Q2 2025 LGI Homes Inc Earnings Call
Welcome to the LGI Homes second quarter 2025 conference call. Today's call is being recorded and a replay will be available on the company's website at www.
LGI Homes, Inc. will now open the floor for questions following Management's prepared comments. At this time, I'll turn the call over to Joshua Fattor, Executive Vice President of Investor Relations and Capital Markets.
Thanks and good afternoon.
I'll remind listeners that this call contains forward-looking statements, including management's views on the company's business strategy, outlook, plans, objectives, and guidance for future periods. Such statements reflect management's current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause those expectations to 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.
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.
In accordance with gaap.
Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the press release we issued this morning and in our quarterly report on Form 10-Q for the quarter ended June 30, 2025, that we expect to file with the SEC later today.
This filing will be accessible on the FCC's website and on the Investor Relations section of our website.
I'm joined today by Eric Lipar, LGI Homes Chief Executive Officer and Chairman of the Board, and Charles Meehan, Chief Financial Officer and Treasurer. I'll now turn the call over to Eric.
Thanks, Josh. Good afternoon, and welcome to our second quarter earnings call.
We delivered solid results last quarter despite a challenging market. While the desire for home ownership has proven resilient, elevated mortgage rates contributed to the affordability pressures weighing on entry-level buyers.
Additionally, heightened economic uncertainty has created a softer sales environment in which buyers are still exploring the idea of homeownership but are taking longer to make decisions and, in some cases, choosing to delay their purchases.
Despite these challenges, we remain confident in the long-term outlook for the housing market, driven by strong demographic trends and a persistent structural shortage of homes.
A shortage that is being compounded as more buyers delay the purchase of their first home.
It was against this backdrop that we delivered 1,323 homes in the second quarter.
At an average sales price of $365,000, resulting in revenue of $484 million.
Our financial results demonstrate our success at maintaining profitability by offering compelling but balanced financing incentives and offsetting their impact by raising prices and higher performance communities.
These initiatives along with the incremental profit captured on self-developed plots, enabled us to deliver an adjusted gross margin of 25.5% of 190 basis points. Sequentially at the high end of the guidance range provide on our last call.
On the cost side, we've been focused on driving operating efficiency and improving cost discipline. Additionally, we made progress optimizing our advertising investments and concentrating dollars on the channels that generate the highest number of leads.
These and other initiatives enable the company to deliver a pre-tax net income margin of 8.7% and earnings per share of $1.36.
We ended the second quarter with 146 active communities, a 14% increase over the prior year.
During the second quarter, our top markets on a closing per community basis were Atlanta with 6.8.
Nashville with 5.4, Wilmington with 5.3, Richmond with 4.7, and Charlotte with 4.5.
Congratulations to teams in these markets on their strong performance last quarter.
We're pleased with our second quarter performance and remain focused on continued improvement.
Our teams across the country remain committed to converting leads and delivering an exceptional customer experience, and we expect to see ongoing progress in the coming quarters.
1 final highlight: on May 15th, we held our annual Service Impact Day.
Nationwide, our team's volunteered more than 8,500 hours working with over 60 organizations around the country.
We're grateful to our nonprofit partners for their indispensable work and for allowing us to contribute to their projects.
We're equally proud of our employees whose generosity and community spirit made this year's Service Impact Day a success.
With that, I would like Charles to provide additional details on our financial results.
Thanks Eric and good afternoon.
Revenue in the second quarter was $483.5 million, based on 1,323 homes closed at an average sales price of $365,446.
The 19.8% year-over-year decrease in revenue was driven by a 20.1% decline in home closings, slightly offset by a 0.4% increase in our average sales price.
The modest increase in our ASP was driven by geographic mix, partially offset by a higher percentage of wholesale closings in the second quarter.
Of our total closings, 237 homes were sold through our wholesale channel, representing 17.9% of closings, compared to 7.1% last year.
Although demand has tapered recently, the wholesale channel continues to be a compelling way to balance our completed home inventory.
Despite early indications, these tariffs would negatively affect margins. Their impact in the second quarter was minimal.
1% in the prior quarter and 25% during the same period last year.
Sequentially, gross margin dollars were up over 50%.
The year-over-year decrease as a percentage of revenue was primarily due to a higher percentage of wholesale closings and, to a lesser extent, higher lot costs and higher capitalized interest as a percentage of revenue, as well as reduced operating leverage when compared to last year's performance.
Adjusted gross margin was 25.5% compared to 23.6% in the prior quarter and 27% during the same period last year.
