LGI Homes Q1 2025 Earnings Call Transcript

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Provided by Quartr
April 29, 2025

There are 10 speakers on the call.

Operator

Welcome to LGI Homes First Quarter twenty twenty five 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 Fadr, Executive Vice President of Investor Relations and Capital Markets.

Speaker 1

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.

Speaker 1

On this call, we'll discuss non GAAP financial measures that are not intended to be considered in isolation or as substitutes for financial information presented in accordance with GAAP. Reconciliations of non GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the press release we issued this morning and in our quarterly report on Form 10 Q for the quarter ended 03/31/2025 that we expect to file with the SEC later today. This filing will be accessible on the SEC's website and in the Investor Relations section of our website. I'm joined today by Eric Lieber, 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 Aaron.

Speaker 2

Thanks, Josh. Good afternoon, and welcome to LGI Homes earnings call. During the quarter, we continued to see strong demand for new homes. Families across the country are excited about the possibility of homeownership and the lack of existing inventory, combined with our ability to offset persistently high mortgage rates through compelling financing incentives, is drawing customers into our information centers. However, affordability remains the biggest challenge for buyers, and rate volatility affects not only their ability to purchase a home, but also their confidence in moving forward with that decision.

Speaker 2

Against this challenging and uncertain backdrop, we're pleased with the solid results we delivered in the first quarter of twenty twenty five. As we noted in our last call, higher mortgage rates in October and November weighed on our year end backlog, and with rates rising in further in January, the first quarter got off to a slow start. While February brought some improvement, the overall trend remained muted. However, in March, the pace materially improved, signaling a belated start in spring sales activity just as the quarter ended. As highlighted in our press release this morning, we delivered nine ninety six homes in the first quarter at an average sales price of $352,831 resulting in revenue of $351,400,000 During the quarter, we recognized a one time expense related to the completion of our forward commitment incentive program that weighed on revenue and gross margins, as well as fees related to that charge that flowed through our G and A expense.

Speaker 2

We ended the first quarter with 146 communities, a 22% increase over the prior year. During the first quarter, our top markets on a closings per community basis were Richmond with 5.3, Charlotte with 4.6, Raleigh with 4.3, Atlanta with 3.8, and Nashville with 3.6. Congratulations to the teams in these markets and their strong performance last quarter. The improvement in lead and order trends in March enabled us to close out the first quarter with a strong backlog as we transitioned into the second quarter. We signed fourteen thirty seven net contracts in the first quarter and ended March with ten forty homes in our backlog, representing over $4.00 $6,000,000 Throughout our history, evidence has shown that training and time spent in the role are the keys to new salespeople hitting standards and delivering their best results.

Speaker 2

As part of last year's rapid community count growth, we welcomed hundreds of new team members across every level of our organization. As these individuals enter their second year with LGI Homes, we're confident that their proficiency with our selling system and growing confidence will positively impact our results. Earlier this month, we welcomed our sales leaders to our corporate headquarters for intensive sales training that they will roll out to our sales teams across the country, setting the stage for a higher performing, more agile sales organization. By reinforcing foundations, building belief, sharpening skills, enhancing alignment with our core values, we're ensuring that our team is well equipped to seize every opportunity that comes through our doors, particularly while the market remains challenging. Despite recent headwinds, we're confident in the long term outlook for the housing market.

Speaker 2

The persistent shortage of entry level homes across the country represents a societal challenge that underscores the importance of affordable new residential construction. Underlying demographic fundamentals will only increase this need, setting the stage for a long runway of sustained demand for homeownership. These structural dynamics provide us with clarity and conviction as we continue to invest in our future growth. With that, I'll invite Charles to provide additional details on our financial results. Thanks, and good afternoon.

Speaker 2

Revenue

Speaker 3

in the first quarter was $351,400,000 based on nine ninety six homes closed at an average sales price of $352,831 The 10.1% decrease in revenue year over year was driven by an 8% decline in home closings and a 2.2% decline in our average sales price. As Eric noted in his opening comments, we recognized a one time expense of $8,600,000 in the first quarter related to the completion of our forward commitment incentive program, of which $6,500,000 was recorded as additional sales incentives in revenue. The decline in our reported ASP was driven by geographic mix, higher wholesale closings, and the one time expense. Excluding this charge, ASP was essentially flat year over year. Of our total closings, 179 homes were through our wholesale channel, representing 18% of total closings compared to 9.4% last year.

