additionally, this is the largest absolute number of communities that we've added in any single year.
Speaker Change: Given when we acquired these communities, the capital invested in their development and the rising cost of replacement projects, their inherent value is substantial.
Speaker Change: In light of this, simply maximizing absorptions at the expense of margins and shortening the economic lifespan of these assets in the process does not yield the optimal returns
Speaker Change: We believe are achievable with a little patience and a disciplined approach to pricing and incentives.
Speaker Change: Therefore, we continue to focus on driving profitability on every home we sell, even if the result is a pace that is below our historical average.
Speaker Change: This strategy reflects our commitment to maximizing long-term profitability rather than focusing solely on immediate output.
Speaker Change: Further, it ensures we sustain our strong margins and generate value for shareholders over a longer period, balancing today's performance with tomorrow's opportunities.
Speaker Change: The success of the strategy played out again during the third quarter as we delivered an adjusted gross margin of 27.2% up 20 basis points from the prior quarter and in line with our standout result from the same period last year.
Speaker Change: Additionally, we delivered a pre-tax net income margin of 14.1%, up 130 basis points sequentially, and significantly higher than our pre-pandemic average of 12.8%.
Speaker Change: These and other achievements contributed to diluted earnings per share of $2.95, representing an increase of 4% year over year and 19% sequentially.
Speaker Change: During the quarter we averaged 4.4 closings per community per month. Our top markets on a closings per community basis were Las Vegas with 9.9, Nashville with 9,
Speaker Change: One final highlight. We were proud to be recognized by Newsweek for the second consecutive year as one of the world's most trustworthy companies. This award underscores our commitment to integrity and excellence with our customers, with our employees, and with our investors.
Speaker Change: This recognition highlights the strength of our culture and the integrity of our employees who provide exceptional customer service as they help families across the country achieve the dream of home ownership. With that, I'll invite Charles to provide additional details on our financial results.
Charles: Thanks, Eric. As mentioned earlier, our revenue in the third quarter increased 5.6% year-over-year to $651.9 million.
Charles: During the quarter, we closed 1,757 homes, slightly higher on a year-over-year basis, and 6.2% higher sequentially.
Speaker Change: We closed 160 homes through our wholesale business, representing 9.1% of our total closings, compared to 7.9% last year.
Speaker Change: Those closings resulted in revenue of $49.5 million, an increase of 14.2% compared to last year.
Speaker Change: Our average sales price was a record $371,004, an increase of 5.2% over the same period last year and 1.9% sequentially.
Speaker Change: The increase was primarily driven by our decision to maintain profitability through price increases in the majority of our markets, as well as a larger percentage of closings in markets with higher average price points, particularly our West and Northwest segments.
Speaker Change: and was partially offset by a slightly higher percentage of wholesale closings.
Speaker Change: Our gross margin performance again reflected the balanced use of financing incentives and our ability to offset the financial impact of these tools by raising prices and taking a disciplined approach to the absolute level of rate buydowns.
Speaker Change: As a result, our third quarter gross margin was 25.1%, and our adjusted gross margin was 27.2%.
Speaker Change: As Eric mentioned, Adjusted Gross Margin improved 20 basis points sequentially and was in line with the prior year results in our pre-pandemic average.
Speaker Change: Adjusted gross margin excluded $13 million of capitalized interest charged cost of sales and $1.2 million related to purchase accounting, together representing 210 basis points compared to 150 basis points last year.
Speaker Change: Combined selling, general and administrative expenses for the third quarter were $83.2 million or 12.8% of revenue.
Speaker Change: Telling expenses were $55.2 million or 8.5% of revenue compared with 8.1% in the same period last year. The increase was primarily related to higher advertising spend and to a lesser extent increased personnel costs related to new community openings.
Speaker Change: General and administrative expenses totaled $28 million, or 4.3% of revenue, in line with the same period last year.
Speaker Change: Based on our performance to date, we now expect our full-year SG&A expense as a percentage of revenue to range between 14% and 14.5%.
Speaker Change: Pre-tax net income was $91.9 million compared to $89.4 million during the same period last year.
Speaker Change: Pre-tax net income as a percentage of revenue was 14.1% compared to 14.5% last year and 12.8% in the second quarter.
Speaker Change: Our effective tax rate was 24.3% compared to 25.1% last year. Given our performance to date, we expect our full year tax rate will be approximately 24.5%.
Speaker Change: Overall, we generated net income of $69.6 million, or $2.96 per basic share and $2.95 per diluted share.
Speaker Change: Gross orders in the third quarter were 1,967, net orders were 1,452, and our cancellation rate was 26.2%, down slightly compared to last year.
Speaker Change: We ended September with 1,088 homes in our backlog, representing $417.8 million.
Speaker Change: At September 30th, our land portfolio consisted of 68,564 owned and controlled lots.
Speaker Change: Of those lots, 54,029, or 78.8%, were owned, and 14,535 lots, or 21.2%, were controlled.
Speaker Change: Of our owned lots, 38,734 were classified as raw land and land under development, with less than 30% of those lots in active development.
Speaker Change: Of the remaining 15,295 owned lots, 10,827 were finished vacant lots, 2,491 were completed homes and information centers.
Speaker Change: And during the quarter, we started 1,554 homes and had 1,977 homes in progress at quarter end.
Speaker Change: With that, I'll turn the call over to Josh for a discussion of our capital position.
Speaker Change: Thank you, Charles.
Josh: We ended the quarter with $1.5 billion of debt outstanding, including $863.3 million drawn on our revolver, resulting in a debt-to-capital ratio of 43.6% and net debt-to-capital ratio of 42.7%.
Speaker Change: Total liquidity was $375.4 million including $60.9 million of cash and $314.5 million available to borrow in a credit facility.
Speaker Change: Our stockholders' equity at September 30th was $2 billion, and our book value per share was $84.93.
Speaker Change: On October 9th, we successfully amended our credit agreement and we're pleased to have several lenders who had previously planned to exit in April of next year choose to extend their capital commitments through April of 2028.
Speaker Change: Their decision to extend for the full duration of the facility offsets $125 million of the $245 million reduction in capacity that we previously expected in April.
Speaker Change: Therefore, under the terms of the new agreement, we will maintain our total capacity of $1,205,000,000 through April 2025 and have $1,085,000,000 of capacity through April of 2028. At this point, I'll turn the call back over to Eric.
Eric Lipar: Thanks, Josh. We're pleased with the strong results we delivered in the third quarter and all of our accomplishments year-to-date. Turning to the current sales environment, I'll provide our thoughts on the fourth quarter to date and briefly discuss our updated guidance.
Speaker Change: Later today, we plan to report that we closed 526 homes in October, down slightly from the prior year.
Speaker Change: While leaves and traffic in October were similar compared to September, we did experience a moderation of sales activity in October, a trend that appears to have been broadly experienced across the industry.
Speaker Change: Part of this is certainly related to our growth and the time it takes to get new hires trained in selling the LGI way, as well as the impact of higher rates on affordability.