Adjusted gross margin excluded $11.8 million of capitalized interest charged to cost of sales and $1 million related to purchase accounting, together representing 260 basis points, compared to 200 basis points last year.
Combined selling, general and administrative expenses for the second quarter totaled $71 million or 14.7% of revenue.
Selling expenses were $41.6 million, or 8.6% of revenue, compared with 8.8% in the same period last year.
The decrease was primarily related to more efficient advertising spend.
General administrative expenses were $29.4 million, or 6.1% of revenue, compared to 5.1% in the same period last year.
Pre-tax net income was $42 million, or 8.7% of revenue, and our effective tax rate was 25%, compared to 23.8% in the same period last year.
For the quarter, we generated net income of $31.5 million, or $0.36 per basic and diluted share.
Gross orders in the second quarter were 1,620, and net orders were 1,091.
Net orders declined sequentially, reflecting a muted demand environment throughout most of the second quarter.
However, we are encouraged by more recent trends, notably in the back half of June and continuing into July, which point to an improving sales environment as we transition into the second half of the year.
Our cancellation rate in the second quarter was 32.7% compared to 22.2% in the same period last year, reflecting the slower sequential sales pace during the quarter.
We ended the second quarter with 808 homes in our backlog, representing $322.5 million in value. Of those homes, 91, or 11.3% of our total backlog, were related to wholesale contracts with institutional buyers, compared to 181, or 13%, in the same period last year.
Turning to our land position.
At June 30th, our portfolio consisted of 64,756 owned and controlled lots.
A decrease of 7.4% year-over-year and 4.5% sequentially.
Of those lots, 535,555, or 82.7%, were owned.
And 11,221 lots, or 17.3%, were controlled.
Of our owned lots, 37,374 were raw land or land under development.
22% of which were in active development that we expected to deliver over the next several years.
The remaining 16,181 lots were owned. Lots were finished.
And of those finished, lots, 12,145 were vacant and 4,036 were related to homes under construction.
The total number of homes under construction was down 13.6% year-over-year and 4.4% sequentially. As we continue to focus on rebalancing inventory in select markets to meet current sales trends.
During the quarter, we started 1,135 homes and ended June with 1,512 homes in progress.
We expect to continue to moderate starts in the coming quarters to align with the current pace of sales, ensuring efficient inventory levels.
I'll now turn the call over to Josh for a discussion of our capital position.
Thanks, Charles. We ended the quarter with $1.7 billion of debt outstanding, including $662.6 million drawn on our revolver, resulting in a debt to capital ratio of 45.8% and a net debt to capital ratio of 45%.
As inventory levels decrease and development spend trends down in the coming quarters, we expect to reduce our overall leverage.
Of cash and $263 million available under our credit facility.
During the quarter, we repurchased 367,568 shares of our common stock for $20.6 million and had $157.3 million remaining under our repurchase authorization.
At June 30th, our stockholders' equity was $2.1 billion, and our book value per share was $89.22, an increase of 9% compared to the same period last year. At this point, I'll turn the call back over to Eric.
Thanks, Josh. The software demand conditions experienced throughout most of the second quarter materialized into weaker July closings than previously anticipated.
Later today, we plan to issue a press release announcing that we closed 382 homes in the month of July across 143 active communities.
As Charles noted, lead and order trends picked up near the end of June, driven by several new sales initiatives. In July, sales trended positively and in the right direction.
Turning to our Outlook.
Our spec-driven business model in today's environment makes visibility into the fourth quarter a challenge. As a result, we're limiting our guidance to the third quarter. At this time, we intend to reintroduce annual guidance when market conditions stabilize.
Based on our current backlog and view of the inventory available to close for Q3 2025, we expect to close between 1,100 and 1,300 homes at an ASP between $360,000 and $365,000 across approximately 145 counties.
We expect a slight reduction in gross margins as we offer compelling incentives and additional discounts to move aged inventory.
Therefore, third quarter, gross margin is expected to range between 21 and 1.5, and 22, and a half percent and adjusted gross margin between 24 and 25%.
Finally, SG&A expense will range between 15% and 16%, and we expect our tax rate to be approximately 24% and 1.5%.
I want to close by thanking all of our LGI Homes employees across the country. Your relentless focus on connecting directly with motivated buyers while sustaining our profitability is instrumental to our performance last quarter.
I'm grateful for your continued dedication to our company and the customers we serve. We'll now open the call for questions.
