LGI Homes - Q2 2023

Transcript

Operator (participant)

Welcome to LGI Homes' Q2 2023 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. At this time, I'll turn the call over to Josh Fattor, Vice President of Investor Relations and Capital Markets.

Josh Fattor (VP of Investor Relations and Capital Markets)

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 2023. Such statements reflect management's current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause management's 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 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 June 30th, 2023, 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. I'm joined on today's call by 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 Lipar (CEO and Chairman of the Board)

Thanks, Josh. Good afternoon, and welcome to our earnings call. The results we reported this morning represent significant progress towards our full year guidance and longer-term objectives. We're proud of these recent accomplishments and grateful to our employees, who successfully executed our strategic initiatives against a backdrop of continued economic uncertainty. In the Q2, we closed 1,854 homes, a 36% increase over the Q1, and generated over $645 million in revenue. We're continuing to invest in the growth of our business, bringing more new communities online and identifying opportunities for additional growth in the years to come. We ended the Q2 with a total of 102 active communities, a net increase of 10 communities compared to the same period last year.

Company-wide, we averaged 6.1 closings per community per month, a 30% improvement over the 4.7 pace delivered in the Q1. The increase resulted from our continued success at connecting motivated and qualified buyers with our highly trained sales teams and the flow-through of the strong net order pace we reported on our last call. Our top market on a closings per community basis was Dallas-Fort Worth, with 10.2 closings per month. Next was Charlotte, with 10 closings, followed by Houston with 7.9. Rounding out the top five were Fort Pierce, Florida, and Las Vegas, Nevada, each with 7.8 closings per month. Congratulations to the teams in these markets on your outstanding performance last quarter. During the quarter, we made significant progress on two key initiatives. First, we increased affordability for our customers.

As the market cooled last summer, we pivoted to starting smaller square footage homes that reduced average selling prices and enabled more customers to qualify for homeownership. In a number of markets, we introduced entirely new floor plans that bridged gaps between existing sizes or further reduced the size of our smallest offering. The success of this initiative has started to materialize in our results. The percentage of closings coming from homes smaller than 1,500sq ft. went from 19% in the Q2 of last year to 27% in the quarter just completed. This trend helped drive the decrease in selling prices year-over-year in four out of our five segments, despite increasing prices in most of our communities during the quarter.

While future home sizes and selling prices in the coming quarters will vary, we believe our continued efforts to reduce the cost of homeownership will be a key factor in the success of our future results. The other key initiative during the quarter was to increase profitability, and our gross margins reflected that focus. On our last call, we shared our intention to return profitability metrics back to their historical levels, starting with a 100 basis point increase in gross margins in the Q2. I'm pleased to report that we're ahead of schedule. In the Q2, we achieved a 170 basis point improvement in both financial and adjusted gross margins through a combination of sales price increases, reduced house costs, and a successful opening of new communities at margin profiles in line with our historical results.

returning margins to their industry-leading levels is foremost in every decision we're currently making. While there's still work to do, we're encouraged by the progress we've made year-to-date. I'll now turn the call over to Charles for more details on our financial results.

Charles Merdian (CFO)

Thanks, Eric. Revenue in the Q2 was $645.3 million, based on 1,854 homes closed. Sequentially, revenue was up 32.4%, and closings were up 35.7%, as we continued to benefit from healthy demand and began to see the Q1's strong order pace start to flow through our results. Of our total closings, 139 were through our wholesale channel, representing 7.5% of total closings, similar to what we delivered in the same quarter last year and in the prior quarter this year. Our average selling price of $348,042 was 2.4% lower, both year-over-year and sequentially.

The decrease was attributable to a higher percentage of homes sold in our lower-priced Central, Southeast, and Florida segments, community transitions, and our success at delivering smaller, more affordable floor plans. Our Q2 gross margin was 22%, and our adjusted gross margin was 23.8%. As Eric highlighted, adjusted gross margin improved 170 basis points sequentially compared to the 100 basis point improvement we guided to on our last call. The outperformance was driven by our success in raising prices in most of our communities, lower input costs, and new community openings at higher margin profiles. Adjusted gross margin excluded $9.1 million of capitalized interest charged cost of sales, and $2.7 million related to purchase accounting, together representing 180 basis points.

