LGI Homes (NASDAQ:LGIH) reported second-quarter results that included higher home deliveries, improved gross-margin guidance and continued debt reduction, while management said affordability pressures and elevated mortgage rates continued to weigh on demand and cancellations.
The company delivered 1,440 homes in the second quarter, up 9% from a year earlier. Of those deliveries, 1,365 new-home closings contributed $501.5 million in homebuilding revenue, while 75 currently or previously leased-home closings were reflected in other income. Total revenue was $516 million, including $14.5 million from land and lot sales and leasing operations.
Margins Exceed Guidance Midpoint
Homebuilding gross margin was 19.8%, while adjusted homebuilding gross margin was 23.2%, both above the midpoint of the guidance range LGI had raised during its prior earnings call. The adjusted figure excluded $16.5 million of capitalized interest and $544,000 related to purchase accounting.
Lipar attributed the stronger-than-expected margin performance to a combination of land-development profits, sales mix, conservative initial assumptions on incentives, lower house costs from a year earlier and progress reducing older inventory. He said homes now closing from newer inventory carry higher gross margins, though margins remain down year over year and the company continues to offer customer incentives.
Selling, general and administrative expenses totaled $72.7 million, or 14.1% of total revenue, improving 40 basis points from a year earlier. Selling expenses were $44.1 million, or 8.6% of revenue, as LGI increased spending to generate leads. General and administrative expenses were $28.6 million, or 5.5% of revenue, compared with 6% a year ago.
LGI generated adjusted EBITDA of $58.7 million, equal to 11.4% of total revenue. Net income was $27 million, or $1.16 per basic and diluted share, while pretax income totaled $36.6 million.
Orders Decline as Backlog Expands
Net orders declined 4.8% to 1,039 homes in the second quarter from 1,091 homes a year earlier. Chief Financial Officer and Treasurer Charles Merdian said the decline reflected affordability pressures, higher mortgage rates and elevated energy costs related to the conflict in the Middle East.
The cancellation rate increased to 49.4% from 32.7% in the prior-year period. Merdian said a broader pool of buyers needed more time to complete the purchase process.
Despite the order decline, LGI ended June with backlog of 1,298 homes valued at $525.5 million, increases of 60.6% and 63%, respectively, from a year earlier. Lipar said the larger backlog reflects continued interest in homeownership as well as a longer buying process for customers navigating financing qualification requirements.
LGI averaged 3.2 total closings per active community per month during the quarter. Its strongest markets by that measure were Atlanta, Southern California, Charlotte, Las Vegas and Albuquerque.
Community Growth and Land Opportunities
The company ended the quarter with 151 active communities, up 3.4% from a year earlier and already at the low end of its full-year target range. Lipar said LGI expected to report 152 active communities following its July results, which would represent the highest active community count in company history.
Management said land-market conditions have begun to improve, with more opportunities becoming available and transaction economics improving. The company is seeing smaller projects and projects later in the development process, which can offer greater certainty around costs and demand.
However, Merdian said most newly evaluated land opportunities would likely affect community count in 2028 because development timelines remain about 12 to 18 months. Management also said finished or partially developed lot opportunities can be more immediately accretive because they can be converted more quickly.
As of June 30, LGI owned and controlled 57,406 lots, down 11.4% from a year earlier and 2.7% sequentially. The company said this was its sixth consecutive quarter of reducing its lot position while concentrating capital in markets where demand and returns support investment.
Debt Declines, Full-Year Outlook Raised
LGI reduced total debt by about $129 million from the prior quarter and approximately $160 million from a year earlier. The company ended June with just under $1.6 billion of debt, including $449 million outstanding on its revolver. Its debt-to-capital ratio declined 220 basis points sequentially to 42.6%, while net debt-to-capital fell 240 basis points to 41.6%.
Liquidity totaled $468 million, consisting of $61 million of cash and $406.9 million available under the company’s credit facility. Stockholders’ equity exceeded $2.1 billion, and book value per share was $91.73.
Pending verification of fundings, LGI said it expected to report 425 July closings, up 11.5% from a year earlier, bringing year-to-date closings to 2,781 homes. Management maintained its full-year closing outlook of 4,600 to 5,400 homes and expects to finish the year with 150 to 160 active communities.
The company raised its full-year average selling price outlook by $5,000 at both ends of the prior range to $360,000 to $370,000. It also lifted expected homebuilding gross margin by 50 basis points to 19% to 21% and adjusted homebuilding gross margin to 22.5% to 24.5%. LGI continues to expect SG&A to equal 15% to 16% of revenue.
About LGI Homes (NASDAQ:LGIH)
LGI Homes, Inc (NASDAQ: LGIH) is a residential homebuilder primarily focused on serving first-time and first-time move-up homebuyers in the United States. The company specializes in the acquisition, development and sale of affordable single-family homes and townhomes. LGI Homes operates through an integrated model that encompasses land sourcing, lot development, home construction, and post-closing customer support including warranty services.
In addition to its core homebuilding activities, LGI Homes offers ancillary services to streamline the homebuying process for its customers.
