LGIH
#Thank you, <UNK>, and welcome to everyone on this call.
We appreciate your continued interest in LGI Homes.
During today's call, I will summarize the highlights from the first quarter of 2016.
Then <UNK> will follow up to discuss our financial results in more detail.
After he is done, we will conclude with comments and what we are seeing for the second quarter and our expectations for the remainder of 2016 before we open the call for questions.
To begin today, we are pleased to announce that LGI Homes was recently named as the 15th largest builder in the United States according to Builder Magazine, based on our 3,404 home closings in 2015.
This considerable jump of six spots on the Builder 100 ranking would not have been possible without the commitment and dedication of our loyal LGI employees.
I'd like to take a moment to extend a special thank you to everyone at LGI.
Because of you, we have been able to realize strong growth throughout the years and have great momentum to build on as we continue to deliver results and move up the Builder 100 list.
Looking at the first quarter of 2016, the year is off to a solid start.
We closed 844 homes, generating just over $162 million in home sales revenues, which represents a 26% increase in homes closed and a 35% increase in revenues over the first quarter of 2015.
As we enter the new year, we continue to demonstrate our ability to expand our business to new markets.
We ended the first quarter with 56 active communities, which is an increase of 12 over the 44 active communities that we had at the end of the first quarter last year.
These 12 communities were spread throughout the country with three in Dallas, two in Charlotte, and one each in San Antonio, Fort Meyers, Tampa, Atlanta, Phoenix, Denver, and our newest market, Jacksonville.
Breaking it down by market, let's first take a look at highlights in our Texas operations.
The fundamentals of this division have remained solid, generating 410 closings and representing approximately 49% of our total closings during the quarter.
This represents a 7.3% increase in closings in Texas over the first quarter of last year.
In addition, the absorption rate in Texas averaged 5.6 closings per community per month which is [very much] in line with our past experience and expectations.
We continue to geographically diversify our operation.
Our concentration outside of Texas increased during the first quarter and was 51% of our closings compared to 43% of our closings in the first quarter of last year.
This was the first quarter in our history in which the majority of our closings came from outside the State of Texas.
The Southwest division represented 20% of our home closings.
The Southeast division represented 19%.
And the Florida division represented 12%.
As we have discussed on previous calls, we anticipate our percentage of closings outside of Texas will continue to increase.
Absorption remains strong in the first quarter, averaging 5.1 closings per community per month, consistent with 5.3 closings per month for the first quarter of last year.
Our top three markets for the quarter, including Charlotte leading the way, was 6.8 closings per community per month, and Houston and DFW remaining solid at 5.8 closings per community per month.
Homeownership demand is alive and well in our markets across the country.
We continue to market directly to renters living within close proximity to our communities.
Our advertising produced over 66,000 inquiries in the first quarter strengthening our belief that there remains a strong demand in the first-time home buyer segment.
In addition, our markets continue to have strong housing demand drivers, including national leading population and employment growth trends, general housing affordability, and desirable lifestyle characteristics.
With that, I'd like to turn the call over to <UNK> <UNK>, our Chief Financial Officer, for a more in-depth review of our financial results.
Thanks, <UNK>.
As previously mentioned, home sales revenues for the quarter were $162.5 million based on 844 homes closed, which represents a 35% increase over the first quarter of 2015.
Our average sales price was $192,491 for the first quarter, a 7% year-over-year increase and approximately 4% increase over the average sales price for the fourth quarter of 2015.
This is largely attributable to changes in product mix, price points in new markets, and a favorable pricing environment.
For example, our comparable entry level product in Denver had an average sales price of over $300,000.
Our adjusted gross margin was 26.7% this quarter compared to 27.8% for the first quarter of 2015, a 110-basis point decline.
The decrease in adjusted gross margin is primarily due to a shift in geographic mix as Houston declined from 29% of our overall closings in the first quarter of last year to 17% in the first quarter of this year as a result of closing out of two high-volume communities in the market.
Houston historically has been one of our highest gross margin markets, and the closeout of these communities directly impacted the overall margins.
