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LGI Homes(NASDAQ: LGIH)
Q2 2024 Earnings Call
Jul 30, 2024, 12:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to LGI Homes second quarter 2024 conference call. [Operator instructions] At this time, I would like to turn the call over to Joshua Fattor, executive vice president of investor relations and capital markets. Please go ahead.
Josh Fattor -- Vice President, Investor Relations
Thanks, and good afternoon. I'll remind listeners that this call contains forward-looking statements, including management's views on the company's business strategy, outlook, plans, objectives and guidance for future periods. Such statements reflect management's current expectations, and involve assumptions and estimates that are subject to risks and uncertainties that could cause those expectations to prove to be incorrect. You should review our filings with the SEC for a discussion of the risks, uncertainties and other factors that could cause actual results to differ from those presented today.
All forward-looking statements must be considered in light of those related risks, and you shouldn't place undue reliance on such statements, which reflect management's current viewpoints and are not guarantees of future performance. On this call, we'll discuss non-GAAP financial measures that are not intended to be considered in isolation or as substitute for financial information presented in accordance with GAAP. Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the press release we issued this morning and in our quarterly report on Form 10-Q for the quarter ended June 30, 2024, that we expect to file with the SEC later today. This filing will be accessible on the SEC's website and on the investor relations section of our website.
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With me today are Eric Lipar, LGI Homes' chief executive officer and chairman of the board; and Charles Merdian, chief financial officer and treasurer. I'll now turn the call over to Eric.
Eric Thomas Lipar -- Chair and Chief Executive Officer
Thanks, Josh. Good afternoon, and welcome to our earnings call. We're pleased to report the strong operating results we delivered in the second quarter and to provide more details on the significant progress we've made, increasing profitability and growing community count. As highlighted in our press release this morning, we delivered 1,655 homes at a record-breaking average sales price of $364,000, resulting in revenue of over $602 million.
During the quarter, we opened more self-developed communities underwritten at higher margins and successfully offset the impact of mortgage buydown incentives and cost inflation by raising prices in our higher-performing communities. Doing so allowed us to deliver a gross margin of 25%, up 300 basis points from last year and adjusted gross margin of 27%, up 320 basis points from last year. These are noteworthy increases in our profitability that brings today's margins in line with pre-pandemic levels. Pretax net income for the quarter was approximately $77 million, representing a pre-tax profit margin of 12.8%.
This was a 170 basis point improvement over last year and like gross margins, in line with our performance prior to the pandemic. These and other achievements contributed to earnings per share of $2.48, an increase of 10.2% compared to the same period last year. In May, we hit a new record of 130 communities and ended June with 128 communities, up an industry-leading 26% in the past year. And more communities are coming.
We just completed our July training class here in the Woodlands which included 60 new salespeople who will be instrumental in helping us achieve our goal of 150 communities by year-end. During the quarter, we averaged 4.3 closings per community per month. Our top markets on a closings per community basis were Charlotte with 8.6 closings per month, Las Vegas with 7.8, Mid-Atlantic with 6.9, Dallas/Fort Worth with 6.7 and Fort Pierce with 6.3 closings per month. Congratulations to the teams in these markets and their outstanding results last quarter.
On May 9, we held our Annual Service Impact Day. Nationwide, our teams volunteered more than 9,000 hours working with 73 local charities that support the most critical needs of our communities. We're grateful to our nonprofit partners for allowing us to support the transformative work they do, and we thank our employees for making this year's service impact day a success. At a high level, the housing market remains healthy with demand supported by strong fundamentals, including household formations and migration trends, years of underproduction and a lock-in effect limiting the supply of resale homes.
Additionally, we're witnessing a resilient labor market with historically low unemployment. On the other side of this equation, it's constrained affordability, which remains the No. 1 challenge for customers and the key limitation on higher sales and closings. With rising land and input costs, compounded by higher interest rates and increased cost of insurance and property taxes, today's entry-level customer faces hard choices and has fewer options.
