LGI Homes, Inc. Stock

Thank you. Welcome to the LGI Homes second quarter, 2026 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 Fatter, Executive Vice President of Finance 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 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 for 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 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 period ended June 30th, 2026 that will be filed with the SEC today.

This file will be accessible on the SEC's website and on the investor relations section of our website. I'm joined today by Eric Lieber, LGI Homes Chief Executive Officer and Chairman of the Board, and Charles Murdian, Chief Financial Officer and Treasurer. I'll now turn the call over to Eric.

Thanks, Josh. Good afternoon and welcome to our earnings call. During the second quarter, our team delivered strong results while continuing to navigate a dynamic operating environment. we delivered a total of 1,440 homes during the quarter, an increase of 9% over the prior year. Of this total, 1,365 homes contributed directly to home building revenue of $502 million, an increase of 4% compared to the prior year. The additional 75 closings were currently or previously leased homes, the gains from which were reflected in other income. Year-to-date, we have delivered a total of 2,356 homes in interstate. an increase of 2% over the same period last year, leaving us well positioned to achieve our full year closing guidance. Our average selling price for new homes increased to over $367,000, while we continue to support affordability through targeted price discounts on older inventory and financing incentives. We ended the quarter with 151 active communities already achieving the low end of our full-year guidance range just six months into the year and representing an increase of 3.4% from a year ago.

We are beginning to see some improvement in the land market with a broader set of opportunities becoming available and transaction economics improving. We are finding more deals where pricing and terms align with our disciplined underwriting standards, particularly as new projects are brought to market later in the development process. This provides greater certainty around cost and demand assumptions, enabling us to underwrite using today's market conditions and more readily achieve risk-adjusted returns. Beyond 2026, our development pipeline positions us well for additional community openings in 2027 and continued community count growth. As we continue to grow our community account, we've invested in the capabilities of our organization. We've strengthened sales leadership, expanded leadership development initiatives, and continued refining our product along with the systems and processes that support our sales organization. We believe these capabilities will build upon our proven ability to deliver exceptional customer experience in high-quality homes, which together contribute to the strong customer satisfaction and low warranty costs that are hallmarks of the LGI Homes brand.

During the quarter, we averaged 3.2 total closings per community per month. strongest performing markets on a clothing per community basis were Atlanta at 5.0, Southern California at 4.7, Charlotte at 4.2, Las Vegas at 3.9, and Albuquerque at 3.8 clothings per community per month. We delivered a home building gross margin of 19.8% and an adjusted home building gross margin of 23.2%, both of which were above the midpoint of the increased guidance range we provided on our last call. Our predominantly self-developed on-balance sheet land position remains an important advantage, supporting higher profitability and providing operational flexibility regardless of housing market conditions. Our adjusted EBITDA for the quarter was $59 million or 11.4 percent of total revenue, reflecting prudent cost discipline, sound decision-making, and a sustained focus on the fundamentals. Demand for new homes during the second quarter was mixed, but still proved more resilient than many would have expected. We ended the quarter with 1,298 homes in backlog, up 61% compared to the prior year. The increase reflects both continued interest in home ownership and a longer buying process as customers navigate affordability challenges and financing qualification requirements.

In addition to delivering growth and solid profitability, we continue to strengthen our balance sheet. During the quarter, we paid down approximately $130 million on our credit facility, reducing our leverage ratio by 220 basis points to 42.6%. This progress was driven by disciplined capital allocation, thoughtful management of our development investments, strategic balance sheet initiatives, and continued success monetizing non-core and aged inventory, positioning us to capitalize on opportunities as market conditions improve. As we look ahead, we believe our strong balance sheet, liquidity, and operating platform position us well to evaluate opportunities in an increasingly active M&A environment. Our focus continues to be on smaller strategic acquisitions that can enhance our existing platform and strengthen our position in attractive markets. Consistent with our approach to capital allocation, we remain focused on opportunities that are strategically aligned, culturally compatible, financially accretive, and capable of creating long-term shareholder value. Last week, members of our board had the opportunity to visit communities within our Charlotte operation and see firsthand the exceptional work being done by the team.

Charlotte continues to be one of our top performing markets, driven by the team's relentless focus on execution, customer service, and operational excellence. impact on our overall success has been significant and want to congratulate and thank everyone in the Carolinas for their hospitality and continued commitment to delivering best-in-class results. Finally, on July 9th, LGI Homes common stock was listed and began trading on NASDAQ Texas. LGI Homes was founded in Texas, we're headquartered here in the Woodlands, and many of the families who have helped become homeowners call this state home. We're pleased to be one of the early companies on this new exchange, and believe it's a good reflection of our ongoing commitment to our home state. Now I'll invite Charles to provide additional details on our financial results.

Thank you, Eric. Good afternoon. Total revenue in the second quarter was $516 million, including $501.5 million of home building revenue generated from 1,365 new home closings. and $14.5 million of revenue from the sale of land and lots and income from leasing operations. Of the 1,365 new home closings delivered during the quarter, 295, or 21.6%, were through our wholesale channel. compared to 17.9% during the same period last year. Our home building gross margin of 19.8% and adjusted home building gross margin of 23.2% each exceeded the midpoint of the increased guidance range provided on our last call. Adjusted home building gross margin excluded $16.5 million of capitalized interest and $544,000 related to purchase accounting. Combined selling general and administrative expenses totaled $72.7 million, or 14.1% of total revenue, an improvement of 40 basis points year-over-year. Selling expenses were $44.1 million, or 8.6% of total revenue, compared to 8.5% in the same period last year. The increase was primarily due to higher overall spending to drive leads to our communities.

General and administrative expenses were $28.6 million, or 5.5% of total revenue, compared to 6% in the same period last year, reflecting higher revenues and our continued focus on controlling costs, improving efficiency, and maintaining a disciplined operating structure. Other income was $7.6 million driven primarily by the sale of 75 currently or previously leased homes. Adjusted EBITDA totaled $58.7 million, representing 11.4% of total revenue. Pre-tax net income was $36.6 million, or 7.1% of total revenue. And we generated net income of $27 million for the quarter, or $1.16 per basic and diluted share. Net orders in the second quarter were 1,039 homes, a decrease of 4.8% from 1,091 homes during the same period last year, reflecting continued affordability pressures, higher mortgage rates, and and elevated energy costs arising from the conflict in the Middle East. Our cancellation rate in the second quarter was 49.4% compared to 32.7% in the same period last year, by a wider pool of buyers needing more time to get across the finish line.

We ended the quarter with 1,298 homes in backlog valued at $525.5 million, representing increases of 60.6% and 63% respectively. Turning to our land position. As of June 30th, we owned and controlled 57,406 lots, a decrease of 11.4% year-over-year and 2.7% sequentially. marked our sixth consecutive quarter of reducing our loss position while focusing capital on markets where demand and returns support the additional investment. Of our total lots 50,522 or 88%. We're owned and 6884 lots or 12% or control. Of our own blocks 33,775. We're raw land or land under development. 19% of which were in active development and 81% were in engineering or undeveloped land. Although early stage lots represents two-thirds of our own lot count, they require only modest investment per lot. In contrast, 26% of our $3.5 billion real estate inventory is invested in the 7% of lots that are homes in progress or completed, positioning us for term revenue conversion of the remaining 16,747 owned lots 12,990 were finished vacant lots and 1858 or completed homes During the quarter, we started 1,560 homes and ended June with 1,899 homes under construction.

I'll now turn the call over to Josh for discussion of our capital position. Thank you, Charles.

We ended the quarter with just under $1.6 billion of debt outstanding, including $449 million drawn on our revolver, resulting in a debt-to-capital ratio of 42.6% and a net debt-to-capital ratio of 41.6%, decreases of 220 and 240 basis points, respectively. Total debt declined by approximately $129 million from the prior quarter and approximately $160 million year-over-year, representing strong progress on our deleveraging objectives. These efforts are intended to enhance flexibility and position us to act opportunistically as attractive opportunities emerge. We ended the quarter with $468 million in liquidity, including $61 million of cash on hand, $406.9 million available to borrow under our credit facility. As of June 30th, our stockholders' equity was over $2.1 billion, and our book value per share was $91.73. At this point, I'll turn the call back over to Eric. Thanks.

Thanks Josh. We're pleased with our performance during the quarter and remain confident in our ability to continue navigating the current market successfully. Our focus remains on affordability, inventory management, capital allocation, and helping more families achieve the dream of homeownership as we move through the second half of the year. Customers remain highly payment sensitive, particularly in an environment where mortgage rates continue to rise. However, our backlog remains strong and buyers continue to inquire about home ownership and engage with our sales teams. After a quieter first half, we are seeing more of our wholesale partners re-enter the market in pursuit of growth opportunities. Demand for affordable homeownership continues to support our business and we are right on track to achieve our 2026 objectives and continue executing against our long-term growth strategy. Pending verification of the funding, we expect to announce that we closed 425 homes in July, an increase of 11.5% over last year, bringing our year-to-date closings to 2,781.