Speaker Change: We believe this is a near-term dynamic and not a new normal. The fundamentals of the housing market are strong, supported by continued household formations, years of underproduction, and limited supply of resale homes.
Speaker Change: Finally, the U.S. economy continues to grow and remains productive, resulting in a resilient labor market and historically low unemployment. In short, the long-term outlook is undeniably positive.
Speaker Change: Based on recent demand trends, our results to date and outlook for the next two months, we now expect to close between 6,100 and 6,400 homes this year at an average selling price between $360,000 and $370,000.
Speaker Change: Margins in the fourth quarter are expected to be similar to slightly lower than what we delivered in the third quarter depending on geographic, product, and retail versus wholesale mix, as well as the cost of incentives offered during an annual make or move sales event.
Speaker Change: Based on those variables and our strong performance today, we are raising our full year margin guidance by 50 basis points.
Speaker Change: at both the low and the high ends and now expect to deliver gross margins between 24% and 25% and adjusted gross margins between 26% and 27%.
Speaker Change: As I highlighted at the beginning, community count continues to grow. Community count held steady at 138 in October, and we have 12 new community openings planned for November.
Speaker Change: We continue to expect to end 2024 with approximately 150 active communities.
Speaker Change: Additionally, we expect another 10 to 20% growth in our community count in 2025.
Speaker Change: Thanks to your outstanding efforts, we are well positioned to continue delivering profitable results and creating long-term value for our shareholders.
Speaker Change: We will now open the call for questions.
Speaker Change: Certainly, as a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster.
Speaker Change: One moment for our first question, which will come from Trevor Allenson of Wolf Research. Your line is open, Trevor.
Trevor Allenson: Hey, good afternoon. Thank you for taking my questions.
Trevor Allenson: First one on gross margin performance, which was really impressive in the quarter. You raised your full year gross margin expectation In what most builders are describing as a challenging incentive environment Can you talk about what came in better than what you were anticipating and sort of bridge us from your prior guide to your updated guide?
Speaker Change: Yeah, Trevor, this is Eric. I can start. It's really just what we're seeing as far as updating the guidance for the results from Q3 and then anticipating what it's going to be in Q4. And the overall yearly guidance needs to be upgraded. And I think
Speaker Change: It goes back to that Pace vs. Price initiative and probably some questions on that. And like other builders, we have to put a margin on top of our costs.
Speaker Change: And we are looking at incentives closely. We're looking at the
Speaker Change: value of our land underneath every house we build and certainly houses that are that are complete we need to incentivize.
Speaker Change: But we've been avoiding wholesale price reductions because in most cases just reducing the prices doesn't necessarily increase your pace. There's other things we'd look at like marketing.
Speaker Change: product, training. We have a lot of new hires right now, but we're weighing all those incentives.
Speaker Change: Okay, gotcha, yeah, makes sense.
Speaker Change: And then, Eric, I wanted to follow up on a comment you made in your prepared remarks, I think, talking about kind of near-term dynamics, not necessarily being a change for the industry. We've heard a lot of builders talk about, you know, non-rate impact to demand conditions. A lot of people cite the election.
Speaker Change: So, is it your view here that we get past the election into early next year, that even if rates remain elevated, that you could still see some...
Speaker Change: improvement in the in demand to the spring selling season or do you think that that's truly going to be dictated by rates and affordability and then maybe perhaps your view is that where rates are currently isn't going to be sustained as we move through 2025. Thanks.
Speaker Change: Yeah, you know, I think Trevor Frost is a...
Speaker Change: We look at demand as the number of leads that we have coming in so The demand for home ownership and what we're seeing in the field is remain strong, you know over over 8,000
Speaker Change: individual leads last week inquired about homeownership. So we don't believe the election has anything to do with demand.
Speaker Change: The challenge with our pace right now...
Speaker Change: and the average price, as we stated in our prepared remarks, average sales price this quarter was the highest in company history. Those two are leading to affordability challenges. And the amount of income it takes to qualify for an entry-level house,
Speaker Change: We have eliminated
Speaker Change: The market has eliminated the customer that makes $60,000 to $100,000 a year in combined income, has been eliminated from the market just from a qualification standpoint relative to their income to what the ratios are. So that's the challenge we have on a pay standpoint.
Speaker Change: That is cautious right now is the absorption pace because gross margins are strong, demand is strong, community count growth is strong, a lot of positive things happening in our business.
Speaker Change: Thank you for watching!
Speaker Change: I appreciate all the color. Thank you and good luck moving forward.
Speaker Change: Thanks, Trevor.
Speaker Change: Thank you. And one moment for our next question.
Speaker Change: Our next question will go to Andrew at J.P. Morgan. Andrew, your line is open.
Speaker Change: Hi everyone, this is Andrew Ozzie on for Mike, congrats on the quarter, appreciate you taking my questions.
Speaker Change: You know, just to go again on the gross margins, in your view, what's allowing you to maintain this level of margin and hold it relatively steady as compared to your peers and how should we think about the next two to three quarters as you adjust prices of your communities at their opening?
Speaker Change: Thank you.
Speaker Change: Yeah, Andrew, I'll answer it another way as well from a, you know, believe it on how we price our homes, but also, you know, we tend to do a lot of land development at LGI, a lot of self-development.
Speaker Change: and also our gross margin from a company standpoint, we have to capture both the development profit and the home building profit.
Speaker Change: So our gross margin should be higher than our peers because we need to capture that development profit. The other item we talk about internally
Speaker Change: is there is a lot of value in the land that we develop and we're financing that more on-balance sheet than off-balance sheet.
Speaker Change: relative to our peer group who has really went all-in on land banking.
Speaker Change: Land banking is expensive. There is a lot of value to land banking as it relates to certain metrics like return on equity.
Speaker Change: But it is a headwind to gross margin. We have a cost advantage as it relates to gross margin, and our lot cost, because we are keeping everything on balance sheet, then doing a lot of land banking, I think that's also an important point.
Speaker Change: Got it. I appreciate that. And then kind of in terms of land inflation, what are you kind of seeing in terms of land contracted today? And maybe if you can help us understand the difference between, you know, development versus the actual land purchases, any color there would be helpful.
Speaker Change: Yeah, Trevor, obviously it's, it's, or excuse me, Andrew, obviously it's different in every market. Generally speaking, land prices are not coming down, still strong demand for land.
Speaker Change: Development costs remain elevated, don't see a lot of relief in development costs either. You know, doing business with the cities and counties and platting fees. We just believe costs are going to continue to go up.
Speaker Change: It may create more opportunities to grow our community count in the future as well.
Speaker Change: Got it. Thank you so much for taking my questions.
Speaker Change: Thanks, Andrew.
Speaker Change: And one moment for our next question. Our next question will be coming from Carl Reichert of BTIG. Your line is open, Carl.
Carl Reichert: Thanks. Hey guys, nice to talk to you. Just one housekeeping question for you, Charles. The other income this quarter, at least relative to our number, was basically all the difference between our...