Combined selling, general, and administrative expenses for the Q2 were $76.9 million, or 11.9% of revenue, a 300 basis point improvement over the prior quarter. Selling expenses were $49.2 million or 7.6% of revenue, compared to 8.8% in the Q1 of this year. The 120 basis point sequential improvement was primarily due to reduced spending on advertising as we curtailed marketing in communities where inventory was limited. General and administrative expenses totaled $27.6 million, or 4.3% of revenue, compared to 6.1% in the Q1 of this year. The 180 basis point sequential improvement was primarily related to operating leverage realized from the increase in revenue.

We expect G&A dollars to remain relatively flat in the second half of the year, with the potential for generating additional operating leverage dependent on volume. At the same time, we expect selling expenses as a percentage of revenue to increase as we turn up advertising spend in the second half to support additional community openings and drive leads to existing communities as more inventory becomes available for sale. As a result, we're maintaining our expectation for full-year SG&A as a percentage of revenue to range between 12.5% and 13.5%. Pre-tax net income for the Q2 was $71.4 million, or 11.1% of revenue. Our effective tax rate was 25.6%, compared to 24.3% in the same quarter last year.

The increase in the rate was primarily due to mix shift to higher tax geographies and fewer federal energy-efficient home tax credits. We currently expect that our full-year effective tax rate will range between 24% and 25%. Our Q2 reported net income was $53.1 million, or $2.26 per basic share, and $2.25 per diluted share. Q2 gross orders were 2,609, up 109.7% over the same period last year. Net orders were 1,937 homes, an increase of 124.2% over the Q2 of last year. Our cancellation rate during the quarter was 25.8%, compared to 30.5% in the same period last year.

At June thirtieth, our backlog consisted of 1,638 homes, valued at $601.3 million. Of those homes, 131, or 8% of total backlog, were related to wholesale contracts with single-family rental partners. Turning to our land position. At June thirtieth, our portfolio consisted of 69,226 owned and controlled lots, a decrease of 23.1% year-over-year and down slightly from the prior quarter. Of those lots, 56,763, or 82%, were owned, a decrease of 8.3% year-over-year and 1.5% sequentially. Of our owned lots, 43,762 were raw land or land under development, with approximately 24% of those lots in active development.

Of the remaining 13,001 owned lots, 1,124 were completed homes, including our information centers, 3,027 were homes in progress, and 8,850 were finished vacant lots. During the quarter, we started construction on 2,351 homes, an increase of 37.3% sequentially, as we ramped up construction to meet demand. We controlled 12,463 lots at quarter end, a decrease of 55.6% year-over-year, but an increase of 3.1% sequentially. With that, I'll turn the call over to Josh for a discussion of our capital position.

Josh Fattor (VP of Investor Relations and Capital Markets)

Thank you, Charles. As of June 30th, we had just over $1 billion of notes payable outstanding, including $768.1 million drawn on our credit facility. Our debt-to-capital ratio was 37.8%, and our net debt-to-capital ratio was 36.8%. This marked our 3rd consecutive quarter of delevering. Total liquidity was $384.7 million, including $43.3 million of cash on hand and $341.4 million of available capacity under our credit facility. At June 30th, our stockholders' equity was $1.7 billion, and our book value per share was $73.52, an increase of 13% over the same period last year. With that, I'll turn the call back over to Eric.

Eric Lipar (CEO and Chairman of the Board)

Thanks, Josh. In summary, we delivered a great quarter, and we're entering the second half of the year well positioned to achieve all of our targets for 2023. Demand trends remain positive, our recent performance has created significant momentum as we focus on driving growth, improving profitability, and continuing to create long-term value for our shareholders. Based on our performance year-to-date, current backlog, continued momentum and sales activity, we're raising our year-end closing guidance to a range between 6,500 and 7,200 homes. Despite the decrease in our average selling price in the Q2, we continue to expect that full-year average selling prices will range between $345,000 and $360,000.

We continue to expect to be active in 115 to 125 communities at year-end, with an additional 20%-30% growth in our community count in 2024, as we expand our presence in existing markets and add new ones. One of those new markets is Salt Lake City. We recently welcomed our new sales team from Utah to our corporate office for new hire training and expect to report our first closings from that state in the Q4. We're focused on increasing gross margins and expect to deliver an additional 150 basis points of margin improvement in the Q3. Given our progress to date, we're raising our full-year gross margin guidance to 21.5%-23.5%, and adjusted gross margin to 23%-25%.

