LGI Homes, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. LGI Homes develops, builds and sells homes across U.S. markets under the LGI Homes and Terrata Homes brands.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Home sales revenue | $751.6 million | $534.2 million | $2,249.1 million | $1,470.5 million |
| Home closings | 2,499 | 2,091 | 7,916 | 5,931 |
| Average sales price per closing | $300,764 | $255,477 | $284,117 | $247,940 |
| Gross margin | 26.9% | 25.3% | 27.0% | 24.5% |
| Operating income | $137.9 million | $77.4 million | $406.4 million | $199.2 million |
| Net income | $100.6 million | $89.0 million | $318.3 million | $187.5 million |
| Diluted EPS | $4.05 | $3.52 | $12.72 | $7.40 |
Q3 revenue grew 40.7% and nine-month revenue grew 52.9%; increased closings and higher average selling prices drove growth. Management attributed margin expansion to home-price increases exceeding input-cost increases. Selling and administrative expenses declined as a percentage of revenue, reflecting operating leverage. Non-GAAP adjusted EBITDA margin was 19.7% in Q3 and 19.6% for the nine months, versus 16.5% and 15.6%, respectively, in 2020.
Cash and debt: Cash was $46.7 million at September 30, 2021, versus $35.9 million at December 31, 2020. Nine-month operating cash flow was $101.1 million, down from $113.0 million; the $286.6 million increase in real estate inventory was a major cash use. Investing activities used $69.8 million, including business acquisitions. Notes payable were $666.1 million, compared with $538.4 million at year-end 2020. The company reported $459.6 million available under its credit agreement, after outstanding borrowings and letters of credit; it was in compliance with facility covenants.
Margins, liquidity and balance sheet: Real estate inventory rose to $1.91 billion from $1.57 billion at year-end. Total assets were $2.15 billion and total equity was $1.34 billion. The filing reports no free-cash-flow measure.
Material changes and unusual items
- LGI issued $300 million of 4.000% senior notes due 2029 and redeemed its $300 million 6.875% notes due 2026. The redemption and write-off of related financing costs produced a $14.0 million nine-month loss on extinguishment of debt ($13.3 million in Q3).
- The company acquired KenRoe assets in Minnesota and Buffington assets in Austin, Texas, for approximately $27.3 million and $39.1 million, respectively. Purchase accounting remained preliminary at quarter-end.
- Wholesale home closings represented 17.3% of Q3 closings, versus 4.4% a year earlier; for the nine months, the shares were 14.5% and 8.3%. Wholesale revenue was $101.6 million in Q3 and $258.6 million year to date.
- Repurchased 910,038 shares for $137.7 million in the first nine months; $162.7 million remained authorized at September 30.
- Q3 2020 included $27.1 million of retroactive federal energy-efficient home tax credits; the nine-month 2020 amount was $26.6 million. The 2021 effective tax rate was 20.3% for the nine months, compared with 6.9% in 2020, affecting year-over-year net income comparability.
Outlook, commentary and risks
The filing provides no specific numeric earnings or revenue guidance. Management said it expected COVID-19-related supply-chain disruptions and elevated land, labor, material and construction costs to continue into Q4 2021 and 2022. It noted that pricing had generally offset cost increases. Management cited strong demand, historically low mortgage rates and limited existing-home availability as supportive factors, while cautioning that pandemic effects remained uncertain.
At September 30, the company had 87,512 owned or controlled lots, 103 active communities and backlog of 3,090 homes valued at $959.8 million. Nine-month net orders were 8,044, down from 8,278; the cancellation rate improved to 18.8% from 20.6%. Backlog and orders are operational measures, and contracts may be cancelled before closing.
Key risks include further supply-chain or labor disruption, cost inflation, higher mortgage rates or reduced mortgage availability, weaker housing demand, land and development risks, acquisition integration, and access to capital. The company also had $199.7 million of letters of credit, surety bonds and financial guarantees, primarily supporting site improvements; management did not expect material draws. It stated that available cash, operating cash flow and financing sources should cover foreseeable liquidity needs for at least 12 months, subject to market and COVID-19 uncertainties.
Important facts for investors to verify
- Whether pricing continues to outpace construction and land-cost inflation, and whether reported gross-margin gains persist.
- How supply-chain delays affect construction cycles, closings, backlog conversion and cancellation rates.
- Whether elevated inventory and land commitments translate into timely closings and operating cash flow; land contracts covered 43,338 lots with approximately $1.05 billion of potential purchase commitments.
- Debt levels, borrowing-base availability, covenant headroom and interest-rate exposure. The filing estimates a 100-basis-point rate increase above the LIBOR floor would add about $3.8 million to annual interest cost on variable-rate debt.
- The effect of the tax-credit comparison and debt-refinancing charge when assessing earnings trends, and the preliminary purchase accounting for the two acquisitions.