LGI Homes (LGIH) Q2 2023 Earnings Call Transcript

LGI Homes (LGIH -0.74%)
Q2 2023 Earnings Call
Aug 01, 2023, 12:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to LGI Homes second-quarter 2023 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 Josh Fattor, vice president of investor relations and capital markets.

Josh Fattor — Vice President, Investor Relations

Thanks, and good afternoon. I’ll remind listeners that this call contains forward-looking statements, including management’s views on the company’s business strategy outlook, plans, objectives, and guidance for 2023. Such statements reflect management’s current expectations and involve assumptions and estimates that are subject to risks and uncertainties and that could cause management’s expectations to prove to be incorrect. You should review our filings with the SEC for a discussion of the risks, uncertainties, and other factors that could cause actual results to differ from those presented today.

All forward-looking statements must be considered in light of those related risks, and you should not place undue reliance on such statements, which reflect management’s current viewpoints and are not guarantees of future performance. On this call, we’ll discuss non-GAAP financial measures that are not intended to be considered in isolation or as 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 June 30th, 2023, that we expect to file with the SEC later today. This filing will be accessible on the SEC’s website and in the Investor Relations section of our website.

I’m joined on today’s call by Eric Lipar, LGI Homes’ chief executive officer and chairman of the board; and Charles Merdian, chief financial officer and treasurer. I’ll now turn the call over to Eric.

Eric Lipar — Chairman and Chief Executive Officer

Thanks, Josh. Good afternoon, and welcome to our earnings call. The results we reported this morning represent significant progress toward our full-year guidance and longer-term objectives. We’re proud of these recent accomplishments and grateful to our employees to successfully executed our strategic initiatives against the backdrop of continued economic uncertainty.

In the second quarter, we closed 1,854 homes, a 36% increase over the first quarter, and generated over $645 million in revenue. We’re continuing to invest in the growth of our business, bringing more new communities online and identifying opportunities for additional growth in the years to come. We ended the second quarter with a total of 102 active communities, a net increase of 10 communities compared to the same period last year. Companywide, we averaged 6.1 closings per community per month, a 30% improvement over the 4.7 pace delivered in the first quarter.

The increase resulted from our continued success at connecting motivated and qualified buyers with our highly trained sales teams and the flow-through of the strong net order base we reported on our last call. Our top market on a closings per community basis was Dallas/Fort Worth with 10.2 closings per month. Next with Charlotte with 10 closings, followed by Houston with 7.9. Rounding out the top 5 were Fort Pierce, Florida, and Las Vegas, Nevada, each with 7.8 closings per month.

Congratulations to the teams in these markets and your outstanding performance last quarter. During the quarter, we made significant progress on two key initiatives. First, we increased affordability for our customers. As the market cooled last summer we pivoted to starting smaller square footage homes that reduced average selling prices and enable more customers to qualify for homeownership.

In a number of markets, we introduced entirely new floor plans that bridge gaps between existing sizes or further reduce the size of our smallest offering. The success of this initiative has started to materialize in our results. The percentage of closings coming from homes smaller than 1,500 square feet went from 19% in the second quarter of last year to 27% in the quarter just completed. This trend helped drive the decrease in selling prices year over year in four out of our five segments despite increasing prices in most of our communities during the quarter.

While future home sizes and selling prices in the coming quarters will vary, we believe our continued efforts to reduce the cost of homeownership will be a key factor in the success of our future results. The other key initiative during the quarter was to increase profitability and our gross margins reflected that focus. On our last call, we shared our intention to return profitability metrics back to their historical levels, starting with a 100 basis point increase in gross margins in the second quarter. I’m pleased to report that we’re ahead of schedule.

In the second quarter, we achieved a 170 basis point improvement in both financial and adjusted gross margins through a combination of sales price increases, reduced house costs, and a successful opening of new communities at margin profiles in line with our historical results. Returning margins that are industry-leading levels is foremost in every decision we’re currently making. While there’s still work to do, we’re encouraged by the progress we’ve made year to date. I’ll now turn the call over to Charles for more details on our financial results.