Speaker 3

Our first quarter gross margin was 21% compared to 23.4% during the same period last year. The decrease as a percentage of revenue was primarily due to the forward commitment expense, an increase in wholesale closings and to a lesser extent, higher construction overhead, lot costs and capitalized interest as a percentage of revenue, as well as reduced operating leverage resulting from lower volumes. Adjusted gross margin was 23.6% compared to 25.3% during the same period last year. Adjusted gross margin excluded $8,300,000 of capitalized interest charged to cost of sales and $809,000 related to purchase accounting, together representing two sixty basis points compared to 190 basis points last year. Excluding the $6,500,000 charge to revenue, gross margin and adjusted gross margin were slightly below the guidance range we provided on our last call, but were in line with our expectations, which factored into typical first quarter seasonality.

Speaker 3

Combined selling, general and administrative expenses for the first quarter totaled $73,500,000 or 20.9% of revenue. Selling expenses were $42,300,000 or 12% of revenue, compared with 10.5% in the same period last year. The increase was primarily related to higher advertising and personnel costs, and was partially offset by lower commissions due to fewer closings. General and administrative expenses were $31,200,000 or 8.9% of revenue, compared to 8.1% in the same period last year. Included in G and A was $2,100,000 related to the buy down expense.

Speaker 3

For the full year, we are maintaining our view that combined SG and A will be 14% to 15% of revenue. Pre tax net income was $5,700,000 or 1.6% of revenue. Our effective tax rate was 30.2% compared to 26.2% in the same period last year. The higher rate was related to the timing of the impact of compensation costs for share based payments. We continue to expect our full year tax rate will be approximately 24.5%.

Speaker 3

Finally, net income in the first quarter was $4,000,000 or $0.17 per basic and diluted share. Gross orders in the first quarter were $17.16 and net orders were $14.37. Our cancellation rate was 16.3% compared to 16.8% in the same period last year. As highlighted earlier, we ended March with ten forty homes in backlog, representing $406,200,000 Turning to our land position. At March 31, our portfolio consisted of 67,792 owned and controlled lots, a decrease of 3.4% year over year and 4.4% sequentially.

Speaker 3

Of those lots, 53,761 or 79.3% were owned and 14,031 lots or 20.7% were controlled. Of our owned lots, 37,064 were raw land and land under development with less than 30% of those lots in active development. Of the remaining 16,697 owned lots, 12,473 were finished vacant lots, and we had 2,702 completed homes and information centers. During the quarter, we started eleven seventy six homes and ended March with fifteen twenty two homes in progress. I'll now turn the call over

Speaker 1

to Josh for a discussion of our capital position. Thanks Charles. We ended the quarter with 1,600,000,000 of debt outstanding including $544,400,000 brought on our revolver resulting in a debt to cap ratio of 44.3% and a net debt to cap ratio of 43.4%. Total liquidity was $360,000,000 including $57,600,000 of cash and $302,400,000 of availability under our credit facility. Yesterday, we successfully completed the recast of our credit agreement, extending our maturity from 2028 to 2029.

Speaker 1

Total commitments through 2028 will be $1,200,000,000 after which total commitments will be $972,500,000 through 2029. During the quarter, we repurchased 41,685 shares of our common stock for $3,100,000 and ended the quarter with $177,700,000 remaining on our current stock buyback authorization. Finally, our stockholders' equity at March 31 was over $2,000,000,000 and our book value per share was $87.27 At this point, I'll turn the call back over to Eric.

Speaker 2

Thanks, Josh. The slower start to the year was factored into the full year guidance we shared on our last earnings call. Therefore, we remain confident in our original closing target of between 213,000 homes, 160 to 170 active communities by year end, and an average selling price between 3 and 60,000 and $370,000 We continue to monitor tariffs and potential impacts that higher costs could have on margins. Beginning in March, we began receiving notices of price increases from some suppliers related to tariffs imposed to date, particularly those utilizing value added components from China. With this in mind, we are proactively trimming our full year gross margin expectations by 150 basis points at the low end and 100 basis points at the high end of our prior range to account for these additional costs and the potential for additional market uncertainty over the coming quarters.

Speaker 2

As a result, we now expect a full year gross margin between twenty one point seven percent and twenty three point two percent and adjusted gross margin between 2425.5%. To conclude, I want to thank our team members again for their dedication and congratulate them on the results they delivered in the face of a challenging market. We deeply value our people, and being named a top Workplaces USA recipient for the fifth consecutive year is a powerful testament to how enthusiastic our team members are about being part of LGI Homes. Thank you for your belief in our mission and your continued commitment to our company and our customers. We'll now open the call for questions.