Certainly, as a reminder, please press *1, 1, 1 on your touchtone telephone to wait for your name to be announced to withdraw your question. Please press *1, 1, 1 again.
Please stand by for what we could call our Q&A roster.
Our first question will come from Trevor Alanson of Wolf Research. Your line is open, Trevor.
Hi, good morning. Thank you for taking my questions. The first 1 just on Pace and price, you guys have been very clear in the past, talking about a need to get paid on the gross margin line and your gross margin was certainly better than than we were anticipating in the quarter. At the same time, your absorption Pace on on orders. Fell to about 2 and a half. So the question is, is there a minimum absorption Pace, where it doesn't make sense for you guys to drop below that number even in in elastic market? And you need to step on an incentives, a bit to maintain that certain level. What what is that level for you guys?
Yeah. Hey Trevor. This is Eric. Thanks for the question. I think we analyze the community by Community cross, the United States, certainly orders. And, and Q2 was, was that where we want them to be. Uh, you we always want more Pace, um, leading to our our discussion on gross margin where for forecasting slightly lower gross margin because we are leaning into incentives, especially on the older, aged inventory. Uh, so it is a balance and I think the other discussion, our gross margin is really capitalizing on all of our Land Development profit. We're in really good shape. And our, Our Land positions. We feel we have a lot of good value there. So even though we're incentivizing heavily and pushing Pace as much as we can, we still think our gross margins should be elevated, uh compared to our peer groups, that are more asset like
Okay. Thanks, that Eric, that was really helpful. And then, second question, uh, you talked about them in encouraging Trends in late June and throughout July. Can you can put some numbers around uh, what you're seeing and then? What do you think is driving that Improvement? Was it the decline in rates in late June or do you believe it's the actions that you guys are putting in place here? Disperse some additional demand uh that's improving your sales Trends here thanks.
Yeah, yeah, great. Great question. Uh, is Wild Trevor? I think it's both, you know, included in.
Make sure we're focused on the customers that are inquiring because the demand is still there and really shutting out a lot of the noise in the market.
So I think those 2 in in combination, increase incentives. On older inventory, um, really made a made it for a positive July. Um, you know it's too too early to tell. We haven't got everybody in July through loan, application yet and got all the necessary approvals. We can't can't give a specific numbers. Like that's also, uh, where we are on the guidance of 11 to 1300 closings. Um, you know, the upside on that is going to come from a stronger July and a good start sales in Q3
Okay, very helpful. Thank you for all the color, and good luck moving forward.
Thanks Trevor. Appreciate it.
Thank you. And our next question will be coming from Michael Overhaul of JP Morgan. Your line is open, Michael.
All right, everyone, thanks for taking my question a little bit choppy on my side. So hope you guys can hear me. This is from Lake. Um, I just like to follow up a little bit on the June and July comment and, um, you know, it kind of by your encouraged, um, you know, the, the press release, it, it seems that sales Pace would be relatively, uh,
You know, is there any community count dynamics because of you? If you kind of pay.
Sales. If you take a little bit, uh, it seems that sales space is relatively stable at these levels, or, um, you know, even down at this. So I just want to see if we can expand on that.
Yeah. Andrew this is Eric. I I think I got the question. You were breaking up a little bit but but more on the sales space and and July again, the numbers are just showing is better than June and and second second quarter, you know, sales and closing numbers certainly are not where we want them to be. So we are, you know, watching every Community. Uh, looking at incentives, looking at our aged inventory and the results are just better in July. The team gets a lot of credit for that. We've really leaned into our training, leaned into the, um, leadership and the overall news around tariffs and some of the uncertainty, maybe that's a baited a little bit. Um, we're not exactly sure, but the demands there and and orders were better in July,
Thank you.
For bearing with my port connection. I guess the last one.
If we have it on the the sheriff purchase was obviously uh you know nice to see how, how do you expect us to trend for the rest of the year? Uh, hopefully these levels. Thank you.
Hey, you got Josh on the line, you know, we're just kind of sticking to what we did during the quarter at this point. You know, we have 157.3 million remaining, um, and it's just going to be something that's constantly on our radar right now. We're being honest, we're really focused, uh, on our our overall leverage and debt outstanding. That's, uh, that's a priority for us right now. We came in right at the top end of the guidance range we provided in the past about 35 to 45%. So that's really where we're going to be. Uh, we're going to be targeting our efforts at this point. But, uh, those share purchases are always something that's on the table and the price is, obviously, at a extraordinary discount, which makes it very compelling.
