LGI Homes Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 5, 2024

There are 10 speakers on the call.

Operator

Welcome to LGI Homes Third Quarter 20 24 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 remarks, there will be an opportunity to ask questions. At this time, I'll turn the call over to Joshua Fatter, Executive Vice President of Investor Relations and Capital Markets. You may begin.

Speaker 1

Thanks, Latanya, and good afternoon. Before we begin, 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.

Speaker 1

On this call, we'll discuss non GAAP financial measures, which are not intended to be considered in isolation or as substitutes for financial information presented in accordance with GAAP. Reconciliations of non GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the press release we issued this morning and in our quarterly report on Form 10 Q for the quarter ended September 30, 2024, that we expect to file with the SEC later today. This filing will be accessible on the SEC's website and in the Investor Relations section of our website. With me today are Eric Leeper, 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.

Speaker 2

Thanks, Josh. Good afternoon, and welcome to LGI Homes' earnings call. We're pleased to report another strong quarter driven by sustained demand for new homes across the country. Despite continued affordability challenges, we delivered outstanding financial results that reflect our focus on operational excellence and a commitment to maximize profitability on every home sold. As highlighted in our press release this morning, we delivered 1757 Homes in the 3rd quarter.

Speaker 2

Those closings combined with a record high ASP of more than $371,000 resulted in revenue of $652,000,000 an increase of 5.6% compared to last year and the highest revenue we've reported since the Q2 of 2022. For the last several years, we've made considerable progress in acquiring and developing attractive land positions across the country. Over the last year, you've seen many of these communities come online and we're extremely pleased to have ended the 3rd quarter with 138 communities, a noteworthy 30% increase over the prior year in our 6th consecutive quarter of community count expansion. Additionally, this was the largest absolute number of communities that we've added in any single year. Given when we acquired these communities, the capital invested in their development and the rising cost of replacement projects, their inherent value is substantial.

Speaker 2

In light of this, simply maximizing absorptions at the expense of margins and shortening the economic lifespan of these assets in the process does not yield the optimal returns we believe are achievable with a little patience and a disciplined approach to pricing and incentives. Therefore, we continue to focus on driving profitability on every home we sell even if the result is a pace that is below our historical average. This strategy reflects our commitment to maximizing long term profitability rather than focusing solely on immediate output. Further, it ensures we sustain our strong margins and generate value for shareholders over a longer period, balancing today's performance with tomorrow's opportunities. The success of this strategy played out again during the Q3 as we delivered an adjusted gross margin of 27.2%, up 20 basis points from the prior quarter and in line with our standout results from the same period last year.

Speaker 2

Additionally, we delivered a pre tax net income margin of 14.1%, up 130 basis points sequentially and significantly higher than our pre pandemic average of 12.8%. These and other achievements contributed to diluted earnings per share of $2.95 representing an increase of 4% year over year and 19% sequentially. During the quarter, we averaged 4.4 closings per community per month. Our top markets on a closings per community basis were Las Vegas with 9.9, Nashville with 9, Charlotte with 8.9, Dallas Fort Worth with 6.4 and Tampa also with 6.4 closings per community per month. Congratulations to these teams in these markets and their outstanding performance last quarter.

Speaker 2

One final highlight. We were proud to be recognized by Newsweek for the 2nd consecutive year as one of the world's most trustworthy companies. This award underscores our commitment to integrity and excellence with our customers, with our employees and with our investors. This recognition highlights the strength of our culture and the integrity of our employees who provide exceptional customer service as they help families across the country achieve the dream of homeownership. With that, I'll invite Charles to provide additional details on our financial results.

Speaker 3

Thanks, Eric. As mentioned earlier, our revenue in the 3rd quarter increased 5.6% year over year to $651,900,000 During the quarter, we closed 1757 homes, slightly higher on a year over year basis and 6.2% higher sequentially. We closed 160 homes through our wholesale business, representing 9.1% of our total closings compared to 7.9% last year. Those closings resulted in revenue of $49,500,000 an increase of 14.2% compared to last year. Our average sales price was a record $371,004 an increase of 5.2% over the same period last year and 1.9% sequentially.