At LGI Homes, we're making those choices easier and creating meaningful value for our customers by providing affordable sized but feature-rich homes and offering the mix of incentives that results in the most attainable monthly payment for our buyers. Finding the effective mix of each of these levers: product type, size, amenities, ASP, and incentive levels presents a unique set of operational challenges in every market. Our performance in the second quarter demonstrates our success at balancing these variables while still delivering outstanding margins that reflect our commitment to increasing profitability and driving higher returns. Now, I'll invite Charles to provide additional details on our financial results.
Charles Michael Merdian -- Chief Financial Officer and Treasurer
Thanks, Eric. As noted earlier, revenue in the second quarter was $602.5 million based on 1,655 homes closed at an average sales price of $364,047, an increase of 4.6% compared to last year. Of our total closings, 117 were through our wholesale channel, representing 7.1% of total closings compared to 7.5% last year. Our second quarter gross margin was 25% and adjusted gross margin was 27%.
As Eric mentioned, gross margin improved significantly, up 300 basis points year over year and 160 basis points sequentially while adjusted gross margins improved 320 basis points year over year and 170 basis points sequentially. Adjusted gross margin excluded $10.6 million of capitalized interest charged cost of sales and $1.2 million related to purchase accounting, together representing 200 basis points compared to 180 basis points last year. The increase was the result of higher borrowing costs coming through cost of goods sold, partially offset by lower purchase accounting adjustments. Combined selling, general and administrative expenses for the second quarter were $83.4 million or 13.8% of revenue.
Selling expenses were $52.9 million or 8.8% of revenue compared to 7.6% in the same period last year. The increase, as a percentage of revenue, was primarily related to higher advertising spend this year as compared to last. General and administrative expenses totaled $30.5 million or 5.1% of revenue compared to 4.3% in the same period last year. The increase as a percentage of revenue was primarily related to higher indirect overhead expenses related to community count expansion that were allocated across lower overall closings.
We continue to expect our full year SG&A expense as a percentage of revenue to range between 13% and 14%. Pretax net income was $76.9 million or 12.8% of revenue compared to 11.1% last year and 5.9% in the first quarter. The increase was the result of driving higher profitability in every home sold, as well as $2.7 million related to the sale of lots and commercial land. Our effective tax rate was 23.8% compared to 25.6% last year, and we expect our full year tax rate will be in the range between 24% and 25%.
Second quarter gross orders were 2,201, net orders were 1,713, and our cancellation rate was 22.2%. We ended the quarter with 1,393 homes in our backlog valued at $553.6 million. Of those homes, 181 or 13% of our total backlog were related to wholesale contracts with institutional buyers. Turning to our land position.
On June 30, our portfolio consisted of 69,904 owned and controlled lots. Of those lots, 54,362 or 77.8% were owned and 15,542 lots or 22.2% were controlled. Of our owned lots, 39,284 were either raw land or land under development with approximately 31% of those lots in active development. Of the remaining 15,078 owned lots, 10,407 were finished vacant lots, and 2,032 were completed homes, including our information centers.
During the quarter, we started 2,172 homes, and we ended the quarter with 2,639 homes in progress. With that, I'll turn the call over to Josh for a discussion of our capital position.
Josh Fattor -- Vice President, Investor Relations
Thank you, Charles. We ended the quarter with $1.5 billion of debt outstanding, including $819.7 million drawn on our credit facility, resulting in a debt-to-capital ratio of 43.8% and net debt-to-capital ratio of 43%. The sequential increase in the amount drawn on our revolver was commensurate with the increase in our inventory as we started more homes in the second quarter. Total liquidity at the end of the quarter was $405.9 million, including $51 million of cash and $354.8 million available to borrow on our credit facility.
We repurchased 83,763 shares for $8 million during the quarter and have $193.5 million remaining on our current authorization. Finally, at June 30, our stockholders' equity was $1.9 billion, and our book value per share was $81.86, an increase of 11.3% over the same period last year. At this point, I'll turn the call back over to Eric.
