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 our performance from the first quarter of 2017.
Then <UNK> will follow up to discuss our financial results in more detail.
After he is done, we will conclude with comments on what we are seeing for the second quarter, and our expectations for the remainder of 2017 before we open the call for questions.
To begin today, we are pleased to announce that Builder Magazine has released their rankings for the 2017 Builder 100.
We have come a long way over the past 10 years when we built exclusively in Texas, and we were ranked as the 151st largest builder in 2007.
This year, we held strong as the 15th largest builder for the second year in a row, based on our 4,163 home closings in 2016.
And I'd like to take a moment to extend a special thank you to our dedicated employees at LGI.
Because of you, we have been able to realize strong growth throughout the years.
Looking at the first quarter of 2017, the year's off to a solid start.
We closed 761 homes, generating approximately $163 million in home sales revenue, which represents a slight increase in revenue over the first quarter of 2016.
Year-over-year closings were lower than last year, primarily driven by lack of finished home inventory in select communities, but we saw an increase in average sales price, which offset our lower volume.
We continue to demonstrate our ability to expand our business to new markets.
We ended the first quarter with 69 active communities, which is an increase of 13 over the 56 active communities that we had at the end of first quarter last year.
These communities were spread throughout the nation, with 3 in Seattle, 2 in Orlando, Denver, and Nashville, and 1 each in Austin, Albuquerque, Phoenix, <UNK>olorado Springs, and our newest markets of Portland and Raleigh, net of 2 communities closing out in the Dallas-Fort Worth market.
Breaking it down by market, let's first take a look at the results of our Texas operations.
The fundamentals of this division have remained solid, generating 315 closings and representing approximately 41% of our total closings during the quarter.
This compares to 410 closings, or 49% of our total closings during the first quarter of last year.
This year-over-year decrease is primarily due to lack of available inventory and the closeout of 2 communities in DFW.
We continue to geographically diversify our operation.
Our presence outside of Texas increased during the first quarter to 59% of our closings compared to 52% of our closings in the first quarter of last year.
The Southwest Division represented 17% of our home closings, the Southeast Division represented 20%, the Florida Division represented 16%, and the Northwest Division represented 5%.
Historically, we have seen lower absorption rates in the first quarter.
This quarter, our top market was Nashville, leading the way with 5.4 closings per community per month, a direct result of our successful grand opening of our second Nashville community during December of 2016.
<UNK>harlotte was our second leading community this quarter, with 5.3 closings per community per month, and Houston in third, remained solid at 5.2.
Our marketing focuses on renters living within close proximity to our communities.
We have seen continued increasing demand for home ownership with our advertising producing over 80,000 inquiries during the first quarter of 2017, reinforcing our belief that there is strong demand in the first-time homebuyer segment.
In addition, housing demand drivers are alive and well in all of our markets, including nationally-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 <UNK>hief Financial Officer, for a more in-depth review of our financial results.
Thanks, <UNK>.
As mentioned earlier, home sales revenues for the quarter were $162.9 million, a slight increase over the first quarter of 2016.
Sales prices realized from homes closed during the first quarter range from the $140,000's to over $480,000.
In the first quarter, approximate average sales prices were $206,000 in Texas, $251,000 in our Southwest Division, $184,000 in our Southeast Division, $197,000 in Florida, and $321,000 in our Northwest Division.
Our overall company-wide average sales price was $214,075 for the first quarter, an 11.2% year-over-year increase, and approximately 3% increase over the average sales price for the fourth quarter of 2016 of approximately $208,000.
This is largely attributable to changes in product mix, price points in new markets, and a favorable pricing environment.
Gross margin as a percentage of sales was 26.7% this quarter, compared to 25.5% for the same quarter last year.
Our adjusted gross margin was 28% this quarter, compared to 26.7% for the first quarter of '16, a 130 basis point increase.
Adjusted gross margin excludes approximately $2.1 million of capitalized interest charged to cost of sales during the quarter, representing 127 basis points.
<UNK>ombined selling, general, and administrative expenses for the first quarter were 16.8% of home sales revenue compared to 14.8% in the prior year.
We typically expect the first quarter to have the highest SG&A ratio due to lower closings on a per-community basis.
We believe that SG&A will vary quarter-to-quarter based on home sales revenue.
And for the full year, we expect SG&A, as a percentage of revenue, to be similar to our 2016 results.
Selling expenses for the quarter were $16.1 million or 9.9% of home sales revenue compared to $14.1 million or 8.7% of home sales revenue for the first quarter of '16, a 120 basis point increase.