Speaker Change: EPS estimate and what you produced. What was that this quarter? And then do you have a sense of the run rate going forward into fourth quarter and then even into next year on what that might be?
Charles Merdian: Yeah, Carl, this quarter we had about four and a half million related to land sales compared to last quarter was the 2.7, so the majority of the Delta this quarter over last was related to some additional lot sales.
Charles Merdian: We expect it to be lumpy going into the fourth quarter and into the future, so don't really have specific guidance for you in terms of what we think fourth quarter 2025 will be.
Carl: Okay, thanks. I thought that might be it. And then for you, Eric, I think I may have asked this before, so I want to touch on it again.
Speaker Change: If I look at your absorption rates per community, you're down about 33% from where you were in 22.
Charles Merdian: Your ASP is up about 5% from there, if I look at the midpoint of your year-end guide.
Charles Merdian: So, how are you changing compensation structure for sales to focus more on margin if absorptions, I assume per salesperson, are falling? How do you sort of true them back up to get them to focus on that dynamic as opposed to turnover?
Speaker Change: Yeah, it's a great question, Carl. I think the focus is really leaving that commission percentage the same. We believe we pay one of the highest commission rates to our salespeople in the industry. We know we do.
Carl: create is very similar to what it was a few years ago so the income is not as effective as much because they're paid on the the revenue part of it.
Carl Reichert: Okay, great. Thanks, Eric. Appreciate it, guys.
Eric Lipar: You're welcome.
Speaker Change: One moment for our next question.
Speaker Change: And our next question will come from Jay McCandless of Wedbush. Your line is open, Jay.
Jay McCandless: Hey guys, so a couple questions. The first one, Eric, that comment you made about
Jay McCandless: Households with a $60K to $100K income priced out of the market now. I mean, how many households, how many potential customers do you think you're talking about there that now can't look at homeownership?
Eric Lipar: Yeah, I don't have that answer off the top of my head, Jay, but I think it's a pretty significant number. You know, I was in the sales office this last weekend and...
Eric Lipar: work on getting to the field as much as I can and there's just a lot of customers in that range that are right now forced to keep running.
Speaker Change: or they have to save up more money for down payment or have to pay more down debt. So our team does an exceptional job of working with these.
Speaker Change: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host
Speaker Change: Difference between owning a home and paying for rent, that gap is wider now than it has been in the past.
Speaker Change: Also a lot of our customers over the years have used various bond programs that are put out by various states.
Charles Merdian: and local community agencies across the United States.
Charles Merdian: And with those local bond programs, you don't have the ability to do a forward commitment and buy down rates. So a lot of those programs today have a market rate of 7, 7.5 percent, which is a completely different rate than what it was three or four years ago.
Speaker Change: Thank you.
Charles Merdian: Thank you.
Speaker Change: and I guess...
Speaker Change: I know y'all aren't ready to get 25 guidance yet, but...
Speaker Change: And kind of to what Carl was asking about in terms of pace I mean, what are you guys thinking about is going to be the right pace because
Charles Merdian: closing submission mark the last couple of years and just wondering
Charles Merdian: how you all are thinking about it, especially if rates don't go down from here. Should we be expecting a pace in line with what we saw at, you know, back half of 24? Or just how are you guys thinking about it, especially with all the communities that you're gonna be bringing out of the ground?
Speaker Change: Yeah, it's a good question, Jay. We're looking at PACE. We're also looking at revenue, community, ASP, gross margins, et cetera. Yeah, we're not going to give 25 guidance today, but, you know, from the...
Charles Merdian: The seat we sit in, I think 25, especially since it's, you know, we're selling for 25 right now, 25 is basically here. No reason to think that 25 pace is any difference than the 24 pace.
Charles Merdian: but also we would think that would result in a very positive year for LGI next year, ASP.
Speaker Change: No reason that doesn't continue to go higher. We just talked about on the call an additional 10 to 20% in community count growth next year, strong gross margins, staying in our elevated range, increasing EPS, a lot of new growth of our employees.
Speaker Change: One of the things I will point to, Jay, is it has been proven time and time again at LGI.
Speaker Change: is sales representative, LGI management, LGI employees in their second year of the business.
Speaker Change: do a lot better than their first year of the business. And we have had such strong community growth, and we got so many new employees, new sales reps, new managers, that I'm excited about all of those individuals getting into their second year in the business in 2025. And that will have a positive impact on the company.
Speaker Change: So then I guess the other question, just to say thank you for all that Eric, to stick on affordability for a second, I mean do you feel like your plans, and I know you guys have a pretty tight plan book,
Speaker Change: Do you feel like there's more opportunities to bring down the size of the plans, or have you kind of hit that terminal bottom where at some point it's just not a house anymore, it's more of an ADU than it is a house? Right.
Eric Lipar: Yeah, I think we're about there there Jay because we've been looking at affordability in our plans for quite a while now certainly on new communities We're always looking at that
Speaker Change: We want to build a quality, affordable house. We're going to look at square footage as the primary driver to...
Speaker Change: reduce the overall affordability and make it as affordable as I possibly can. So I also don't think we're going to chase square footage down to the absolute bottom. You know, some of our competitors are building product
Speaker Change: with NOAA garages, one car garages. They're just a product that here at LGI we would not be comfortable building with. We want to be proud of the product that we're building.
Speaker Change: We're going to be consistent with our fit and finish nationwide.
Speaker Change: All of our houses nationwide have hard surface countertops. There are certainly, in addition to the product exterior, there are certainly components that we could take out more of the fit and finish inside.
Speaker Change: and probably take a couple thousand hours out of the house, but we're not sure the value is really there, and we want to be proud of the product we're building and make sure it's a great product for our customers to move into.
Speaker Change: Understood. Just one more question.
Speaker Change: You know the...
Speaker Change: I don't know how much people talk about it, but you guys do have Torada.
Speaker Change: Move-up price points seem to be selling really well at this point. I mean, is it a thought process that, you know, until rates come down or affordability gets better, maybe you convert some of this dirt over to Toronto and ride some of this wave that we're seeing in the move-up and call it entry-level luxury markets?
Speaker Change: Yeah, I mean certainly depending on the market depending on the community, you know, since we do a lot of development We got a lot many larger communities
Speaker Change: In fact, I was in a meeting this morning. We're going to have Terada and LGI Home Product in the same actual community.
Speaker Change: So Toronto is going well for us. We believe it's going to be continued growth in the future.
Speaker Change: ever since I believe it was 2017 when we had our first Toronto Closing. Toronto Closings have increased every year and looking forward to doing more Toronto product in the future and we'll look at that on a community-by-community basis, Jay, but good comment.
Speaker Change: Great. Thanks. Appreciate it.
Speaker Change: You're welcome.
Speaker Change: Next question.
Speaker Change: Our next question will be coming from Alex Barron of Housing Research Center. Your line is open, Alex.