Charles Merdian — Chief Financial Officer and Treasurer

Thanks, Eric. Revenue in the second quarter was $645.3 million based on 1,854 homes closed. Sequentially, revenue was up 32.4% and closings were up 35.7% as we continue to benefit from healthy demand and began to see the first quarter’s strong order pace start to flow through our results. Of our total closings, 139 were through our wholesale channel, representing 7.5% of total closings, similar to what we delivered in the same quarter last year and in the prior quarter this year.

Our average selling price of $348,042 was 2.4% lower both year over year and sequentially. The decrease was attributable to a higher percentage of homes sold in our lower-priced Central, Southeast, and Florida segments, community transitions, and our success at delivering smaller, more affordable floor plans. Our second-quarter gross margin was 22%, and our adjusted gross margin was 23.8%. As Eric highlighted, adjusted gross margin improved 170 basis points sequentially and compared to the 100 basis point improvement we guided to on our last call.

The outperformance was driven by our success in raising prices in most of our communities, lower input costs, and new community openings at higher-margin profiles. Adjusted gross margin excluded $9.1 million of capitalized interest charged to cost of sales and $2.7 million related to purchase accounting together representing 180 basis points. Combined selling, general, and administrative expenses for the second quarter were $76.9 million or 11.9% of revenue, a 300 basis point improvement over the prior quarter. Selling expenses were $49.2 million or 7.6% of revenue compared to 8.8% in the first quarter of this year.

The 120 basis point sequential improvement was primarily due to reduced spending on advertising as we curtailed marketing in communities where inventory was limited. General and administrative expenses totaled $27.6 million or 4.3% of revenue compared to 6.1% in the first quarter of this year. The 180 basis point sequential improvement was primarily related to operating leverage realized from the increase in revenue. We expect G&A dollars to remain relatively flat in the second half of the year, with the potential for generating additional operating leverage dependent on volume.

At the same time, we expect selling expenses as a percentage of revenue to increase as we turn up advertising spend in the second half to support additional community openings and drive leads to existing communities as more inventory becomes available for sale. As a result, we’re maintaining our expectation for full-year SG&A as a percentage of revenue to range between 12.5% and 13.5%. Pretax net income for the second quarter was $71.4 million or 11.1% of revenue. Our effective tax rate was 25.6% compared to 24.3% in the same quarter last year.

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

Net orders were 1,937 homes, an increase of 124.2% over the second quarter of last year. Our cancellation rate during the quarter was 25.8% compared to 30.5% in the same period last year. And at June 30, our backlog consisted of 1,638 homes valued at $601.3 million. Of those homes, 131, or 8% of total backlog were related to wholesale contracts with single-family rental partners.

Turning to our land position. At June 30th, our portfolio consisted of 69,226 owned and controlled lots, a decrease of 23.1% year over year and down slightly from the prior quarter. Of those lots, 56,763 or 82% were owned, a decrease of 8.3% year over year and 1.5% sequentially. Of our owned lots, 43,762 were raw land or land under development with approximately 24% of those lots in active development.

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

Josh Fattor — Vice President, Investor Relations

Thank you, Charles. As of June 30th, we had just over $1 billion of notes payable outstanding including $768.1 million drawn on our credit facility. Our debt-to-capital ratio was 37.8%, and our net debt-to-capital ratio was 36.8%. This marked our third consecutive quarter of delevering.

Total liquidity was $384.7 million, including $43.3 million of cash on hand and $341.4 million of available capacity under our credit facility. At June 30, our stockholders’ equity was $1.7 billion our book value per share was $73.52, an increase of 13% over the same period last year. With that, I’ll turn the call back over to Eric.

Eric Lipar — Chairman and Chief Executive Officer

Thanks, Josh. In summary, we delivered a great quarter, and we’re entering the second half of the year well-positioned to achieve all of our targets for 2023. Demand trends remain positive, and our recent performance has created significant momentum as we focus on driving growth, improving profitability, and continuing to create long-term value for our shareholders. Based on our performance year to date, current backlog, and continued momentum in sales activity, we’re raising our year-end closing guidance to a range between 6,500 and 7,200 homes.