In addition, we experienced higher indirect overhead charges in the first quarter of 2016, primarily due to timing and costs related to our expansion.
Adjusted gross margin excludes approximately $1.8 million of capitalized interest, charged cost of sales during the quarter, representing 110 basis points.
Combined selling, general, and administrative expenses for the first quarter were 14.8% of home sales revenue compared to 16.4% in the prior year.
We typically expect the first quarter to have the highest SG&A ratio as it generally results in the lowest closings on a per-community basis during the year.
As a percentage of home sales revenues, we believe that SG&A will vary quarter to quarter based on home sales revenue and remain within our previous guidance of 13% to 14% for the full year.
Selling expenses for the quarter were $14.1 million or 8.7% of home sales revenue compared to $11.6 million or 9.6% of home sales revenues for the first quarter of 2015, which is a 90 basis point improvement.
Selling expenses as a percentage of home sales revenue improved primarily as a result of operating leverage realized related to advertising costs.
General and administrative expenses were 6.1% of home sales revenues compared to 6.8% for the first quarter of 2015, a 70 basis point improvement.
This decrease or flexed leverage realized from the increase in home sales revenue during the first quarter of 2016 as compared to the first quarter of 2015.
Pre-tax income for the quarter was $17.8 million or 11% of home sales revenue, an increase of 130 basis points over the same quarter in 2015.
We generated net income in the quarter of $11.7 million or 7.2% of home sales revenue, which represents earnings per share of $0.58 per basic share and $0.57 per diluted share.
First quarter gross orders were 1,468, and net orders were 1,135.
Ending backlog for the first quarter was 814 homes compared to 601 last year.
And the cancellation rate for the first quarter of 2016 was 22.8%.
We ended the first quarter with a portfolio of approximately 25,500 owned and controlled lots and as of March 31, approximately 11,700 of our 17,800 owned lots were either raw or under development.
Turning to the balance sheet, we ended the quarter with approximately $48 million of cash, $561 million of real estate inventory, and total assets of $653 million.
On January 6, 2016, we increased our revolving credit facility to $300 million in accordance with the accordion feature of the credit agreement.
At March 31, we had $248 million outstanding under the facility as well as $85 million in convertible notes.
Our gross debt to capitalization was approximately 55%, and our net debt to capitalization was 51%.
During the first quarter, we issued 150,000 shares of our common stock under our ATM program generating net proceeds of approximately $3.5 million.
At this point, I'd like to turn it back over to <UNK>.
Thanks, <UNK>.
In summary, we had another successful quarter and a great start to 2016.
Let me provide some guidance and thoughts on what we are seeing thus far in the second quarter and looking ahead into the remainder of the year.
The second quarter is off to a strong start with 341 closings in April, up 28% from the 267 closings in April of last year.
The 341 closings came from 55 active communities resulting in a very solid absorption pace of just over six closings per community per month.
Based on our backlog, we expect to close more homes in the month of May than in April, keeping our absorption pace north of six closings per community per month and right on track to meet our goal of closing between 4,000 and 4,400 homes for the year.
We expect to see continued demand for our new homes in Houston.
As <UNK> noted earlier, some of our Houston communities sold out earlier than originally expected, reducing our community count from eight to six.
We expect to close more than 60 homes in these six active communities in May of 2016, averaging more than 10 closings per community for the month, demonstrating continued strength in the Houston market.
Our expansion efforts are already generating closings for the second quarter of 2016.
Our first project in the state of Washington, Evergreen Point in Olympia, had a very successful grand opening in March which generated five closings for the month of April.
Producing five closings in a new market in our first month is a great accomplishment by our team in the Northwest and again proves that we have the systems and processes in place to get out to a fast start in new markets.
We expect to have closings in at least two other projects in the Seattle area before the end of 2016.
Additional highlights of our growth and expansion across the nation include our presence in Nashville where we have started construction on our first five homes.
In this new market, we expect to open for sales in the third quarter and close on our first homes in the fourth quarter.
We are also making progress in Raleigh, North Carolina, and have our first two projects under contract.
We expect construction to start in the third quarter, sales to begin in the fourth quarter, and our first closings in Raleigh to take place in the first quarter of 2017.