Speaker 3

The increase was primarily driven by our decision to maintain profitability through price increases in the majority of our markets as well as a larger percentage of closings in markets with higher average price points, particularly our West and Northwest segments and was partially offset by a slightly higher percentage of wholesale closings. Our gross margin performance again reflected the balanced use of financing incentives and our ability to offset the financial impact of these tools, raising prices and taking a disciplined approach to the absolute level of rate buy downs. As a result, our 3rd quarter gross margin was 25.1% and our adjusted gross margin was 27.2%. As Eric mentioned, adjusted gross margin improved 20 basis points sequentially and was in line with the prior year results in our pre pandemic average. Adjusted gross margin excluded $13,000,000 of capitalized interest charged to cost of sales and $1,200,000 related to purchase accounting, together representing 2 10 basis points compared to 150 basis points last year.

Speaker 3

Combined selling, general and administrative expenses for the Q3 were $83,200,000 or 12.8 percent of revenue. Selling expenses were $55,200,000 or 8.5 percent of revenue compared with 8.1% in the same period last year. The increase was primarily related to higher advertising spend and to a lesser extent increased personnel costs related to new community openings. General and administrative expenses totaled $28,000,000 or 4.3 percent of revenue in line with the same period last year. Based on our performance to date, we now expect our full year SG and A expense as a percentage of revenue to range between 14% 14.5%.

Speaker 3

Pretax net income was $91,900,000 compared to $89,400,000 during the same period last year. Pretax net income as a percentage of revenue was 14.1% compared to 14.5% last year and 12.8% in the 2nd quarter. Our effective tax rate was 24.3% compared to 25.1% last year. Given our performance to date, we expect our full year tax rate will be approximately 24.5%. Overall, we generated net income of $69,600,000 or $2.96 per basic share and $2.95 per diluted share.

Speaker 3

Gross orders in the Q3 were 19.67 net orders for 14.52 and our cancellation rate was 26.2 percent, down slightly compared to last year. We ended September with 1088 homes in our backlog representing $417,800,000 At September 30, our land portfolio consisted of 68,564 owned and controlled lots. Of those lots, 54,029 or 78.8 percent were owned and 14,535 lots or 21.2% were controlled. Of our owned lots, 38,734 were classified as raw land and land under development with less than 30% of those lots in active development. Of the remaining 15,295 owned lots, 10,827 were finished vacant lots, 2,491 were completed homes and information centers.

Speaker 3

And during the quarter, we started 15 54 homes and had 19 77 homes in progress at quarter end. With that, I'll turn the call over to Josh for a discussion of our capital position.

Speaker 1

Thank you, Charles. We ended the quarter with $1,500,000,000 of debt outstanding, including $863,300,000 drawn on our revolver, resulting in a debt to capital ratio of 43.6 percent and net debt to capital ratio of 42.7%. Total liquidity was $375,400,000 including $60,900,000 of cash and $314,500,000 available to borrow on our credit facility. Our stockholders' equity at September 30 was $2,000,000,000 and our book value per share was $84.93 On October 9, we successfully amended our credit agreement. We're pleased to have several lenders who had previously planned to exit in April of next year choose to extend their capital commitments through April of 2028.

Speaker 1

Their decision to extend for the full duration

Speaker 4

of the

Speaker 1

facility offsets $125,000,000 of the $245,000,000 reduction in capacity that we previously expected in April. Therefore, under the terms of the new agreement, we will maintain our total capacity of $1,205,000,000 through April 2025 and have $1,085,000,000 of capacity through April of 2028. At this point, I'll turn the call back over to Eric.

Speaker 2

Thanks, Josh. We're pleased with the strong results we delivered in the Q3 and all of our accomplishments year to date. Turning to the current sales environment, I'll provide our thoughts on the Q4 to date and briefly discuss our updated guidance. Later today, we plan to report that we closed 5 26 homes in October, down slightly from the prior year. While lease and traffic in October were similar compared to September, we did experience a moderation of sales activity in October, a trend that appears to have been broadly experienced across the industry.

Speaker 2

Part of this is certainly related to our growth and the time it takes to get new hires trained and selling the LGI way as well as the impact of higher rates on affordability. We believe this is a near term dynamic and not a new normal. The fundamentals of the housing market are strong, supported by continued household formations, years of underproduction and limited supply of resale homes. Finally, the U. S.

Speaker 2

Economy continues to grow and remains productive, resulting in a resilient labor market and historically low unemployment. In short, the long term outlook is undeniably positive. Based on recent demand trends, our results to date and outlook for the next 2 months, we now expect to close between 6,106,400 homes this year at an average selling price between $360,000 $370,000 Margins in the 4th quarter are expected to be similar to slightly lower than what we delivered in the Q3 depending on geographic, product and retail versus wholesale mix, as well as the cost of incentives offered during an annual make or remove sales event. Based on those variables and our strong performance to date, we are raising our full year margin guidance by 50 basis points at both the low and the high ends and now expect to deliver gross margins between 24% 25% and adjusted gross margins between 26% 27%. As I highlighted at the beginning, community count continues to grow.