The increase in selling expenses as a percentage of home sales revenue is due to an increase in advertising-related expenses in both new and existing markets.
General and administrative expenses were 6.9% of home sales revenue compared to 6.1% for the first quarter of 2016, an 80 basis point increase.
The increase in general and administrative expenses as a percentage of home sales revenue reflects an increase in overhead related to our ongoing expansion and lower closings on a per-community basis.
Pretax net income for the quarter was $16.8 million or 10.3% of home sales revenue, a decrease of 70 basis points over the same quarter in 2016.
As a result of the recently adopted accounting standard, our effective tax rate of 30.1% is lower than the statutory rate due to the tax benefit of deductions in excess of compensation costs or windfalls for share-based payment that impact this quarter's tax rate.
We expect our effective tax rate for the remainder of 2017 to be similar to the 2016 rate of approximately 34%.
We generated net income in the quarter of $11.8 million or 7.2% of home sales revenue, which represents earnings per share of $0.55 per basic share and $0.52 per diluted share.
Weighted shares outstanding for calculating diluted earnings per share are impacted by our outstanding convertible notes.
In the first quarter of 2017, our average stock price was approximately $30.50, exceeding the conversion price, and therefore the convertible notes were determined to be dilutive under the treasury stock method.
This resulted in an approximate 1.2 million share increase to the weighted average shares outstanding for the diluted EPS calculation for the quarter.
First quarter gross orders were 1,734, and net orders were 1,402.
<UNK>oming off a record-breaking quarter at the end of 2016 for homes closed, we began the year with a backlog at 446, which was lower than the prior year, and a contributing factor to our year-over-year decrease in homes closed in the first quarter.
Our backlog, as of March 31, was 1,087 homes compared to 814 at the end of the first quarter of last year, and the cancellation rate for the first quarter of 2017 was 18.9%.
We ended the first quarter with a portfolio of approximately 29,300 owned and controlled lots.
And as of March 31, approximately 12,400 of our 20,800 owned lots were either raw or under development.
Turning to the balance sheet.
We ended the quarter with approximately $32 million of cash, $789 million of real estate inventory, and total assets of $868 million.
As of March 31, we had a total of approximately 2,150 homes complete and in progress, compared to 1,560 as of December 31, increasing our investment and vertical construction by over $50 million this quarter, in line with our increase in backlog during the quarter.
In February of this year, we increased our revolving credit facility to $400 million in accordance with the accordion feature of the credit agreement.
At March 31, we had $350 million outstanding under the facility as well as $85 million outstanding in convertible notes.
Our gross debt-to-capitalization was approximately 53% and net debt-to-capitalization was 51%.
Also during the first quarter, we issued 150,000 shares of our common stock under the 2016 ATM program, generating net proceeds of approximately $4.7 million.
At this point, I would like to turn it back over to <UNK>.
Thanks, <UNK>.
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.
<UNK>losings for the first 4 months of the year have totaled 1,126, which is 9.8% less than 1,185 closings that we started last year with.
The primary reason that our closings are down year-over-year is that we had strong closings in December 2016, and our inventory of completed homes during Q1 was not as high as we would have liked.
As <UNK> mentioned, we ended 2016 with 1,560 homes at various stages compared to 1,710 homes at the end of 2015, giving us fewer homes to close in the first quarter.
We believe the situation will correct itself over the next few months as we're bringing new inventory online with additional homes under construction and the completion of new development sections.
As we continue to build back our inventory, we have continued to sell homes.
Sales over the last 90 days have been very strong.
We have had over 500 net sales in each of the months of February, March, and April.
We currently have more homes under contract than we have had at any one time in our company history.
We expect our inventory levels to increase in May, trending back to targeted levels over the second quarter, and in line with our strong sales performance.
Based on our backlog, we expect to close between 450 and 500 homes in the month of May, resulting in an absorption pace north of 6 closings per community per month, and right on track to meet our goal of closing more than 4,700 homes for the year.
We ended April with 71 active communities, continuing on pace to end the year between 75 and 80 communities.
New projects will be introduced in both Minneapolis, Minnesota and Winston-Salem, North <UNK>arolina by the end of the year, and we'll have continued expansion in Nashville, Houston, Dallas, <UNK>harlotte, and the Seattle markets.
We believe our average sales price will continue to increase during 2017, just as it did in the first quarter, ending the year with an average sales price between $210,000 and $220,000.
We also expect our gross margin to be in the 25% to 27% for the remainder of the year, and adjusted gross margin for the year will continue to be in our historical range between 26.5% and 28.5%.