Despite the decrease in our average selling price in the second quarter, we continue to expect that full-year average selling prices will range between $345,000 and $360,000. We continue to expect to be active in 115 to 125 communities at year-end with an additional 20% to 30% growth in our community count in 2024 and as we expand our presence in existing markets and add new ones. One of those new markets is Salt Lake City. We recently welcomed our new sales team from Utah to our corporate office for new hire training and expect to report our first closings from that state in the fourth quarter.

We’re focused on increasing gross margins and expect to deliver an additional 150 basis points of margin improvement in the third quarter. Given our progress to date, we’re raising our full-year gross margin guidance to 21.5% to 23.5% and adjusted gross margin to 23% to 25%. I’ll conclude by expressing my appreciation for the LGI Homes teams around the country. Your intense focus on increasing affordability and enhancing profitability made our great performance last quarter possible.

Thank you for your continued commitment to our company and to our customers. We’ll now open the call for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] One moment, please. Our first question comes from the line of Ken Zener with Seaport. Please proceed.

Ken Zener — Seaport Research Partners — Analyst

Good morning, everybody.

Operator

Good morning, Ken. Please proceed.

Ken Zener — Seaport Research Partners — Analyst

Can you hear me?

Operator

We can hear you. Please proceed.

Ken Zener — Seaport Research Partners — Analyst

Great. So my question is starting big picture, looking into next year, your 20% to 30% community count target range. But I assume that’s based on year-end communities, just to get a sense of the ramp? And then can you talk to how many of those communities are going to be or what percent are going to be a new market. So if you’re in today, how many are you going to be in that you’re not in currently? Operator — hearing management.

Operator

Yes. This is the operator and I am hearing you.

Ken Zener — Seaport Research Partners — Analyst

I didn’t hear management.

Operator

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

Eric Lipar — Chairman and Chief Executive Officer

Can you hear me now?

Ken Zener — Seaport Research Partners — Analyst

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

Eric Lipar — Chairman and Chief Executive Officer

So your question?

Ken Zener — Seaport Research Partners — Analyst

There’s a little feedback. I could reask my question. I wasn’t sure if you heard it.

Eric Lipar — Chairman and Chief Executive Officer

Yeah. I heard your question — so at the end. Yeah, we’re getting feedback.

Ken Zener — Seaport Research Partners — Analyst

Do you want to reset it with the operator or —

Eric Lipar — Chairman and Chief Executive Officer

Ken, can you hear me now?

Ken Zener — Seaport Research Partners — Analyst

I hear about eight of you.

Operator

Please stay in the meeting. We are experiencing technical difficulties. Please remain on the line. Your conference will resume shortly.

Thank you for your patience. Welcome back to the meeting.

Ken Zener — Seaport Research Partners — Analyst

Can you hear me, operator?

Operator

Sounds good. We can hear you.

Ken Zener — Seaport Research Partners — Analyst

Hello, everybody.

Eric Lipar — Chairman and Chief Executive Officer

Welcome back.

Ken Zener — Seaport Research Partners — Analyst

I can hear you. I’m going to go to state my question. Is that OK?

Eric Lipar — Chairman and Chief Executive Officer

OK. Go ahead.

Ken Zener — Seaport Research Partners — Analyst

Of the 20% to 30% 20% community growth next year. Is that really a fourth quarter year over year? And then how many of those are in new markets that you’re going to be in. So if you’re an X today, you’re going to be in Y next year?

Eric Lipar — Chairman and Chief Executive Officer

OK, Ken. This is Eric. Great question, and apologize again for all the technical difficulties. We believe we’ve got that straightened out now.

So this year’s ending community count end of year 2023, we expect to be 115 to 125, that’s going to be back-end loaded. We’re opening up a lot of new communities in Q4 that we expect to have closings in November and December of this year. The 20% to 30% growth in community count next year is off of the year-end number this year 2023. The only new market we’re entering is Salt Lake City, and we expect to have two communities opening and having closings by the end of ’24.