Speaker 2

Community count held steady at 138 in October and we have 12 new community openings planned for November. We continue to expect to end 2024 with approximately 150 active communities. Additionally, we expect another 10% to 20% growth in our community count in 2025. In conclusion, I want to thank our employees. Your hard work, dedication and execution on our strategy were essential to our success in the Q3.

Speaker 2

Thanks to your outstanding efforts, we are well positioned to continue delivering profitable results and creating long term value for our shareholders. We'll now open the call for questions.

Operator

Which will come from Trevor Allison of Wolfe Research. Your line is open, Trevor.

Speaker 5

Hey, good afternoon. Thank you for taking my questions. First one on gross margin performance, which was really impressive in the quarter. You raised your full year gross margin expectation in what most builders are describing as a challenging incentive environment. Can you talk about what came in better than what you're anticipating and sort of bridge us from your prior guide to your updated guide?

Speaker 2

Yes. Trevor, this is Eric. I can start. It's really just what we're seeing as far as updating the guidance with our results from Q3 and then anticipating what it's going to be in Q4 and the overall yearly guidance needs to be upgraded. And I think it goes back to that pace versus price initiative and probably some questions on that.

Speaker 2

And like other builders, we have to put a margin on top of our costs. And we are looking at incentives closely. We're looking at the value of our land underneath every house we build and certainly houses that are complete, we need to incentivize. But we've been avoiding wholesale price reductions because in most cases, just reducing the prices doesn't necessarily increase your pace. There's other things we'd look at like marketing, product, training.

Speaker 2

We have a lot of new hires right now, while we're weighing all of those incentives.

Speaker 5

Okay, got you. That makes sense. And then Eric, I wanted to follow-up on

Speaker 4

a comment you made in your prepared remarks, I think, talking about kind

Speaker 5

of near term dynamics, prepared remarks, I think, talking about kind of near term dynamics, not necessarily being a change for the industry. We've heard a lot of builders talk about non rate impacts to demand conditions, a lot of people cite the election. So is it your view here is that we get past the election into early next year that even if rates remain elevated that you could still see some improvement in demand to the spring selling season? Or do you think that's truly going to be dictated by rates and affordability? And then maybe perhaps your view is that where rates are currently isn't going to be sustained as we move through 2025?

Speaker 5

Thanks.

Speaker 2

Yes. I think, Trevor, for us, it's a we look at demand as the number of leads that we have coming in. So the demand for homeownership and what we're seeing in the field remains strong. Over 8,000 individual leads last week inquired about homeownership. So we don't believe the election has anything to do with demand.

Speaker 2

The challenge with our pace right now and what we're working through every day in the offices nationwide is entry level affordability. Affordability is challenged right now. The combination of rates being higher and the average price as we stated in our prepared remarks, average sales price this quarter was the highest in company history. Those 2 are leading to affordability challenges. And the amount of income it takes to qualify for an entry level house, we have eliminated the market has eliminated the customer that makes $60,000 to $100,000 a year in combined income has been eliminated from the market just from a qualification stand point relative to their income to what the ratios are.

Speaker 2

So that's the challenge we have on a pace standpoint, but that is about the only component that is cautious right now is the absorption pace because gross margins are strong, demand is strong, community count growth is strong, a lot of positive things happening in our business.

Operator

And one moment.

Speaker 5

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

Operator

Thank you. And one moment for our next question. Our next question will go to Andrew at JPMorgan. Andrew, your line is open.

Speaker 6

Hi, everyone. This is Andrew Ozzie on for Mike. Congrats on the quarter. Appreciate you taking my questions. Just to go again on the gross margins, in your view, what's allowing you to maintain this level of margin and hold it relatively steady as compared to your peers?

Speaker 6

And how should we think about the next 2 to 3 quarters as you adjust prices of new communities of their openings?

Speaker 2

Yes. Andrew, I'll answer it another way as well from a believe it on how we price our homes, but also we tend to do a lot of land development at LGI, a lot of self development. And also our gross margin from a company standpoint, we have to capture both the development profit and the homebuilding profit. So our gross margin should be higher than our peers because we need to capture that development profit. The other item we talk about internally is there is a lot of value in the land that we develop and we're financing that more on balance sheet than off balance sheet.