Given our guidance of delivering more than 4,700 home closings, along with an increase in average sales price and consistent gross margins, we continue to believe our basic earnings per share for the full year 2017 will be between $4 and $4.50 per share.
Now, we'll be happy to take your questions.
The first one, much better performance on gross margin than we expected.
<UNK>ould you talk about how much that was price versus mix.
Sure.
This is <UNK>.
So predominantly mostly price, but a combination with ---+ in the last quarter's call, we also talked about some cost initiatives that we implemented at the end of the summer and into the fall.
So we again got to see some of those benefits that carried into the first quarter as well.
And that's why we had a better-than-expected performance in the first quarter.
Got it.
I mean, on a percentage basis, how many of your communities do you think you're ---+ be able to raise prices right now, if you look across your whole footprint.
Yes, Jay, this is <UNK>.
I think we are raising prices pretty much consistently in every project nationwide because we're continuing to see costs go up.
And everybody's been talking about lumber costs going up, we're finding that across the country, whether it's the price of a developed lot, the fees coming out from cities, the cost of lumber, the cost of concrete.
Generally, it's more expensive to build a house today than it was 90 days ago.
So we're consistently raising prices.
We keep that gross margin consistent.
Okay.
And then the last question I had, with the expansion to some of these geographies where, Minneapolis, you may have some weather issues or Winston-Salem ---+ I mean, not Winston-Salem, but some of the other Northwest geographies, is it going to make your backlog run a little bit longer.
Or are you thinking the cycle times for the company are going to be moving up because you're going into some of these different areas where weather might push out closings.
Yes, I think that's going to happen to be built in our schedule.
I mean, we don't talk about weather here at LGI very often.
But certainly in those markets where you have to deal with the climates, more so than in Texas, our build schedule is going to be a little bit longer.
But we don't anticipate the build schedule in those markets being any longer than 5 to 10 days longer than we are building in Texas.
Yes, sure.
I think the issue is a combination of a few different factors, and you're correct.
And we have room to improve on that.
A couple of different things.
One, is we just flat out, didn't start enough houses.
We dropped the ball in some cases.
We just didn't start enough houses to build up the inventory for the first quarter.
Also, construction times, we just had the question on construction times.
We got room for improvement, nationwide, on reducing our construction times.
The construction times in some of our newer markets are not where we want them today.
And also, from a development standpoint, getting plats and cities to approve our plats and getting new development sections on the ground, especially in the Dallas-Fort Worth market, which is where we're really short of inventory, and we closed out 2 separate communities, that had an influence.
And then, obviously, we don't want to not say sales weren't an issue either.
I think inventory was the predominant reason we were less year-over-year on closings, but we can always use more sales.
I mean January ---+ and we talked about this on the last call, January sales were down year-over-year, but February, March, and April have been, like I said, over 500 net sales a month.
So I think it's a combination of factors, <UNK>, but I think our inventory is going to be in line.
And we're not going to be talking about inventory anymore over the next couple of quarters.
No.
I think it's not material.
And we worry about those issues you talked about.
I mean, certainly from a contract standpoint, the longer customers are under contract.
And I think this is the case with every builder, the longer it takes from the contract signing to closing, the better chance that life's going to get in the way and something happens and that deal has a higher percentage of not closing.
Now I don't think that's going to be a material number for us, but I do think we will probably lose more as that gets extended.
And as far as the quality, I'm not concerned about the quality.
The costs ---+ like I said earlier, the costs will continue to go up.
So the longer it takes us to start houses and get them closed, I think the costs will go up.
I think we've got that built into pricing, so I think our margins are going to remain consistent.
<UNK>orrect, correct.
I mean I just think based on our history of selling houses, if it takes an average 30 days longer than it did to close houses, you will lose some percentage of those deals.
So our business model is converting renters into homeowners.
And ideally we have the house finished, so the customer can look at it, and we can close in the next 30 to 45 days.
And the longer that it gets extended, there will be more deals that cancel.
But like I said, I don't think that's going to be a material amount.
We need to do a good job to keep the customers engaged, keeping them informed and keeping them excited.
But there will be a situation where the customer's life gets in the way, and it will lead to some, but not much.
Yes.
Yes.
I think Houston has been in our top 3, <UNK>.
I mean, <UNK>harlotte's has been strong for us, Dallas was actually our #1 community last year in closings, surpassing Houston.
So Houston, for the first quarter of last year, averaged 5.8 closings per community, and this year we averaged 5.2.
So slightly down this year, but Houston is going to continue to be a strong market for us.
That number in the second quarter will certainly be over 6 closings per month per community.