As a result, we are well positioned to achieve the full-year guidance metrics we provided on our last call, annual closings between 4,600 and 5,400 homes in 150 to 160 active communities by year-end. Our ability to maintain price year-to-date and current visibility into our backlog, we are raising the guidance range for our average selling price by $5,000 at both the low and high end of our prior range, resulting in full-year ASP range between $360,000 and $370,000. We continue to expect SG&A as a percentage of revenue between 15 and 16%. Given our margin outperformance and visibility into the strong margins in our backlog, we are raising full-year home building gross margin and adjusted home building gross margin by 50 basis points at both the low and high end of our prior ranges. We now expect home building gross margin will range between 19 and 21 percent, and adjusted home building gross margin between 22 and a half and 24 and a half percent. This is our second consecutive quarter of raising gross margin guidance. Our teams continue to execute at a high level, delivering strong results across the business.

We are pleased with our results to date and remain confident in our ability to achieve all of our full-year expectations.

We'll now open the call for questions. Our first question will be coming from the line of Trevor Allison of Wolf Research. Your line is open.

Good afternoon. Thank you for taking my questions. Eric, I wanted to follow up on the raise the gross margin guidance for second quarter in a row. That is despite mortgage rates moving higher through the quarter. So can you talk about what's driving the better performance than you expected? Is it allowing more significant reaction from customers to the higher rates or what's going better than what you thought that's leading to the Higher gross margins to what you originally anticipated.

Yes, Trevor, thanks. Yes, I think starting with, you know, we do a lot of land development, so we got some land development profits in that gross margin. There's a mixed component to that as well. There's a conservative component, not knowing exactly where incentives are going to be at the beginning of the year, so our guidance was conservative. And as we work through our older inventory, the new homes that we're closing have a higher gross margin. That's been helpful and sequentially the team across the country has done a great job of getting rid of older inventory. Our house costs are down year over year, which is contributing to that as well. So it's really a combination of a lot of factors, but we're pleased with our progress.

Even though gross margins are still down year over year, we're still incentivizing our customers. We're still dealing with a higher rate environment, but really good progress.

Yes, thanks for that, Eric. And then second one's on the demand trends through the quarter. I think you called them mixed. Can you talk about kind of sequentially how that performed relative to normal seasonality given the move higher in rates? And then a similar comment or question on July. How has July trended so far relative to normal seasonality?.

seasonality. Thanks. Yes, we're definitely dealing with some normal seasonality in the summer months here in July. Definitely the higher rates. I think in general, the higher rates and the negative news cycle and the higher gas prices are always going to be a headwind to sales. We're seeing some of that in July. But also our July closing number that we'll report which is really focused on June and Q2 sales. happy with reporting approximately 425 closings. We'll also report an increase of another community, so we're going to report 152 active communities, and we'll report tomorrow night, and we believe that's the highest active community count in company history.

Thank you for all the color and good luck moving forward. Thanks, Trevor. Appreciate it.

Hello. And as a reminder, to ask a question, please press star 1-1 on your touchtone telephone and wait for your name to be announced. Our next question will come from the line of Alex Riggle of Texas Capital Securities. Your line is open.

Good morning gentlemen, nice quarter. Thank you. Thank you. Could you talk a little bit more about the new communities that came online during the quarter and even subsequently and how they may impact ASPs and gross margin and it seems like or it looks like quite a few of these might have come online at the later portion of the quarter, is that correct?.

Yes, that is correct, Eric. Or excuse me, Alex. This is Eric. Yes, we just opened up a new community. The ones we just added, California, we're having a lot of success in California. I know we added a few new communities in the western area. United States will influence ASP. We just added one, a new project in Dallas, just becoming active community. We've got a community that's off to a fast start in Seattle that's going to be really ramping up closings over the next six months that will influence ASB. So there's certainly a mixed component to our raising ASB guidance.

We've also seen a component of mix within the floor plans of the community, even though we are dealing with affordability challenges markets, a lot of customers that qualify today are not necessarily picking the smallest homes They want what they want, and if they qualify, and they sometimes pick the larger square footages in the community. So there's a mixed intra-community as well.

That sounds great. And then regarding the closings in July, which looks pretty good. How does that compare to what you might have expected a few months ago? Do you feel it's a little bit better in line or a little bit lighter? Yes.

I think in line to slightly better, Alex. I think we always track everything to our annual guidance of 4,600 to 5,400 homes. So I'd say it's right on track to continue on our pace to hit our margin guidance and closing guidance for the year.

That's great. And one last question. You referenced land looking to be a little bit more attractive. How should we think about how that improved pricing flows through your income statement. Sort of how far down the road would we anticipate to see that play out?.

Charles, I think most of what we're still seeing are land deals, although they're further along in the entitlement process. So our development months, so it would be into 2028. Most of these are communities that we're looking at that will affect our community count further out, so not as much in the near term because most of those projects are currently on balance sheet. We've developed those first initial sections, so what you're coming through, what's coming through in the short run are projects that we had purchased several years ago.

Very helpful. Thank you. You bet. Thank you. And our next question will be coming from the line of Jay McCandless of Citizens Bank. Jay, your line is open.

Hey, good afternoon everyone. Thanks for taking my questions. Great progress on getting the finished spec countdown. I guess, could we talk about the comment, I can't remember who made it, but about demand from wholesale getting better, especially now that the Road to Housing Act is finished. Does A, or is it turning into tangible contracts yet? But also, B, is this an opportunity for LGI to offload some of the older specs that you referenced earlier, Eric? Yes.

Yes and yes, Jay. I think it's not necessarily turning into orders yet, but for most of the year until the Road to Housing Act was finalized. There was just uncertainty, and what uncertainty leads to is just pencils down and not really a lot of engagement from our wholesale partners. And now that the Road to Housing Act is finalized, which was positive, we have seen the investors pick up their pencil, they're engaged, they're talking to our teams, not necessarily resultant. resulting in orders yet, but we are talking to them and it's very much a positive for our business not only to finish out the year, whether it's older inventory or also making agreements to look at contracts and delivering houses going into next year as well.

Got it. And then the next one I had... You said that you're seeing at the beginning of the prepared comments that you're seeing better opportunities for land deals, maybe a little more rational in terms of pricing. I think last quarter you guys talked about more finished lot deals that you were able to see. Is that what's happened again this quarter is that there's more finished lots of land? out there and stuff that y'all can turn a little bit quicker is that is that what happened this quarter.

Yes, Charles commented, they're most predominantly land still and we're comfortable developing land, but we are starting to see some finished lot opportunities that we can turn quicker. Even the land parcels we're seeing are smaller, they're further in the development cycle. The pricing is more reflective of, it's a challenging market right now for developers to capture development profit, especially if they've bought the project over the last few years. So the finished lot opportunities are very accretive. because you can buy finished lots or partially developed lots. There's no reason to develop them to end up at the same price, I guess is my point. The developer profit is challenging right now. So we are seeing those opportunities.

And the acquisitions teams are all doing a great job and letting everyone know that we are open for business and looking at growing our community count.

That's great. And then on the flip side of that, on some of the older land parcels that LGI is trying to sell, what type of investor interest or interest level have you seen with those type of sales?.

Yes, I think the opportunity for us is really on the finished lots. We're very comfortable with our older land parcels, the ones we bought where our basis is very strong. But I think just like us, the opportunity to sell lots is really the finished lot opportunities where we have a section that maybe is too large for the current absorption pace. and we can sell some finished lots to another builder that would be a great partner and reinvest those dollars in an additional community account somewhere else.

Okay, that's great. Thanks, Ken. Thanks, Jay. Thank you. At this time, I'm showing no further questions. I would now like to turn the call back to Eric for closing remarks.

Yes, thanks everyone for participating on today's call and your continued interest in LGI homes. Have a great day.

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

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Welcome to LGI Homes First Quarter 2026 Conference Call. Today's call is being recorded, and a replay will be available on the company's website at www.lgihomes.com. [Operator Instructions] At this time, I'll turn the call over to Joshua Fattor, Executive Vice President of Investor Relations and Capital Markets. Please go ahead.

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 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 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 period ended March 31, 2026, that will be filed with the SEC today. This filing will be accessible on LGI Homes and the SEC's website. I'm joined today 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.

Thanks, Josh. Good afternoon, and welcome to our earnings call. The first quarter played out largely as we expected, reflecting disciplined execution across the organization and steady demand for our homes. As the quarter progressed, sales activity improved across most of our markets, enabling continued backlog growth and providing a solid foundation as we have transitioned into the spring selling season.

During the quarter, we delivered a total of 916 homes. Of this total, 881 homes contributed directly to our revenue of $320 million. The remaining 35 closings were currently or previously leased homes, the gains from which were reflected in other income. Notably, our average selling price increased nearly 3% to approximately $363,000, demonstrating our ability to preserve pricing while continuing to support affordability through targeted price discounts and financing strategies. We ended the quarter with 142 active communities and averaged 2.2% closings per community per month. This was consistent with the pace achieved last year and in line with our expectations for the period.

During the first quarter, our top 5 markets on a closings per community basis were Charlotte with 4.6%, Las Vegas with 3.2%, Phoenix with 2.8% and Northern California and Seattle, each with 2.7% closings per community per month. Our gross margin before inventory-related charges of 20.2% and adjusted gross margin of 23.4% were both modestly above the high end of our full year outlook, highlighting the benefits of self-development, the durability of our operating model and the strategic choices we continue to make around pricing, incentives and inventory management.