Ken Zener — Seaport Research Partners — Analyst

Great. And then just related to operations. First, your start level, high in the second quarter, like it was last year. Do you think about that being at a certain level absolutes since whatever you start.

Obviously, you’re going to sell there’s seasonality. And then I wanted to clarify your comments. I heard something about sequential margins 150 bps. I wasn’t sure if you were referring to gross margins there.

And the reason I ask is you’ve made very strong statements about returning to industry-leading margins. And if that’s gross margin, is that confidence tied to your eight years of owned self-developed land separate from reductions in net pricing cost on the vertical.

Eric Lipar — Chairman and Chief Executive Officer

Yeah. Thanks, Ken. I’ll take the gross margin question, then Charles can follow up. So on the gross margin question, that’s on adjusted gross margin and gross margin, 150 basis points increase in Q3 and that’s primarily driven from the strength of our backlog.

Sales have been positive. We’ve been able to increase prices. Also, most of the high-cost houses, high construction cost houses have already pushed through our backlog, so we’ve got really good visibility into Q3 gross margins, and we’re confident in that 150 basis points increase. And getting back to two things: one, our historical adjusted gross margins in that 25% to 28% range.

And then also in that range, that will be near industry-leading or certainly at the top of the tier group. And you mentioned owned land. We believe we need to be there as well because we do own a lot of land. We do a lot of development, and we need to be capturing that developer profit as well as the homebuilding profit as well.

And we’re focused on that.

Charles Merdian — Chief Financial Officer and Treasurer

And Ken, this is Charles. I can take the start question. So 2,350 starts in the second quarter, I would describe as right on track that ended with about 4,150 units in inventory. I think what we — when we highlighted in our prepared remarks, it’s a little more weighted to work in progress, over 3,000 of those units were in WIP.

So normally, we’re looking for about 50% complete and 50% in WIP, which just is an indicator that we were successful coming out the end of the year, monetizing our completed units kind of focused on making sure that we adjusted inventory and now we’re ramping back up and then future starts will really be determined based on current orders on a community-by-community basis, really looking for six months of inventory on a per community basis is what we’re looking for.

Ken Zener — Seaport Research Partners — Analyst

Great. And my last question is because you’re — you have your production builder with a very distinct sales process. Can you talk to the ramp of sales personnel, etc, that you’re doing for this community count next year as well as the dynamic or some of the two material changes you’ve made in how you’re using those call lists. I was think about Glenn Clary, Glen Ross always be closing.

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

Eric Lipar — Chairman and Chief Executive Officer

Sure, Ken. Thanks for that. Yes, we just came off our last sales training class where we hired 22 additional salespeople for what we call the July training class. That will be ramping up in October.

We anticipate hiring 40 to 50 new sales reps to staff, the 10 or so new communities that are opening in Q4 and then continuing ramping up staff next year as well. And I think the positive thing about our sales process and sales training really change much over the years. The great thing about our sales process is our individuals need to be great listeners. All the customers — right now, we’re average, 6,000 to 7,000 leads per week.

So we spent a lot of dollars advertising directly to consumer, 6,000 to 7,000 individuals or families calling us every week, wanting to get into or acquire about a new LGI home. So the demand is robust. There’s no cold calling, there’s no soliciting the customers. We only engage with customers after they engage with us.

So a lot of follow-ups, a lot more digital follow-up than there used to be, more than 50% of our leads coming in now come through email or a digital channel rather than phone calls. So that’s the only thing that’s changed in our business. Same desire for homeownership. It has been over the last 20 years.

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

Ken Zener — Seaport Research Partners — Analyst

Thank you.

Eric Lipar — Chairman and Chief Executive Officer

You’re welcome.

Operator

Thank you. One moment as I prepare the next question. Our question comes from the line of Michael Bruno from J.P. Morgan.

Please proceed.

Andrew Azzi — JPMorgan Chase and Company — Analyst

Hi, everyone. Thanks for taking my question. This is Andrew Azzi on for Mike. I just wanted to ask about — I believe in the prepared remarks, you mentioned that you increased — you were able to positively increase your prices in most communities.