Alex Barron: Yes, thank you. Hey, guys. Yeah, I wanted to ask also along the lines of Dave's questions. I think most of your homes are usually single-family. I don't recall you guys doing too much attached product, but is that anything you guys are considering?
Speaker Change: are looking at as a way to make houses more affordable.
Speaker Change: We are, Alex, and we do have a number of attached townhome products across the United States, and we certainly look at that. We'll continue to look at that, and part of our community account growth next year will be attached product as well.
Alex Barron: got it and then my other question was I think I heard you say the
Alex Barron: The SG&A ratio is in the 14% range, many of the larger public builders are now below 10, whereas in previous years it never used to go below 10, so is there anything you guys are working on to try to bring down the SG&A ratio?
Speaker Change: Thank you.
Speaker Change: Nothing specific, Alex. This is Charles. I mean, I think we're comfortable in our advertising spend and where we break it down into two categories. So you have selling expenses,
Speaker Change: which is, you know, predominantly advertising spend.
Speaker Change: commissions to both inside and outside salespeople and then running our offices. So as community count continues to grow, we continue to invest in new community openings, information centers across the country. From a G&A standpoint, then that's more of our
Speaker Change: Our corporate overhead and support operation, we've been running around an average of about $30 million a quarter.
Speaker Change: This year, the third quarter came in a little bit under than our
Speaker Change: than our average, so we continue to monitor.
Speaker Change: expenses from an overhead standpoint.
Speaker Change: to make sure that we are...
Speaker Change: supporting the field in the best way possible and really right now we're focused more on
Speaker Change: community account growth and getting getting these new communities opening in the markets. Not a lot of geographic expansion in terms of where the new communities are coming from. They're coming from our existing markets. So we hope to leverage off of having the established overhead in those markets going into the future.
Speaker Change: Okay, and if I could ask one last one.
Speaker Change: Any thoughts around issuing more fixed rate debt to swap out the lines of credit?
Speaker Change: It's something that's always on the radar for us, Alex. We evaluate those opportunities. We're constantly informed by our syndicate where rates are and where our current bonds are trading. So we want to make sure it's an attractive situation and there's actually good use for the capital, but it is something that we're constantly looking at.
Alex Barron: Got it. Best of luck guys. Thank you.
Speaker Change: All right, thanks Alex.
Speaker Change: One moment for our next question.
Speaker Change: Thank you.
Speaker Change: Afternoon, everybody.
Speaker Change: Good afternoon.
Speaker Change: A few questions here for you.
Speaker Change: Understanding you don't want to give FY 25 PACE gross margin, maybe you could illuminate us in terms of your either returns on capital
Speaker Change: or equity goals so we can understand how you are balancing that margin, which is, you know, clearly against peers' trends right now, just in terms of the asset efficiency side, as you outlined your...
Speaker Change: you know, your return goals.
Eric Lipar: Yeah, Ken, this is Eric. I could start. Charles can add specific into it. I think for next year, without getting into specific guidance, which we'll get very, you know, similar pace and similar gross margins to this year, because we believe we're at a historical average and we'll always be there. Obviously, it depends on wholesale versus retail mix and geographic mix and incentives. There's variables there.
Eric Lipar: And then when we're buying a deal, we're underwriting to a 20% ROE. But what has happened over the last couple of years, we've got a lot of invested in land, all these communities that we are bringing online, the 30% year over year and the additional 10 to 20% growth.
Speaker Change: That has all just been expense right now. We are not seeing any revenue for those communities. So we believe our ROE is going to be increasing over the next couple of years and heading in a positive direction.
Speaker Change: Agreed.
Speaker Change: Appreciate that. Very good.
Speaker Change: As we think about your
Speaker Change: land, which has been in development on the balance sheet and capitalized interest, it's been picking up. Is it reasonable to assume
Speaker Change: the current, I know you gave fourth quarter guidance in terms of the gross margin interest expense spread, but is that going to be increasing next year as these
Speaker Change: longer dated land positions come on or through the income statement
Speaker Change: Yeah, Ken, this is Charles. I mean, I think we've been running around 180 and up to 200 basis points. You know, as far as what we can see in terms of visibility right now, I would say we're going to be somewhere in and around that 200 basis point range.
Speaker Change: as we go into 2025, but we'll certainly give more color on that as we get closer into giving guidance for next year.
Ken: Excellent and then my one last question because your development is so specific and I think it's obviously been helping you guys consistently with your past. Is there a way you could
Speaker Change: Comment on
Speaker Change: the cost of your land cost as a percent of sales versus your variable costs, which I assume, both on the development of land are more similar to other builders, considering the common trade that you use. Thank you very much.
Speaker Change: Yeah, I can start. I think, you know, our average finished lot cost as a percentage of our ASP has been pretty close to around 20%, just under for quite some time. I think that's
Speaker Change: Part of the way as Eric was explaining how we think about pricing and achieving a return is that we would expect that to
Speaker Change: you know, somewhere around 10% of the total finished lot cost. So, you know, most of the variability we see when we look at development costs and what it costs to replace the project are going to be included in the infrastructure requirements.
Speaker Change: You know, are there off-sites required? What are the municipalities requiring us to do in order to bring that deal online? How much yield can we get out of the project due to detention requirements and those things? So the vast majority of the replacement costs come in the development spend.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Speaker Change: At this time, I'm not showing any further questions. I'd like to hand the call back to Eric for closing remarks.
Eric Lipar: Thanks, everyone, for participating on today's call and your continued interest in LGI homes. Have a great rest of the day.
Speaker Change: This concludes LGI Homes' third quarter 2024 conference call. Have a great day.
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Speaker Change: Welcome to LGI Homes third quarter 2024 conference call. Today's call is being recorded and a replay will be available on the company's website at www.lgihomes.com. After management's prepared remarks there will be an opportunity to ask questions.
Speaker Change: At this time, I'll turn the call over to Joshua Fattor, Executive Vice President of Investor Relations and Capital Markets. You may begin.
Joshua Fattor: Thanks, LaTanya, and good afternoon.
Speaker Change: Before we begin, I'll remind listeners that this call contains forward-looking statements, including management's views on the company's business strategy, outlook, plans, objectives, and guidance for future periods.
Speaker Change: On this call, we'll discuss non-GAAP financial measures, which are not intended to be considered in isolation or as substitutes for financial information presented in accordance with GAAP.
Speaker Change: 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 30th, 2024 that we expect to file with the SEC later today.
Speaker Change: This filing will be accessible on the SEC's website and in the Investor Relations section of our website.
Speaker Change: With me today are Eric Lipar, LGI Homes Chief Executive Officer and Chairman of the Board, and Charles Merdian, Chief Financial Officer and Treasurer. I'll now turn the call over to Eric.
Eric Lipar: Thanks, Josh. Good afternoon and welcome to LGI Homes Earnings Call.
Eric Lipar: We're pleased to report another strong quarter driven by sustained demand for new homes across the country.
Speaker Change: Despite continued affordability challenges, we delivered outstanding financial results that reflect our focus on operational excellence and a commitment to maximize profitability on every home sold.