Speaker 2

Relative to our peer group who has really went all in on land banking, land banking is expensive. There is a lot of value to land banking as it relates to certain metrics like return on equity, but it is a headwind to gross margin. We have a cost advantage as it relates to gross margin and our lot cost, because we are keeping everything on balance sheet than doing a lot of land banking, I think that's also an important point.

Speaker 6

Got it. I appreciate that. And then kind of in terms of land inflation, what are you kind of seeing in terms of land contracted today? And maybe if you can help us understand the difference between development versus the actual land purchases? Any color there would be helpful.

Speaker 2

Yes, Trevor, obviously it's or excuse me, Andrew. Obviously, it's different in every market. Generally speaking, land prices are not coming down, still strong demand for land. The bigger component for us is it's a larger percentage of the finished lot is the development costs. Development costs remain elevated, don't see a lot of relief in development costs either, doing business with the cities and counties and planning fees.

Speaker 2

We just believe costs are going to continue to go up for our development. We are starting to see because of challenges for the private builders, we are starting to see more opportunities to buy finished lots on a takedown or buy an opportunity where capital wasn't available for a builder, not necessarily a distressed pricing levels, but may it may create more opportunities to grow our community count in the future as well.

Speaker 6

Got it. Thank you so much for taking my questions.

Speaker 2

Thanks, Andrew.

Operator

And one moment for our next question. Our next question will be coming from Carl Reichardt of BTIG. Your line is open, Carl.

Speaker 2

Thanks. Hey, guys.

Speaker 7

Nice to talk to you. Just one housekeeping question for you, Charles. Just the other income this quarter, at least relative to our number was basically all the difference between our EPS estimate and what you produced. What was that this quarter? And then do you have a sense of the run rate going forward into Q4 and then even into next year on what that might be?

Speaker 3

Yes, Carl. This quarter we had about $4,500,000 related to land sales compared to last quarter was at 2.7 So the majority of the delta this quarter over last was related to some additional lot sales. We expect it to be lumpy going into the Q4 and into the future. So don't really have specific guidance for you in terms of what we think Q4 or 2025 will be.

Speaker 7

Okay. Thanks. I thought that might be it. And then for you, Eric, just I think I may have asked this before, so I want to touch on it again. So if I look at your absorption rates per community, you're down about 33% from where you were in 2020 2.

Speaker 7

Your ASP is up about 5% from there, if I look at your the midpoint of your year end guide. So how are you changing compensation structure for sales to focus more on margin if absorptions, I assume per salesperson, are falling? How do you sort of true them back up to get them to focus on that dynamic as opposed to turnover?

Speaker 2

Yes. It's a great question, Karl. I think the focus is really leaving that commission percentage the same. We believe we pay 1 of the highest commission rates to our salespeople in the industry. We know we do.

Speaker 2

And having that same percentage on a higher ASP, even though the unit volume may be down in or per community, the overall revenue that a individual salesperson creates or a community creates is very similar to what it was a few years ago. So the income is not as affected as much because they're paid on the revenue part of it.

Speaker 7

Okay, great. Thanks, Eric. Appreciate it, guys.

Speaker 4

You're welcome.

Operator

One moment for our next question. And our next question will come from Jay McCanless of Wedbush. Your line is open, Jay.

Speaker 4

Hey, guys. So a couple of questions. The first one, Eric, that comment you made about households with a $60,000 to $100,000 income priced out of the market now. I mean, how many households, how many potential customers do you think you're talking about there that now can't look at home ownership?

Speaker 2

Yes. I don't have that answer off the top of my head, Jay, but I think it's a pretty significant number. I was in the sales office this last weekend and work on getting to the field as much as I can and there's just a lot of customers in that range that are right now forced to keep running or they have to save up more money for down payment or have to pay more down debt. So our team does an exceptional job of working with these customers and helping them get into position where they can buy. But a household income, because of rates and ASP, just that that measure, as we all know, is just more constrained than it used to be.

Speaker 2

That difference between owning a home and paying for rent, that gap is wider now than it has been in the past. Also a lot of our customers over the years have used various bond programs that are put out by various states and local community agencies across the United States. And with those local bond programs, you don't have the ability to do a forward commitment and buy down rates. So a lot of those programs today have a market rate of 7%, 7.5%, which is a completely different rate than what it was 3 or 4 years ago.

