LGI Homes, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. LGI Homes develops, builds and sells homes across U.S. markets. Amounts below are in millions of dollars unless otherwise stated.
Financial and operating results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Home sales revenue | $547.1 | $751.6 | $1,816.2 | $2,249.1 |
| Homes closed | 1,547 | 2,499 | 5,173 | 7,916 |
| Average sales price per closing | $353,635 | $300,764 | $351,091 | $284,117 |
| Gross margin | 28.5% | 26.9% | 30.0% | 27.0% |
| Operating income | $94.6 | $137.9 | $349.3 | $406.4 |
| Net income | $90.4 | $100.6 | $292.5 | $318.3 |
| Diluted EPS | $3.85 | $4.05 | $12.29 | $12.72 |
| Adjusted EBITDA margin (non-GAAP) | 18.4% | 19.7% | 20.4% | 19.6% |
Q3 home sales revenue fell 27.2% year over year as closings declined 38.1%; higher average selling prices partly offset the volume decline. For the nine months, revenue fell 19.2% and closings fell 34.7%, while the average selling price rose 23.6%. Gross margin improved in both comparisons, which management attributed to price increases exceeding increases in input costs. Selling and general and administrative expenses increased as a share of revenue, reflecting higher advertising, personnel costs and terminated land purchase agreements.
Q3 net income declined 10.1%, less than the decline in operating income, helped by higher other income and a lower effective tax rate. Other income included a $7.1 million gain from selling an interest-rate cap; the prior-year periods included debt-extinguishment losses of $13.3 million in Q3 and $14.0 million for the nine months. Adjusted EBITDA is a non-GAAP measure: Q3 margin declined despite higher GAAP EBITDA margin, in part because adjusted EBITDA excludes other income. These measures are not substitutes for GAAP results or cash flow.
Cash, debt and liquidity
- Cash and cash equivalents were $52.7 million at September 30, 2022, versus $50.5 million at December 31, 2021.
- Net cash used in operating activities was $359.6 million for the nine months, compared with $101.1 million provided in the prior-year period. The principal use was a $791.7 million increase in real estate inventory, partly offset by net income and increases in payables and accrued liabilities.
- Financing activities provided $363.8 million, including $534.9 million of note borrowings and $35.9 million related to land-banking arrangements; cash used in investing activities was $2.1 million. Ending cash increased by $2.1 million.
- Notes payable totaled $1,230.1 million, including $942.3 million drawn under the revolving credit agreement and $300.0 million of 4.000% senior notes due 2029, net of debt issuance costs. The revolver matures April 28, 2025 and bears floating-rate interest; SOFR was 3.03% at quarter end, with a 1.85% spread disclosed for outstanding borrowings.
- The $1.1 billion credit facility had a $1.4 billion borrowing base; borrowings including the senior notes were $1.2 billion, letters of credit were $29.8 million, and reported availability was $127.3 million. The company said it was in compliance with credit covenants.
- Management believes cash, operating cash generation and expected financing availability can meet foreseeable liquidity needs for at least 12 months, while noting market and financing conditions could constrain access. A hypothetical 100-basis-point increase in rates above the SOFR floor would add about $9.4 million to annual interest costs on variable-rate debt.
Business changes, outlook and risks
- Management cited higher mortgage rates, reduced buyer affordability and confidence, supply-chain disruptions, construction-cost inflation and longer development and closing cycles. It expects elevated mortgage rates and cost and supply pressures to persist for the foreseeable future, with housing demand headwinds continuing.
- The company began offering mortgage rate buy-downs and other sales incentives, increased advertising and allocated more inventory to wholesale sales. Wholesale revenue was $127.9 million, or 28.6% of Q3 closings, versus $101.6 million, or 17.3%, a year earlier.
- Active communities declined to 93 from 103 year over year. Owned and controlled lots were 76,453 at quarter end, down from 91,845 at year-end 2021; management said it reduced its lot position while focusing available capital on near-term land development. No shares were repurchased in Q3; $95.1 million was repurchased during the nine-month period, with $211.5 million remaining under the authorization.
- Backlog fell 59.4% year over year to 1,255 homes valued at $428.3 million. Nine-month net orders were 4,373 versus 8,044; the cancellation rate was 21.0% versus 18.8%. Management said orders were affected by weaker demand, higher rates, contract timing and longer construction cycles.
- Management sees long-term support from low housing inventory, aging housing stock, rising rents, household formation and low unemployment, but offered no specific financial or closing guidance in the provided filing text.
- Other exposures include $338.7 million of letters of credit, performance and surety bonds, versus $206.8 million at year-end 2021; management did not expect material draws. The filing also describes ordinary-course claims and environmental indemnities, and states that management does not expect a material financial effect from disclosed contingencies.
Most important facts for investors to verify
- Whether orders, cancellations, backlog and closings stabilize as mortgage rates and affordability change.
- Whether gross-margin gains remain sustainable after incentives, construction-cost inflation and longer cycle times.
- Cash conversion and inventory investment, including the funding needs and penalties associated with land-banking arrangements.
- Revolver availability, borrowing-base capacity, covenant compliance and exposure to higher floating interest rates.
- The extent of future land commitments, surety and letter-of-credit obligations, and any material developments in contingencies.