LGI Homes, Inc. — 2022 Form 10-K Summary
Business context and reporting period
LGI Homes designs, builds and sells homes across 20 states, with an emphasis on entry-level buyers. Its products include attached and detached homes, active-adult communities and luxury homes under the Terrata brand; it also sells homes in bulk to institutional buyers and has rental-home and mortgage and insurance joint ventures. This annual report covers the fiscal year ended December 31, 2022, compared primarily with 2021. It does not provide a clear, standalone set of fourth-quarter results.
Financial and operating metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Home sales revenue | $2.304 billion | $3.050 billion |
| Homes closed | 6,621 | 10,442 |
| Average sale price per home | $348,052 | $292,104 |
| Gross margin | $646.6 million; 28.1% | $818.0 million; 26.8% |
| Operating income | $390.1 million | $547.7 million |
| Net income | $326.6 million | $429.6 million |
| Diluted EPS | $13.76 | $17.25 |
| Net cash from operating activities | $(370.5) million | $21.7 million |
Adjusted gross margin, a non-GAAP measure, was 29.2%, versus 28.2%. EBITDA margin was 19.1% in both years; adjusted EBITDA margin declined to 18.2% from 19.4%. These supplemental measures are not substitutes for GAAP results or cash flow.
At year-end, cash was $32.0 million and total assets were $3.125 billion. Notes payable were $1.117 billion, including $828.4 million drawn on a $1.1 billion revolving facility and $300.0 million of 4.000% senior notes due 2029. The company reported $236.6 million available to borrow under the facility, subject to the borrowing base, and said it complied with its covenants. The revolver matures in April 2025. The filing states management believes available cash, operating cash flows and financing sources can fund foreseeable needs for at least 12 months.
Real estate inventory rose to $2.898 billion from $2.086 billion, including $523.1 million of completed homes and $287.1 million of homes in progress. The company had 71,904 owned or controlled lots, down from 91,845, and 99 active communities, down from 101. Year-end backlog was 702 homes valued at $252.0 million, compared with 2,055 homes and $659.2 million a year earlier.
Material changes versus 2021
- Revenue fell 24.4% and closings fell 36.6%, reflecting fewer average communities, slower absorption and weaker demand in the second half of the year. Average home prices increased 19.2%, partly offsetting lower closings.
- Net income declined 24.0%. Gross margin percentage improved as pricing gains exceeded input-cost increases, while selling and general and administrative costs rose as a share of revenue.
- Net orders declined to 5,268 from 9,533; the cancellation rate increased to 24.4% from 19.3%.
- Operating cash flow shifted to a $370.5 million use, principally due to an $823.9 million increase in real estate inventory. Financing cash flow was $357.9 million provided, including borrowings and land-banking proceeds; the company also spent $95.1 million on share repurchases.
- Wholesale closings were 1,233, or 18.6% of total closings, versus 1,515, or 14.5%, in 2021. Wholesale revenue was $340.6 million versus $349.3 million.
Outlook, commentary, risks and unusual items
Management expects affordability pressures, higher mortgage rates, inflation and supply-chain constraints to persist and potentially worsen in 2023, with lower net orders and higher cancellations than in prior periods. The company used more advertising, mortgage-rate buy-downs and other incentives, and directed more inventory to wholesale buyers. It also reduced its land position and focused capital on near-term land development. Management cited low existing and new-home inventory, an aging housing stock, rising rents, household formation and low unemployment as support for the longer-term housing outlook. It expected Terrata to represent about 5% of 2023 closings and wholesale sales about 5% to 10%.
Key exposures include mortgage-rate and housing-market volatility, land and inventory impairment, construction cost inflation and delays, labor and materials availability, financing and covenant requirements, and weather, regulatory, environmental, warranty, litigation and cybersecurity risks. Land-banking arrangements created $141.8 million of real estate not owned and a corresponding liability; the company is not legally required to buy all lots but may face financial and other penalties if it does not. No inventory impairment charges were recorded in 2022, 2021 or 2020.
Unusual items included $7.1 million of income from selling an interest-rate cap and gains from land sales and unconsolidated investments, contributing to $28.0 million of net other income. The 2021 comparison included a $14.0 million debt-extinguishment loss. The company recorded a 21.9% effective tax rate in 2022, including a $9.1 million benefit from federal energy-efficient home credits. 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 orders, cancellations, absorption and backlog stabilize as mortgage rates and affordability change.
- How much inventory converts to closings and cash, and whether completed-home levels or carrying costs require discounts or impairments.
- Availability and cost of revolving-credit capacity, covenant headroom and refinancing plans ahead of the April 2025 maturity.
- Expected cash commitments and penalties under land-banking arrangements, and the pace of lot takedowns.
- Whether reported margin resilience continues after incentives, advertising costs and elevated construction and development costs.
- How the company’s 2023 wholesale and Terrata expectations compare with actual closings and profitability.