Speaker Change: As highlighted in our press release this morning, we delivered 1,757 homes in the third quarter. Those closings combined with a record high ASP of more than $371,000
Speaker Change: resulted in revenue of $652 million, an increase of 5.6% compared to last year and the highest revenue we've reported since the second quarter of 2022.
Speaker Change: For the last several years, we've made considerable progress in acquiring and developing attractive land positions across the country.
Speaker Change: Over the last year, you've seen many of these communities come online, and we're extremely pleased to have ended the third quarter with 138 communities, a noteworthy 30% increase over the prior year, and our sixth consecutive quarter of community count expansion.
Speaker Change: Additionally, this is the largest absolute number of communities that we've added in any single year.
Speaker Change: Given when we acquired these communities, the capital invested in their development, and the rising cost of replacement projects, their inherent value is substantial.
Speaker Change: In light of this, simply maximizing absorptions at the expense of margins and shortening the economic lifespan of these assets in the process does not yield the optimal returns we believe are achievable with a little patience and a disciplined approach to pricing and incentives.
Speaker Change: Therefore, we continue to focus on driving profitability on every home we sell, even if the result is a pace that is below our historical average.
Speaker Change: This strategy reflects our commitment to maximizing long-term profitability rather than focusing solely on immediate output.
Speaker Change: Further, it ensures we sustain our strong margins and generate value for shareholders over a longer period, balancing today's performance with tomorrow's opportunities.
Speaker Change: The success of the strategy played out again during the third quarter, as we delivered an adjusted gross margin of 27.2 percent of 20 basis points from the prior quarter and in line with our standout results from the same period last year.
Speaker Change: Additionally, we delivered a pre-tax net income margin of 14.1%, up 130 basis points sequentially, and significantly higher than our pre-pandemic average of 12.8%.
Speaker Change: These and other achievements contributed to diluted earnings per share of $2.95.
Speaker Change: representing an increase of 4% year-over-year and 19% sequentially.
Speaker Change: During the quarter, we averaged 4.4 closings per community per month. Our top markets on a closings per community basis were Las Vegas with 9.9, Nashville with 9,
Speaker Change: Charlotte with 8.9
Speaker Change: Dallas Fort Worth with 6.4 and Tampa also with 6.4 closings per community per month. Congratulations to these teams in these markets and their outstanding performance last quarter.
Speaker Change: One final highlight. We were proud to be recognized by Newsweek for the second consecutive year as one of the world's most trustworthy companies.
Speaker Change: This award underscores our commitment to integrity and excellence with our customers, with our employees, and with our investors.
Speaker Change: This recognition highlights the strength of our culture and the integrity of our employees who provide exceptional customer service as they help families across the country achieve the dream of home ownership.
Speaker Change: With that, I'll invite Charles to provide additional details on our financial results.
Charles Merdian: Thanks, Eric. As mentioned earlier, our revenue in the third quarter increased 5.6% year-over-year to $651.9 million.
Charles Merdian: During the quarter, we closed 1,757 homes, slightly higher on a year-over-year basis, and 6.2% higher sequentially.
Charles Merdian: We closed 160 homes through our wholesale business, representing 9.1% of our total closings, compared to 7.9% last year.
Charles Merdian: Those closings resulted in revenue of $49.5 million, an increase of 14.2% compared to last year.
Charles Merdian: Our average sales price was a record $371,004, an increase of 5.2% over the same period last year and 1.9% sequentially.
Charles Merdian: The increase was primarily driven by our decision to maintain profitability through price increases in the majority of our markets, as well as a larger percentage of closings in markets with higher average price points, particularly our West and Northwest segments.
Charles Merdian: and was partially offset by a slightly higher percentage of wholesale closings.
Charles Merdian: Our gross margin performance again reflected the balanced use of financing incentives and our ability to offset the financial impact of these tools are raising prices and taking a disciplined approach to the absolute level of rate buydowns.
Charles Merdian: As a result, our third quarter gross margin was 25.1% and our adjusted gross margin was 27.2%.
Speaker Change: As Eric mentioned, Adjusted Gross Margin improved 20 basis points sequentially and was in line with the prior year results in our pre-pandemic average.
Charles Merdian: Adjusted gross margin excluded $13 million of capitalized interest charged cost of sales and $1.2 million related to purchase accounting, together representing 210 basis points compared to 150 basis points last year.
Speaker Change: Combined selling, general and administrative expenses for the third quarter were $83.2 million or 12.8% of revenue.
Speaker Change: Selling expenses were $55.2 million, or 8.5% of revenue, compared with 8.1% in the same period last year. The increase was primarily related to higher advertising spend and, to a lesser extent, increased personnel costs related to new community openings.
Speaker Change: General and administrative expenses totaled $28 million, or 4.3% of revenue, in line with the same period last year.
Speaker Change: Based on our performance to date, we now expect our full-year SG&A expense as a percentage of revenue to range between 14% and 14.5%.
Speaker Change: Pre-tax net income was $91.9 million compared to $89.4 million during the same period last year.
Speaker Change: Pre-tax net income as a percentage of revenue was 14.1% compared to 14.5% last year and 12.8% in the second quarter.
Speaker Change: Our effective tax rate was 24.3% compared to 25.1% last year. Given our performance to date, we expect our full year tax rate will be approximately 24.5%.
Speaker Change: Overall, we generated net income of $69.6 million, or $2.96 per basic share and $2.95 per diluted share.
Speaker Change: Gross orders in the third quarter were 1,967, net orders were 1,452, and our cancellation rate was 26.2 percent, down slightly compared to last year.
Speaker Change: We ended September with 1,088 homes in our backlog, representing $417.8 million.
Speaker Change: At September 30th, our land portfolio consisted of 68,564 owned and controlled lots.
Speaker Change: Of those lots, 54,029, or 78.8%, were owned, and 14,535 lots, or 21.2%, were controlled.
Speaker Change: Of our owned lots, 38,734 were classified as raw land and land under development, with less than 30% of those lots in active development.
Speaker Change: Of the remaining 15,295 owned lots, 10,827 were finished vacant lots.
Speaker Change: 2,491 were completed homes and information centers.
Speaker Change: And during the quarter, we started 1,554 homes and had 1,977 homes in progress at quarter end.
Speaker Change: With that, I'll turn the call over to Josh for a discussion of our capital position.
Josh: Thank you, Charles.
Josh: We ended the quarter with $1.5 billion of debt outstanding, including $863.3 million drawn on our revolver, resulting in a debt-to-capital ratio of 43.6% and net debt-to-capital ratio of 42.7%.
Josh: Total liquidity was $375.4 million including $60.9 million of cash and $314.5 million available to borrow in our credit facility.
Speaker Change: Our stockholder's equity at September 30th was $2 billion, and our book value per share was $84.93.
Speaker Change: On October 9th, we successfully amended our credit agreement, and we're pleased to have several lenders who had previously planned to exit in April of next year choose to extend their capital commitments through April of 2028.
