LGI Homes' Q3 2025: Contradictions Emerge on Incentive Strategy, Pricing, and Land Development

Date of Call: November 4, 2025

Financials Results

• Revenue: $396.6M, down 39.2% YOY
• EPS: $0.85 per basic and diluted share (no prior-year EPS comparison provided)
• Gross Margin: 21.5%, compared to 25.1% in the prior year (adjusted gross margin 24.5% vs 27.2% prior year; capitalized interest and purchase accounting headwinds ~300 bps vs 210 bps LY)

Guidance:

• Q4 closings expected to be 1,300–1,500 homes (midpoint ~26% increase vs Q3)
• October preliminary closings 390–400 homes
• Q4 average sales price expected $365,000–$375,000
• Year-end community count ~145; community count to grow 10%–15% by end of 2026
• Q4 gross margin expected 21%–22%; adjusted gross margin 24%–25%
• SG&A expected 15%–16%; tax rate ~26%
• Will balance starts, focusing on new/high-performing communities

Business Commentary:

• Strong Sales Momentum and Backlog Growth:
• LGI Homes reported an 8% increase in net orders for Q3 compared to the same period last year and a 44% increase compared to Q2.
• The backlog at quarter end was up 20% year-over-year and 62% sequentially.
• This was driven by lower mortgage rates, exceptional financing options, and significant price discounts on aging inventory.

• Earnings and Revenue Trends:
• The company recorded $397 million in revenue for Q3, down 39.2% year-over-year, primarily due to a 39.4% decline in closings.
• Gross margin was 21.5%, and adjusted gross margin was 24.5%, both in line with guidance.
• Cost management strategies, including targeted financing incentives and strategic pricing, helped maintain margin stability despite market challenges.

• Inventory Management and Land Position:
• LGI Homes ended Q3 with 895 homes under construction, down 40.8% sequentially and 54.7% year-over-year.
• The company's land portfolio consists of 62,564 owned and controlled lots, a decrease of 8.8% year-over-year.

• The focus on rebalancing inventory and managing land supply ensures competitive lot cost advantages, supporting margin stability and affordability.

• Capital and Liquidity Position:

• As of Q3, LGI Homes ended with $1.75 billion of debt outstanding, with a debt-to-capital ratio of 45.7% and a net debt-to-capital ratio of 44.8%.
• Total liquidity was $429.9 million, including $62 million in cash and $367.9 million available under the credit facility.
• The company's focus on reducing leverage and maintaining strong liquidity positions it well to navigate market uncertainties.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management said they "delivered positive third quarter results" in line with guidance; backlog up 19.9% YOY and 61.5% sequentially; net orders +8.1% YOY and +43.9% sequentially; CEO: "rates are down and sales were up" and they "expect to close between 1,300 and 1,500 homes in the fourth quarter."

Q&A:

• Question from Trevor Allinson (Wolfe Research, LLC): First question is on the acceleration in orders of more than 40% sequentially... which company-specific initiatives were the biggest driver and is this a strategy shift to lean into more volume or to move aged inventory?
  Response: Primary driver was lower mortgage rates improving affordability; company also introduced a 3.99% promotional rate, increased advertising and added sales staff—management said this is market-driven, not a fundamental shift to pursue higher volume at the expense of margins.

• Question from Trevor Allinson (Wolfe Research, LLC): Second, views on your land position — with roughly a decade of land, do you plan to work down land positions and what's buyer appetite from other builders?
  Response: They are managing land supply and development spend down, confident in low lot-cost basis (~$70k avg finished lot), plan to monetize excess finished lots selectively and expect inventory to be rightsized over time.

• Question from Kenneth Zener (Seaport Research Partners): On the 10%–15% community count growth, how much of that is reflected in G&A in Q4 guidance and will growth be front- or back-loaded through 2026?
  Response: Community additions will be spread evenly through 2026 (primarily Florida, Texas, California); G&A baseline is stable (~$30M quarterly) and incremental costs for new communities are limited and largely come in line with revenue, not front‑ended.

• Question from Kenneth Zener (Seaport Research Partners): Given SG&A and gross margin pressures, do you expect SG&A as a percentage to stay at current elevated levels or improve?
  Response: SG&A percentage is volume‑dependent; with expected higher Q4 closings they anticipate SG&A% to decline due to operating leverage while G&A remains largely fixed.

• Question from Alexander Rygiel (Texas Capital Securities): Can you talk about the types of mortgages your buyers are taking and are you seeing more adjustable-rate mortgages?
  Response: About 60% of customers use FHA, government loans (FHA/VA/USDA) make up ~70%–75%, conventional ~10%–15%; ARMs are increasing via a 3.99% 5/1 ARM product that has been well received.

• Question from Alexander Rygiel (Texas Capital Securities): Directionally into 2026, any unique dynamics that could affect your average sales price or should we model externally?
  Response: ASP is highly geographic and community-mix dependent; management expects long‑term ASP to rise but near‑term movement will depend on mix, with modest downward pressure from smaller floorplans in affordability markets.