Sales activity during the quarter was positive. Net orders were 1,221 homes, and our cancellation rate was 45.6%, driven by buyers who are ultimately unable to qualify for financing. Our backlog at quarter end was 1,699 homes, which represents a 63% increase year-over-year, a 22% increase sequentially and marks the highest number of units in backlog since the first quarter of 2022.

Before turning the call over to Charles, I want to emphasize our confidence in the long-term fundamentals of the housing market. The persistent undersupply of attainable housing, coupled with favorable demographic trends continues to support a long runway of demand for homeownership. LGI Homes' 100% spec entry-level focused business model centered on providing an affordable alternative to renting is purpose-built for this backdrop.

Underpinning that model is a strong low-cost land pipeline, which is nearly 100% on balance sheet, providing investors full transparency into our capital structure, driving margin durability by capturing the developer's economic value and minimizing reliance on external partners whose priorities may not align with the long-term value creation we're focused on. These advantages underpin our confidence as we focus on execution today while investing to drive durable long-term growth for many years to come.

With that, I'll invite Charles to provide additional details on our financial results.

Thank you, Eric, and good afternoon. Revenue in the first quarter was $319.7 million based on 881 homes closed at an average sales price of $362,924, up 2.9% year-over-year, primarily driven by geographic mix and a lower volume of wholesale closings. The 9% year-over-year decrease in revenue was driven by an 11.5% decline in closings, partially offset by a higher ASP.

Of our total closings, 111 were through our wholesale channel, representing 12.6% of total closings compared to 179 or 18% during the same period last year. Our first quarter gross margin was 18.7%, in line with the guidance provided on our last call. Gross margin, excluding impairment-related charges, was 20.2% compared to 21% in the same period last year. The year-over-year decline was primarily attributable to financing incentives and discounts on older inventory, partially offset by the structural margin benefit of our self-developed lot positions and our disciplined approach to pricing.

Adjusted gross margin was 23.4%, up 110 basis points sequentially, in line with our result last year and above the guidance we provided on our last call. Adjusted gross margin excluded $10 million of capitalized interest and $389,000 related to purchase accounting. Combined selling, general and administrative expenses totaled $60.5 million or 18.9% of revenue, an improvement of 200 basis points year-over-year. Selling expenses were $32.7 million or 10.2% of revenue compared to 12% in the same period last year. The decrease was primarily due to overall cost efficiencies in advertising spend.

General and administrative expenses were $27.9 million or 8.7% of revenue compared to 8.9% in the same period last year. Other income was $4.9 million, driven primarily by the sale of 35 currently or previously leased homes and gains coming from the sale of finished lots and commercial land. Adjusted EBITDA increased 30% to $24.4 million, representing 7.6% of revenue compared to 5.3% in the first quarter of last year.

Pretax net income was $4.3 million or 1.4% of revenue. The effective tax rate in the first quarter was 50%, above our outlook and reflects the timing impact of share-based compensation expenses that vested during the quarter. This impact is isolated to the first quarter, and we continue to expect our full year effective tax rate to be approximately 26.5%, in line with our previously issued guidance. First quarter net income was $2.2 million or $0.09 per basic and diluted share. Excluding impairment-related charges and associated tax impacts, net income was $5.6 million or $0.24 per basic and diluted share.

Turning to our land position. At March 31, we owned and controlled 59,028 lots, a decrease of 12.9% year-over-year and 3% sequentially. The decrease reflects our continued strategy of aligning land investment with current sales trends, acquiring lots in markets where demand supports it and moderating investment where inventory rebalancing is still underway.

Of our total lots, 51,193 or 86.7% were owned and 7,835 lots or 13.3% were controlled. Of our owned lots, 34,168 were raw land or land under development, approximately 20% of which were in active development and 80% were in engineering or undeveloped land. Of the remaining 17,025 owned lots, 13,404 were finished vacant lots and 3,621 were completed homes or homes under construction. During the quarter, we started 1,137 homes to support the seasonal uplift in sales trends.

I'll now turn the call over to Josh for a discussion of our capital position.

Thanks, Charles. We ended the quarter with $1.7 billion of debt outstanding, including $579 million drawn on our revolver, resulting in a debt-to-cap ratio of 44.8% and a net debt-to-cap ratio of 44%. The slight increase sequentially reflects our typical first quarter cadence as we invest in vertical construction ahead of the spring selling season.

We remain focused on reducing leverage as we work through older inventory and selectively monetize lot positions with a long-term objective of maintaining a ratio of total debt to cap near the midpoint of our 35% to 45% target range.

Total liquidity at the end of the quarter was $355 million, including $61 million of cash on hand and $294 million available under our revolving credit facility. We ended the quarter with over $2.1 billion in equity, equating to a book value per share of $90.50.

At this point, I'll turn the call back over to Eric.

Thanks, Josh. We are encouraged by what we're experiencing in the market as we transition into the spring selling season. As always, affordability and consumer confidence remain important considerations for buyers, particularly in a volatile rate environment. However, despite an uptick in interest rates late in the quarter, driven by geopolitical uncertainty, recent trends have remained healthy across most of our markets, suggesting many buyers are looking beyond short-term rate movements and focusing on value and the impact of the tools we're using to support affordability.

Buyers continue to inquire about homeownership and engage with our sales teams, and we are right on track to achieve the full year guidance metrics we provided on our last call, including annual closings between 4,600 and 5,400 homes, 150 to 160 active communities by year-end, an average selling price between $355,000 and $365,000 and SG&A as a percentage of revenue between 15% and 16%.

However, based on first quarter margins exceeding the range of our previous guidance and our visibility into our growing backlog, we are raising our full year gross margin to a range between 18.5% and 20.5% and adjusted gross margin between 22% and 24%. We believe we are executing well on the elements of our business that we can control, and we're positive about our ability to achieve our full year expectations.

Finally, I want to thank our team members for their ongoing dedication to our company and our customers. Being recognized for the sixth consecutive year as a Top Workplaces USA employer based on direct employee feedback is a significant honor and underscores the strength of our culture as experienced by our people. Thank you for your hard work and for ensuring that LGI Homes is providing the best customer experience in the industry.

We'll now open the call for questions.

[Operator Instructions] Our first question comes from Trevor Allinson with Wolfe Research.

First one is on gross margin, better than you guys were anticipating. You're raising your full year guidance as well. So that's encouraging, heading in the right direction. You talked about some strategic decisions around pricing and incentives. Can you just talk about what drove the better gross margin than what you were anticipating and what's driving your improved outlook for the year?

Yes, Trevor, thanks. This is Eric. I can start. I think the driver of gross margin, a couple of different things. One is we're seeing cost relief consistently throughout the quarter. The team is doing a great job of reducing our older inventory, so our newer inventory that's closing in the quarter. We were able to push pricing in a number of select communities across the country in the quarter. And also geographic mix always plays a part in gross margin as well. But because of the success in the first quarter, we thought it was prudent to raise gross margin for the year and are comfortable with that new range.

Okay. And then second is on demand trends through the quarter. It sounds like those were still relatively healthy. Did you see any impact in March as rates went up and you had the Iran conflict really start to take off? And then how has demand trended so far in April, perhaps relative to seasonality? And I'm not sure if I heard an April closings number as well. So any color so far on how April is shaping up as well?

Yes, sure. This is Eric again. I can start with that. So January and February were tougher closing March -- tougher closing months. March recovered based on the strength of February sales. And then that strength continued into March. We anticipate closing between 400 and 450 in April. It's still a little early. We're waiting for all of our final underwriting and mortgage commitments to get everything scheduled over the next couple of days here, but should be similar to March, similar to last year and somewhere in that 400 to 450 range for the month of April.

And I would say sales trends in April have been similar to March. There does not seem to be an impact because of war or higher rates. There's a little bit of seasonality built in, but we continue to spend money on marketing. We're continuing to see demand. Our teams continue to do a great job with that customer experience, working with them on their -- on affordability, working with them on down payment, paying off debt, whatever is needed to get them into the house. It's still a challenging time, but our teams are doing a great job dealing with those challenges of affordability and really working hard and producing results, I think, relative to the last couple of years are more positive.

Our next question comes from Michael Rehaut with JPMorgan.

Just also, obviously, going to be a lot of focus on the gross margin. So just to kind of revisit that, if I may. Eric, I think you cited cost relief, some pricing power and some mix. I just wanted to clarify, are those factors all kind of what played out to the upside relative to your original expectations in the -- when you provided guidance for the quarter? Or was there one particular factor that was more kind of drove the upside versus others?

No, I think it's all played a factor, Michael. And also the way we usually focus on guidance, we want to be conservative with our guidance. We weren't sure going into the year where gross margin was going to be exactly. So it's probably a conservative guide to start with, which we hope it's still conservative, but comfortable with the number for now. And then also a lot of on our gross margin, and we've been talking about the strength of our balance sheet, the value of our land.

LGI does a lot of self-development across the United States. So our gross margin should be higher than our peer group. We have to make sure we're capturing that developer profit inside of that gross margin as well as providing incentives to our customers to keep up with the competition. And we're still leaning into incentives, but increasing gross margin at the same time.