I'll conclude by expressing my appreciation for the LGI Homes teams around the country. Your intense focus on increasing affordability and enhancing profitability made our great performance last quarter possible. Thank you for your continued commitment to our company and to our customers. We'll now open the call for questions.

Operator (participant)

Thank you. We will now conduct the question-and-answer session. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment, please. Our first question comes from the line of Ken Zener with Seaport. Please proceed.

Ken Zener (Senior Analyst of Housing Sector)

Good morning, everybody.

Operator (participant)

Good morning, Ken. Please proceed.

Ken Zener (Senior Analyst of Housing Sector)

Josh, can you hear me?

Operator (participant)

We can hear you. Please proceed.

Ken Zener (Senior Analyst of Housing Sector)

Great. My question is, starting big picture, looking into next year, your 20%-30% community count target, it's a range, but I assume that's based on year-end communities, just to get a sense of the ramp. Can you talk to how many of those communities are going to be, or what % are going to be a new market? If you're in, you know, X today, how many are you going to be in that you're not in currently? Operator, are you hearing me and management?

Operator (participant)

Yes, this is operator. I am hearing you.

Ken Zener (Senior Analyst of Housing Sector)

I didn't hear management.

Operator (participant)

They have not responded. Let me message them. Please hold.

Ken Zener (Senior Analyst of Housing Sector)

Thank you. Ken, can you hear me now? I can hear you now. You must be using Verizon. How are you guys doing?

Operator (participant)

Your question? There's a little feedback. I could re-ask my question. I wasn't sure if you heard it.

Ken Zener (Senior Analyst of Housing Sector)

Yeah, I, I heard you. Yeah, we're getting feedback. You want to reset it with the operator or?

Operator (participant)

Ken, can you hear me now?

Ken Zener (Senior Analyst of Housing Sector)

I hear about 8 of you. Please stay in the meeting. We are experiencing technical difficulties. Please give us one moment.

Operator (participant)

Please remain on the line. Your conference will resume shortly. Thank you for your patience. Welcome back to the meeting. Can you hear me?

Ken Zener (Senior Analyst of Housing Sector)

Operator, can you hear me?

Operator (participant)

Sounds good. We can hear you.

Ken Zener (Senior Analyst of Housing Sector)

Hello, everybody.

Operator (participant)

Welcome back.

Eric Lipar (CEO and Chairman of the Board)

Hi, Ken. How are you?

Ken Zener (Senior Analyst of Housing Sector)

Good. I can hear you.

Eric Lipar (CEO and Chairman of the Board)

Okay, good.

Ken Zener (Senior Analyst of Housing Sector)

I'm going to restate my question. Is that okay?

Eric Lipar (CEO and Chairman of the Board)

Okay, go ahead.

Ken Zener (Senior Analyst of Housing Sector)

Of the tw-- Hello, by the way. Of the 20%-30% community growth next year, is that really a Q4 year-over-year? How many of those are in new markets that you're going to be in? If you're in X today, you're going to be in Y next year.

Eric Lipar (CEO and Chairman of the Board)

Okay, Ken, this is Eric. Great, great question, and apologize again for all the technical difficulties. We believe we've got that straightened out now. This year's end, ending community count, end of year 2023, we expect to be 115-125. That's going to be back-end loaded. We're opening up a lot of new communities in Q4 that we expect to have closings in November and December of this year. The 20%-30% growth in community count next year is off of the year-end number this year, 2023. The only new market we're entering is Salt Lake City, and we expect to have 2 communities opening and having closings by the end of 2024.

Ken Zener (Senior Analyst of Housing Sector)

Great. Just related to operations, first, your start level, high in the Q2 like it was last year. Do you think about that being at a certain level? Absolute, since whatever you start, obviously you're going to sell or there's seasonality. I wanted to clarify your comments. I heard something about sequential margins, 150 basis points. I wasn't sure if you were referring to gross margins there. The reason I ask is, you've made very strong statements about returning to industry-leading margin. If that's gross margins, you know, is that confidence tied to your 8 years of owned self-developed land, separate from reductions in net pricing costs on the vertical? Thank you very much.