I kind of wanted to 0 in on maybe the magnitude of that price increase and where regionally you saw that?

Eric Lipar — Chairman and Chief Executive Officer

Yes, Andrew. This is Eric. I can start. I think generally, prices are increasing, I would say, in the vast majority of our communities.

One is because demand has been strong. We don’t have a lot of finished inventory available for sale. Also, we’re selling houses that we haven’t started yet. So we need to be increasing the price to make sure we’re taking out any risk on costs increasing.

And we’re also seeing over the last month or two, our house costs starting to increase, which will affect our starts over the next couple of months and closings by the end of the year. So we need to increase our prices just to maintain margins as well as increasing prices to increase our margins to the communities that are selling above average paces.

Andrew Azzi — JPMorgan Chase and Company — Analyst

And I guess my next question is what are the current level of incentives? And how are you thinking about adjusting these? And how do they compare maybe sequentially?

Eric Lipar — Chairman and Chief Executive Officer

Yes. From an incentive standpoint, most builders and our peers are really doing incentives around closing costs and mortgage financing, getting rates down as low as possible for the consumer. We’re doing the same thing. We have not engaged in buying forward commitments on the mortgage side and really driving the rate down into the 4s or 5s.

But we’ve been consistently paying a discount point or two on behalf of the borrower to get the lowest fixed rate possible every weekend for sales. And that’s been consistent for us. really since interest rates started to rise about a year ago, and we plan on that being consistent at these levels probably through at least the end of the year.

Andrew Azzi — JPMorgan Chase and Company — Analyst

Thanks for that. I’ll pass it on. Good luck next quarter.

Eric Lipar — Chairman and Chief Executive Officer

Thank you.

Operator

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

Truman Patterson — Wolfe Research — Analyst

Hey. Good afternoon, everyone. Thanks for taking my questions. We’re wondering if artificial intelligence might have taken over your phone but no, your second-quarter backlog, you had about 1,640 units and if I’m looking at the back half closings guide, I think it implies a little over 1,800 closings in both the third quarter and fourth quarter.

So some pretty healthy back-half order metrics normal seasonality. Could you just help us understand what’s driving that guide? And were you intentionally curbing some orders perhaps during the second quarter to kind of build up a spec pipeline?

Eric Lipar — Chairman and Chief Executive Officer

Yes, a couple of things. One is that we’re selling it further out, but we’re cautious not to get too further out just to maintain and limit the risk on construction costs increasing. And really, our guidance through the end of the year is around six closings a month, and we’re comfortable with that number. We have the advertising spend that we increase and decrease as necessary to drive leads, which drives sales and closings.

So we’re comfortable in our guidance and one, to increase guidance, one because of the positivity we’re seeing in sales and really taking the low end of our previous guide range off the table. The other thing that’s going to help overall closings is we’re bringing out a number of communities here before the end of the year, and that will increase the net sales overall for the company and be additive to closings, especially in Q4.

Truman Patterson — Wolfe Research — Analyst

Gotcha. And kind of following up on one of Ken’s questions. Very healthy community count growth through the end of the year and into ’24. I understand there’s always risks associated with selling out faster than expected due to absorptions.

But, just trying to understand where you all see kind of the potential risks for new community openings. We’ve heard of tight transformer supply, if you will, local municipality approvals. But trying to understand where some of the big hangups might be there? Or if you all have everything kind of in the pipeline right now, where there aren’t too many issues that can pop up.

Eric Lipar — Chairman and Chief Executive Officer

Yeah. It’s a great question, Truman. We’ve been dealing with development challenges and what we call getting the developments open for sales, get them across the finish line. electrical transformers are still an issue.

This year’s community count, those communities are all across the finish line as far as Platts recorded, development complete, houses are either under construction or going to be under construction here very soon. So I don’t think there’s any risk on development timing through the end of the year community count, that’s more of a sales and construction risk, which we think we’ve built into our guidance. And then next year, all of the communities that are going to be added to the community count next year, those are already owned. The vast majority of those or all of them are under some form of development, a lot of them are nearing completion.