Operator

Thank you. As a reminder to ask a question, please press Our first question comes from the line of Michael Ruh from JPMorgan.

Speaker 4

Hi. Good afternoon, everyone. It's Mike Rehart. Thanks for all the detail and color as always. I was hoping to get a little more granular in terms of my first question on the gross margin trajectory that you've adjusted for in terms of guidance.

Speaker 4

Specifically, how we should think about 2Q, 3Q, 4Q in terms of

Speaker 1

the

Speaker 4

cadence? And of the reduction in overall guidance, what is kind of related to the expected increase in costs related to tariffs as opposed to other drivers of the margin?

Speaker 2

Yes. Thanks, Mike. This is Eric. I think on margin question, there's really three components to it. We started with the tariffs, and we've seen minimal cost increases yet, but there's no question we are getting letters from our suppliers with tariff surcharges that are going into effect in April and May.

Speaker 2

Right now, it's not a material amount, but it is a factor in our decision to lower gross margins. And more than that is just the uncertainty of what will happen next week on tariffs or costs. We're still seeing costs generally increase when it comes to doing business with cities, various fees. And also the results of Q1, the gross margin was less. We thought it was prudent, taking all that into consideration, we're leaning into incentives with our customers.

Speaker 2

Those are averaging 5% to 6% now of ASP, which impacts gross margin. So with all those things considered, we thought it was prudent for the end of the year gross margin to be adjusted.

Speaker 4

Yeah. No. I appreciate that, Eric. You know, I guess your comments also kind of lead into my second question, which is you said that you're maybe leaning into incentives a little more this past quarter. And I was curious, mean, I think you said 5% to 6% just now.

Speaker 4

What that compares to maybe last quarter? And how much of this is just more related to when you think about what's driving the need to do that? Is it more just can buyers kind of maybe on the sideline amid some of the volatility going on here or other factors driving maybe a more competitive market? I know that you kind of said in your prepared remarks a lack of an existing inventory across your markets as being a positive fundamental element of housing backdrop. Just wanted to kind of circle back to that as well and if that's at all part of what's driving the higher incentives as well or in fact, to the extent that there is some increase in inventory, that's also been a reason.

Speaker 2

Yes, I think incentives as a percentage is similar to last quarter. You know, what we're doing on incentives, and we think we need to be competitive in the market, so the market dynamic is certainly playing a role now. We don't think we need to be racing to the bottom as far as incentives go. But the three components are closing cost incentive, as most of our competitors are doing, something we've always done with our customers. Cash out of pocket is important for our customers, and we are incentivizing closing cost assistance.

Speaker 2

The second one is we're currently incentivizing with rate buy downs as most builders are doing. You know, that trend continues. That's a big expense for LGI. We're getting that fixed rate as low as we possibly can for our buyers, because certainly an affordable payment and qualifying for a mortgage where sales prices are today is important. And then finally, and right now the slower sales pace leads to more finished inventory across our portfolio.

Speaker 2

And when you have more finished inventory, that leads to more price discounting or more heavily incentives on the older inventory. So all that is up, all those added up is a more heavier incentive. The percentage is similar, but we're talking about what it's gonna look like over the next two or three quarters. Obviously, it depends on the sales base, but, we thought reducing our gross margin was was prudent.

Speaker 4

Alright. Great. Thank you very much.

Speaker 2

You're welcome.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Trevor Allinson from Wolfe Research.

Speaker 5

Hi, good afternoon. Thank you for taking my questions. First was on the midpoint of the full year closings guide. I think it implies a roughly 3.5 absorption pace on closings. You did more like 2.2 here in the first quarter.

Speaker 5

So can you just talk about your confidence in accelerating pace the rest of the year to drive at that full year target range, especially given some of the volatility we're seeing here recently?

Speaker 2

Yeah, it's a great question, Trevor. Can start. January and February certainly were sluggish. March sales were great. I mean, sales were more in the four to five a month pace, which is fantastic.