Speaker Change: Their decision to extend for the full duration of the facility offsets $125 million of the $245 million reduction in capacity that we previously expected in April.
Speaker Change: Therefore, under the terms of the new agreement, we will maintain our total capacity of $1,205,000,000 through April 2025 and have $1,085,000,000 of capacity through April of 2028. At this point, I'll turn the call back over to Eric.
Eric Lipar: Thanks Josh. We're pleased with the strong results we delivered in the third quarter and all of our accomplishments year-to-date.
Eric Lipar: Turning to the current sales environment, I'll provide our thoughts on the fourth quarter to date and briefly discuss our updated guidance.
Speaker Change: Later today, we plan to report that we closed 526 homes in October, down slightly from the prior year.
Speaker Change: While leaves and traffic in October were similar compared to September, we did experience a moderation of sales activity in October, a trend that appears to have been broadly experienced across the industry.
Speaker Change: Part of this is certainly related to our growth and the time it takes to get new hires trained in selling the LGI way, as well as the impact of higher rates on affordability.
Speaker Change: We believe this is a near-term dynamic and not a new normal. The fundamentals of the housing market are strong, supported by continued household formations, years of underproduction, and limited supply of resale homes.
Speaker Change: Finally, the U.S. economy continues to grow and remains productive, resulting in a resilient labor market and historically low unemployment. In short, the long-term outlook is undeniably positive.
Speaker Change: Based on recent demand trends, our results to date and outlook for the next two months, we now expect to close between 6,100 and 6,400 homes this year at an average selling price between $360,000 and $370,000.
Speaker Change: Margins in the fourth quarter are expected to be similar to slightly lower than what we delivered in the third quarter, depending on geographic, product, and retail versus wholesale mix, as well as the cost of incentives offered during an annual make or move sales event.
Speaker Change: Based on those variables and our strong performance today, we are raising our full year margin guidance by 50 basis points.
Speaker Change: at both the low and the high ends, and now expect to deliver gross margins between 24% and 25% and adjusted gross margins between 26% and 27%.
Speaker Change: As I highlighted at the beginning, community count continues to grow. Community count held steady at 138 in October, and we have 12 new community openings planned for November.
Speaker Change: We continue to expect to end 2024 with approximately 150 active communities.
Speaker Change: Additionally, we expect another 10 to 20% growth in our community count in 2025.
Speaker Change: In conclusion, I want to thank our employees. Your hard work, dedication, and execution on our strategy were essential to our success in the third quarter.
Speaker Change: Thanks to your outstanding efforts, we are well positioned to continue delivering profitable results and creating long-term value for our shareholders.
Speaker Change: We will now open the call for questions.
Speaker Change: Certainly, as a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster.
Speaker Change: And one moment for our first question, which will come from Trevor Allenson of Wolf Research. Your line is open, Trevor.
Trevor Allenson: Hey, good afternoon. Thank you for taking my questions. First one on gross margin performance, which was really impressive in the quarter. You raised your full year gross margin expectation. In what most builders are describing as a challenging incentive environment, can you talk about what came in better than what you were anticipating and sort of bridge us from your prior guide to your updated guide?
Speaker Change: Yeah, Trevor, this is Eric. I can start. It's really just what we're seeing as far as updating the guidance for the results from Q3 and then anticipating what it's going to be in Q4. And the overall yearly guidance needs to be upgraded. And I think
Speaker Change: It goes back to that Pace vs. Price initiative and probably some questions on that. And like other builders, we have to put a margin on top of our costs.
Speaker Change: And we are looking at incentives closely. We're looking at the
Speaker Change: value of our land underneath every house we build and certainly houses that are that are complete we need to incentivize.
Speaker Change: But we've been avoiding wholesale price reductions because in most cases, just reducing the prices doesn't necessarily increase your pace. There's other things we'd look at like marketing.
Speaker Change: product, training. We have a lot of new hires right now, but we're weighing all those incentives.
Speaker Change: Okay, gotcha, yeah, makes sense.
Speaker Change: And then, Eric, I wanted to follow up on a comment you made in your prepared remarks, I think, talking about kind of near-term dynamics, not necessarily being a change for the industry. We've heard a lot of builders talk about, you know, non-rate impact to demand conditions. A lot of people cite the election.
Speaker Change: So, is it your view here that we get past the election into early next year, that even if rates remain elevated, that you could still see some...
Speaker Change: improvement in the in demand to the spring selling season or do you think that that's truly going to be dictated by rates and affordability and then maybe perhaps your view is that where rates are currently isn't going to be sustained as we move through 2025. Thanks.
Speaker Change: Yeah, I think Trevor Frost is a...
Speaker Change: We look at demand as the number of leads that we have coming in. So the demand for home ownership and what we're seeing in the field remains strong, you know, over 8,000
Speaker Change: individual leads last week inquired about homeownership. So we don't believe the election has anything to do with demand. The challenge with our pace right now
Speaker Change: and the average price, as we stated in our prepared remarks, average sales price this quarter was the highest in company history. Those two are leading to affordability challenges. And the amount of income it takes to qualify for an entry-level house, we have eliminated.
Speaker Change: The market has eliminated the customer that makes $60,000 to $100,000 a year in combined income, has been eliminated from the market just from a qualification standpoint relative to their income to what the ratios are. So that's the challenge we have on a pay standpoint.
Speaker Change: But that is about the only component.
Speaker Change: That is cautious right now, is the absorption pace, because gross margins are strong, demand is strong, community count growth is strong, a lot of positive things happening in our business.
Speaker Change: Thank you.
Speaker Change: I appreciate all the color. Thank you and good luck moving forward.
Speaker Change: Thanks, Trevor.
Speaker Change: Thank you. And one moment for our next question.
Speaker Change: Our next question will go to Andrew at J.P. Morgan. Andrew, your line is open.
Speaker Change: Hi everyone, this is Andrew Azeon from MICA, congrats on the quarter, appreciate you taking my questions.
Speaker Change: Bye.
Speaker Change: Yeah, Andrew, I'll answer it another way as well from a, you know, believe it on how we price our homes. But also, you know, we tend to do a lot of land development at LGI, a lot of self-development. And also our gross margin from a company standpoint, we have to capture both the development profit and the home building profit.
Speaker Change: So, our gross margin should be higher than our peers, because we need to capture that development profit. The other item we talk about internally...
Speaker Change: is there is a lot of value in the land that we develop.
Speaker Change: and we're financing that more on balance sheet than off balance sheet.
Speaker Change: Relative to our peer group who has really went all in on land banking, land banking is expensive. There is a lot of value to land banking as it relates to certain metrics like return on equity.
Speaker Change: But it is a headwind to gross margin. We have a cost advantage as it relates to gross margin, and our lot cost, because we are keeping everything on balance sheet, then doing a lot of land banking, I think that's also an important point.
Speaker Change: Got it, I appreciate that. And then kind of in terms of land inflation, what are you kind of seeing in terms of land contracted today and maybe if you can help us understand the difference between, you know, development versus the actual land purchases, any color there would be helpful.