Okay. No, I appreciate that. And then I guess, also as we kind of think about the rest of the year for this metric, I believe you took up the adjusted gross margin outlook to a range of 22% to 24%. So in the first quarter, excluding purchase accounting, you were closer to the high end of that range, 23.4%. So how should we think about the second quarter coming up? And are there any factors that might kind of push you more towards the middle of the range, which would imply maybe the rest of the year on average being slightly below the first quarter?

Yes. Obviously, it's going to depend on -- we're still selling a lot of houses for the second quarter. It's going to depend on mix. It's going to depend on other factors, on pricing. But generally, we expect the second quarter adjusted gross margin to be similar to first, which is why it's right in the middle or just above the mid part of our range on our annual guidance.

Okay. Great. And one more, if I could. The cancellation rate being somewhat elevated the last couple of quarters. I'm just curious on what impact that might have on the operations. Certainly, this quarter, you were able to achieve a solid gross margin above guidance. So that's certainly a positive. But anything we should think about in terms of maybe any impact potentially negative or not of the 40% plus can rate that we've seen for a couple of quarters now?

Yes. I think the emphasis should be on our closing guide and the closing guide remains same. Our backlog is the highest since 2022, which we're excited about. And then from this point forward, it's really just managing the pipeline. Because of the challenging affordability situations and the challenging absorption rate, we have been working with customers. We've had a lot more flexibility of keeping the customers on the houses longer as they're saving up for down payment or working on paying off some debt, working on their credit scores. So we think that's been a positive strategy and a great customer experience as well as benefiting LGI.

As that backlog has grown, that may not be a tool that's needed. We'll look at that and analyze that community by community across the United States. We need to continue to work with those customers, continue to follow up. Our team of 400-plus salespeople across the United States, that's one of the benefits of LGI and our strength is we have the team in place to keep in contact with these customers because we are still dealing with an affordability challenged market, but we believe we're up for that challenge. The team is doing a great job. The leadership is doing a great job. And we anticipate cancellation rate remaining elevated for the last couple of years based on historicals, but we think that's positive and necessary for this point in the cycle.

Our next question comes from Alex Rygiel with Texas Capital Securities.

Backlog has increased sequentially. Has the time to close on this also increased? And/or do you see any evidence that time to close could be improving?

I'm going to say, generally, yes, Alex, we don't have the information in front of us, but time to close with customers saving for down payment as an example, is going to be elevated. And then the other thing that's happening in our business, which is positive, is sales relative to the amount of houses we had under construction is increasing. So we're selling more customers further out and customers that are going on houses that are under construction are going on houses that are -- permits in hand or permits pending that we haven't started construction on. So that's going to lengthen the time under contract to close, but we also think that's positive as well.

And to kind of sort of follow up on that, are you still seeing an improvement in the move-up buyers?

Yes. I think the overall business is so focused on the entry-level buyer. It's tough to judge, but we are seeing success in our Terrata brand. It's about 10% of our community count nationwide, around 15 communities. But the overall market, like we said in our scripted remarks, is still a challenging market. We're dealing with some economic uncertainty, some consumer confidence. All those headwinds are still there. I think where our optimism comes from is relative to expectations, we feel really good where we are, and we feel really good with our guidance for the year.

Our next question comes from Jay McCanless with Citizens Bank.

So the first question I had, really good gains in the Northwest average sales price up 7%. The West was up 5%. Was this more of a one-off thing? Or is this representative of what you have sitting in backlog right now and maybe help you guys get to the high end of that ASP guide for the year?

Yes. I think it's community by community specific, Jay. We've opened up some new communities. And I think the whole industry is going to be facing this as new communities come online, our lot cost is going to be higher. That's directly going to have an impact on ASP. So there is going to be a geographical mix component in our average ASP for the year. Certainly, the West has the highest average sales price. So a percentage, how the West compares to the rest of the company for the year will certainly dictate where we are in the ASP range or even exceeding it.

Do -- I guess that's kind of my next question then. If you think about the price cost right now, it sounds like you guys are seeing a little lower direct cost, but what are you seeing for land and especially with lumber prices starting to move up, how are you feeling about that for the balance of the year?

Yes. I haven't seen a lot of land development cost increases. And house cost increases, with oil where it is right now, we don't expect our house costs to go down. We don't really forecast costs going down over the next few quarters or a year or 3 to 5 years from now. We tell all of our employees, we believe house prices are going up because every component of building a house and developing land is likely to be higher over the next few quarters and next few years. So that's going to continually drive our ASP higher. Do you got anything to add to that, Charles?

Yes. The other thing I would add, Jay, is we have 13,000 finished vacant lots. So the development costs that we're seeing are really going to affect most of those communities will be 12 to 18 months out. So we -- another reason why we feel very strongly about our balance sheet and our land in inventory because those costs are generally pretty locked already as those sections have been developed. We run about just above 20% of our ASP and finished lot costs and feel pretty confident in that number going forward and maybe some potential upside as we get into the later part of the year and next year.

Just 2 more for me. Eric, in your prepared comments, you talked about how the age of some of the specs you're selling now are younger. Do you guys have any type of quantification around what the average age of your homes in the field are now maybe versus where they were a year ago?

I don't have anything quantifiable. Charles, do you have anything to add?

I think what I would say is we're running about 2,100 completed units right now, Jay, and that's a little heavier than we typically would like on our overall inventory. So we have about 1,300 that we've started. We didn't start a lot in January or February, but that trend is increasing as we're kind of getting into the summer.

So I think as we continue to work on our older inventory, we would expect our completed inventory units to start to work their way down into more balance. Typically, we would want to see about half of our inventory in complete and about half of our inventory in progress. So still a little bit heavier weighted to complete, but that's been a focus that we've been working on, and we expect that to trend down.

Our next question comes from Alex Barron with Housing Research Center.

I just wanted to confirm your order ASP seems to have gone up in the quarter. I'm just getting that from looking at the ASP in the backlog relative to last quarter. I was just wondering what drove that? Do you guys have a big change in mix? Or were you just -- any other explanation there?

Yes. I think the backlog ASP is elevated primarily because of the results in the West. In the West, we tend to sell further out, not as much spec inventory on the ground. So that probably comes down a little bit in the future and consistent with our annual guidance for ASP.

Okay. Got it. And in terms of the wholesale business, do you guys have any sort of breakdown as far as what percentage of the orders came from that versus just regular sales?

Yes. I can start and Charles can add to it. The closings, the wholesale business was 12.6% of our closings in Q1. We may have to get back to you on the order number unless you have it, Charles.

Well, I would say the backlog at the end of the quarter is going to have about just over 400 units related to wholesale. So we had a fairly large transaction in the fourth quarter that we booked and not a lot of activity in the first quarter. So I would say the order activity in the first quarter was pretty limited from wholesale business, but we do have a decent backlog with the -- backlog over 400 is up 70% from last year first quarter. So we feel good about the units we have under contract going in. And then as the wholesale market kind of starts to evolve as the year goes on, we'll kind of be able to evaluate where the full year results are going to end up.

Okay. And do you guys have any guidance or suggestions how to think about the other income line item? I'm not sure how much visibility we have there.

Sure, Alex. It is pretty variable. This is Charles. I mean I think over the last few quarters, we've been around the $5 million number, and that's a combination of mix of selling lots and commercial land and also the results from our -- the profit from our previously leased homes. So there's a potential for that one to bounce around a little bit. But I think for modeling purposes, if you kind of look at what we've done over the last several quarters and extend that out, that's a reasonable guess at this point.

At this time, I'm showing no further questions. I'd like to turn the call back over to Eric Lipar for closing remarks.

Thanks, everyone, for participating on today's call, your interest in LGI Homes, and have a great day.

Thank you. This concludes LGI Homes First Quarter 2026 Conference Call. Have a great day.

Welcome to the LGI Homes Fourth Quarter 2025 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 Joshua Fattor, Executive Vice President 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 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 a 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 annual report on Form 10-K for the period ended December 31, 2025, that will be filed with the SEC. This filing will be accessible on the SEC's website and in the Investor Relations section of our website.

I'm joined today 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.

Thanks, Josh. Good afternoon, and thanks for joining us to discuss our fourth quarter and full year results. This marks our 50th earnings call. And on reflection, I'm proud to say that the same principles that guided us and drove our success over the years were once again on display in 2025.

Throughout the year, our team successfully navigated a dynamic and challenging market environment. Affordability remained the primary pressure point in rate volatility added uncertainty across the market. Even so, our teams executed with discipline, generating leads, managing inventory, supporting our customers and delivering homes with the exceptional service that sets LGI apart. That discipline is evident in our fourth quarter results.

During the quarter, we delivered 1,362 homes. Of this total, 1,301 homes contributed directly to our reported revenue of $474 million. The remaining 61 were currently or previously leased homes, the profits of which were reflected in other income. Notably, during December, we closed our 80,000 homes, another significant milestone that highlights our growing scale and longevity of our business model. Our margins continue to demonstrate resilience relative to industry expectations, supported by our approach to pricing, incentives and inventory management.