Speaker 2

April so far has been a little bit more sluggish, even last week sales we got to get into loan application, but not as strong as April. We are going to close approximately four fifty houses in April, which is more of the three a month cadence. Every month, January to February, February to March, March to April has been increasing closings, so we're trending in the correct direction. And yeah, no, we need to be in that four closings a month absorption pace for the rest of the year, and I think the rest of the year does it look like more like March or the April, If it looks more like March, then we're going be in really good shape. We're still seeing demand, so we're confident in our end of the year closing guidance.

Speaker 5

Okay, I appreciate all that color. And then second question is more of the pace and price trade off here. You're taking down your gross margin estimates or guidance. Some of that is due to tariffs, some of that is due to market conditions. Should we interpret the adjustment as a view that the 3.3 absorption pace implied by the low end of your guidance represents a floor for you all, and that if demand were to soften that you would lean more heavily into either incentives or discounting to make sure you don't fall below that pace?

Speaker 5

Or should we think that if demand were to soften that would play through a slower pace? How are thinking about the trade off between those two things? Thanks.

Speaker 2

Yeah, the other component on demand is our wholesale business, know, it's 18% of our closings in Q1, so it depends what percentage that flows through the rest of the year, because we're willing to take a lower gross margin when we sell wholesale houses to our investor friends. So that will have a factor as well on gross margin. And then demand, you know, we talk about demand at LGI is how many leads are we having come through our systems, how many inquiries we're having, how many people are going to our website. The good news for all of us is the demand is still strong, I would say. We're having, you know, six to 7,000 inquiries a week, people looking to change their address, primarily getting out of a lease situation to homeownership.

Speaker 2

The challenge is in affordability. So we think demand is going to be there. It's just getting the customers qualified, that comes into what's the tenure doing, where's the mortgage rate market, what is pricing doing. So we're going keep an eye on all those factors very closely.

Speaker 5

Thanks for all the color and good luck moving forward.

Speaker 2

All right, thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Carl Reichardt from BTIG.

Speaker 6

Eric, you talked about confidence related to rate volatility as a hindrance in Q1. That seemed odd to me and just I'm wondering if you're seeing confidence related to say worries about income, worries about cost out the door, worries about savings or the market. I'm trying to see how broad the lack of confidence is. We know rate fall impacts business, but I'm curious if you're seeing it morph into deeper concerns when you talk to your sales teams about the consumers they're seeing.

Speaker 2

Yeah, I think, Carl, it's a great question. I think the first thing we look at is affordability and qualifying, like I said on the previous answer, but certainly, as homes have gotten more expensive, I mean, our average credit score for our buyers is around 700 now last quarter, in the 690s, with very good income and very good debt to income ratios. So we have a very strong buyer that probably is paying attention more to the market dynamics and the job market and uncertainty in the economy than our entry level true entry level was buyer was from five years ago, so I think that's playing a role. So general uncertainty, but the demand is there, you know, obviously per market conditions. We talked about our five strongest markets on the call for Q1 closings, those for us were all in the Southeast.

Speaker 2

So on a closing volume, you know, Florida, Texas and the West were not as strong. I think that's playing into the market dynamic as well.

Speaker 6

Great. Thank you, Eric. And then just on new community openings as you go, so two things. One, typically, I'm expecting that new stores are going to generate faster sales when they open, but at the same time for you guys because the sales system is so important, training is so important to your folks. I think you've said in past, sometimes it takes new salespeople at new communities a while to get ramped up.

Speaker 6

So between those two dynamics as you look out for this year, what are you expecting to see in terms of mix from new communities helping sales rate or improving salespeople as they get experience helping your sales rate?

Speaker 2

Yeah, those are both great comments, Carl, and probably should have been added to Trevor's comments on why we're confident in our overall year end closing guidance, because a lot we with 22% year over year closing growth, we have hired a lot of new people, a lot of new managers over the last twelve months. And we expect all those salespeople to improve in year two in the business. That's been consistent for the last twenty five years. And then also community count will be opening up. We do expect communities to get off to a sometimes a fast start, sometimes a cautious start, but it will improve as the community gets more experience as well.

Speaker 2

And then just the overall volume of new communities from 146 reported last month to the end of the year, 160, one hundred and 70, those additional communities will help us achieve our closing target.

Speaker 6

Great, I appreciate it. Thank you, Eric. Thanks, fellows.

Speaker 2

All right. Thanks.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Kenneth Zener from Seaport Research Partners.

Speaker 7

Afternoon, everybody.

Speaker 2

Good afternoon, Ken.