Speaker 4

And I guess not I know you aren't ready to give 25% guidance yet, but kind of to what Carl was asking about in terms of pace. I mean, what are you guys thinking about is going to be the right pace because closing some Mr. Mark the last couple of years and just wondering how you all are thinking about it, especially if rates don't go down from here. Should we be expecting a pace in line with what we saw in the back half of 'twenty four? Or just how are you guys thinking about it, especially with all the communities that you're going to be bringing out of the ground?

Speaker 2

Yes, it's a good question, Jay. We're looking at Page. We're also looking at revenue community ASP gross margins, etcetera. Yes, we're not going to give 25 guidance today. But from the seat we sit in, I think 25 especially since it's we're selling for 25 right now, 25 is basically here.

Speaker 2

No reason to think that 25 pace is any different than the 24 pace. But also we would think that is that would result in a very positive year for LGI next year. ASP, no reason that doesn't continue to go higher. We just talked about on the call an additional 10% to 20% in community count growth next year, strong gross margins, staying in our elevated range, increasing EPS, a lot of new growth with our employees. One of the things I will point to, Jay, is it has been proven time and time again at LGI is sales representatives, LGI Management, LGI employees in their 2nd year of the business do a lot better than their 1st year of the business.

Speaker 2

And we have had such strong community outgrowth and we got so many new employees, new sales reps, new managers that I'm excited about all of those individuals getting into their 2nd year in the business in 2025 and that will have a positive impact on the company.

Speaker 4

So then I guess the other question just to say and thank you for all that Eric. To stick on affordability for a second, I mean do you feel like your plans and I know you guys have a pretty tight plan book. Do you feel like there's more opportunities to bring down the size of the plans or have you kind of hit that terminal bottom where at some point it's just not a house anymore, it's more of an ADU than it is a house.

Speaker 2

Right. Yes. I think we're about there, Jay, because we've been looking at affordability in our plans for quite a while now. Certainly, on new communities, we're always looking at that. We want to build a quality affordable house.

Speaker 2

We're going to look at square footage as the primary driver to reduce the overall affordability and make it as affordable as we possibly can. So I also don't think we're going to chase square footage down to the absolute bottom. Some of our competitors are building product with no garages, 1 car garages. There's just a product that here at LGI we would not be comfortable building with. We want to be proud of the product that we're building.

Speaker 2

We're going to be consistent with our fit and finish nationwide. All of our houses nationwide have hard surface countertops. There are certainly in addition to the product exterior, there are certainly components that we could take out more of the fit and finish inside and probably take a couple of $1,000 out of the house, but we're not sure the value is really there and we want to be proud of the product that we're building and make sure it's a great product for our customers to move into.

Speaker 4

Understood. And just one more question.

Speaker 3

I don't know how much people

Speaker 4

talk about it, but you guys do have Terrata move up price points seem to be selling really well at this point. I mean, is it thought process that until rates come down or affordability gets better, maybe you convert some of this dirt over to Terada and ride some of this wave that we're seeing in the move up and call it entry level luxury markets?

Speaker 2

Yes. I mean certainly depending on the market, depending on the community, Since we do a lot of development, we got many larger communities. In fact, I was in a meeting this morning. We're going to have Trurotta and LGI Home product in the same actual community. So Trurotta is going well for us.

Speaker 2

We believe it's going to be continued growth in the future. Every since, I believe, it's 2017 when we had our first Trada closing. Trada closings have increased every year and looking forward to doing more Trada product in the future and we'll look at that on a community by community basis, Jay, but good comment.

Speaker 4

Okay, great. Thanks. Appreciate it. You're welcome.

Operator

Next question. Our next question will be coming from Alex Barron of Housing Research Center. Your line is open, Alex.

Speaker 8

Yes, thank you. Hey, guys. Yes, I wanted to ask also along the lines of Dave's questions. I think most of your homes are usually single family. I don't recall you guys doing too much attached products, but is that anything you guys are considering or looking at as a way to make houses more affordable?

Speaker 2

We are, Alex, and we do have a number of attached townhome products across the United States, and we certainly look at that. We'll continue to look at that and part of our community count growth next year will be attached product as well.

Speaker 8

Got it. And then my other question was, I think I heard you say the SG and A ratio is in the 14% range. Many of the larger public builders are now below 10%, whereas in previous years, it never used to go below 10%. So is there anything you guys are working on to try to bring down the SG and A ratio?