During the quarter, we delivered a gross margin before inventory related charges of over 19% and adjusted gross margin of over 22%. These results were below the guidance ranges provided primarily due to the outsized impact of buydowns and price discounts on older inventory. However, even with this targeted activity to rightsize our inventory, our margins continue to reflect the strength of our operating model and the deliberate choices we make to enhance affordability while supporting profitability. We ended the year with 144 active communities and averaged 3.1 closings per community per month in the fourth quarter, our highest pace of the year driven by solid execution and our strong finish in December.

During the fourth quarter, our top markets on a closings per community basis were Charlotte with 6, Northern California with 5.8, Las Vegas with 4.6 and Atlanta with 4.2 closings per community per month. For the full year, our top markets were Charlotte with 5.2, Atlanta with 4.4 and Las Vegas with 4 closings per community per month. Congratulations to the teams in these markets on their performance.

We continue to write contracts in a market where many buyers need additional time, save for a down payment, strengthen their credit or finalize the sale of an existing home. As a result, the time between contract and close remains extended, and we expect this trend to persist for the foreseeable future. As a result, our cancellation rate increased to 43.3% with affordability pressures and broader economic uncertainty, amplifying the typical factors that drive cancellations. Further, we expect this dynamic to continue for the foreseeable future.

It's important to remember that a gross sale simply reflects a buyer placing a deposit on a home, the start of the home purchasing process and some of those early commitments naturally don't progress through the qualification process. However, while some won't reach the finish line, writing those additional deals enables us to close an incremental number of qualified buyers.

During the quarter, our net orders increased 39% year-over-year. Our backlog grew 133% to 1,394 homes, and the value of our backlog exceeded $501 million, up 112% compared to the same period last year. Included in these results was an agreement with a wholesale buyer to acquire 480 homes that will deliver throughout 2026. Excluding that agreement, our backlog was still up 53% from the end of 2024. General lease and retail net orders were up slightly, admittedly compared to a softer comp last year. Nevertheless, we expect results in the first quarter to be similar to last year as we continue to monitor the pull-through on our backlog and the ongoing evolution and cancellation rates.

Stepping back, 2025 was a year defined by disciplined execution. We remained focused on what we can control: managing cost, offering competitive financing options, supporting our margins and delivering affordable move-in ready homes to first-time buyers. We continue to invest in people, land and operating platforms that support our long-term strategy even as we adapted to near-term market conditions.

Before turning the call over to Charles, I want to reiterate that our long-term outlook for the housing market remains positive. The supply-demand imbalance, favorable demographic trends and essential need for attainable homeownership, I'll reinforce the strength of our strategy. As we move into 2026, we do so with resilience, focus and a deep commitment navigating the market with the same determination that has guided us throughout our history.

With that, I'll invite Charles to provide additional details on our financial results.

Thanks, Eric. Revenue in the fourth quarter was $474 million, a 19.5% sequential increase, driven primarily by the elevated sales activity generated through our targeted sales initiatives in the back half of the year. Of the 1,301 homes we closed during the fourth quarter, 158 or 12.1% were through our wholesale business compared to 173 or 11.3% during the same period last year. The average selling price of fourth quarter closings was $364,000, down slightly compared to last year, primarily driven by geographic mix, a higher percentage of wholesale closings and financing incentives. Additionally, targeted discounts on selected aged inventory were reflected in roughly 1/3 of our closings.

Our fourth quarter gross margin, excluding inventory-related charges, was 19.2% compared to 22.9% in the same period last year. The year-over-year decline was primarily attributable to financing incentives, discounts on older inventory, a higher percentage of wholesale closings and higher borrowing costs. These dynamics were partially offset by the structural margin benefit of our self-developed lot positions. Adjusted gross margin was 22.3%, which excluded $14.4 million of capitalized interest and $609,000 related to purchase accounting.

During the quarter, we took an inventory impairment charge of $6.7 million related to 4 underperforming communities impacted by lower-than-modeled pace, financing incentives and price discounts on aged inventory. We regularly review our inventory positions and will continue to monitor conditions closely. However, at this time, nothing in our analysis points to future impairments meaningfully different from the amount recognized in the fourth quarter.

Combined selling, general and administrative expenses totaled $65.6 million or 13.8% of revenue, down 90 basis points year-over-year. Selling expenses were $42.5 million or 9% of revenue, similar to the same period last year. General and administrative expenses were $23.1 million, a decrease of $8.1 million or 26% from the prior year and were down 70 basis points as a percentage of revenue. The year-over-year improvement was driven primarily by compensation-related adjustments. Other income was $5.5 million, driven by the gain on sale of leased homes, finished lots and income from our ongoing leasing operations.

Pretax net income was $24 million or 5.1% of revenue. Our effective tax rate was 27.9%, above our outlook, reflecting the impact of higher state income tax rates and the impact of impairments. Fourth quarter net income was $17.3 million or $0.75 per basic and diluted share. Excluding impairment-related charges, net income was $22.4 million or $0.97 per basic and diluted share.

For the full year, we delivered a total of 4,788 homes, including 103 currently or previously leased homes. Of this total, 4,685 homes contributed to our full year reported revenue of $1.7 billion. During the year, we closed 737 homes through our wholesale business, representing 15.7% of total closings and generating over $230 million in revenue compared to 9.2% of closings or $164 million in revenue in 2024.

Our full year average selling price was $364,000, roughly in line with the prior year. Our full year gross margin, excluding inventory-related charges, was 21.1% and adjusted gross margin was 24%. Combined selling, general and administrative expenses totaled $273.8 million or 16.1% of revenue, a 150 basis point increase compared to 2024 and driven primarily by fewer closings and a higher average community count this year compared to last. During the year, we generated $18.7 million in other income driven by the sale of nearly 550 lots, 103 currently or previously leased homes and commercial property, along with income from our joint ventures. Pretax net income for the year was $98.5 million. Net income was $72.6 million, representing $3.13 per basic share and $3.12 per diluted share. Excluding impairment related charges, full year net income was $77.6 million or $3.35 per basic share and $3.34 per diluted share.

Turning to our lot position. Our on-balance sheet land portfolio remains a key strategic advantage. Self-development allows significantly more operational flexibility while supporting profitability in a challenging market. Across the lots we currently control, the average finished lot cost is approximately $70,000 and lot costs last year represented about 21% of our ASP, underscoring structural benefit of our land strategy.

At year-end, we owned and controlled 60,842 lots a decrease of 14.2% year-over-year and 2.8% sequentially. The decline reflects ongoing discipline in capital allocation and a continued focus on evaluating future land investment with the current pace of sales. Of our total lots, 51,890 or 85.3% were owned and 8,952 lots or 14.7% were control. Of our owned lots, 35,416 were raw land or land under development, of which approximately 22% were in active development and 36% were in engineering. Of the remaining 16,474 owned lots, 13,109 were vacant finished lots. And the remaining 3,365 were completed homes or homes under construction, down 9% compared to the third quarter and 16.8% compared to the same time last year.

I'll now turn the call over to Josh for a discussion of our capital position.

Thank you, Charles. We ended the year with $1.7 billion of debt outstanding, including $528 million drawn on our revolver. In the fourth quarter, we reduced our net debt-to-capital ratio 160 basis points to 43.2%. Throughout 2026, we expect to continue to work through older inventory, selectively monetize certain lot positions and use the proceeds to reduce debt as we make progress toward the midpoint of our 35%, 45% target leverage range.

Total liquidity at year-end was $335 million, including over $61 million of cash on hand and $274 million of revolver availability. With nearly $2.1 billion of equity at year-end, our balance sheet remains well positioned to navigate the current operating environment, support our long-term growth and continue executing our strategy in 2026.

At this point, I'll turn the call back to Eric.

To conclude, I'll share our outlook for 2026. Our guidance reflects our current view of demand trends, our elevated starting backlog and what we believe is attainable if market conditions remain generally consistent with our most recent experience. For the full year, we expect to close between 4,600 and 5,400 homes and to end the year with 150 to 160 active selling communities. We expect selling prices to be relatively stable as we balance affordability with margin discipline. Based on product and geographic mix, backlog composition and expected community openings, we are guiding to a full year average sales price between $355,000 and $365,000. To support affordability, we will continue to lean into incentives, including closing costs, interest rate buydowns, discounts to older inventory and selective price adjustments by community.

Based on our most recent results, we are guiding to a full year gross margin between 18% and 20% and adjusted gross margin between 21% and 23%. Finally, we expect SG&A to range between 15% and 16% and our full year tax rate to be approximately 26.5%.

In closing, I want to thank our team members for their continued dedication and the strong execution they delivered in 2025. We remain focused on operational excellence, maintaining profitability and positioning LGI Homes for sustainable long-term growth. I'm confident in the strength of our model, the experience of our team and believe we are well positioned to navigate the year ahead.

We'll now open the call for questions.

[Operator Instructions] And our first question will be coming from Michael Rehaut of JPMorgan.

I wanted to start off with the gross margin outlook and kind of a 2-parter on this one, if you don't mind. First, to line out -- lay out the drivers of the sequential decline in the fourth quarter. Obviously, I know you talked about kind of working through aged inventory and if it was purely through greater-than-expected incentives and discounts. And looking towards 2026, what could drive the upside to the 20% range as opposed to staying at the lower end? Just trying to understand the rationale behind the range and if there's anything that could push you towards the higher end?