Eric Lipar (CEO and Chairman of the Board)

Yeah, thanks, Ken. I'll take the gross margin question, then Charles can follow up. On the gross margin question, that's on adjusted gross margin and gross margin, 150 basis points increase in Q3, and that's primarily driven from the strength of our backlog. Sales have been positive. We've been able to increase prices. Also, most of the high-cost houses, high construction cost houses, have already pushed through our backlog. So we've got really good visibility into Q3 gross margins, and we're confident in that 150 basis points increase. Getting back to two things. One, our historical adjusted gross margins in that 25%-28% range, and then also in that range, that will be, you know, near industry leading or, or certainly at the top of the tier group.

You, you've mentioned own land, and we believe we need to be there as well because we do own a lot of land. We do a lot of development, and we need to be capturing that developer profit as well as the home-building profit as well, and we're focused on that.

Charles Merdian (CFO)

Ken, this is Charles. I can take the starts question. 2,350 starts in the Q2, I would describe as right on track. That ended with about 4,150 units in inventory. I think what we, what we highlighted in our prepared remarks, it's a little more weighted to work in progress. Over 3,000 of those units were in WIP. Normally, we're looking for about 50% complete and 50% in WIP, which just is an indicator that we were successful coming out the end of the year, monetizing our completed units, kind of, focused on making sure that we adjusted inventory and now we're ramping back up. Then future starts will really be determined based on current orders on a community-by-community basis.

Really looking for 6 months of inventory on a per community basis is what we're looking for.

Ken Zener (Senior Analyst of Housing Sector)

Great. My last question is, because you're-- Right, you, you have your production builder with a very distinct sales process, can you talk to the ramp in sales personnel, et cetera, that you're doing for this community count next year, as well as the dynamics, or some of the, you know, 2 material changes you've made in how you're using those call lists? I always think about Glengarry Glen Ross, always be closing. How is that

... changed here in the last six, nine months, in a meaningful way that you could communicate to us that you teach your salespeople? Thank you.

Eric Lipar (CEO and Chairman of the Board)

Sure, Ken. Thanks for that. Yeah, we, we just came off our last sales training class, where we hired 22 additional salespeople for what we call the July training class. That will be ramping up in October. We anticipate hiring 40 to 50 new sales reps to staff the 10 or so new communities that are opening in Q4, then continuing ramping up staff next year as well. I think that the positive thing about our, our sales process and, and sales training, it really hasn't changed much over the years. The, the great thing about our sales process is our, our individuals need to be great listeners. All the customers, right now, we're averaging 6,000 to 7,000 leads per week, so we spend a lot of $ advertising directly to the consumer.

6,000-7,000 individuals or families calling us every week, wanting to get into or inquire about a new LGI Homes. The demand is robust. You know, there's no cold calling, there, there's no soliciting the customers. We only engage with customers after they engage with us, so a lot of follow-up. A lot more digital follow-up than there used to be. The more than 50% of our leads coming in now come through email or a digital channel rather than phone calls. That's really the only thing that's changed in our business. Same desire for homeownership, it has been over the last 20 years.

Certainly affordability is a little bit more constrained right now with interest rates and pricing being elevated, but the desire for homeownership and get out of that rental situation into a home of your own is as strong as it's ever been.

Ken Zener (Senior Analyst of Housing Sector)

Thank you.

Eric Lipar (CEO and Chairman of the Board)

You're welcome.

Operator (participant)

Thank you. One moment as I prepare the next question. Our question comes from the line of Michael Rehaut from JP Morgan. Please proceed.

Andrew Azzi (Research Analyst)

Hi, everyone. Thanks for taking my question. This is Andrew Azzi for Mike. I just wanted to ask about, I believe in the prepared remarks, you mentioned that you increased, you were able to positively increase your prices in most communities. I kind of wanted to zero in on maybe the magnitude of that price increase, and where, you know, regionally you saw that.

Eric Lipar (CEO and Chairman of the Board)

Andrew, this is Eric. I, I can start. I think generally prices are, are increasing, I would say, in the vast majority of our communities. One is because demand has been strong. We don't have a lot of finished inventory, you know, available for sale. Also, we're selling, selling houses that we haven't started yet. We need to be increasing the price to make sure we're taking out any, any risk on, on costs increasing. We're also seeing over the last month or two, our house costs starting to increase, which will affect our, you know, starts over the next couple months and closings by the end of the year. We need to increase our prices just to maintain margins, as well as increasing prices to increase our margins in the communities that are selling above average paces.