Speaker 3

Yes. Nothing specific, Alex. This is Charles. I mean, I think we're comfortable in our advertising spend and we're we break it down into 2 categories. So you have selling expenses, which is predominantly advertising spend, commissions to both inside and outside sales people and then running our offices.

Speaker 3

So as community count continues to grow, we continue to invest in new community openings, information centers across the country. From a G and A standpoint then that's more of our corporate overhead and support operation. We've been running around an average of about $30,000,000 a quarter. This year, the Q3 came in a little bit under than our average. So we continue to monitor expenses from an overhead standpoint to make sure that we are supporting the field in the best way possible.

Speaker 3

And really right now, we're focused more on community count growth and getting these new communities opening in the markets. Not a lot of geographic expansion in terms of where the new communities are coming from. They're coming from our existing markets. So we hope to leverage off of having the established overhead in those markets going into the future.

Speaker 8

Okay. And if I could ask one last one. Any thoughts around issuing fixed more fixed rate debt to swap out the lines of credit?

Speaker 1

It's something that's always on the radar for us, Alex. We evaluate those opportunities. We're constantly informed by our syndicate where rates are and where our current bonds are trading. So we want to make sure it's an attractive situation and there's actually good use for the capital, but it is something that we're constantly looking

Speaker 8

at. Got it. Best of luck guys. Thank you.

Speaker 2

All right. Thanks, Alex.

Operator

One moment for our next question. And our next question will come from Kenneth Zener of Seaport. Your line is open.

Speaker 9

Good afternoon, everybody. Good afternoon. Few questions here for you. Understanding you don't want to give FY 'twenty five pace gross margin, maybe you could illuminate us in terms of your either returns on capital or equity goals, so we can understand how you are balancing that margin, which is clearly against peers' trends right now, just in terms of the asset efficiency side that you outlined your return goals?

Speaker 2

Yes, Ken, this is Eric. Eric, I can start and Charles can add specific into it. I think for next year, without getting into specific guidance, which will get very similar pace and similar gross margins to this year because we believe we're at our historical average and we'll always be there. Obviously, it depends on wholesale versus retail mix and geographic mix and incentives, there's variables there. And then when we're buying a deal, we're underwriting to a 20% ROE.

Speaker 2

But what has happened over the last couple of years, we've got a lot of investment in land, all these communities that we are bringing online, the 30% year over year and the additional 10% to 20% growth, That is all just been expense right now. We are not seeing any revenue for those communities. So we believe our ROE is going to be increasing over the next couple of years and heading in a positive direction.

Speaker 9

Appreciate that. Very good. As we think about your land, which has been in development on the balance sheet and capitalized interest, it's been picking up. Is it reasonable to assume the current I know you gave 4th quarter guidance in terms of the gross margin interest expense spread, but is that going to be increasing next year as these longer dated land positions come on or through the income statement?

Speaker 3

Yes. Ken, this is Charles. I mean, I think we've been running around 180 and up to 200 basis points. As far as what we can see in terms of visibility right now, I would say we're going to be somewhere in and around that 200 basis point range as we go into 2025, but we'll certainly give more color on that as we get closer into giving guidance for next year.

Speaker 9

Excellent. And then my one last question, because your development is so specific and I think it's obviously been helping you guys consistent with your past. Is there a way you could comment on the cost of your land cost as a percent of sales versus your variable cost, which I assume both on the development of land are more similar to other builders considering the common trade that you use? Thank you very much.

Speaker 3

Yes, I can start. I think our average finished lot cost as a percentage of our ASP has been pretty close to around 20%, just under for quite some time. I think that's part of the way as Eric was explaining how we think about pricing and achieving a return is that we would expect that to remain relatively consistent in when you're buying finished lots that number can push up. But from a development standpoint that usually stays in somewhere around that number. The actual raw land portion is somewhere around 10% of the total finished lock costs.

Speaker 3

So most of the variability we see when we look at development costs and what it costs to replace a project are going to be included in the infrastructure requirements. Are there off sites required? What are the municipalities requiring us to do in order to bring that deal online? How much yield can we get out of the project due to detention requirements and those things. So the vast majority of the replacement costs come in the development spend.

Speaker 9

Thank you very much.

Operator

At this time, I'm not showing any further questions. I'd like to hand the call back to Eric for closing remarks.

Speaker 2

Thanks everyone for participating on today's call and your continued interest in LGI Homes. Have a great rest of the day.

Operator

This concludes LGI Homes' 3rd quarter 2024 conference call. Have a great day.

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