LGI Homes, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited results are compared with the corresponding 2021 periods. LGI Homes develops, builds and sells homes across multiple U.S. markets.
Financial and operating results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Home sales revenue | $723.1 million | $791.5 million | $1,269.1 million | $1,497.5 million |
| Homes closed | 2,027 | 2,856 | 3,626 | 5,417 |
| Average sales price per home | $356,719 | $277,140 | $350,005 | $276,438 |
| Gross margin | 32.0% | 27.0% | 30.7% | 27.0% |
| Operating income | $159.0 million | $146.0 million | $254.7 million | $268.5 million |
| Net income | $123.4 million | $118.1 million | $202.1 million | $217.8 million |
| Diluted EPS | $5.20 | $4.71 | $8.43 | $8.66 |
Q2 adjusted gross margin was 33.1% and adjusted EBITDA margin was 23.1% (both non-GAAP), versus 28.5% and 20.0%, respectively, a year earlier. For the first half, those margins were 31.9% and 21.3%, versus 28.5% and 19.5%. Management attributed higher gross margin rates largely to home price increases exceeding input-cost increases.
Cash flow and balance sheet: Six-month operating cash flow was negative $263.3 million, compared with positive $139.9 million in 2021, mainly reflecting a $547.6 million increase in real estate inventory. Investing cash use was $2.5 million; financing cash provided was $257.2 million. Cash ended June at $42.0 million, down from $50.5 million at year-end 2021. Real estate inventory was $2.634 billion, up from $2.086 billion. Notes payable were $1.155 billion, up from $805.2 million; total equity was $1.514 billion.
The $1.1 billion revolving credit facility matures in April 2025; $868.6 million was drawn at June 30. Including $300 million of 4.0% senior notes due 2029, borrowings against the borrowing base totaled approximately $1.2 billion. The borrowing base was $1.4 billion, with $203.7 million available to borrow and $26.9 million of facility letters of credit outstanding. The company reported compliance with facility covenants. Management said it expects to meet current and foreseeable liquidity needs for at least 12 months, while noting access to capital markets is not assured.
Changes versus prior comparable periods
- Q2 revenue fell 8.6% and closings fell 29.0%, while average selling price rose 28.7%. Net income increased 4.4%, supported by higher gross margin and selling prices.
- First-half revenue fell 15.2%, closings fell 33.1%, and average selling price rose 26.6%. Net income declined 7.2%; operating income declined 5.1%.
- Average community count fell to 91.3 in Q2 from 105.0 a year earlier; period-end communities were 92 versus 106.
- First-half net orders fell to 2,837 from 7,254. Cancellation rate rose to 20.8% from 14.8%, and ending backlog declined 73.6% to 1,266 homes valued at $445.1 million.
- General and administrative expense increased 25.0% in Q2 and 19.5% for the first half, which management linked mainly to personnel-related costs and professional fees.
Outlook, commentary and risks
- Management reported that rising mortgage rates weakened Q2 demand, new orders softened in many markets, and cancellations were higher than normal. Many closings in the reported results were under contracts written before the rapid rate increases.
- The company increased targeted advertising toward quarter-end and said early results in leads and new orders were favorable. It slowed new home starts to align with absorption. No quantified earnings or revenue guidance was provided.
- Management expects elevated mortgage rates until inflation subsides, and continued cost inflation, material shortages and longer municipal lead times until demand normalizes and supply constraints ease. It said it generally passed increased costs through in selling prices during the period.
- Key exposures include mortgage-rate sensitivity and affordability, supply-chain and labor constraints, inflation, land availability and valuation, development delays, financing access and broader housing-market conditions. A hypothetical 100-basis-point increase above the SOFR floor on variable-rate debt would add approximately $8.7 million to annual interest cost.
- Outstanding letters of credit, surety bonds and financial guarantees totaled $284.6 million, primarily related to site improvements; management did not believe material draws were probable. Ordinary-course claims, regulatory matters and environmental indemnities were disclosed; management did not expect these matters to materially affect financial position, results or cash flows.
- The company repurchased 892,916 shares for $95.1 million in the first half. As of June 30, $211.5 million remained authorized under its repurchase program. The program may be changed or suspended.
Important facts for investors to verify
- Subsequent order trends, cancellations, backlog conversion and absorption as mortgage rates affect affordability.
- Whether margins can hold as pricing adjusts to demand and construction, labor and land costs evolve.
- Inventory growth, operating cash use and the pace of land development relative to home closings.
- Facility availability, borrowing-base capacity, covenant compliance and exposure to variable interest rates.
- Potential changes in liquidity from share repurchases, surety and letter-of-credit obligations, and other commitments.