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Operator: Hello, and welcome to LGI Homes’ First Quarter 2024 Conference Call. Today’s call is being recorded and a replay will be available on the company’s website at www.lgihomes.com. After management’s prepared comments, there will be an opportunity to ask questions. [Operator Instructions] I would now like to hand the conference over to Executive Vice President of Investor Relations and Capital Markets, Joshua Fattor.

Joshua Fattor: Thanks and good afternoon. I’ll remind listeners that this call contains forward-looking statements, including management’s views on company’s business strategy, outlooks, 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 related risks and you should not 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 substitutes 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 March 31, 2024, that we expect to file with the SEC later today. This filing will be accessible on the SEC’s website and in the Investor Relations section of our website. With me today are Eric Lipar, LGI Homes’ Chief Executive Officer and Chairman of the Board; Charles Merdian, Chief Financial Officer and Treasurer. And I’ll now turn the call over to Eric.

Eric Lipar: Thanks, Josh. Good afternoon, and welcome to our first quarter earnings call. We delivered 1,083 homes in the first quarter at an average sales price of over $360,000 resulting in total revenue of $391 million. During the first quarter, our top markets on a closings per community basis were Raleigh with 7.7 closings per month, followed by Southern California with 5.5 closings and Washington DC with 5. Congratulations to the teams in these markets for the results last quarter. Despite the slower start in closings, the improved lead and sales trends we saw in February accelerated further in March. The resulting increase in net orders allowed us to finish the quarter with 1,335 homes in backlog compared to 590 homes in backlog when we ended the fourth quarter, putting us in a much stronger position entering the second quarter.

It’s also worth noting that these improvements were accomplished solely through marketing and training, not through price discounting or increasing incentives. These recent sales trends give us confidence that demand remains healthy, supported by positive long-term fundamentals, including strong demographic trends and a limited supply of affordable homes. Along with increasing leads and sales, another positive highlight was our success controlling costs and protecting our margins. We delivered a first quarter gross margin of 23.4%, up 310 basis points compared to last year and in line with our performance in the fourth quarter. Adjusted gross margin was 25.3%, up 320 basis points over last year and 20 basis points sequentially. Much of the land we acquired over the last few years has been working through development and slowly accumulating on our balance sheet is now beginning to deliver closings at margins in line with our historical results.

As more of these land deals come online, we expect revenue to grow at a faster pace than inventory resulting in increasingly positive impacts to our overall performance and return metrics. Finally, we ended the quarter with 120 active communities, an increase of 21% over the prior year. This is the highest community count in our history. In addition, we opened 13 new communities in March that will be added to community count as they deliver closings. I’ll now turn the call over to Charles for more details on our financial results.

Charles Merdian : Thanks, Eric. As mentioned earlier, revenue in the Q1 was $390.9 million based on 1,083 homes closed at an average sales price of $360,897. The 19.8% decline year-over-year was driven by a 20.7% decline in closings, partially offset by a 1.2% increase in ASPs. Of our total closings, 102 were through our wholesale representing 9.4% of total closings compared to 7.5% last year. Our first quarter gross margin was 23.4% and adjusted gross margin was 25.3%. Gross margins improved 310 basis points and adjusted gross margins improved 320 basis points compared to the same period last year. Adjusted gross margin excluded $6.6 million of capitalized interest charged cost of sales and $803,000 related to purchase accounting, together representing 190 basis points compared to 180 basis points last year.

The increase was primarily the result of elevated borrowing costs coming through our cost of goods sold, partially offset by lower purchase accounting adjustments. Combined selling, general and administrative expenses for the first quarter were $72.7 million or 18.6% of revenue. Selling expenses were $41.1 million or 10.5% of revenue compared to 8.8% in the same period last year. General and administrative expenses totaled $31.5 million or 8.1% of revenue compared to 6.1% in the same period last year. While SG&A expenses as a percentage of revenue are always higher in the first quarter, this was amplified this year due to lower volumes as well as increased advertising spend to drive leads and other investments made to support the opening of new communities.

First quarter SG&A performance was in line with the expectations we held when we provided our original guidance for the full year. Therefore, we still expect our full year SG&A expense as a percentage of revenue to range between 12.5% and 13.5%. Pre-tax net income for the quarter was $23.1 million or 5.9% of revenue. Our effective tax rate was 26.2% compared to 16.7% last year and the higher rate was related to the timing of compensation costs for share based payments and slightly higher state taxes. We continue to expect our full year tax rate will be in the range between 24% and 25%. Overall, we generated net income of $17.1 million or $0.72 per basic and diluted share. First quarter gross orders were 2,198. Net orders were 1,828 and our cancellation rate was 16.8%.

