LGI Homes, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. LGI Homes develops communities and builds and sells homes across U.S. markets. Comparisons below are with the corresponding 2022 periods unless noted.
Financial and operating results
| Metric | Q2 2023 | Six months 2023 |
|---|---|---|
| Home sales revenue | $645.3 million; down 10.8% | $1.133 billion; down 10.8% |
| Home closings | 1,854; down 8.5% | 3,220; down 11.2% |
| Average sales price per closing | $348,042; down 2.4% | $351,748; up 0.5% |
| Gross margin | $141.9 million; 22.0% of revenue, versus 32.0% | $240.8 million; 21.3%, versus 30.7% |
| Operating income | $65.1 million, down 59.1% | $91.1 million, down 64.2% |
| Net income | $53.1 million, down 56.9%; diluted EPS $2.25 | $80.1 million, down 60.4%; diluted EPS $3.39 |
Adjusted gross margin and adjusted EBITDA are non-GAAP measures; six-month adjusted gross margin was $261.4 million (23.1% of revenue) and adjusted EBITDA was $112.8 million (10.0%). Management cautions that these measures exclude costs and should be considered alongside GAAP results.
For the six months, operating cash flow was positive $92.8 million, compared with negative $263.3 million in 2022. Investing cash flow was negative $6.8 million and financing cash flow negative $74.7 million. Cash increased to $43.3 million from $32.0 million at year-end 2022.
Balance sheet, debt and liquidity
At June 30, 2023, total assets were $3.140 billion, total liabilities $1.409 billion and equity $1.731 billion. Notes payable totaled $1.053 billion, including $768.1 million outstanding under the variable-rate revolving credit agreement and $300 million of 4.000% senior notes due 2029, net of debt issuance costs. The revolver commitments total $1.13 billion; reported borrowing availability was $341.4 million, with $18.8 million of letters of credit outstanding. The company reported compliance with credit agreement covenants.
Real estate inventory was $2.889 billion. The company owned or controlled 69,226 lots and had 102 active communities at quarter-end. Backlog was 1,638 homes, valued at $601.3 million, up 29.4% in units year over year; the cancellation rate was 20.8%.
Material changes and management commentary
- Profitability weakened substantially despite a reported recovery in demand compared with the second half of 2022. Management attributed lower results year over year to fewer closings, slower absorption and reduced gross margin.
- Gross margin pressure reflected higher construction costs, more capitalized interest charged to cost of sales, and sales incentives. Selling expenses rose as a share of revenue, partly due to increased advertising and personnel costs.
- Management cited targeted marketing, mortgage buy-downs and other incentives, a shift toward smaller, lower-priced homes, and relatively stable interest rates versus the second half of 2022 as supporting Q2 demand. The company selectively increased construction starts while monitoring inventory against sales.
- Management said long-term housing fundamentals remain favorable, but affordability constraints are expected to affect demand for the foreseeable future. It expected inflation-related cost pressure to continue through 2023. No specific earnings or revenue guidance was provided in the filing.
Risks, contingencies and unusual items
- Demand and margins are exposed to mortgage rates, affordability, inflation, construction and labor costs, supply constraints, housing-market conditions and seasonal fluctuations. A hypothetical 100-basis-point increase in rates on variable-rate debt would raise annual interest cost by approximately $7.7 million.
- The filing added a risk concerning financial-industry and capital-markets turmoil: lender failures could reduce access to the revolving facility or letters of credit. The company reported no banking relationships with the three U.S. banks closed in the first half of 2023.
- Outstanding letters of credit, performance and surety bonds totaled $348.7 million, primarily supporting site improvements. Management did not believe draws were probable or expected to have a material effect.
- Land purchase contracts covered 12,463 lots, with $493.6 million of commitments if purchases are completed; deposits and option payments were $24.3 million. Land-banking arrangements carry performance obligations and potential penalties if lots are not purchased.
- The company capitalized $41.3 million of interest during the first six months, with $15.9 million charged to cost of sales. It also transferred $5.5 million of home assets to rental properties during the period.
Management stated it expected cash, operating cash flows and available financing to cover current and foreseeable liquidity needs for at least the next 12 months, while noting that capital-market access and lender capacity are not assured.
Investor verification priorities
- Track whether backlog converts to closings and revenue, and monitor cancellations, absorption rates and community count.
- Assess whether gross margins recover as incentives, construction costs and capitalized interest change; review both GAAP and non-GAAP measures.
- Verify liquidity and borrowing availability, debt maturities, variable-rate exposure and continued covenant compliance.
- Monitor inventory and lot commitments, including land-banking obligations, and cash conversion as construction activity changes.
- Evaluate the effects of mortgage rates, affordability, inflation, supply-chain conditions and the added banking-system risk disclosure on demand and financing.