Yes. Thanks, Michael. This is Eric. I can start. Yes, I think the sequential decline in Q4 is like we talked about in our prepared remarks is we leaned into incentives in Q4, had a really solid December, cleared out some aged inventory through buy-downs, forward commitments, aged inventory discounts, pricing adjustments, a lot of things that other builders are doing in the market is also influencing that to keep up with everyone, if you said, certainly, appraisals come into that as well. So keep it in line with market pricing and all of what our competitors are doing is really the sequential decline.

But our outlook for 26 on gross margin is just taking that gross margin in Q4 and expecting everything to be similar. We expect 2026 will be another year. We're leaning into incentives, discounts, mortgage buy-downs, we need to be -- take appraisals into consideration what our competitors are doing. So those factors, we thought it was prudent for our gross margin guidance for '26 to be similar to Q4 of 2025.

Okay. And then I guess, secondly, when you think about the closings outlook, it seems like you're looking for maybe a similar pace -- closings pace in '26 versus '25. I just wanted to make sure I have that right. And if there's a portion of closings that are expected from wholesale -- I'm sorry, from your wholesale business, I just wanted to kind of understand your level of confidence there and if the recent talk around limiting institutional buyers of single-family homes that -- if you feel like that is a risk to whatever portion of closings that you might expect would come from that channel? .

Yes, Mike, again, it's Eric. Really good question. On the institutional investor and wholesale, we expect wholesale closings to be 10% to 15% of our closings this year for LGI. We feel really good about the 10% because that's kind of orders are already created, and that's our backlog, and we feel confident that those will close this year. New orders, we'll see. New orders right now are somewhat on pause until we get more clarification on the policy.

I think for guidance for 2026 at closings, you're right on. We are expecting a similar closings per community guidance for 2026, that makes sense. Similar to our gross margin discussion, we think 2026 is going to be very similar to '25 as far as guidance goes.

And our next question will be calling from Paul Przybylski of Wolfe.

Going back to, I guess, the wholesale, the 480 orders you have now, how should we think about profitability on those, both gross margin and op margin. And will all those flow through the other income line?

This is Eric. I could start. From a profitability standpoint, you can expect those from an operating margin standpoint are similar to operating margin from the retail standpoint, as we've always said from a wholesale business standpoint, our gross margin is less when we sell to any wholesale operator, but operating margin is similar. And then for the overall year, the percentage of wholesale business could influence gross margin in either direction. Our guidance for this year on the wholesale business is 10% to 15% of our closings. Last year was 15.7%. So we're expecting it to be slightly down as a percentage of our closings this year. .

Paul, this is Charles. I'll just add. These units would be expected to come through the top line. So our wholesale business goes through home sales revenue is just the previously or currently leased units that run through other income, which we had 103 last year.

Okay. Okay. And then I guess on your community count growth expectations for '26, are those going to be pretty even throughout the year? And then how should we think about, I guess, new community openings relative to that net growth? And are you seeing higher absorptions on your new communities relative to some of your legacy projects? .

I would say not necessarily higher absorptions. I think the new communities will be spread out or more weighted to the back half. You can see our January community count was down. We are expecting to add a few in February. And then the rest of the year more -- I'd do more back half weighted, but we do plan on opening a number of communities. We feel confident in our 150 to 160 end of the year community count guidance.

[Operator Instructions] Our next question is coming from Alex Rygiel of Texas Capital Securities.

Again, our next question will be coming from Alex of Texas Capital Securities.

Can you provide some additional color on the older inventory and the land that may be sold in 2026?

Yes. I can start and Charles can add to it. I think the land is primarily finished lots that we've been selling. We have certainly in positions across the country. We have more finished lots on the ground that's needed for the current absorption pace, and that's really where the market is for other builders buying lots from us. And we're -- I described it as very opportunistic. If we see a price or have a bid on some finished lots, where we have excess inventory, we're engaging in that. And it's a good opportunity for us to drive some other income and pay down our debt. .

Yes, Alex, I'd just add on the older inventory. So we just have a number of communities scattered throughout the country that where we had starts that were outsized, if you will, from what the actual absorption pace was. So we're just taking a look at what we've got those priced at, how they age in our inventory and then just making great decisions as leads come in and evaluate whether we should move those or work through maybe any other issues that may be relevant to moving those inventory units. .

And then kind of question about cancellations. Obviously, that number has kind of been walking up a little bit here. Generally speaking, how long are these homes kind of off the market before they're canceled? Is that a few days? Or is it weeks or months? And then has the reason for canceling changed much over the last couple of quarters?

Yes, I can start on this one as well, Alex. It's a great question. Our cancellation rate is elevated. The reason for cancellation has not changed at all. The reason for cancellation is strictly the ability to get financing. What has happened is we're in a more challenging environment right now for closings and sales and affordability. So our customers are staying on the house longer. After a couple of weeks is really the time we measure cancellation rate as far as getting them time due to loan application. But in a lot of cases, after a couple of weeks, the customer needs more time, whether it's paying off debt, saving up for a down payment, potentially working on their credit score, and when we have enough inventory in slot communities, it's likely worth it to keep that customer engaged and keep them working on that down payment funds, if you will. Because there is a chance that they'll have that and be able to close in a timely manner. So we think that's the best strategy in this market.

So in more challenging markets. We're spending more time with customers. They're taking longer to get across the finish line. We think that's a right strategy, although it is going to lead to a higher cancellation rate net-net, we think it's accretive to our closings.

And our next question will be from Jay McCanless of Citizens Bank.

I did want to dig down on that a little more, Eric, because I don't remember, and apologies if I missed this, but when you guys talked about contingency issues with buyers selling their homes, I guess, has your -- where is your mix now of first time versus move-up buyers? And how has that changed over the last couple of years? .

Yes. I think it's growing. The amount of move-up buyers is growing, one, because of our Terrata brand that continues to expand and then also just the price point, the entry-level price point now at $360,000 plus is just an elevated price point. So the income needed for a customer to qualify or the household to qualify is elevated and the odds of that customer being in an ownership situation is higher than it used to be. Still predominantly first-time homebuyers, but certainly, it's elevated.

Okay. And can you just remind us what percentage of your communities are Terrata?

Let say 10% .

Yes, I would say 10% to 15%. Yes.

Okay. And then I guess my next one is, could you just talk about current conditions? I mean, it sounds like you're still pretty aggressive discounting at the entry level. Maybe are you seeing any relief there or the larger competitors still leaning in from that perspective?

Yes. I think all of us are leaning into incentives, Jay. We're still battling affordability. Rates have come down somewhat over the last couple of months, 10 years, down closer to 4.05% now as high as 4.25%. So that's helping the mortgage rate spreads that compressed affordability in general is rate, but also the sales price of the house, it's the insurance, it's property taxes. It's all the other bills, the consumers facing outside of their new mortgage payment as well, I think is weighing on affordability pressures for our consumer. So what we are doing as much as we can. I think that's probably the sentiment of the entire industry to help assist and work with our buyers as much as possible on the affordability and creating that first-time home buyer, which we think is a good win-win for everybody involved.

And then the other question I had, just on the year-over-year decline in G&A, I guess, Charles, could you maybe give us an idea of what run rate G&A is going to be for this year? Is it going to be similar to 4Q or a little higher than that? .

Yes. For the year, we came in just over $110 million total in G&A. So I would say the answer is very similar to what we're saying on most of the other categories is '26 is going to look a lot like '25, so somewhere in around that number for a full year. and then may bounce around quarter-to-quarter depending on how expenses come in.

And our next question is a follow-up from Michael Rehaut of JPMorgan. .

I just wanted to circle back to the question I had earlier around the gross margin range that you laid out for '26. And what do you think would be the drivers to get you towards that higher end of the range or even the midpoint of the range, let's start as a baseline, that's a more appropriate question. To hit like that 19%, would you need incentives to come down a little bit? Or would that be with incentives kind of staying where they are, but maybe other factors driving improvement like lower labor costs or better land cost basis?

Yes, it's a great question, Michael. And I think I would look at it as the midpoint, if you will, from our gross margin, is expecting similar to 2026 Q4 -- similar to '25, excuse me. So I think your example is correct. The higher gross margin will result from lower incentives our cost, whether it's in land development cost or impact fee costs or house construction cost, labor and materials, if costs come down, obviously, that would be helpful in gross margin.

The wholesale business, the greater percentage of wholesale business above last year would result in a factor of either up or down on gross margin. We don't hope we have less wholesale business, but that would certainly help the overall gross margin. So it's all those categories of improvements that would lead to a higher gross margin than modeled.

Our next question is a follow-up from Paul Przybylski of Wolfe.

Yes. Regarding your G&A, you mentioned comp reduction, was that more permanent change to your overhead? Or was that more bonus driven? And then the high end of your closing guide I think, is right around 3 absorptions. If you were to achieve that sales pace, do you let volumes continue to run? Or do you start taking some price? .

Yes, I can start on the G&A question. Certainly, the fourth quarter was more bonus-driven, but we think the annual run rate should be similar for the year.

Yes. And I think at 3 a month, we continue to lean into that pace and see if we can push that even higher once we get to the 3 a month pace.

And I would now like to turn the call back to Eric for closing remarks. .

Yes. Thanks, everyone, for participating and listening on today's call and your continued interest in LGI Homes. Have a great day.