Appreciate that. Thank you, as well.
Thank you.
And our next question will be coming from Kennex. Kenneth Zenner, a C Port. Your line is open. Kenneth.
Hello everybody.
Hey, Ken.
Okay, good to see if I had a bad connection. Um,
The question about pace.
I think about Pace as starting by giving your focus on inventory units, which then you try to sell.
You know, it seems because Q2...
Uh, orders or starts were pretty moderate, you know, with the $2 handle.
I'm not.
At seasonality usually doesn't come into effect with you guys. But, I mean, from a modeling perspective, can you see that running below?
Which I was looking back at your history. I'm not sure I've even.
Seen it so low. But, I mean, would you accept that running below 2? The pace.
Well, that's not what we expect, kind of. I mean, we wouldn't expect that; we would expect Q2 to be the low on orders per community and closings per community. But, you know, that being said, we never know what to expect. That's a little bit out of our control, but we would expect better results than that.
Okay. I mean, this is very helpful that you're.
You know, you're down about 14% in the quarter. Second quarter, is that kind of tie-off with how you're thinking? Your end count will be...
Again, this is Charles. Um, yeah, I think we will start fewer homes than we close in the third quarter. We'll evaluate, um, kind of on a month-to-month basis.
Uh, on on where we start houses based on the specific markets. Uh, we ended the quarter with about 2,300 completed homes, which is more than we typically, would would carry given our order pace. So we're focused on, um, selling out of those completed homes. Eric had mentioned incentives on on aged inventory that's going to help reduce the overall inventory levels. Uh down and our Target is between 6 and 7 months Supply. We're a little heavy at the end of this quarter so uh we would expect to kind of end the year uh at about 6 to 7 months based on um 2026 expected closings is how we would think about it.
Okay. And then, um,
I believe in the guidance you guys were like 160 community count for fiscal year in Q1's guidance, and now you're giving 3 Qs at 1:45. Am I tracking that correctly?
Correct.
Does that?
I mean, were there a few, you know, it's logical to assume you're not going to pop up, but then there's always community timing, which can be very.
Random. Is there any kind of structural change that we should infer between where guidance is for Q3 and where it was at Q4?
No, no structural change. Kind of, I think we're just focused on Q3 guidance because that gives us the biggest visibility. Um, you mentioned it. There's always.
A lot of challenges with getting these new communities open from a timing standpoint and where our sales pace is at today. We're really analyzing whether we should open the community, possibly a community, which sales teams can be associated with the community. So we just got a lot better visibility into Q3 and Q4 at this time.
Right, and I do think one quarter forward is the proper way to do it. So I'm happy to see that in the press release. Thank you very much.
Thank you, you bet.
And our next question.
Will be coming from Alex, Regal of Texas Capitol security. The line is open, Alex.
Thank you. Can you talk a little bit about the sale of finish? Lots moving forward.
Um, the sale of finished lots to other developers or other builders, Alex. Is that the question?
Yes. Yes. Should we expect the pace to be similar to the second quarter, or do you see that increasing?
Yeah, Alex, this is Charles. I'll take it first. Um, I think we were a little lighter in this quarter. I think our other income was pretty limited related to finished lot sales. Uh, we did close on a commercial tract, which is in our quarter. Um, this quarter, it's pretty volatile or unpredictable, I guess is maybe the best way to put it.
We have certain lots in select communities that...
Uh, we've identified that we have excess spinach lot inventories. So we are.
Evaluating, uh, each one of those on a community-by-community basis. So, not really a lot that we can give in terms of guidance regarding how it may relate to, uh, profitability or cash flow generation. Uh, but it is something that we're, um, that we're working towards to make sure that that is, uh, helping to evaluate our.
Our leverage balance and inventory balances overall.
And technically, the cancellation rate in the quarter was a little on the high end. Um, can you talk about, uh, maybe what in particular impacted that in the current quarter? And if any actions have been taken as sort of a...
uh, diminish that
Yeah, sure. Yeah. I think I'd start with, you know, the cancellation rate can be uh, fairly uh, up and down depending on uh timing of where gross orders come in at. So we did have, you know, a declining gross order patients, which tends to inflate the cancellation rate when the trend uh, turns. In other words, the cancellation rate tends to be a little bit lower when when, uh, gross orders uh, tend to accelerate. Uh, we also had a large uh, wholesale uh, contract that canceled. It was booked in the first quarter and then canceled in the second quarter which was part of our first quarter backlog. Uh, so that had an impact on our overall cancellation rate without that cancellation, we would have been in the mid to high uh, 20s, which would have been more, uh, normalized.