We ended the quarter with 1,335 homes in our backlog valued at $519.5 million and of those homes, 178 or 13.3% of our total backlog were related to wholesale contracts with single-family rental partners. Turning to our land position. At March 31, our portfolio consisted of 70,145 owned and controlled lots. Of those lots, 54,763 or 78.1% were owned and 15,382 lots were controlled. Of our owned lots, 39,601 were either raw land or land under development. Of the remaining 15,162 owned lots, 11,008 were finished vacant lots and 4,154 were completed homes, information centers and homes in progress. During the quarter, we started 1,810 homes to meet current demand and ensure completed inventory is available for new community openings. With that, I’ll turn the call over to Josh for a discussion of our capital position.

Joshua Fattor: Thank you, Charles. We ended the quarter with just under $1.4 billion of debt outstanding including $703.1 million drawn on our credit facility resulting in a debt to capital ratio of 42.5% and net debt to capital ratio of 41.6%. Total liquidity at the end of the quarter was $491.5 million, including $49 million of cash and $442.5 million available to borrow on our credit facility. We repurchased 89,227 shares for $10 million during the quarter and we expect to allocate additional capital to share repurchases in the coming quarters. Finally, at March 31, our stockholders’ equity was $1.87 billion and our book value per share was $79.31, an increase of 11.5% over the same period last year. With that, I’ll turn the call back over to Eric.

Eric Lipar : Thanks, Josh. The second quarter is off to a positive start. Despite the uptick in interest rates, I’m pleased to say the positive momentum experienced in March continued in April. On Friday, we expect to report that we closed approximately 500 homes in the month of April and added seven net new communities, bringing us to 127 active communities nationwide, a new company record. The slower start to the year was understood and factored into the full year guidance we shared on our last call. Despite the recent uptick in interest rates, the positive trends we witnessed in March continued into April, resulting in over 35,000 leads each month. As a result, we generate over 800 net sales per month for the last two months, reflecting a pace of approximately six homes per community per month.

With clear visibility onto our backlog and the strong demand we continue to see, we are confident in our original closing target of between 7,000 and 8,000 homes at an average selling price between $350,000 and $360,000. Our full year gross margin guidance remains between 23.1% and 24.1% and adjusted gross margin between 25% and 26%. Our teams around the country are doing an outstanding job getting new communities online and ready for sales. We recently welcomed 65 new sales reps and sales managers to support 13 communities opened in March, as well as additional openings in the coming months and continue to expect to be active in approximately 150 communities at year-end. I’ll close with one final thought. For the fourth consecutive year, LGI Homes has received the Top Workplace USA award.

What makes this recognition especially meaningful is that the results are entirely based on the views of those best positioned to judge our success, our employees. We value our people immensely and it’s satisfying to know that they value LGI Homes just as much. Thank you to all of our teams around the country for your continued commitment to our company and to our customers. We’ll now open the call for questions.

Operator: [Operator Instructions] And our first question comes from the line of Michael Rehaut with JPMorgan.

Andrew Azzi: This is actually Andrew Azzi on for Mike. Maybe just wanted to start with trying to get a sense for how the land pipeline is looking right now in terms of inflation for land that’s contracted today and maybe help us understand the difference between the development part and the raw land part?

Eric Lipar: This is Eric. I can start and Charles can add if he cares to. Yes, I think the land market has continued to increase in price, strong demand, it’s competitive. We’re being selective, make sure we’re being diligent in the land we are buying across United States. We have a lot of projects underway right now, a lot of projects in development. Development costs are continuing to rise. We think we’re in good shape at our land market and our land basis, what we have bought over the years. And as we said in the scripted remarks, we do believe the lots will come through and we’re going to be able to maintain our historical gross margins on all the lots we have under development.

Andrew Azzi: And it’s nice to see that you guys kept your guide. I was just hoping maybe to get more granularity and an update on how you’re thinking to community count growth as we go through the year and maybe any initial thoughts that have been updated as we move into next year?