Eric Thomas Lipar -- Chair and Chief Executive Officer
Thanks, Josh. While we still have two days left for closings in July, we expect to report approximately 550 homes closed this month and a similar number of communities. Based on our performance to date, current backlog and a view of the inventory available to sell and close this year, we are updating our guidance. We now expect to close between 6,400 and 7,200 homes this year.
This new range reflects our current view of the market and implies the pace in the second half of the year that is similar to the sales pace we saw in the second quarter. As we mentioned earlier, we've been pleased with our ability to raise sales prices in most of our communities and especially in our highest performing communities. Based on the contract value of homes in our backlog and continued outperformance compared to our original expectations, we're increasing our ASP guide to a range between $360,000 to $370,000, a $10,000 increase at both the low and high end of the range. We expect to continue to raise prices as needed while remaining disciplined around the level of incentives required to achieve our margin targets.
Based on our outperformance in the first half of the year, we are raising our gross margin guidance to a range between 23.5% and 24.5% and adjusted gross margin to between 25.5% and 26.5%. I'll conclude by saying once more how pleased we are with our strong second quarter performance. These achievements are thanks to our teams around the country and their tireless execution of our strategy. On the topic of our people, I'll share a final highlight.
For the second year in a row, the U.S. News and World Report recognize LGI Homes as one of the best companies to work for in multiple categories. This achievement is clear evidence that we've created an exciting workplace where our people feel valued, inspired and positioned for long-term success. To all of our employees, I say thank you for your dedication and the loyalty you continue to show to our company.
We'll now open the call for questions.
Questions & Answers:
Operator
[Operator instructions] And our first question will come from Michael Rehaut of J.P. Morgan. Your line is open.
Andrew Azzi -- JPMorgan Chase and Company -- Analyst
Hi, everyone. This is Andrew Azzi on for Mike. I appreciate you taking my questions. Congrats on the quarter.
I just wanted to get a sense of that gross margin improvement sequentially. If maybe you can bucket out the drivers of that and how that translates over to next quarter, that would be excellent.
Eric Thomas Lipar -- Chair and Chief Executive Officer
Andrew, this is Eric. I could start. Yes, a big improvement in gross margin. I think the main point is, and we're pretty excited about it, all the development that we do, there's a lot of value in the lots that we own.
There's a lot of value in doing the owned development. The team is doing a great job, and we're pricing our communities to market, which we need to make sure we're capturing the developer profit. And that's where I think that elevated gross margin comes from. And that's where we've been historically pre-pandemic, and that's where we need to be.
We're a company that does a lot of development. We take on that development risk. It requires a lot of capital, and we need to pay for that or get paid for that and capture that development profit and have that adjusted gross margin up in that 27%, 28% range. And the team is doing fantastic.
So I think that's the leading driver of it.
Andrew Azzi -- JPMorgan Chase and Company -- Analyst
Got it. I just wanted to ask also maybe on capital allocation. As you continue to grow, how you expect to manage your leverage metrics, too, and what we could expect there in the near to medium term.
Josh Fattor -- Vice President, Investor Relations
This is Josh. We've typically said 35% to 45%. That will be the standard going forward for our gross debt leverage. When we look at all the opportunities, I think for us right now, it's continued land development, it's bringing these new communities online.
We continue to get M&A packages. It's -- nothing especially compelling that we've seen recently. We're a little bit more of a nuanced buyer, so that always makes that a little bit tricky for us. And then, on the other side is the share repurchases.
And so, you saw, we did about $8 million during the quarter. We got a great value on those shares. So we continue to monitor that as well.
Andrew Azzi -- JPMorgan Chase and Company -- Analyst
Thanks so much. I'll pass it on.
Operator
Thank you. One moment for our next question, which will be coming from Carl Reichardt of BTIG. Your line is open.