Couple, thank you.
You bet. Thank you.
And our next question will be coming from Jay McCandless of Wedbush. Your line is open, Jay.
Hey, thanks for taking my questions. Um, I guess the first one could you talk about where incentives are as a percentage of ASP now versus this time last year?
Yeah, I think it's slightly higher J. Uh, we could get those exact numbers for you because, uh, there's closing costs extended incentives. There's also a price reduction. So I, I would say it's 50 to 100 basis points, uh, higher than last year is what it feels like operationally.
Um,
And then the second question I have, when we look at the 15% to 16% for SG&A, is that just less revenue leverage, or are you guys increasing the amount of co-worker or other incentives that show up in the SG&A to get those specs sold?
Yep, yeah, I can take it. This is Charles, so I think, you know, coming off of 14.7 from this quarter, I mean, I think the high end of the guidance range for the quarter at 1,300 kind of puts us at a similar ratio. So, just factoring the extra 100 basis points, if we come in at the bottom end of the range.
Um, and then I know you guys pulled the fiscal '25 guide, but I guess directionally, how are you all thinking about Community count for the rest of this year and into '26? Since Community count is a big piece of the revenue equation for you guys with your spec model.
Yeah, I think Jay this is Eric, uh, you're actually, it should be increasing. Um, there's no question. I mean, the community is that we had guided to before, are still there. It's just a question of timing. This, this decision on spending Capital, get those communities open looking at the marketing and marketing and taking it, you know, month by month and and quarter by quarter. So real real comfortable at the end of Q3 ending up at approximately 145, but also, uh, growing Community count into 2026.
Okay, and then the last one for me. Um, Josh, you talked about doing some share repurchases this quarter, which was good to see, but also about debt reduction. I guess what takes precedent and where do you want the leverage ratio to be in the next couple of quarters?
Yeah, I, J. I think it's probably.
Getting ahead of ourselves to say exactly where we want it to be. I'll say that de-levering is absolutely a focus for us. Um, alright, we're coming in. We've always measured this right on a.
A net debt-to-capital ratio, and we really did just sort of nail it right on the nose at 45, at the high end of the 35 to 45% range.
Um, and so we'd like to get that a little bit lower. As we right-size our inventory to the current environment. Uh, obviously we started a fewer homes and we closed, uh, this past quarter. So that's a strategy. We'll continue and the coming quarters as we rebalance, that inventory. And I think the other stat I put in people's minds and this might help you for every, uh, for every 500 units. We lower the inventory that equates to about a hundred million dollars, Less in completed inventory. And so, that's capital that we can allocate into into either 1 of those strategies.
Yeah, that's great. Thanks guys.
Thank you. And our next question will be coming from Alex Barron.
Of Housing Research Center. Your line is open.
Yes, thank you.
Yeah, hi guys. Um, historically, you know, you guys have had probably one of the highest margins and highest sales pace in the group.
And right now, I guess obviously the environment's a bit weaker, but I'm kind of wondering how you guys are thinking about going forward?
Uh, you know, it seems like you're still emphasizing margins, but I'm wondering if you guys are reconsidering whether maybe, uh, going forward, you know, it's more of a matter of having slightly lower margins to kind of pick up the pace. Uh, or how are you guys thinking about it right now?
The lower end of the FHA spectrum is currently paying rent. I think it's feeling the strain more than some of the other buyer segments and has been over the last couple of years, but we are 100% focused on Pace.
Got it. And in terms of affordability, is there anything you guys are?
Thinking of doing differently, like maybe more attached housing, or smaller, you know, square footage type houses, or anything like that.
Absolutely. We're we're laser focused on affordability. I think, the 2 components that comes into play on, is the incentives to drive that rates rates lower and prices as much as we can. While protecting that that margin that we need to make for the continuation of our business. And then smaller square footage is on the houses is something that we've employed over the last couple years. We're looking at our Land Development opportunities, uh, future sections, where they're, we can do more attached products. Whether we can do smaller lot size to get that, uh, developed finish lot costs, as low as we possibly can, that leads into more housing, affordability.
Okay, great. Eric, thank you and good luck.
Thanks, Alex. I appreciate it. Thank you. This concludes our Q&A section. I would now like to turn the call back to Eric for closing remarks.
Thank you, and thank you for participating in today's call and your continued interest in LGI Homes. Have a great day.
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