Our acquisitions committee has also approved our first deal in the Portland market.
We anticipate closing homes in this new market in the first or second quarter of 2017.
We expect community count at the end of the year to be between 62 and 67 active communities.
This quarter, we saw nearly a 4% increase in average sales price over Q4 2015.
We believe our average sales price in 2016 will continue to increase as a result of product and geographic mix as well as the market conditions increasing on average by 1% to 2% per quarter, ending the year with an overall average sales price between $190,000 and $200,000.
Although we continue to expand into new markets and deliver homes at higher price points, we will remain focused on serving the entry-level buyer.
We expect adjusted gross margin, which excludes the effects of interest and purchase accounting, will continue to be strong.
Although the first quarter adjusted gross margin of 26.7% was near the low end of our guidance, we believe that our year-end adjusted gross margin will be in our target range of 26.5% to 28.5%.
Based on our expectation of delivering between 4,000 and 4,400 home closings along with an increase in average sales price, consistent gross margin, and realized SG&A leverage, we believe our first-quarter results and our strong start to the second quarter keep us on track to deliver basic earnings per share for the full-year 2016 between $3 and $3.50 per share.
These expectations are based on the general economic conditions and our experience for the remainder of the year being similar to 2015 and our results to date in 2016.
In summary, we are very pleased with our results and our ploy to take advantage of continued growth opportunities in existing and new markets.
We believe we are well positioned to continue to grow our revenues, community count, and earnings in line with our guidance, allowing LGI Homes to achieve our long-term goals and objectives of market leading returns for our shareholders.
Now, we'll be happy to take your questions.
Thanks, <UNK>.
This is <UNK>.
I'll start.
As far as Houston goes, as we mentioned in our remarks, Houston coming in at 17% of the overall closing total compared to 29% last year.
And you're right, historically Houston has been at or near or above our stated gross margin guidance range, so we did have a couple communities that were nearing the end of their cycle closeout.
So mathematically replacing those closings with other markets that had slightly less gross margins had an impact on the overall gross margins, so we believe that is somewhere in the 30 basis point range related to the impact of the Houston mix falling off.
So that's how we see the Houston impact.
And <UNK>, this is <UNK>.
I can add a couple things to that.
First of all, we're comfortable in our range, 26% to 28.5% was what we thought about last quarter.
We came in obviously on the low end of that range at 26.7%.
But we put a pretty good size range out there because we were comfortable even under the scenario of mix and not sure exactly what market the closings are coming from, and every market is slightly different on the gross margin.
We are comfortable we would be in that range.
And the bottom line is we just really didn't raise prices fast enough to keep up with costs.
We always raise prices on a quarterly basis and look at our costs.
Costs have been going up for us as well as other builders.
We implemented in a lot of our communities somewhat of a mid-quarter price increase over the last three weeks.
We're comfortable.
We've looked at the preliminary numbers for April, and we're comfortable that the second quarter is going to be higher than the first quarter and the additional volume is going to help that as well.
I think we're in good shape in gross margin going forward and very comfortable in our range for the year.
Sure.
Typically, the first quarter bears a greater proportionate share of indirect overhead as a percentage of revenues due to the fact that the closing volume is historically the lowest for the quarter for the year.
So this particular quarter, we saw about a 20-basis point increase in the indirect overhead.
This quarter over first quarter of last year.
And just primarily due to timing on how new markets come in.
We opened Jacksonville this first quarter.
We also opened up an additional community in Colorado.
<UNK> had went through in his comments on some of the other markets we went through.
It's really more directed towards just timing getting our primarily superintendents onboarded, getting trained as we get them on and working in our communities as we work to open other communities throughout the rest of the year.
We'll be increasing our community count issue.
The reason we wanted to make six is really positive.
We just had a very strong 2015 in the Houston market as well as a lot of markets in the country.
But the replacement projects for those two that sold out were just not ready yet because we increased the absorption above what was expected.
So we're down to six communities right now.
That's going to ramp up by the end of the year to at least seven and possibly eight before we get into closings.
