LGI Homes, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. LGI Homes develops, builds and sells homes across five reportable segments. Results are compared with the corresponding 2020 periods.
Financial and operating performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Home sales revenue | $791.5 million | $481.6 million | $1,497.5 million | $936.3 million |
| Homes closed | 2,856 | 2,005 | 5,417 | 3,840 |
| Average sales price per closing | $277,140 | $240,200 | $276,438 | $243,836 |
| Gross margin | 27.0% | 24.5% | 27.0% | 24.0% |
| Operating income | $146.0 million | $67.8 million | $268.5 million | $121.7 million |
| Net income | $118.1 million | $55.6 million | $217.8 million | $98.5 million |
| Diluted EPS | $4.71 | $2.21 | $8.66 | $3.88 |
Cash flow and liquidity: Six-month operating cash flow was $139.9 million, compared with $146.1 million a year earlier. Inventory growth used $158.7 million of cash. Cash and cash equivalents were $111.7 million at June 30, 2021, versus $35.9 million at year-end 2020.
Debt: Notes payable, net of discounts and issuance costs, totaled $583.7 million at June 30, 2021. Principal outstanding under the revolving facility and senior notes was approximately $600.3 million; $714.5 million was available under the credit agreement, subject to its borrowing base and terms. The company reported covenant compliance.
Material changes and developments
- Q2 revenue rose 64.3%, closings increased 42.4%, and average selling price increased 15.4% year over year. For the first half, revenue rose 59.9%, closings 41.1%, and average selling price 13.4%.
- Management attributed stronger margins to price increases exceeding input-cost increases, along with operating leverage. It also cited favorable demand, low mortgage rates and limited existing-home supply.
- Backlog at June 30 was 4,801 homes valued at $1.434 billion, versus 2,127 homes valued at $558.0 million a year earlier. The six-month cancellation rate declined to 14.8% from 21.8%.
- Owned and controlled lots increased to 75,910 from 61,504 at December 31, 2020. Real estate inventory reached $1.751 billion, up from $1.569 billion year-end.
- The company acquired KenRoe assets in Minnesota for approximately $27.3 million in May, adding homes under construction and owned or controlled lots. After quarter-end, it acquired Buffington assets in Austin for approximately $40.0 million.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said it expected COVID-19 to continue influencing results, while expressing the view that demand was supported by interest rates and housing supply conditions.
- Management expects seasonal patterns to continue; home closings and capital needs are generally higher in the second, third and fourth quarters.
- Risks highlighted include COVID-19 uncertainty, mortgage-rate increases and buyer affordability, inflation, higher land, labor and material costs, potential lumber cost pressure, construction or development delays, land availability, financing access, and acquisition execution and integration.
- Land purchase contracts covered 33,418 lots with potential purchase commitments of $781.3 million; deposits were $36.1 million. Letters of credit, surety bonds and financial guarantees totaled $182.3 million. Management did not expect material draws or material effects from disclosed claims and proceedings.
- The company issued $300 million of 4.000% notes due 2029. After quarter-end, it redeemed $300 million of 6.875% notes due 2026, paying a $10.3 million premium and expensing $3.0 million of deferred financing costs and discounts.
- Six-month share repurchases totaled $81.6 million; $218.8 million remained authorized at June 30. The reported six-month results also included a $0.7 million debt-extinguishment loss.
Important facts for investors to verify
- Whether home-price gains continue to exceed increases in land, labor and construction costs, and how this affects gross margins.
- Whether backlog converts to closings as expected; contracts may be cancelled, and customer deposits are generally modest.
- Cash requirements from inventory investment, land commitments and acquisitions, alongside available borrowing capacity and covenant headroom.
- The final purchase accounting for KenRoe and Buffington, and the impact of the post-quarter debt redemption on interest expense and liquidity.
- Exposure to mortgage-rate changes, COVID-19 developments, supply constraints, and the availability and continuation of federal energy-efficient-home tax credits.