And this concludes today's conference. Thank you for participating. You may now disconnect.

Welcome to the LGI Homes Third Quarter 2025 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 Joshua Fattor, Executive Vice President of Investor Relations and Capital Markets. [Technical Difficulty]

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 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 a 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 September 30, 2025, 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.

I'm joined today 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.

Thanks, Josh. Good afternoon, and welcome to our earnings call. During the quarter, our teams remained focused driving leads, managing inventory and supporting our customers by delivering exceptional customer service and providing a seamless road to homeownership. Thanks to our outstanding efforts, we delivered positive third quarter results that were in line with the guidance provided on our last call.

During the quarter, we closed 1,107 homes. Of this total, 1,065 homes contributed directly to our reported revenue of $397 million. The remaining 42 were currently or previously leased homes, the profits of which reflected in other income.

Gross margin came in at 21.5%, and adjusted gross margin was 24.5%, both in line with the guidance range we provided. We've been successful in maintaining the overall strength of our margins even while operating in the most challenging segment of the market. That's on purpose and it's worth spending a few moments discussing why.

First, we take a thoughtful approach to financing incentives. With higher mortgage rates driving affordability challenges, buydowns and other financing tools are among the most effective ways to tell buyers reach the closing table, and we continue to lean into offering the most competitive buydowns possible. However, going to extremes and buydowns just to move a few incremental homes is something we're working hard to avoid.

Second, we continue to price all of our homes competitively, and we use price adjustments selectively, focusing on aging inventory while maintaining or raising prices in high-performing communities.

Third, we prefer not to sacrifice margins to institutional land bankers. As a result, we don't have a pipeline of lot takedowns pressuring us to start homes prematurely, heavily discounting them to keep the system moving or to renegotiate takedown schedules which leads to higher future lot costs. Avoiding these situations gives us the freedom to be patient and make smart long-term decisions that will benefit our shareholders. Our best land banking partner has been and will continue to be the seller.

Finally, because we primarily self-develop our lots, our margins include the profit a developer would have earned. This adds several hundred basis points to our margins and sets our performance apart from other builders who rely on purchasing finished lots. It's also a key reason we have never taken an inventory impairment. In short, our margins reflect disciplined execution, not elevated pricing. We do everything possible to manage costs and deliver high-quality beautiful home at a price that enables as many first-time buyers as possible to achieve the dream of homeownership.

During the third quarter, our top market on a closing per community basis were Charlotte was 5.7%, Las Vegas was 4.7%, Raleigh was 4.2%, Greenville was 3.7% and Denver with 3.5% closings per community per month. Congratulations to the teams in these markets on their performance last quarter.

Another highlight of our results was a significant increase in net orders and backlog. As we noted on our last call, sales trends improved in the back half of June, continuing into July, as mortgage rates declined from their midyear highs. These trends continued into August and September, driven by continued relief in rates and sales initiatives connected to our year-end Make Your Move National Sales Event.

Because mortgage rates remain the key pressure point for entry-level buyers, we introduced exceptional financing options, including a forward rate buy-down commitment, which has a meaningful impact on improving affordability for many buyers. Additionally, we're offering price discounts of up to $50,000 on select older inventory.

Together, these initiatives jump-started sales activity, demonstrated by an 8% increase in net orders compared to the same period last year and a 44% increase compared to the second quarter. As a result, our backlog at quarter end was up 20% year-over-year and 62% sequentially.

We're encouraged by the momentum these initiatives have generated and view them as a positive step forward as we head into the fourth quarter.

Before I hand the call over to Charles, I'll note that our long-term view of the housing market remains solidly optimistic. The underlying demographic trends continue to support our strategy, while the widening supply gap makes the attainable housing options LGI provides more valuable than ever.

With that, I'll invite Charles to provide additional details on our financial results.

Thanks, Eric. Revenue in the third quarter totaled $396.6 million, down 39.2% compared to the prior year, driven by a 39.4% decline in closings. The average selling price of homes closed was $372,424, up slightly from last year, primarily driven by geographic mix and lower magnitude of incentives and was partially offset by a higher percentage of wholesale closings in the third quarter. The wholesale channel remains a compelling way to balance our home inventory. Our wholesale operation generated $54.5 million of revenue, resulting from 163 home closings or 15.3% of total closings compared to 9.1% of total closings in the same period last year.

Our gross margin was 21.5% compared to 25.1% in the same period last year, the decline was primarily driven by a particularly strong comp last year, along with higher lot costs and capitalized interest as a percentage of revenue and a higher mix of wholesale closings.

Adjusted gross margin was 24.5% compared to 27.2% in the same period last year. Adjusted gross margin excluded $11 million of capitalized interest charged to cost of sales and $1 million related to purchase accounting, together representing 300 basis points compared to 210 basis points last year. We expect capitalized interest to remain elevated due to higher borrowing costs and have reflected such in our fourth quarter guidance.

Combined selling, general and administrative expenses totaled $63.6 million or 16% of revenue, in line with our guidance. Selling expenses were $35.7 million or 9% of revenue, up slightly from 8.5% in the same period last year. General and administrative expenses were flat year-over-year at $28 million. As a percentage of revenue, G&A expenses were 7.1% compared to 4.3% in the same period last year. Both selling and general and administrative expenses were higher as a percentage of revenue due to lower volumes.

Other income in the quarter was $5.2 million, primarily resulting from the gain on sale of leased homes, finished lots, other land held for sale and LGI living lease income. Pretax net income was $26.7 million or 6.7% of revenue. Our effective tax rate was 26.2% compared to 24.3% in the same period last year.

And for the quarter, we generated net income of $19.7 million or $0.85 per basic and diluted share. Order metrics improved materially in the third quarter with net orders coming in at 1,570 homes, an increase of 8.1% over the same period last year and 43.9% sequentially. Our cancellation rate in the third quarter was 33.6%, similar to the prior quarter of this year.

Backlog at quarter end totaled 1,305 homes, up 19.9% year-over-year, and 61.5% sequentially. The value of our backlog at quarter end was $498.7 million. Of the homes under contract, 60 were tied to contracts with institutional buyers representing 4.6% of total backlog compared to 212 or 19.5% of backlog in the same period last year.

Currently, we're seeing continued interest from our wholesale partners and we're well positioned for increased engagement from institutional buyers seeking to acquire scaled portfolios of finished inventory. However, the ability to transact continues to depend on alignment around pricing expectations.

Turning to our land position. At September 30, our portfolio consisted of 62,564 owned and controlled lots, a decrease of 8.8% year-over-year and 3.4% sequentially. Of our total lots, 53,148 or 84.9% were owned and 9,416 lots or 15.1% were controlled. Of our owned lots, 36,316 were raw land and land under development, 25% of which were in active development that we expect to deliver over the next few years. The remaining 16,832 owned lots were finished. Of those, 13,136 were vacant and 3,696 were related to completed homes or homes under construction.

We had 895 homes under construction at quarter end, down 40.8% sequentially and 54.7% year-over-year as we continue to focus on rebalancing inventory in select markets to meet current sales trends. The value of our portfolio of owned lots continues to be a competitive advantage for LGI Homes, with an average finished lot cost of approximately $70,000 and lot costs representing just over 20% of our ASP in the third quarter, our land position provides a meaningful cost advantage that supports margin stability even in a volatile market. This low basis enables us to offer competitive pricing to buyers while preserving profitability and it reflects years of disciplined land acquisition and development.

During the quarter, we started 725 homes. We expect to continue to balance starts in the coming quarters primarily focusing on new and high-performing communities while slowing or pausing starts in communities where there is unsold existing inventory.

I'll now turn the call over to Josh for a discussion of our capital position.

Thanks, Charles. We ended the quarter with $1.75 billion of debt outstanding, including $623.6 million drawn on our revolver. We remain focused on reducing leverage, ending the quarter with a debt-to-capital ratio of 45.7% and a net debt-to-capital ratio of 44.8%.

As inventory levels decreased and development spend moderates, leverage will continue moving toward the midpoint of our targeted range of 35% to 45%. Total liquidity at the end of the quarter was $429.9 million, including $62 million of cash and $367.9 million available under our credit facility. Our liquidity was up by over $107 million compared to the prior quarter, over $54 million compared to the same period last year.

As of September 30, our stockholders' equity was $2.1 billion, and our book value per share was $90.10.

With that, I'll turn the call back to Eric.

Thanks, Josh. Rates are down and sales were up. This recent increase in the pace of sales is an encouraging sign and our October closings demonstrate that the fourth quarter is off to a strong start. Tomorrow, we plan to issue a press release announcing that we close between 390 and 400 homes in October, pending verification of funding. This is our best month since June and reflects early signs of momentum coming from our sales initiatives.

Community count at the end of October was 141 communities. We're continuing to write contracts in a market where many of our buyers need additional time to stay for a down payment, make modest improvements in their credit or sell in the existing home. This dynamic results in longer times between contract and close. Based on our current backlog, recent pull-through trends, October closings and current sales trends, we currently expect to close between 1,300 and 1,500 homes in the fourth quarter.

