LGI Homes’ rightsizing approach resulted in significant year-over-year declines in the fourth quarter but record margin levels and profitability for the full 2022 fiscal year.
Eric Lipar, CEO and chairman of the board for LGI Homes, said on the builder’s earnings call that 2022 was one of the company’s most profitable years, with full-year gross margin of 28.1% and net income margin of 14.2%, representing company records.
The company continued its efforts to rightsize its inventory levels, reducing owned or controlled lots by 21.7% in 2022 and ending the calendar year with approximately 3,300 homes in vertical construction and completed inventory.
As a result of the efforts, revenue in the fourth quarter decreased 39% on a year-over-year basis to $488.3 million. Chief financial officer and treasurer Charles Merdian said the decrease was primarily due to a 42.7% year-over-year drop in closings in the fourth quarter, partially offset by a 6.3% increase in average selling price to $337,198. Revenue for the full year decreased 24.4% to $2.3 billion, also reflecting a significant decrease in closings compared with 2021, offset by a 19.2% increase in average selling price.
LGI Homes’ gross margin in the fourth quarter decreased 570 basis points on a year-over-year basis to 20.7%, reflecting incentives, lower sales prices, and higher input costs working through vertical inventory, according to Merdian. The builder’s cancellation rate in the fourth quarter was 34.5%, with a full-year cancellation rate of 24.4%.
Lipar said LGI Homes for the full year averaged at least nine closings per community per month, with communities in Dallas-Fort Worth, San Antonio, and Charlotte, North Carolina, outperforming the company average.
“We enter 2023 with tempered optimism. Recent leads and sales trends have been very positive,” Lipar said. “In the first eight weeks of the year, our retail net orders pace has been 7.2 homes per active community, compared to 2.9 in the fourth quarter of 2022. However, mortgage rates are again rising, and the Fed’s interest rate path is still uncertain. Therefore, our focus remains on what we control—driving leads through marketing; controlling input costs; starting affordable, move-in ready homes at a disciplined pace; and maintaining our strong balance sheet while investing to support our future growth.”
Land Update
LGI Homes owned 58,720 lots at the end of 2022, of which 47,857 were raw land or land under development and 10,863 finished lots. Merdian said 30% of the 47,857 lots were actively being developed at the end of 2022.
“During the quarter, we continued to release starts at a pace chosen to rightsize our inventory, and, in the fourth quarter, we started 646 homes compared to 1,653 in the same period the prior year and 840 last quarter,” Merdian said.
LGI Homes controlled 13,184 lots as of December 31, 2022, a 64.3% decrease on a year-over-year basis. Merdian said the decrease was the result of pausing all land acquisition activities in the second half of 2022 and the builder’s decision to “walk from deals that no longer met our criteria.”
“For five months, we didn’t approve a deal. However, in January and February, we approved three new finished lot deals that will deliver closings over the next 12 to 18 months,” Lipar said. “We’re still highly selective on new deals and expect that most of our focus will be on developing land we already own to drive community count growth.”