Andrew Azzi (Research Analyst)

Thanks for that, Eric. I guess my next question is, what are the current level of incentives, and how, how are you thinking about adjusting these, and how do they compare, maybe sequentially?

Eric Lipar (CEO and Chairman of the Board)

Yeah, from an incentive standpoint, you know, most builders and, and our peers are really doing incentives around closing costs and, and mortgage financing, you know, getting rates down as low as possible for the consumer. We're doing the same thing. We, we have not engaged in buying forward commitments on the mortgage side and, and really driving the, the rate down into the, the fours or fives. We've been consistently paying a discount point or 2 on behalf of the borrower to get the lowest fixed rate possible every weekend for sales. That's been consistent for us really since interest rates started to rise about a year ago, and we plan on that being consistent at these levels, probably through at least the end of the year.

Andrew Azzi (Research Analyst)

Thanks for that. I'll pass it on. Good luck on the quarter.

Eric Lipar (CEO and Chairman of the Board)

Thank you.

Operator (participant)

Thank you. One moment as I prepare the next question. The next question comes from the line of Truman Patterson of Wolfe Research. Please proceed.

Truman Patterson (Head Analyst of Housing Equity Research)

Hey, good afternoon, everyone. Thanks for taking my questions. We're wondering if artificial intelligence might have taken over your phone line. No. Your Q2 backlog, you had about 1,640 units, if I'm looking at the back half closings guide, I think it implies a little over 1,800 closings in both the Q3 and Q4. Some pretty healthy back half order metrics versus normal seasonality. Could you just help us understand, you know, what's driving that guide? You know, were you intentionally curbing some orders, perhaps during the Q2 to kind of build up a spec pipeline?

Eric Lipar (CEO and Chairman of the Board)

Yeah, a couple things. One is, is that, you know, we're, we're, we're selling further out, but we're cautious not to get too further out just to maintain and limit the risk on construction costs increasing. You know, really, our, our guidance through the end of the year is around, you know, 6 closings a month, and we're comfortable with that number. We have the, the advertising spend that we increase and decrease as necessary to drive leads, which drive sales and closings. We're comfortable in our guidance. One, to increase guidance, one, because of the positivity we're seeing in sales and really taking the low end of our previous guidance range off the table.

The other thing that's going to help, you know, overall closings, is we're bringing out a number of communities here before the end of the year. That will increase the net sales overall for the company and, and be additive to closings, especially in Q4.

Truman Patterson (Head Analyst of Housing Equity Research)

Gotcha. you know, kind of following up on one of Ken's questions, you know, very healthy community count growth through the end of the year and into 2024. I, I understand there's always risks associated with, you know, selling out faster than expected due to absorptions. just trying to understand where you all see kind of the potential risks for new community openings. you know, we've heard of tight transformer supply, if you will, local municipality approvals. trying to understand where some of the big hangups might be there, or if you all have, you know, everything kind of in the pipeline right now, where, where, you know, there, there aren't too many issues that can pop up.

Eric Lipar (CEO and Chairman of the Board)

Yeah, it's a great, great question, Truman. We've been dealing with, you know, development challenges and what we call, you know, getting the developments open for sales, get them across the finish line. Electrical transformers are, are still an issue. You know, this year's community count, those communities are all across the finish line as far as plats recorded, development complete, houses are either under construction or, or going to be under construction here very soon. I don't think there's any risk on, on development timing through the end of the year community count. That's more of a, a sales and construction risk, which we think we've built into our guidance. Next year, all of the communities that are going to be added to the community count next year, those are already owned.

The vast majority of those or all of them are under some form of development. A lot of them are nearing completion. There is some timing risk quarter to quarter, but I wouldn't say there's annual timing risk to that. The other thing that's positive about community count growth next year is we are starting to see some finished lot opportunities. We have approved, you know, multiple finished lot deals through our acquisitions committee that will have closings in 2024 that, that we didn't know about, you know, 90 days ago. We are starting to see more opportunities to drive community count through both finished lots and what I'll say is, shovel-ready development opportunities, which will be additive to community count in 2025 and 2026.

Truman Patterson (Head Analyst of Housing Equity Research)

Perfect. All right, well, thanks for your time.

Eric Lipar (CEO and Chairman of the Board)

Thank you.