So there is some timing risk quarter to quarter, but I wouldn’t say there’s annual timing risk to that. The other thing that’s positive about community count growth next year is we are starting to see some finished lot opportunities. We have approved multiple finished lot deals through our acquisitions committee that will have closings in 2024 that we didn’t know about 90 days ago. So we are starting to see more opportunities to drive community count through both finished lots and what I’ll say is shovel-ready development opportunities, which will be additive to community count in ’25 and ’26.

Truman Patterson — Wolfe Research — Analyst

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

Eric Lipar — Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. One moment as I prepared the queue. Our next question comes from the line of Carl Reichardt from BTIG. Please proceed.

Eric Lipar — Chairman and Chief Executive Officer

Carl, can you hear us? Why don’t we move on to the next question?

Operator

One moment please. Our next question comes from the line of Jay McCanless from Wedbush. Please proceed.

Jay McCanless — Wedbush Securities — Analyst

Can you hear me?

Eric Lipar — Chairman and Chief Executive Officer

Yes, Jay. Go ahead.

Jay McCanless — Wedbush Securities — Analyst

OK. Perfect. All right. So if you stayed at 102 communities and you stated at the sixth base for the rest of the year, you guys are pretty much going to be, I think, either at or just below the top end of the guidance, why the conservatism? I mean I understand you guys are always conservative because homebuilding is a timing business, but this seems even more conservative, I would say, than what we have come to expect from you guys.

Eric Lipar — Chairman and Chief Executive Officer

Yeah. Jay, we’re going to — a couple of things. One is we’re going to report for July. Obviously, we’re sitting here on August 1st.

So our July closings were going to 5.85 to 5.90 that will come out over the next few days with 103 active communities. So that’s about 5.7 per community per month for the month of July. And the math we did that keeps us 5.7 through the rest of the year is the midpoint to do the high end is above six. It’s more 6.3 to 6.5 at the high end, depending on what you’re using for community count.

So that means sales would have to be as good as they are now or even in proven. So coming off 5.7 in July, we thought that was a good midpoint to high end of the range. That means we expect sales and closings to be at least as strong through the end of the year. And I think the question or the factor that’s at play is really what this interest rates going to do from here.

It’s very clear to us. We’re in the business of offering an affordable payment to our customers. And we believe if that 30-year fixed rate rises above seven and gets to seven and a quarter or seven and a half, then that would be a headwind. and anything below seven, especially six and a half and below would be a tailwind to community count.

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

Jay McCanless — Wedbush Securities — Analyst

All right. That makes more sense. And then just if you could talk for a minute about the homes that you’re selling ahead and when those homes, you started them today when you think they’d be delivered what type of forward risk are you taking on those sales?

Eric Lipar — Chairman and Chief Executive Officer

Yeah. We have limited markets across United States that were selling houses that we haven’t started yet. And certainly, in some communities, that sales are very strong. We are getting to the point where we’re selling houses in permits in hand or permits pending stage.

In most markets across the country, we can still start houses in August, that would close this year. So not — I don’t believe we have a single house under contract across the nation that is scheduled for a 2024 closing. It’s really focused on 2023.

Jay McCanless — Wedbush Securities — Analyst

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

Charles Merdian — Chief Financial Officer and Treasurer

Yeah. This is Charles, Jay. We’re seeing just slight movement in lumber. But I think we don’t expect it to have a overall impact to gross margins because to Eric’s comments about pricing, we think we’re doing a good job of factoring that in, it really kind of gets back to our normal mode of operations where we expect costs to increase.

So I think that’s really factored into our gross margin guidance and we would expect nominal increases. We’re seeing anywhere from $1,000 to $2,000 increases in lumber prices right now, so kind of in that 0.5% to 1% range over the last couple of months. We don’t expect that to ramp up heavily. But if — we’ll continue to monitor it and then adjust sales prices accordingly to make sure that we can maintain our margins.

Jay McCanless — Wedbush Securities — Analyst

OK. That sounds great. Thanks, guys.

Eric Lipar — Chairman and Chief Executive Officer

Thanks, Jay.