Carl Reichardt -- Analyst
Thanks everybody. Nice to talk to you. So Eric, know that you've got your gross margin sort of at a pre-pandemic level, and you've sort of talked about that long-term average that you'd like to be at. Under the assumption that your current backlog or your homes under construction, you have been sold are going to run at a similar margin per your guidance, where do you start beginning to try to push absorption levels up a little bit? Like do we need another 100 basis points of margin where you say we want to -- now we want to focus a little more on pace? I'm trying to get a sense of where that balance is, where you'd start to focus a little more on pace and be willing to give up a little margin to run the inventory turns faster.
Eric Thomas Lipar -- Chair and Chief Executive Officer
Yes. It's a great question, Carl, and figured you had a question of price versus pace. And really, we spent a lot of time analyzing the data. We're working with our leadership teams and we wish it as simple as reducing the price and getting more absorption and it really doesn't look like that.
I mean, our strongest communities, we look at our top 10 communities that are driving the highest absorption rates, they also have the highest gross margin. So a couple of things we would point to is, one, we're doing mortgage buydown just like every other builder. And I think that's the big incentives that we offer. I think the cost of those incentives has come down a little bit or been able to offer a better rate over the last couple of months because the rates -- mortgage rates have moved in our favor.
So we'll continuously look at the mortgage incentive program, but we're priced to market. There's a lot of value in our finished lots. So decreasing the price is likely not the answer to increasing the pace because we just don't see that that's evident. Our communities tend to be larger in size.
And we tend to gradually raise prices over time. And I think we'll stay on that theory. The other thing we're seeing is on the house cost, we're starting to see some relief on house costs. It was fairly flat for cost in the last quarter.
And certainly, if house costs provide some relief, we could lower ASPs, especially newer communities and keep our gross margins similar, but potentially help with the pace.
Carl Reichardt -- Analyst
Actually, I was going to ask about build cost, so let me ask something different. So I think as I calculated it, you're a little over 11 years of land on a trailing basis. That's high even relative to you. And you've got big store count opening coming this year, and I think you've talked a little bit about next year.
So really two questions. One, can you talk a little bit about next year's plans for store openings? And when do you expect your planned land and lot spend to kind of flatten out trajectory-wise relative to what it has been to get this new store base open this year and into next?
Eric Thomas Lipar -- Chair and Chief Executive Officer
Yes, I can take the community count, and I'll let Charles talk about the land spend. Community count, I think it's a little early for 2025 community count guidance yet. We plan on growing community count in 2025. We're focused on the '24 community count getting to 150.
We're still comfortable with that metric. We're at 128 last month. So a lot of new communities coming online in the back half of the year. A lot of training going on.
We just hired 60 new sales reps to fill these communities. So we still feel comfortable about the 150. And then, we'll see if any M&A opportunities arise, any finished lot opportunities arise. So those can still be part of the community count for next year.
We haven't seen as many opportunities over the last six months as we thought we might in a more challenging, affordable market, but those may or may not come over the next couple of quarters. But confident in the 150 for this year, and Charles could talk about land spend.
Charles Michael Merdian -- Chief Financial Officer and Treasurer
Yes. This -- our owned lots at 54,000, just over 54,000 total owned lots. 10,400 of them are finished, so we've done a good job over the last 12 to 18 months on working through some of the pandemic-related delays in getting communities online. Certainly, they had taken longer over that period of time than we originally had expected or planned.
So we feel very good about what the teams have been doing in terms of scheduling out our developments, getting those through the process. We still have 12,000 additional lots that are in development, so that's about a third of the remaining owned lots that are in some sort of land stage. So constantly monitoring the timing and delivery of those. So I think in some markets, in some cases, we're a little ahead in terms of what we have in terms of finished inventory, which will decrease the pace of development in some of those markets.
And in some markets, we are still working hard to get communities delivered. So I think beginning at the back half of this year, the development pace, and then also the acquisition pace will certainly start to taper to where we see the replacement dollars that are coming in from the increased closings and community count increase start to exceed what we're spending on a development spend. But I think we'll see that in the first -- in the fourth quarter and into the first quarter of next year.
Carl Reichardt -- Analyst
Great. Thank you so much, Charles. I really appreciate the answer and thank you, Eric.
