LGI Homes, Inc. — FY 2023 Form 10-K
Business and reporting period. LGI Homes designs, builds and sells homes across 36 markets in 21 states, primarily to entry-level buyers. It also operates a wholesale home business, rental properties and mortgage and insurance joint ventures. This is the annual report for the year ended December 31, 2023, compared principally with FY 2022; it does not provide a clear standalone Q4 financial summary.
Financial and operating highlights
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Home sales revenue | $2.359 billion | $2.304 billion |
| Homes closed | 6,729 | 6,621 |
| Average sales price per home | $350,510 | $348,052 |
| Gross margin | $542.2 million; 23.0% | $646.6 million; 28.1% |
| Operating income | $233.3 million | $390.1 million |
| Net income | $199.2 million | $326.6 million |
| Diluted earnings per share | $8.42 | $13.76 |
| Net cash from (used in) operating activities | $(57.0) million | $(370.5) million |
| Cash and cash equivalents at year-end | $49.0 million | $32.0 million |
| Notes payable, net of issuance costs | $1.248 billion | $1.117 billion |
Margins and profitability. Adjusted gross margin, a non-GAAP measure, was 24.7% versus 29.2%; adjusted EBITDA was $275.5 million versus $418.8 million, and its margin was 11.7% versus 18.2%. Selling expense rose 32.2% to $191.6 million, including higher advertising costs. The effective tax rate increased to 23.9% from 21.9%.
Liquidity, debt and inventory. The company reported $354.8 million available to borrow under its $1.205 billion revolving credit facility at year-end and said it expected cash, operating cash flow and available financing to cover foreseeable needs for at least 12 months. It had $569.6 million outstanding on the variable-rate revolver and $700 million of senior notes: $400 million due 2028 at 8.750% and $300 million due 2029 at 4.000%. Credit-agreement covenants were met. Real estate inventory was $3.108 billion, including $104.5 million classified as real estate not owned under land-banking arrangements. Owned or controlled lots totaled 71,081, down from 71,904.
Material changes versus FY 2022
- Revenue increased 2.3%, supported by 1.6% more closings and a 0.7% increase in average sales price. Higher average community count offset a lower absorption pace.
- Profitability weakened: gross margin percentage fell 5.1 percentage points and net income declined 39.0%. Management cited higher construction costs and capitalized interest, sales incentives, lower absorption, and higher selling costs.
- Closings varied by segment: Central revenue fell 27.8%, while Southeast rose 22.3%, West 26.6% and Florida 55.1%.
- Wholesale closings fell to 679 from 1,233; wholesale revenue declined to $202.3 million from $340.6 million. Retail revenue increased.
- Operating cash use improved to $57.0 million from $370.5 million, primarily because the inventory-related cash outflow was smaller. Net cash provided by financing activities was $87.6 million. The company issued $400 million of 8.750% notes in November 2023.
- Year-end backlog fell 16.0% to 590 homes valued at $224.9 million. The cancellation rate rose to 25.4% from 24.4%; net orders increased to 6,617 from 5,268.
Outlook, commentary and risks
- No specific revenue, earnings or margin guidance is provided. Management expects wholesale homes to represent about 5% of annual closings in 2024 and Terrata Homes closings to remain below 5%.
- Management attributes weaker absorption and affordability pressure primarily to higher mortgage rates and describes continued exposure to inflation, construction and land costs, labor availability, and supply-chain constraints.
- Key risks include changes in mortgage availability and rates, cancellations, weaker housing demand, land and inventory impairment, construction delays and costs, subcontractor and warranty claims, regulation, natural disasters and access to financing. The company recorded no real-estate inventory impairment charges in 2023, 2022 or 2021.
- Land-banking arrangements carry performance obligations and potential financial penalties if specified lots are not purchased. Outstanding letters of credit, surety bonds and financial guarantees totaled $357.0 million; management did not believe draws were probable or would have a material effect.
- Management said ordinary-course legal matters were not expected to materially affect financial position, results or cash flows. The auditor issued unqualified opinions on the financial statements and internal controls; land-development cost estimates were identified as a critical audit matter.
Important facts for investors to verify
- Whether demand, absorption, cancellations and backlog improve or deteriorate as mortgage rates and buyer affordability change.
- Whether margins recover, particularly given elevated construction costs, incentives and selling expenses.
- How inventory growth and land development translate into operating cash flow, and whether inventory values remain recoverable.
- Debt service and refinancing capacity, including the 8.750% notes, variable-rate revolver exposure, covenant headroom and 2025 facility maturity tranche.
- Whether the expected 2024 wholesale mix and the company’s 12-month liquidity assessment are borne out by subsequent results and filings.