Speaker 7

Alright. Look. Obviously, 1Q came in below what had been a strong 4Q where you guys were confident your land model would be delivering those higher margins part of

Speaker 8

your long term

Speaker 7

DNA. Street's obviously skeptical given the book, the stock's valuation. Was it January, February slow, March picked up, you're giving guidance up sequentially. Right? I think you can understand why people are, know, given what other builders have been saying, skeptical of that.

Speaker 7

So it sounds like in reference to Carl's question, mix is playing a big piece of that. And then I wasn't clear if you gave or I guess I missed it if you did give the answer to the earlier question about is there a ramp up in gross margins or is that kind of just the click up occurs all at once and then we hold steady for the year? If you could just I know that was a little broad question, but I was trying to get an understanding of where your confidence exists and clearly the market's lacking a little bit.

Speaker 2

Yes. I'll start, Ken, on the ramp up of gross margin. I think gross margin will ramp up through the end of the year, primarily because we expect volume to ramp up through the year. I think the cost associated with gross margin, the incentives, I'd say is similar, but I think it will ramp up because of volume component. Charles, do you have anything to add

Speaker 3

to that? Sure. I would just add in terms of the land management, how we're thinking about it is that our acquisitions pace has tempered as we're modeling to our current absorption expectations. We are working through our development spend as we are bringing on the communities that we just delivered in addition to the new communities that we expect to deliver into 2026 development timelines continue to be elongated and take longer to get a development from initial completion of engineering and design to getting the community ready and on boarded and ready for sales teams to be active. So I think in

Speaker 2

the first quarter, you see

Speaker 3

is just the lower absorption rate kind of impacts that from a timing standpoint. So as absorptions start to reaccelerate in the back half of the year, you'll see us recover more cash than we're reinvesting because our communities are delivering the sections. The timing of the next section is being pushed out and reevaluated. That just takes some time for that to happen. So two things, adjust the cash flow spend, and then make sure we can get the homes delivered and into the sales process.

Speaker 3

And that just takes a little bit longer than I think it sees in a single quarter.

Speaker 7

Really appreciate that. And then I guess given your comment about gross margins going up partly due to higher volume, could you refresh us on what costs you have I guess in gross margin as a percent of sales? Like is it like 3% the sales are fixed in the COGS line? And then what do you expect your year end inventory units to be? Thank you very much.

Speaker 3

Yeah, great questions, Ken. So included in gross margins, you're going to have capitalized overhead as the primary variable. So if you've got lower, lower volume, the amount of dollars that come through related to construction related costs. That's typical when absorptions are lower. The percentage of revenue that is allocated based on the construction dollars is typically going to be higher.

Speaker 3

That that levels out through the year that is that is not unique to 2025. That's that's really been the case, why we guide to lower gross margin

Speaker 7

for have a number for that? So 4% for the year, we could do the modeling ourselves?

Speaker 3

Yeah. I'm going to say over time, it's going to be somewhere around 30 to maybe up to 50 basis points improvement directly related to absorptions, but obviously going to be tied to how much volume comes through and then staffing levels per community make a difference as well. But around 30 to 50 basis points.

Speaker 7

Okay. And then year end inventory thoughts? Thank you.

Speaker 3

Yeah. Year end inventory, I think we're trending to we ended we ended first quarter at about 4,200 units. So I'd say we're probably going to be somewhere in that range. A lot of it's going to depend on timing of twenty twenty six openings and what that outlook looks like. But I'd say we'd end the year similar somewhere similar to where we are today, maybe a little bit more balanced in terms of we would expect our completed homes and with to be a little bit more balanced sixtyforty rather than we're a little bit heavier and completed units at the moment, but that is also typical in the first quarter as we move into the summer.

Speaker 7

Thank you.

Speaker 1

You're welcome.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Jay McCanless from Wedbush.

Speaker 8

Hey, guys. Thanks for taking my questions. The first one I had, you called out, I think, wholesale at roughly 18% of closings this quarter. And I think that's probably the highest number you all had in at least the last five or six quarters. Is there enough demand in the wholesale channel that if you needed to lean into that, the buyers are there to support that large of a percentage?

Speaker 2

Yeah, Jade, it's there. I think it's very market specific and then that 18% number was on a pretty low overall volume number. So it certainly wasn't the biggest wholesale number we've had in our history as an absolute number, I don't believe. So I would say the wholesale appetite for houses, there's still a significant bid ask spread difference, but the business is there for the right price, also very market specific and even submarket specific.