Charles Michael Merdian -- Chief Financial Officer and Treasurer
You bet.
Operator
One moment for our next question. Our next question will be coming from Kenneth Zener of Seaport. Your line is open.
Kenneth Zener -- Analyst
Hello everybody. A couple of different questions here. Given the rate outlook, could you just level set us for what -- where incentives are today, either like percent of ASP or kind of the impact on margins specifically? And talk about how many of the buyers are using it. And if rates go down 50 bps, what you're buying it to basically.
So if rates -- if you were to buy it to six or five and a half, rates go down 50 bps, how much of a margin benefit would that be?
Eric Thomas Lipar -- Chair and Chief Executive Officer
Yes, it's a great question, Ken. And I'll have to give you a broad answer because incentives are really on a case-by-case, community by community, market by market, nationwide, certainly incentivizing the houses that are finished and closing in the next 30 days, more so than something that isn't permitting that's not going to deliver for six months. A lot of that flows through our gross margin dollars, but some of the closing cost incentives also flow through SG&A. It's certainly an expense and it's an elevated expense over where it was pre-pandemic.
The positive thing is that we've been able to raise prices, reduce our costs, capture development profit and all of those savings has made up for the incentives at the current rate. In general, it costs about 1% to get 0.25 point buy down in the rate.
Kenneth Zener -- Analyst
Now, this quarter with the rising gross margin and historically, your DNA of doing all the self-development, could you kind of frame out that spread that you historically associate with that? It seems to be the industry kind of talks about a 300-basis point swing developed versus buying finished lots. Would you agree with that?
Eric Thomas Lipar -- Chair and Chief Executive Officer
Yes, that's exactly the LGI way of pricing communities. It's 300 basis points as a minimum. So I'd say 300 to 500 basis points is the typical spread if we are going to price a community where we're buying a finish lot or pricing a community where we did the development, it should result in the same retail pricing. We're just creating greater margins because we're capturing that developer profit.
Kenneth Zener -- Analyst
And if I could, just given your SG&A rising community as you're pulling these online, could you help us think about what a more normalized SG&A level would be since you highlighted that with gross margins, once these communities are -- you've absorbed the cost of these new hires. You just talked about 60 new hires. I'm assuming that's for the 128 to 150 community count by year-end. But talk to like what a more normalized SG&A level will be because it seems like you've been a little top heavy there.
Charles Michael Merdian -- Chief Financial Officer and Treasurer
Yes. Great question, Ken. This is Charles. So yes, I mean, certainly in the beginning part of the year as well, it becomes top-heavy when closings per community are typically lower in the first quarter.
So I think year-to-date, obviously, our guidance implies that SG&A will continue to see some leverage as communities come online and the top line starts to increase. I think, historically, we've been around that 12% to 13% range. We've been spending more on advertising recently. We've been talking about that over the last several quarters, spending the money to generate the leads and driving leads to our communities.
So I think that's been a little bit more elevated than what we might consider normal, if you will. So a little bit depends, I think, in conjunction with where rates go and what we see in the future. But I think we break it down into selling and then G&A. And I think selling is predominantly variable.
That's where our commissions are recorded to. So that is the major driver for selling expense along with advertising. So I think that one will stay relatively similar to lower than where we were in the second quarter. On a long-term rate, that's kind of 8% to 9%.
And then, in the G&A side, that's where we'll see the most operating leverage as we continue to grow, covering things like the corporate-related costs. So that should trend down from 5% down into the 4% range.
Kenneth Zener -- Analyst
Thank you very much.
Charles Michael Merdian -- Chief Financial Officer and Treasurer
You bet.
Operator
Our next question is going to come from Jay McCanless of Wedbush. Your line is open.
Jay McCanless -- Analyst
Hey. Good afternoon, everyone. So Eric, I was surprised to hear you say that if you did cut prices, that probably wouldn't drive more volume. That's essentially antithetical to what all of your competitors have been saying.
So maybe could you talk about why a price cut could -- won't work with the typical LGI customer?