• Question from Andrew Azzi (JPMorgan Chase & Co, Research Division): Is the 2026 community-count outlook contingent on improved demand, or are you committed to that growth even if current trends persist?
  Response: They are committed—projects are funded ('dollars in the ground') and planned community additions align with the current pace of absorption.

• Question from Andrew Azzi (JPMorgan Chase & Co, Research Division): How do current incentives compare to six months ago and are you planning to adjust incentives alongside strategic initiatives?
  Response: Incentive levels are similar to six months ago; they're selectively using rate buydowns and discounts to move older inventory but do not plan to increase overall incentive spend given Q4 gross margin guidance is similar to Q3.

Contradiction Point 1

Incentive Strategy and Market Conditions

It highlights shifts in company strategy regarding incentives and market conditions, which can impact sales and financial performance.

What drove the acceleration in orders? Is it a strategic shift toward higher volume or an effort to clear aged inventory? - Trevor Allinson(Wolfe Research, LLC)

2025Q3: This is more market-driven and affordability-driven, not a shift in strategy. Rates are important for entry-level buyers, and when rates went down, our sales went up. The company has been offering more competitive buydowns and promotional rates, like a 3.99% promotional rate, and increased advertising, which has driven more leads and sales. - Eric Lipar(CEO)

Is there a minimum absorption pace you shouldn't drop below in an inelastic market, even if it requires increasing incentives to maintain it? What is this minimum level for you? - Trevor Scott Allinson(Wolfe Research)

2025Q2: We're forecasting slightly lower gross margin because we're leaning into incentives, especially on the older aged inventory. We're incentivizing heavily and pushing pace as much as we can, but we're still elevated compared to our peer groups. - Eric Thomas Lipar(CEO)

Contradiction Point 2

Incentives and Pricing Strategy

It involves the company's approach to incentives and pricing, which directly impacts revenue and customer acquisition.

How do current incentives compare to those six months ago, and what are the upcoming strategic initiatives? - Andrew Azzi(JPMorgan Chase & Co, Research Division)

2025Q3: Incentives have been consistent, focused on older inventory. The market downturn has made lower rates more valuable. Gross margin guidance is consistent with Q3, reflecting stability in incentives. - Eric Lipar(CEO)

How do increased incentives and competitive pressures affect pricing strategy? - Michael Rehaut(JPMorgan)

2025Q1: Incentives are similar to last quarter, focusing on closing cost assistance and rate buydowns. The slower sales pace leads to more price discounts on older inventory. We are competitively pricing, but our communities are large, so we avoid steep discounts on newer inventory. - Eric Lipar(CEO)

Contradiction Point 3

Sales Efficiency and Demand

It involves differing perspectives on sales efficiency and demand conditions, which impact operational strategies and resource allocation.

What was the main factor behind the order acceleration, and is it a strategy shift to increase volume or an effort to clear old inventory? - Trevor Allinson(Wolfe Research, LLC)

2025Q3: The sales team has also improved with more hires and better training. - Eric Lipar(CEO)

Will you focus on expanding into new markets or concentrate on existing markets in 2025? - Jay McCanless(Wedbush)

2024Q4: Will we focus on expanding into new markets or concentrate on existing markets for community expansion in 2025? We'll focus on our current 35 markets, aiming to go deeper with community count, leveraging the existing infrastructure and leadership for efficiency. - Eric Lipar(CEO)

Contradiction Point 4

Land Development and Community Count

It involves the company's approach to land development and community growth, which impacts long-term expansion plans and financial projections.

Is there a desire to significantly reduce land holdings, and if so, what is the demand from other builders for additional land? - Trevor Allinson(Wolfe Research, LLC)

2025Q3: We have 13,000 finished vacant developed lots, but given the timing of development, we feel confident in the basis. Our development spend is decreasing, and we're focusing on absorptions. There is some excess land that may be monetized, with some activity expected in the future. - Charles Merdian(CFO)

What is the expected gross margin ramp-up, and how do you view the land model? - Kenneth Zener(Seaport Research Partners)

2025Q1: Land acquisitions are pacing with absorption expectations. Delays in community development due to longer timelines impact the model. - Charles Merdian(CFO)

Contradiction Point 5

Sales and Demand Trends

It involves the company's perception of sales and demand trends, which are crucial for strategic planning and investor expectations.

What was the primary driver of the order acceleration, and does it reflect a strategy shift toward higher volume or a push to clear old inventory? - Trevor Allinson(Wolfe Research, LLC)

2025Q3: This is more market-driven and affordability-driven, not a shift in strategy. Rates are important for entry-level buyers, and when rates went down, our sales went up. - Eric Lipar(CEO)

How broad is the lack of confidence in Q1 due to rate volatility? - Carl Reichardt(BTIG)

2025Q1: The biggest issue is affordability and qualifying, with strong demand despite challenges. Our current buyers are more attentive to market dynamics and the economy. - Eric Lipar(CEO)