So Houston feels good as it always has.
This is <UNK>, <UNK>.
It ---+ definitely, we believe that there's a wide range, and there's a number of factors that come into play on a quarter-to-quarter basis on gross margin, introduction of new markets, transition between communities within our existing markets, <UNK> mentioned and we talked a little bit about some of the labor and material headwinds that we constantly really kind of see on a regular basis, all of that offsetting with increased average sales prices.
So I think it's more of a function ---+ 2015 and 2016, both came in at an adjusted gross margin at 27.8%.
So if we think we come in somewhere in and around that number, is how we would define being consistent.
Yes, we did.
Yes, we had over 80,000 leads in the first quarter this year.
That was up at least 20% over last year.
So we spent additional dollars, primarily as a result of having more communities.
So we keep it pretty consistent on a per community basis.
But we're definitely seeing the results of that additional spend.
Yes, they're going to be coming online over the next 90 days.
And that's a big part of us talking about getting our inventory back in line.
Dallas-Fort Worth is a big part of that, so we're looking for pretty big numbers out of that market over the next 90 days.
Yes, I think, it's gaining experience in the new markets.
Our construction times in Texas have historically been quicker, if you will, than the new markets out of the state.
And in the markets we've been in longer, like a Florida market or a <UNK>harlotte market, we're in pretty good shape there on our construction timelines.
And then on our newer markets, like Nashville and Denver and even the Northwest, we are still working on getting that construction timeline down.
And it really comes with a lot of experience, learning our systems, but also getting credibility in the market, getting access to the trades.
As we open up more communities and can produce more volume, that should come down as well, building that relationship with our trade partners.
Yes.
We're building to a schedule of 50 to 60 calendar days in the Texas markets, from the time we start pushing dirt until the home is complete.
And our out-of-state markets, it's running 15 to 30 days longer than that, and we think we can improve on that by 5 or 10 days.
Yes, this is <UNK>.
Yes, it will pace out relatively even out for the remainder of the year.
We will have net communities ---+ net of some other community closeouts that we're expecting.
And then you're also right in terms of the communities that we add in the late to back half part of the year generally tend to count as a community, but don't contribute a significant number of closings until the following year.
Probably around 5 of those, I would say.
This is <UNK> speaking.
It's not going to be a problem for us getting our inventory back in line because we've already got that scheduled, that's in progress.
We're comfortable that we can deliver enough houses because of labor.
I think where labor does come into play, and I think this is a challenge for the industry, is labor is tight in some markets, and we're going to have to pay up for it.
So I think, it is more of a margin headwind than getting the houses built.
Yes.
We haven't given a specific guidance range outside of 2017, so 4,700 homes in 2017.
But we have talked about before on the call, and we'll reiterate that we are going into new markets, we continue to grow and, obviously our community counts continue to grow.
And our goal is to get into the top 10.
We talked about on the call today, we're a top 15 builder right now.
Our goal is to get into the top 10 over the next few years, and eventually be a top 5 builder in the United States.
Yes, good question, <UNK>.
I look at it from an absolute numbers, but you're correct in your math on a per opportunity basis.
So to get to 4,700, we basically have to close 450 houses per month, the rest of the way from May on.
And we said on the call that we're comfortable based on the division presidents and what they said, we can count on them to close this month between 450 and 500 closings in May.
And also based on our pipeline, the next 90 days of closings looks real clear to us.
So I'm very comfortable saying in May, June and July, we can average 450 closings per month, which is where we need to be for the year.
So that's why we think we're right on track to hit that 4,700 number.
Now once you get past July and you get into August to December, obviously, I'm not as confident of that other than our historical trends because we know the phone's going to keep ringing and we're going to have closings, but we just haven't got into a lot of sales that's going to impact the back half of the year yet.
But the next 90 days, averaging 450 closings a month and putting us right on track for the 4,700 gives us a good confidence in that number.
Yes.
I mean, the active communities is defined by information centers or sales teams that are open having closings.
But you're right, transition.
And that part of the inventory challenge in the first quarter, we had a lot of communities transitioning from one community to the other.
They were still having closings, but closings definitely got bumpy, if you will, so the goal is to stay in each submarket and stay consistent.
We mentioned on the call, we had 2 communities in DFW closeout.
So it reduced our community count by 2 compared to last year, so there's going to be some of that, but we want to stay pretty consistent in each submarket and replace the communities that we're currently selling in.
All right.
Thank you, and thank you, everyone for participating on today's call, and your continued interest in LGI Homes.
Everybody, have a great day.