Eric Lipar: Sure. Yes. Community count in all these new communities is one of the most exciting things happening at LGI right now. It involves hiring a lot of new sales people, a lot of new managers, a lot of new promotions. We ended the quarter at 120 active communities, which is a new company record. We added seven, which we’ll release on Friday and make it official but won’t to talk about on this call. So April will end with 127 active communities, which obviously will be another company record and puts us right on track for that 150 by the end of the year. I think from 127 to 150 probably equally spaced out throughout the rest of the year and right on track and pretty exciting to hit that milestone.

Operator: And our next question comes from the line of Carl Reichardt with BTIG.

Carl Reichardt: Charles, can I just on the SG&A side? So dollars, at least on the selling expense side down a little bit. Can you just sort of give me a sense as the communities ramp, advertising costs are going to come out? And what gives you some confidence that you are not going to have selling expenses related to turning these last sort of units that you need to get to your guide this year?

Charles Merdian: So, we spent about $9.5 million in the first quarter in total advertising spend. So we expect that to tick up in terms of absolute dollars, but on a per community basis as we go into the remainder of the year, we expect that to be relatively similar. I think everything we are seeing for the rest of the year is more of the same. So I think we are pretty confident with what we are — where we are spending the money and how we are monitoring it to make sure we are spending our money in the right places and making sure that we are being the most effective on our advertising. And then most of our community count from an information center standpoint, from a people standpoint, we still have new people that will be coming in, new sales people and sales managers throughout the rest of the year, but the impact of that should be relatively nominal to the overall absolute dollars in selling as we move through the rest of the year.

Carl Reichardt: So better than typical leverage on the selling expense side as you go through the year and deliveries ramp. And then if I backed into the number right, the average order price, I think was relatively high. I think it was up over 10% sequentially. Can you talk a little bit about the mix of orders, incoming orders that you saw during the quarter and whether or not there were some geographic shifts or even maybe even some price point shifts up to Raleigh?

Eric Lipar: Our pipeline ASP is certainly higher than I reported, and we’re already at the top end of the range. First, we do see apples-to-apples comparison. We think prices are going to continue to go up, because our costs are continuing to go up, whether it’s materials, labor, development, all costs continue to go up. So we believe that’s going to flow through our pricing. We left the guide alone at $3.50 to $3.60, because there is a mix component to that. We are still seeing individuals and our customers pick smaller square footage houses. So example, first quarter of 2023, 23% of our homes were under 1,500 square feet that closed. In the first quarter of 2024, that went from 23% to 33%. That pipeline also is skewed towards the more expensive West Coast markets that generally have a longer build time and a longer lead time.

So that’s been pretty consistent that the backlog ASP is higher than the current closing ASP. It’d be the other reason. We’re keeping guide where it is.

Operator: [Operator Instructions] And our next question comes from the line of Alex Barron with Housing Research Center.

Alex Barron: I was trying to, I guess, understand, what changed in the last couple of months where you say you’ve sold at least 800 sales versus the closings you were reporting earlier in the year? Were you just out of inventory? Or did you step up incentives? Or what caused the dramatic shift?

Eric Lipar: The fourth quarter sales just weren’t where we want them to be going through the holidays and into January. And then really ramping up on our advertising spend. No additional incentives opening up new communities still help. The leadership team is doing a great job of training in the field. But yes, pretty excited about March and April orders averaging over 800 in each month and getting us back about that six absorption pace for orders. So it’s really just the leadership team is doing a great job of training and our marketing team doing a great job of driving leads with over 35,000 people inquiring about homeownership in both the months of March and April, really showing how strong the demand is out there, just still affordability constrained and we have to work through that. But our team is doing a great job.

Alex Barron: And what’s roughly the lag between a sale and a closing these days? Is it like three months? In other words, is it going to start showing up in May?

Eric Lipar: Yes. It is starting showing up 60, 90 days later after the orders on average.

Alex Barron: And in terms of incentives, lots of other builders are advertising low interest rates. I imagine you guys are doing the same or what types of incentives are you guys finding that’s helping you out at the moment?

Eric Lipar: Yes. Similar, Alex. I think we’re all playing from the same playbook that lower monthly payment incentives around the rate, it certainly gives you more value than incentives around pricing. So rate buy downs, lower fixed rates on a weekly basis, those type of incentives, just like the other builders are doing.

Operator: And our next question comes from the line of Jay McCanless with Wedbush.