Operator (participant)

Thank you. One moment as I prepare the queue. Our next question comes from the line of Carl Reichardt from BTIG. Please proceed. Our next question comes from the line of Carl Reichardt from BTIG. Please proceed. Carl, can you hear us? Mike, we can take the next question.

Eric Lipar (CEO and Chairman of the Board)

Yeah. Why don't we move on to the next question, Robert?

Operator (participant)

One moment, please. Our next question comes from the line of James McCandless from Wedbush. Please proceed.

James McCanless (Equity Research Analyst)

Hey, guys. Can you hear me?

Eric Lipar (CEO and Chairman of the Board)

Yes, Jay, go ahead.

James McCanless (Equity Research Analyst)

Okay, perfect. All right, so if you stayed at 102 communities and you stayed at the 6 pace for the rest of the year, you guys are pretty much going to be, I think, either at or just below the top end of the guidance. Why the conservatism, Eric? I mean, I understand you guys are always conservative because home building's a timing business, but this seems very, even more conservative, I would say, than what we have come to expect from you guys.

Eric Lipar (CEO and Chairman of the Board)

Yeah, you know, Jay, A couple of things. One is we're going to report for July. Obviously, we're, we're sitting here on August first, so our July closings, we're going to report 585-590. That'll come out over the next, you know, few days with 103 active communities. That's about 5.7 per community per per month for the month of July. You know, the math we did, that keeps us 5.7 through the rest of the year is the midpoint. To do the high end is above 6. It's more 6.3-6.5 at the high end, depending on what you're using for community count. That means sales would have to be as good as they are now or even improving.

Coming off 5.7 in July, we thought that was a good midpoint to high end of the range. That means we expect sales and closings to be at least as strong through the end of the year. I, I think the question or the factor that's at play is really, what is interest rates going to do from here? It's very clear to us, you know, we're in the business of offering an affordable payment to our customers, and we believe if that 30-year fixed rate rises above 7 and gets to 7.25 or 7.5, then that would be a headwind. Anything below 7, especially 6.5 and below, would be a tailwind to community count.

You know, 6 is kind of how we're thinking about for the, for the rest of the year, not the full year as well in, in the math that you're doing.

James McCanless (Equity Research Analyst)

Okay. All right, that makes more sense. Thank you.

Eric Lipar (CEO and Chairman of the Board)

You're welcome.

James McCanless (Equity Research Analyst)

Just if you could talk for a minute about the homes that you're selling ahead and when those homes, you know, if you started them today, when you think they'd be delivered, what type of forward risk are you taking on those sales?

Eric Lipar (CEO and Chairman of the Board)

Yeah, we, we have limited, limited markets across the United States that we're selling houses that we haven't started yet, and certainly in, in some communities, that sales are, are very strong. We are getting to the point where we're selling, you know, houses in, in permits in hand or permits pending stage. In most markets across the country, we can still start houses in August that would close this year. Not, not- I don't, I don't believe we have a single house under contract, across the nation that is scheduled for a, a 2024 closing. It's, it's really focused on 2023.

James McCanless (Equity Research Analyst)

If you could just touch a little more, I know you-- I think you talked to your prepared comments about lumber prices starting to move up. Just maybe, you know, when, when should we should expect the margin impact from that? I guess, how much of lumber prices for you guys come off the bottom?

Charles Merdian (CFO)

Yeah, this is Charles, Jay. We're seeing just slight movement in lumber, but I think, you know, we don't expect it to have a overall impact to gross margins, because to Eric's comments about pricing, we think we're doing a good job of factoring that in. It really kind of gets back to our normal mode of operations, where we expect costs to increase. I think that's really factored into our gross margin guidance, and we would expect, you know, nominal increases. We're seeing, you know, anywhere from a $1,000-$2,000 increases in lumber prices right now. Kind of in that 0.5%-1% range over the last couple of months. We don't expect that to ramp up heavily, but if...

we'll, we'll continue to monitor it and then adjust sales prices accordingly to make sure that we can maintain our margins.

James McCanless (Equity Research Analyst)

Okay. That sounds great. That's all I had. Thanks, guys.

Eric Lipar (CEO and Chairman of the Board)

Thanks, Jay.

Operator (participant)

Thank you. One moment as I prepare the queue. Our next question comes from the line of Alex Barron of Housing Research Center. Please proceed.