Speaker 8

Okay. And then it was nice to see liquidity went up sequentially from the fourth quarter and also like to see in the stock buyback. Could you tell us how much you have outstanding on the repurchase authorization right now?

Speaker 1

Hey, Jay. This is Josh. Yeah. We currently have a hundred and $77,000,000 still outstanding on that. You saw that we did about $3,100,000.

Speaker 1

Last quarter was about 41,000 shares. Probably worth hitting on the point that to the comment that Charles made earlier, right, when you're seeing a 2.2 absorption pace and that's gonna, you know, delineate where your underwriting criteria is for that period, makes it a little bit more compelling for you to be going out and using some of that cash to buy back shares. There's obviously a nice arbitrage on that, so you should expect for us to put a higher priority on share repurchases in the future as long as we're, I think today trading at a 36% discount to the book value we just reported. And so that's a compelling investment for our business.

Speaker 8

Thanks. And then one more if I may. Know, Eric, I know you said at the beginning that the full year volume guidance was predicated on a slow start to the year. And I know a couple other people have asked about this, but maybe could you talk about where some of the openings are going to happen the rest of the year? And are they in some of your higher volume markets or lower volume markets?

Speaker 8

Is there anything geographically besides just the volume of communities opening, maybe something geographically that's going to help you guys get to the full year closing guidance?

Speaker 2

Yeah, I think it's more of the absolute number Jay than geography and also replacement communities. You know, we're talking about net new communities, a lot of replacement communities coming online. We are opening a number in The Carolinas, is a higher volume community for us, but we're also opening quite a few communities in the West Coast, which isn't necessarily higher volume, but certainly higher ASP and higher revenues, so we're excited about those openings as well.

Speaker 8

Okay, great. Thanks, guys.

Speaker 2

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Alex Barron from Housing Research Center.

Speaker 9

Yes. Thank you, gentlemen. I wanted to ask, you know, some of your larger competitors who focus on specs and and the affordable segment seem to be more focused on cutting prices these days. And I'm just wondering how you guys are responding to that and, you know, what criteria do you use when you think about the need to cut prices? That's my first question.

Speaker 9

The other question is, with regards to the forward commitment, what interest rate, generally speaking, are you guys offering to buyers through that incentive?

Speaker 2

Yes, it's a good question, Alex. I'll start with the rate question. You know, we're buying down the lowest fixed rate possible every week, so obviously that changes and there's some market dynamics to it. Right now, we are buying down and most of our customers are in the mid-5s for the FHA rate with good credit, which we think we can sell a lot of houses at the mid-five rates, but it also comes into price and all the other incentives. So we're leaning in incentives.

Speaker 2

We think it's really compelling, the value and the offering we're having for consumers right now. Discounting houses is something we don't do a lot of unless it's a standing inventory house. And then once a house has been in inventory for a while, that's another tool that we have. But our communities tend to be larger, they tend to have a couple hundred houses per community, and so we're a little bit more cautious on doing steep discounts to the price, and in a lot of cases, it's not necessarily as well.

Speaker 9

Got it. Thank you so much.

Speaker 2

Alright. Thank you. Thank

Operator

you. One moment for our next question. Our next question comes from the line of Michael Rehaut from JPMorgan.

Speaker 4

Thanks. Appreciate it. Just wanted to circle back to a couple of clarifying remarks, I guess, around margins. First off, broke out the charge, I believe, of $8,600,000 on the forward commitment expenses, kind of onetime. 6,500,000.0 was in gross margin, I guess, through by virtue of the ASP.

Speaker 4

So there, obviously, we're just want to make sure I have it right that the remainder would be in SG and A, the $2,100,000

Speaker 3

Mike, this is Charles. Yes, that's correct.

Speaker 4

6.5% in revenue and 2.1% in G and A. Okay. And then secondly, again, just any thoughts around 2Q, 3Q, 4Q gross margin cadence would be helpful for modeling?

Speaker 2

Well, think it's going to ramp up as we go because of volume component and Charles already talked about that 30 to 50 basis points with that, and then we gave our annual guidance of 24% to 25.5% is where we're comfortable for the year end range.

Speaker 4

Okay. All right. So I'll work it that way. Thanks very much.

Speaker 2

Thank you. Welcome.

Operator

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

Speaker 2

Thanks, everyone, for participating on today's call and your continued interest in LGI Homes.

Operator

This concludes LGI Homes first quarter twenty twenty five conference call. Have a great day.

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