Speaker Change: Yeah, Trevor, obviously it's, or excuse me, Andrew, obviously it's different in every market. Generally speaking, land prices are not coming down. Still strong demand for land.
Speaker Change: Development costs remain elevated. Don't see a lot of relief in development costs either. You know, doing business with the cities and counties and platting fees. We just believe costs are going to continue to go up.
Speaker Change: We are starting to see, because of challenges for the private builders, we are starting to see more opportunities to buy finished lots on a takedown or buy an opportunity where capital wasn't available for a builder. Not necessarily at distressed pricing levels, but it may create more opportunities to grow our community account in the future as well.
Speaker Change: Got it. Thank you so much for taking my questions.
Speaker Change: Thanks Andrew.
Speaker Change: And one moment for our next question. Our next question will be coming from Carl Reichert of BTIG. Your line is open, Carl.
Carl Reichert: Thanks. Hey, guys. Nice to talk to you. Just one housekeeping question for you, Charles. Just the other income this quarter, at least relative to our number, was basically all the difference between our EPS estimate and what you produced. What was that this quarter? And then do you have a sense of the run rate going forward into the fourth quarter and then even into next year on what that might be?
Charles Merdian: Yeah Carl, this quarter we had about four and a half million related to land sales compared to last quarter was the 2.7 so the majority of the Delta this quarter over last was related to some additional lot sales.
Carl Reichert: We expect it to be lumpy going into the fourth quarter and into the future, so don't really have specific guidance for you in terms of what we think fourth quarter 2025 will be.
Carl Reichert: Okay, thanks. I thought that might be it. And then for you, Eric, I think I may have asked this before, so I want to touch on it again.
Carl Reichert: If I look at your absorption rates per community, you're down about 33% from where you were in 22.
Carl Reichert: Your ASP is up about 5% from there if I look at the midpoint of your year-end guide.
Carl Reichert: So, how are you changing compensation structure for sales to focus more on margin if absorptions, I assume per salesperson, are falling? How do you sort of true them back up to get them to focus on that dynamic as opposed to turnover?
Speaker Change: Yeah, it's a great question Carl. I think the focus is really leaving that commission percentage the same.
Carl Reichert: We believe we pay one of the highest commission rates to our salespeople in the industry. We know we do.
Carl Reichert: and having that same percentage on a higher ASP, even though the unit volume may be down in a per community, the overall revenue that an individual salesperson creates, or a community.
Speaker Change: Create is very similar to what it was a few years ago so the income is not as effective as much because they're paid on the the revenue part of it.
Speaker Change: Okay, great. Thanks, Eric. Appreciate it, guys.
Speaker Change: You're welcome.
Speaker Change: One moment for our next question.
Speaker Change: And our next question will come from Jay McCandless of Wedbush. Your line is open, Jay.
Jay McCandless: Hey guys, so a couple questions. The first one...
Jay McCandless: Eric, that comment you made about...
Jay McCandless: Households with a $60K to $100K income priced out of the market now, I mean, how many households, how many potential customers do you think you're talking about there that now can't look at homeownership?
Eric Lipar: Yeah, I don't have that answer off the top of my head, Jay, but I think it's a pretty significant number. You know, I was in the sales office this last weekend and...
Jay McCandless: Work on getting the field as much as I can and there's just a lot of customers in that range that are right now Forced to keep running
Speaker Change: or they have to save up more money for down payment or have to pay more down debt. So our team does an exceptional job of working with these customers.
Speaker Change: and helping them get into a position where they can buy. But a household income, because of rates and ASP, that measure, as we all know, is just more constrained than it used to be. That
Speaker Change: Difference between owning a home and paying for rent, that gap is wider now than it has been in the past.
Jay McCandless: Also a lot of our customers over the years have used various bond programs that are put out by various states.
Jay McCandless: and local community agencies across the United States.
Jay McCandless: And with those local bond programs, you don't have the ability to do a forward commitment and buy down rates. So a lot of those programs today have a market rate of 7, 7.5 percent, which is a completely different rate than what it was three or four years ago.
Jay McCandless: and I guess
Speaker Change: I know y'all aren't ready to give 25 guidance yet, but...
Speaker Change: kind of to what Carl was asking about in terms of pace, I mean, what are you guys thinking about is going to be the right pace because closings have missed your mark the last couple of years and just wondering how you all are thinking about it, especially if rates don't go down from here. Should we be expecting a pace in line with what we saw in Back to Alpha 24 or just how are you guys thinking about it, especially with all the communities that you're going to be bringing out of the crowd?
Speaker Change: Yeah, it's a good question, Jay. We're looking at PACE. We're also looking at revenue, community, ASP, gross margins, etc. Yeah, we're not going to give 25 guidance today, but, you know, from the...
Speaker Change: The seat we sit in, I think 25, especially since it's, you know, we're selling for 25 right now, 25 is basically here. No reason to think that 25 pace is any different than the 24 pace.
Speaker Change: but also we would think that would result in a very positive year for LGI next year, ASP.
Speaker Change: There's no reason that doesn't continue to go higher.
Speaker Change: We just talked about on the call an additional 10 to 20% in community count growth next year, strong gross margins, staying in our elevated range, increasing EPS.
Speaker Change: A lot of new growth with our employees.
Speaker Change: One of the things I will point to, Jay, is it has been proven time and time again at LGI.
Speaker Change: is sales representatives, LGI management, LGI employees in their second year of the business.
Speaker Change: do a lot better than their first year of the business. And we have had such strong community growth, and we got so many new employees, new sales reps, new managers, that I'm excited about all of those individuals getting into their second year in the business in 2025. And that will have a positive impact on the company.
Joshua Fattor: and Charles Merdian. Thank you.
Speaker Change: So then I guess the other question, just to set and take all that air, to stick on affordability for a second, I mean do you feel like your plans, and I know you guys have a pretty tight plan book,
Speaker Change: Do you feel like there's more opportunities to bring down the size of the plans, or have you kind of hit that terminal bottom where at some point it's just not a house anymore, it's more of an ADU than it is a house?
Speaker Change: Yeah, I think we're about there, Jay, because we've been looking at affordability in our plans for quite a while now, certainly on new communities, we're always looking at that.
Speaker Change: We want to build a quality, affordable house. We're going to look at square footage as the primary driver to...
Speaker Change: reduce the overall affordability and make it as affordable as I possibly can. So I also don't think we're going to chase square footage down to the absolute bottom. You know, some of our competitors are building product.
Speaker Change: with no garages, one-car garages. There's just a product that here at LGI we would not be comfortable building with. We want to be proud of the product that we're building.
Joshua Fattor: We're going to be consistent with our fit and finish nationwide.
Joshua Fattor: All of our houses nationwide have hard surface countertops. There are certainly, in addition to the product exterior, there are certainly components that we could take out more of the fit and finish inside.