Alex Barron (President)

Yeah. Hey, guys. Thanks for taking my question. I believe, you know, when I first met you, your primary form of marketing, as I understood it, was sending out mailers to rental communities and stuff like that. I imagine those, those buyers are a bit more challenged at current interest rates. I'm wondering to what extent you guys are still doing that versus have you had to shift your marketing strategies to more finding clients, you know, through digital means and, and stuff like that? If you could talk about that.

Eric Lipar (CEO and Chairman of the Board)

Yeah, Alex, this is Eric. Great question. You know, certainly the, the marketing strategy hasn't changed, but the, the form of marketing to reach that consumer has changed. Obviously, we live in a more digital world than we did 20 years ago, when we, when we started. We are still doing some direct mail, but not, not as a percentage of overall market spend. That percentage is a lot lower than it used to be. The consumer hasn't changed. The customer that we used to direct market or the customer we're hitting more with digital marketing today, whether it be social media or search or Zillow or whatever the digital means is, that customer hasn't changed.

That customer is, is someone that is currently paying rent, probably looking to buy their first home and want to get out of that situation, change their address and get into a home of their own, and that's still the customer that we are marketing to and, and still selling and closing homes to.

Alex Barron (President)

Got it. In terms of your, I guess, incentive, are you guys finding rate buy downs to be the main incentive, or what, what is driving, you know, what, what's helping you get customers over the edge?

Eric Lipar (CEO and Chairman of the Board)

Yeah, it's, it's the qualifying for the mortgage is what the challenge is. That monthly payment is obviously very important, and customers have to have the income to qualify for the mortgage, and, and qualifying for a mortgage is, is more challenging than it used to be. I think some of that's offset by lack of supply in the market. Some of that is, that's offset by really strong job growth and, and good solid wage growth. At the end of the day, the, you know, most affordable payment in all our neighborhoods compared to a few years ago is, is vastly elevated, and the customer has to make more money to qualify today, so we can spend more money on advertising to drive more leads.

One of the things we haven't talked about in the Q&A, but it's in the script and a big part of what we're doing is really focusing on more affordable plans. That's not the fit and finish of the homes. That's primarily driven by square footage. In a lot of our communities, we've been able to introduce smaller square footage plans as a way to bring down the average sales price, which brings down the monthly payment, even at the elevated interest rates, and that is working.

Alex Barron (President)

In terms of that, which I thought was interesting, are you, in turn, having to buy lots or develop lots that are smaller, like, you know, 35 foot or something south of 40 feet wide lots, also?

Eric Lipar (CEO and Chairman of the Board)

Generally not the case, Alex. I, I think nothing's really changed on the development side. You know, in our, in our history of developing lots, which we develop a lot of our communities, we are always taking into consideration the lot size and making it as, as dense as possible or as affordable as possible. These communities that, you know, we're, we're closing and selling houses on, were developed over the last 12 to 24 months and, and planned a year or 2 before that. We're always taking that into consideration on the development side. The square footage of the homes is predominantly on the same lot size. We're just building a smaller footprint.

Alex Barron (President)

Got it. If I could ask one more. On, on the salespeople that you guys are training, besides the Utah ones, which is a new market, is there any one concentration where, where these people are going, or is it just pretty evenly spread throughout all your markets?

Eric Lipar (CEO and Chairman of the Board)

Well, we we, we looked at that before the call in preparing. We thought it might be a question on, you know, where's all these new communities coming in the markets. I would generalize it by saying they're coming in Texas, Florida, the Carolinas, and California, is where the, the bigger percentages are. They're really coming across the United States as we focus on going deeper in our existing markets.

Alex Barron (President)

Most of these new salespeople are not replacing others or joining existing communities, they're more meant to sell new communities?

Eric Lipar (CEO and Chairman of the Board)

Correct. Yeah, the predominant number of salespeople we hire, we're not having a lot of turnover in our sales, sales force. Everyone's doing really well and, and making good commissions, and, and leads are coming in. Primarily, the people we're hiring is to open up these new communities.

Alex Barron (President)

Okay. Well, best of luck for the year. Thank you.

Eric Lipar (CEO and Chairman of the Board)

All right. Thanks, Alex.

Operator (participant)

Thank you. At this time, I am not showing any further questions.

Eric Lipar (CEO and Chairman of the Board)

All right. Thanks, everyone, for participating on today's call and your continued interest in LGI Homes. Have a great afternoon.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.