Eric Thomas Lipar -- Chair and Chief Executive Officer
Yes. No, I think cutting price in general, Jay, does just give you the monthly payment bang for the buck as it does putting money into mortgage incentives, right? Because right now, the challenge in the market is affordability. We're seeing strong demand from our customer that's currently living in an apartment, somebody that's currently paying rent, they want to get into homeownership. But affordability, combination of rates and a combination of pricing, affordability is as challenged as it ever has been.
And the team is doing a great job working with the customers. And you have a choice as a builder, and all the builders are, you can cut the price or you can work on mortgage incentives. And the mortgage incentives leads to a lower monthly payment. And also cutting price in general, unless we're having appraisal challenges, but the vast majority of our houses -- almost all of our houses are appraising based on the comp scenarios, that tells you your price to market.
So no reason to sell houses below market. It's still a low supply environment, generally speaking, across the United States. And the houses we have and the lots we have are valuable, and discounting them to move them is generally not a great idea, in our opinion.
Jay McCanless -- Analyst
And so, looking at the new gross margin guidance. I guess, what -- if you're raising prices, if you're getting a little bit more on the developer side, I guess, where -- what's the downside risk? And what could make gross margin go down sequentially in the back half of the year?
Eric Thomas Lipar -- Chair and Chief Executive Officer
Well, I think it's the mortgage incentive dollars, what it's going to take to make our houses affordable and get the customers qualified. So that's rate dependent on the cost of that. We're not seeing a lot of relief on the cost, even though house costs are fairly flat to some relief, doing business with cities, whether it's permits and fees, development costs as new communities are coming online, even though we're capturing that developer profit, new communities coming online generally have a higher cost than the older communities that are selling out. So we're still at a fairly high cost environment where we need to raise prices just to maintain margins.
Jay McCanless -- Analyst
And I guess, what percentage of communities were you able to raise prices this quarter?
Eric Thomas Lipar -- Chair and Chief Executive Officer
I would say more than half, for sure, just because of the strong demand and to offset the cost increases that we're seeing.
Jay McCanless -- Analyst
And then, just one more real quickly. I think -- I can't remember, Charles or Eric, if you said it about not seeing the opportunities that you expected to see on the land side. Is that a function of just deals not being brought to market? Or is that more aggressively and buying from some of your competitors?
Eric Thomas Lipar -- Chair and Chief Executive Officer
Yes. I think it's a little of both. I think, Jay, we're -- what we've seen in that comment really stems for -- it wasn't too long ago that we were talking about SVB Bank and maybe bank lending really tightening up for the private builders, the private developers, maybe you'd see some deals getting dropped or having trouble getting financed. We think it's a little bit more challenging in the market from an affordability standpoint.
And those type of markets where financing goes away, it's a little bit more challenging. Those are the type of markets that you see more finished lot opportunities and more deals. And we're seeing deals out there, and we're buying deals and we're approving deals through our acquisitions committee. I think the comment is we just probably haven't seen as many as we thought may be coming.
Jay McCanless -- Analyst
OK. Great. Thanks guys. Appreciate it.
Eric Thomas Lipar -- Chair and Chief Executive Officer
You're welcome.
Operator
I would now like to turn the conference back to Eric for closing remarks.
Eric Thomas Lipar -- Chair and Chief Executive Officer
Yes. Thanks, everybody, for participating on today's call and for your continued interest in LGI Homes. And go, Astros.
Operator
[Operator signoff]
Duration: 0 minutes
Call participants:
Josh Fattor -- Vice President, Investor Relations
Eric Thomas Lipar -- Chair and Chief Executive Officer
Charles Michael Merdian -- Chief Financial Officer and Treasurer
Eric Lipar -- Chair and Chief Executive Officer
Andrew Azzi -- JPMorgan Chase and Company -- Analyst
Carl Reichardt -- Analyst
Charles Merdian -- Chief Financial Officer and Treasurer
Kenneth Zener -- Analyst
Jay McCanless -- Analyst
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