We'll start construction on project seven and eight before the end of the year, but probably seven or eight by the end of the year.
And the next question you may have is Houston as a percentage of overall.
We expect Houston to be off 15% to 20% of our closings for this year.
That's getting real specific on guidance, <UNK>, but we definitely expect the second quarter to be higher than the first quarter.
The mid-quarter price increase, that's not going to have a big effect on the second quarter since our pipeline is pretty full for the second quarter already.
But sales over the last couple weeks, we'll get some of those closings in June but certainly relative to the third quarter of this year.
So I think our adjusted gross margin, what I would believe is it's going to continue to go up throughout the year.
Getting 80 to 100 basis points in one quarter might be at the high end of what I would suggest.
But <UNK> and I both are comfortable that we're heading in the right direction on gross margin.
The second quarter should be higher than the first quarter.
This is <UNK>.
That's fair.
What we're saying really is that the first quarter is typically on the highest end of the range and that's why 14.8% came in above the full year guidance of 13% to 14%.
But I think as we go throughout the year, it's going to be primarily driven on where we land in the closing guidance range.
Obviously on the lower end of the closing guidance, the full-year SG&A will likely be on the higher end of the 13% to 14%, and then on the high end of the closing guidance it will likely end up down at the lower end of the range.
I think we'll definitely see on a quarter-over-quarter basis, I would say that's fair.
It will be more dramatic in the first quarter as we've seen than it would be in the quarter-over-quarter comparisons for the remainder of the year.
Great.
Yes.
That's what we talked about.
It's going to be on a lower comp, close to 155 homes in May, so as a percentage increase, it's going to be dramatically higher.
It's month-to-month volatility based on last year's comp, but I can tell you that sales have been extremely strong over the last couple months and we are very positive about the second quarter and very comfortable telling everyone that closings in the month of May are going to be higher than April.
No impact from weather on closings at LGI.
And also very happy to report most of the people heard about some big storms we had in the Houston market and no LGI Homes or communities either past or present had any flooding or any damage to the homes at all.
Yes, I think it's very positive for LGI as most everyone on the call knows, we tend to be in a little bit further out locations and the Grand Parkway is adding another ring of highway to the Houston market.
So one of our projects, Bauer Landing, for example, the exit off the Grand Parkway to the front entrance of that project is about three or four miles and it's just created a more convenient access point for our customers.
And sales are very strong there and continue to be so the Grand Parkway opening in Houston is certainly positive for LGI and those of us to develop a little bit further out.
I'll start and <UNK> can add to it if he likes to.
Yes.
I absolutely believe our return on equities can be sustainable.
We are going to be diligent in our acquisitions committee.
That's one of the metrics that we look at.
And also, and it does impact gross margin.
As we've been expanding outside of Texas, we have been more likely to develop ---+ to buy finished lots from a developer and not take that development risk and all the upfront capital in these new markets.
Our gross margin hurdle is lower on a finished lot deal than on a development deal we take, but it certainly is accretive to the return on equity metric.
Good question, <UNK>.
Appreciate the question.
Houston has traditionally run at the high end of our range at 28%, 29%, and these new markets, when we go into a market, we're modeling those closer to 25% gross margin and that increasing prices and increasing our gross margin as we develop.
That would be accurate.
It depends on a little bit on the market but Colorado is 50% higher than the Houston market.
So it's a little bit market specific, but generally speaking most of our other markets are higher average sales price than Houston and the gross margin dollars, you are correct, would be higher, even if the percentage is lower.
No, this is <UNK>.
No, we just increased our credit facility as we mentioned to 300.
We continue to work with our lenders as we evaluate our capital needs, same approach in terms of evaluating our acquisitions and our acquisitions pipeline.
We also have our ATM program.
Cumulatively we've used about $13 million total of the $30 million.
So we have about $16 million or $17 million left available to us in that program, and then having the shelf registration filed as well.
Thanks, <UNK>.
Appreciate it.
Thank you, everyone, for participating on the call and for your interest in LGI Homes.
We look forward to sharing the achievements of 2016 throughout the year.
Have a great day.