Operator

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

Alex Barron — Housing Research Center — Analyst

Yeah. Hey, guys. Thanks for taking my question. I believe when I first met you, your primary form of marketing, as I understood it was sending up mailers to rental communities and stuff like that.

I imagine those buyers are a bit more challenged at current interest rates. So I’m wondering to what extent you guys are still doing that versus have you had to shift your marketing strategies to more finding clients through digital means and stuff like that. If you could talk about that.

Eric Lipar — Chairman and Chief Executive Officer

Yeah, Alex. This is Eric. Great question. Certainly, the marketing strategy hasn’t changed, but the form of marketing to reach that consumer has changed.

Obviously, we live in a more digital world when we did 20 years ago when we started. We are still doing some drag, but not as a percentage of overall marketing spend. That percentage is a lot lower than it used to be. But the consumer hasn’t changed.

The customer that we used to market or the customer we’re hitting more with digital marketing today, whether it be social media or search or Zillow, whatever the digital means is that customer has a change. That customer is someone that is currently paying rents, probably looking to buy their first home and want to get out of that situation, change your address and get into a home of their own. And that’s still the customer that we are marketing to and still selling and closing homes too.

Alex Barron — Housing Research Center — Analyst

Got it. And in terms of your, I guess, incentives, are you guys finding rate buy-downs to be the main incentive? Or what is driving what’s helping you get customers over the edge?

Eric Lipar — Chairman and Chief Executive Officer

Yeah. It’s the qualifying for the mortgage is what the challenge is. So that monthly payment is obviously very important and or have to have the income to qualify for the mortgage. And qualifying for a mortgage is more challenging than it used to be.

I think some of that’s offset by lack of supply in the market. Some of that was offset by really strong job growth and good solid wage growth. But at the end of the day, the most affordable payment in all our neighborhoods compared to a few years ago is vastly elevated and the customer has to make more money qualified today so we can spend more money on advertising to drive more leads. Also, one of the things we haven’t talked about in the Q&A, but in the script and a big part of what we’re doing, is really focusing on more affordable plans.

That’s not the finish of the homes. That’s primarily driven by square footage. So in a lot of our communities, we’ve been able to introduce smaller square footage plans as a way to bring down the average sales price, which brings down the monthly payment even at the elevated interest rates, and that is working.

Alex Barron — Housing Research Center — Analyst

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

Eric Lipar — Chairman and Chief Executive Officer

Generally not the case, Alex. I think nothing has really changed on the development side. In our history of developing lots, which we sell develop a lot of our communities. We are always taking to consideration the lot size and making it as dense as possible or as affordable as possible.

But these communities that we’re closing and selling houses on, we’ve developed over the last 12 to 24 months and planned a year or two before that. But we’re always taking that into consideration on the development side. But the square footage of the homes is predominantly on the same lot size. We’re just building a smaller footprint.

Alex Barron — Housing Research Center — Analyst

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

Eric Lipar — Chairman and Chief Executive Officer

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

Alex Barron — Housing Research Center — Analyst

So most of these new salespeople are not replacing others or joining existing communities? Is there more meant to sell new communities?

Eric Lipar — Chairman and Chief Executive Officer

Correct. Yes, the predominant number of salespeople we hire. We’re not having a lot of turnover in our sales force. Everyone is doing really well and making good commissions and leads are coming in.

So primarily the people are hiring us to open up these new communities.

Alex Barron — Housing Research Center — Analyst

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

Eric Lipar — Chairman and Chief Executive Officer

All right. Thanks, Alex.

Operator

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

Eric Lipar — Chairman and Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Josh Fattor — Vice President, Investor Relations

Eric Lipar — Chairman and Chief Executive Officer

Charles Merdian — Chief Financial Officer and Treasurer

Ken Zener — Seaport Research Partners — Analyst

Andrew Azzi — JPMorgan Chase and Company — Analyst

Truman Patterson — Wolfe Research — Analyst

Jay McCanless — Wedbush Securities — Analyst

Alex Barron — Housing Research Center — Analyst

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