Jay McCanless: So looking at the numbers you guys gave out for April, looks like there was a small deceleration to roughly 3.9 closings per month in April versus 4 in March. Is there anything to say there about when those communities opened or anything along those lines? And is that type of pace, I’m assuming you’re thinking it will accelerate, but maybe talk a little bit about what type of pace you want to see during the second quarter?

Eric Lipar: We’re definitely expecting our closings to much orders. It’s just going to be two or three month lag to that. Yes, I think the only caveat on our April closings of those seven new communities, they probably average two closings apiece, because they’re just really starting, this is the first month of closing, some of mine had one closing. So it’s going to take a month or two for those communities to ramp up. But if we keep selling 800 net orders a month, that is going to result in 800 closings a month.

Jay McCanless: And then when you were talking in the prepared comments about revenue dollars starting to accelerate faster than inventory dollars, when should we expect that to kick in?

Charles Merdian: I think you’re going to see it throughout the remainder of the year. I think it’s — we’re still focused on spending dollars to deliver our new community counts to get to 150 communities by the end of the year, but I think you’ll see it spread out throughout the year but heavier weighted to the back half of the year.

Jay McCanless: And then Eric, you were talking about pushing price to offset costs. I mean, what type of percentage are we talking here, like low-single-digit percentage pricing to offset or what are you having to do there?

Eric Lipar: Yes. No, I think that’s Jay, we’ve seen pretty nominal increase in our costs so far this year. We expect that to increase. So I think low-single-digits would be right on for our expectations, apples-to-apples price increases across United States.

Operator: And we have a follow-up question from the line of Carl Reichardt with BTIG.

Carl Reichardt: Just a pragmatic question for you guys, when you’re doing a grand opening like one of these seven new stores, how many finished homes do you typically have available at that grand opening?

Eric Lipar: Usually between four and six that could close in the next 30 days and then another four to six behind that and another four to six behind that and usually four to six months of supply of that current closing pace, which most of these started were in that four to six range.

Carl Reichardt: And then you’ve talked about the importance of training the new sales folks coming on. And can you and this is sort of a softer question, but are you doing anything sort of differently given sort of differently given today’s environment versus three or four years ago in terms of the training process or who you hire or what you’re focused on when you’re working with new sales folks?

Eric Lipar: Generally, no, Carl. We’re looking for the same type of sales people, sales people that have a proven track record of success. I think the environment we are in right now, take some resolve and some patience, it’s a 100 day training program to get the individuals up to speed, but it really takes a year for our sales people really to get up to speed and be comfortable in our process and going through a lot of leads right now, working our backlog, working with what we call credit challenged people to work with them on their credit, work with our fair payment, more cosigners than normal. But our teams are doing a great job. No challenge hiring people, but as big a challenge as it always been, getting these new individuals trained and comfortable in our position. But nothing has changed in our overall training program.

Operator: And we have another follow-up question from the line of Alex Barron with Housing Research Center.

Alex Barron : I was hoping you could comment, again, I apologize if you already mentioned it. What — where is your build time these days? And what improvement was there quarter-over-quarter? And is there any room to keep lowering the build time going forward?

Charles Merdian: Now build times are relatively the same across the country. I mean, we have a range going anywhere from 75 to 180 days and particularly, Toronto is a little bit longer but some of the markets we’ve been in the longest can be on the low end of the side like Texas. But generally build times are the same. We factor it into our inventory flow in terms of how many starts each month we’re doing based on what we’re seeing for orders. So ending the quarter at 4,150 units roughly, we would describe as being right on track.

Alex Barron : And did I hear you correctly saying that you expect to be at 150 communities by year-end?

Eric Lipar: Correct. Yes, same guidance from last quarter and we reiterated our guidance as well, and we’re confident in that number.

Alex Barron : And do you believe your sales pace will remain similar to historical or recent experience or as the community count goes up that could compress a bit?

Eric Lipar: Well, our guidance has all that built in, Alex. We believe that if leads keep coming into our company and salespeople follow our process, that we are going to have a lot of success on the sales side similar to what we have seen over the last couple of months. And the plan is to continue doing that. And when that happens, we’re going to be right on track for all of our guidance. It’s going to be an unbelievable year.

Operator: At this time, I am not showing any further questions.

Eric Lipar: Thank you everybody for participating on today’s call and for your continued interest in LGI Homes. Have a great afternoon.

Operator: This concludes LGI Homes’ first quarter 2024 Conference Call. Have a great day.