At the midpoint of this range, that would represent a 26% increase in closings compared to the third quarter. We remain focused on affordability and meeting buyers at a monthly payment where they are able and willing to transact. We expect an average sales price in the fourth quarter to range between $365,000 and $375,000. Community count at year-end is expected to be approximately 145.

Looking ahead, we expect community count at the end of 2026 to increase by 10% to 15%, reflecting continued investment in growing community count in our existing markets.

Fourth quarter gross margin is expected to range between 21% and 22% and adjusted gross margin between 24% and 25%, similar to the results we delivered in the third quarter.

Finally, SG&A expenses are expected to fall between 15% and 16%, and our tax rate is expected to be approximately 26%. We're pleased with our third quarter results and proud of the hard work our teams have put in to build up the backlog and position us for success in the quarters ahead. Their efforts drive our results and lay the groundwork for future opportunities, and I want to thank them for their continued focus and dedication to our company and to our customers.

We'll now open the call for questions.

[Operator Instructions] And our first question will be coming from Trevor Allinson of Wolfe Research.

First question is on the acceleration in orders of more than 40% sequentially. So clearly much better than normal seasonal trends. You talked about the benefit of lower rates, but since you also talked about some company-specific initiatives. Can you talk about which of those do you think was the biggest driver of the acceleration? And then should we view this as a strategy shift to lean into more volume? Or were some of the actions or a reflection of a desire to move some of the aged inventory that you guys had?

Yes. Thanks, Trevor. Great question. This is Eric. I want to look at it as a strategy shift to start with. I think what we've been talking to investors about and talking throughout the call, we're in the affordable housing business focused on an entry-level buyer. And we talked about rates are very important in that affordable monthly payment. And rates, the headline rates as the lowest has been in the last 12 to 18 months is that 10-year pop below 4%. And as rates went down, our sales went up, not a surprise to us, just offering a more affordable monthly payment.

There are things that's happened when rates have come down, where our incentives and the value that we're providing, not necessarily spending more money, but being able to offer a 3.99% promotional rates is something we never offered before, and that's new for the quarter. We continue to lean into advertising dollars when appropriate. And this quarter, we were able to increase our advertising, drive more leads because it was working to drive those payments. And also the team in the field is doing a great job. We're hiring more salespeople. The field is taking more on more responsibility and training our new sales reps and doing a great job with that. So all those in combination is really more, I think, market-driven and affordability driven, not a shift in strategy.

Okay. That was really helpful. And then second is on your views on your own land position and you had some commentary about the benefits of your own land position, but appreciating you guys -- your orders did jump here. It does seem overall like the market still remains pretty slow for most of the industry. You guys still control give or take 10 years of land. So is there a desire to more significantly work down your land positions here? And if you have already done -- begun doing this to some degree, what's been the appetite from other builders for additional land?

Yes. Trevor, this is Charles. I can take that one first. So we're constantly looking at our land supply in terms of what our current absorptions are, timing our development. We've got 13,000 finished vacant developed lots, which is a little heavier than we typically would like to have, but given the fact that we started development on a number of these communities beginning back in 2021, 2022. So we have a number of communities that have been either in entitlements or active development for several years, and they're just now coming to fruition and getting online for sales.

So we feel very confident in our basis in those finished lots. So of our 13,000 finished lots, we have an average lot cost basis in the 70s, which we think is a tremendous value to help us maintain stability in margins, gives us a cost advantage when we're thinking about our land inventory and when to bring it on.

And then the processes and what we're working with is managing our future development spend. So our development spend is sequentially coming down. We had about 9,000 lots that were in active development that's going to come into the operation over the next couple of years. So I think as we continue to focus on absorptions, work through the vacant developed land, we think eventually we are going to be in a position where the land inventory has been rightsized and in line with what we would expect.

As far as availability of land and what we're offering, we do have some communities where we have excess finished -- vacant developed lots in terms of where we're thinking about we may have another community that we can adjust and put in behind it. So we're actively working on making good decisions on monetizing those where appropriate. Didn't have a lot of activity close in this quarter, but we just continue to evaluate that and make good decisions, whether to monetize those finished lots or whether to put them in the queue for future home construction.

And our next question will be coming from Kenneth Zener of Seaport.

So the commentary around 10% to 15% community count growth, 2 aspects. First, given your selling and training process, which is unique to you guys. Can you talk about how much of that, I guess, the G&A is in your fourth quarter guidance as we think about modeling that community count growth? And then is that community count growth, could you give us like a first half, second half lift? Or is it steady?

Yes, Ken. Yes. No, good question, Ken. This is Eric. I can talk about the community counts and then Charles can talk about the G&A part of that. But community count, I think is going to be spread equally through 2026. One of the notes I made is the state that will be primarily driving the increase in community count are Florida, Texas and California, but they'll be spread equally through 2026. They're all bought, they're in process, and we're confident with that number.

Yes, Ken, as far as SG&A goes, I'll start with G&A. I mean, we've been averaging around $30 million in quarterly G&A expense going all the way back to the beginning of 2024. So we feel pretty comfortable that we've pretty well established the overhead side from a G&A perspective.

And then as we bring in new community counts, we have the incremental dollars that we're going to have in terms of installing our information centers, hiring new sales staff, our office managers and our sales managers. So incrementally, those come in as a similar percentage of our expected revenue. So we don't think there's any front-ending, if you will, on this coming up next 12 months of community count. We're in the same geographic areas. So we're not expanding into any new markets.

So our leadership infrastructure is in place, so that should be limited additional costs related to that.

And then thinking about leverage, sticking with SG&A on units. Obviously, the first quarter was quite high this year, but we've been in that kind of 15 range, 2, 3, implied 4Q or -- a little higher. But can you comment about given where your SG&A is and the gross margin pressure, I think we can understand. But what do you think about SG&A given your community count? And how you see the business unfolding? Would it -- should it stay at the same rate or as we are ending this year or do you think you're going to get some lift in SG&A in general?

Yes, Ken, great question. Charles can add to it. But I think we look at SG&A, as it's really all about leverage and volume and absorptions. The G&A is predominantly fixed, the amount of marketing dollars fixed, but the total percentage of SG&A that was 16% last quarter, that is entirely dependent on the volume. And volume is not where we want it to be right now nor the past couple of years. It's improving in Q4, and we're excited about the orders in the backlog heading into Q4 and our guidance is for closings to be up 26%. And that's why we're guiding to a little bit less SG&A percentage in Q4 because of the leverage we're getting from closings.

Our next question will come from Alex Rygiel from Texas Capital Securities.

Can you talk a bit about the types of mortgages that your buyers are taking? And are they -- are you starting to see any use adjustable rate mortgages?

Yes. Thanks, Alex. This is Eric. I can take that. About just over 60% of our customers are taking FHA mortgages. And then when you combine that with VA and a very small percentage of USDA. I'd say government makes up 70% to 75% of our customers. And then conventional mortgages are another 10% to 15%. Adjustable rates, more customers are taking adjustable rates only because we are offering -- I mentioned it earlier, a 3.99% 5/1 ARM product, which is a fixed rate for 5 years at 3.99% which has been very positive in the market and then well received by our customers.

Super helpful. And then directionally speaking, as we look out into 2026, anything unique dynamic that could affect your average selling price? Or should we just model it based upon our own views as to how much price you might get next year?

Yes. I think my personal opinion is ASP is really going to have a lot of geographic component to it. And then it also, even on a community-by-community basis, the customers, the range of floor plans in available communities is usually $60,000 to $80,000 from the smallest floor plan to the largest floor plan. So that brings a layer of variability to it. We've been seeing our average square foot decrease in a more challenging affordability market.

Costs right now are slightly down, which is a little bit of a tailwind to margins, but a little bit lower ASP, all things considered. So we have a view that prices are going to continue to go up. Our average sales price was $160,000 in 2019 and $240,000 in 2019. So when you look at cost over the next 3 to 5 years, we believe they'll continue to go up and our ASP is going to continue to go up. Over the next year, we'll see how it plays out and probably use your judgment as well.

And our next question will be coming from Andrew Azzi of JPMorgan.

Just wanted to dig in a little bit on the community count growth for next year. That was definitely helpful guidance. I mean is that outlook inclusive of the view that demand kind of improved significantly from here? Or are you kind of dedicated to that growth, let's say, if current trends were to continue?

Yes. We're dedicated to that. The dollars are in the ground, and that would be at a community count that would be level with the current pace of absorption today.

Got it. And how would you compare your incentives currently, let's say, 6 months ago? And how are you thinking about kind of adjusting these alongside your strategic initiatives? I believe just to touch on that, I think it was just the rate buydown and the price discounts. I'm curious if there are any others that are in the pipeline, but I would love to hear your thoughts there.

Yes. I would describe it as similar. We have been leaning into incentives and focus on getting older inventory sold and closed. I think the overall market coming down is what's been the difference for us is our similar pain points to get a lower rate, you just get more value from that right now.

You can see in our gross margin guide being similar to -- in Q4 as Q3. We're not planning on incentivizing more current levels, current levels of gross margin, and then we'll see what 2026 holds. But I think incentive levels have been consistent and it's something that all of us in the industry have had to do for the last couple of years.

And I'm showing no further questions at this time. I would now like to turn the call back to Eric for closing remarks.

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

This concludes LGI Homes Third Quarter 2025 Conference Call. Have a great day.