Speaker Change: and probably take a couple thousand dollars out of the house, but we're not sure the value is really there and we want to be proud of the product that we're building and make sure it's a great product for our customers to move into.
Speaker Change: Understood. Just one more question.
Speaker Change: You know the...
Speaker Change: I don't know how much people talk about it, but you guys do have Torada.
Speaker Change: Move-up price points seem to be selling really well at this point. I mean, is it a thought process that, you know, until rates come down or affordability gets better, maybe you convert some of this dirt over to Toronto and ride some of this wave that we're seeing in the move-up and call it entry-level luxury markets?
Speaker Change: Yeah, I mean, certainly, depending on the market, depending on the community, you know, since we do a lot of development, we got a lot, many larger communities. In fact, I was in a meeting this morning, we're going to have Terada and LGI Home Product in the same actual community.
Joshua Fattor: So Toronto is going well for us. We believe it's going to be continued growth in the future.
Joshua Fattor: Every since, I believe it's 2017 when we had our first Toronto closing. Toronto closings have increased every year. And looking forward to doing more Toronto product in the future. And we'll look at that on a community by community basis, Jay. But good comments.
Jay McCandless: Great. Thanks. Appreciate it.
Jay McCandless: You're welcome.
Speaker Change: Next question.
Speaker Change: Our next question will be coming from Alex Barron of Housing Research Center. Your line is open, Alex.
Alex Barron: Yes, thank you. Hey, guys. Yeah, I wanted to ask also along the lines of Dave's questions. I think most of your homes are usually single-family. I don't recall you guys doing too much attached product, but is that anything you guys are considering?
Jay McCandless: are looking at as a way to make houses more affordable.
Speaker Change: We are, Alex, and we do have a number of attached townhome products across the United States, and we certainly look at that. We'll continue to look at that, and part of our community account growth next year will be attached product as well.
Alex Barron: Got it. And then my other question was, I think I heard you say the...
Alex Barron: The SDNA ratio is in the 14% range. Many of the larger public builders are now below 10, whereas, you know, in previous years it never used to go below 10. So is there anything you guys are working on to try to bring down the SDNA ratio?
Speaker Change: Thank you.
Charles Merdian: Yeah, nothing specific, Alex. This is Charles. I mean, I think we're comfortable in our advertising spend and we break it down into two categories. So you have selling expenses.
Joshua Fattor: which is, you know, predominantly advertising spend.
Joshua Fattor: to both inside and outside salespeople and then running our offices so as community count continues to grow we continue to invest in new community openings information centers across the country. From a G&A standpoint then that's more of our
Joshua Fattor: Our corporate overhead and support operation, we've been running around an average of about $30 million a quarter.
Joshua Fattor: This year, the third quarter came in a little bit under than our...
Joshua Fattor: than our average, so we continue to monitor.
Joshua Fattor: expenses from an overhead standpoint.
Joshua Fattor: to make sure that we are...
Joshua Fattor: supporting the field in the best way possible and really right now we're focused more on
Joshua Fattor: community account growth and getting these new communities opening in the markets. Not a lot of geographic expansion.
Joshua Fattor: in terms of where the new communities are coming from. They're coming from our existing markets. So we hope to leverage off of having the established overhead in those markets going into the future.
Speaker Change: Okay, and if I could ask one last one.
Speaker Change: Any thoughts around issuing more fixed rate debt to swap out the lines of credit?
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: It's something that's always on the radar for us, Alex. We evaluate those opportunities. We're constantly informed by our syndicate where rates are and where our current bonds are trading. So we want to make sure it's an attractive situation and there's actually good use for the capital, but it is something that we're constantly looking at.
Alex Barron: Got it. Best of luck, guys. Thank you.
Speaker Change: All right. Thanks, Alex.
Speaker Change: One moment for our next question.
Speaker Change: Thank you.
Speaker Change: Afternoon, everybody.
Speaker Change: Good afternoon.
Speaker Change: A few questions here for you.
Speaker Change: Understanding you don't want to give FY 25 PACE gross margin, maybe you could illuminate us in terms of your either returns on capital
Speaker Change: or equity goals so we can understand how you are balancing that margin, which is clearly against peers' trends right now, just in terms of the asset efficiency side as you outline your return goals.
Speaker Change: Yeah, Ken, this is Eric. I get started. Charles can add.
Speaker Change: I think for next year, without getting into specific guidance, which we'll get very similar pace and similar gross margins to this year, because we believe we're at a historical average and we'll always be there. Obviously, it depends on wholesale versus retail mix and geographic mix and incentives. There's variables there.
Speaker Change: And then when we're buying a deal, we're underwriting to a 20% ROE. But what has happened over the last couple of years, we've got a lot of invested in land, all these communities that we are bringing online, the 30% year over year and the additional 10 to 20% growth.
Speaker Change: That has all just been expense right now. We are not seeing any revenue for those communities. So we believe our ROE is going to be increasing over the next couple of years and heading in a positive direction.
Speaker Change: Thank you. Bye-bye.
Speaker Change: As we think about your
Speaker Change: land which has been in development on the balance sheet and capitalized interest, it's been picking up. Is it reasonable to assume the current, I know you gave fourth quarter guidance in terms of the gross margin interest expense spread, but is that going to be increasing next year as these
Speaker Change: longer days in land, positions come on or through the income statement?
Speaker Change: Yeah, Ken, this is Charles. I mean, I think we've been running around 180 and up to 200 basis points, you know, as far as what we can see in terms of visibility right now, I would say we're going to be somewhere in and around that 200 basis point range as we go into 2025, but we'll certainly give more color on that as we get closer into giving guidance for next year.
Ken: Excellent and then my one last question because your development is so specific and I think it's obviously been helping you guys consistently with your path. Is there a way you could
Speaker Change: Comment on
Speaker Change: the cost of your land cost as a percent of sales versus your variable costs, which I assume both on the development of land are more similar to other builders, considering the common trade that you use. Thank you very much.
Speaker Change: Yeah, I can start. I think, you know, our average finished lot cost as a percentage of our ASP has been...
Speaker Change: pretty close to around 20 percent, just under for quite some time. I think that's part of the way, as Eric was explaining, how we think about pricing and achieving a return is that we would expect that to
Speaker Change: you know, somewhere around 10% of the total finished lot cost. So, you know, most of the variability we see when we look at development costs and what it costs to replace the project are going to be included in the infrastructure requirements.
Speaker Change: You know, are there off sites required? What are the municipalities requiring us to do in order to bring that deal online? How much yield can we get out of the project due to detention requirements and those things? So the vast majority of the replacement costs come in the development spend.
Speaker Change: Thank you for watching!
Speaker Change: Thank you very much.
Speaker Change: Thank you. Bye.
Speaker Change: At this time, I'm not showing any further questions. I'd like to hand the call back to Eric for closing remarks.
Eric Lipar: Thanks, everyone, for participating on today's call and your continued interest in LGI homes. Have a great rest of the day.
Speaker Change: This concludes LGI Homes' third quarter 2024 conference call. Have a great day.