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Edited Transcript of LGIH earnings conference call or presentation 7-May-19 4:30pm GMT

Q1 2019 LGI Homes Inc Earnings Call

The Woodlands May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of LGI Homes Inc earnings conference call or presentation Tuesday, May 7, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Michael Merdian

LGI Homes, Inc. - CFO & Treasurer

* Eric Thomas Lipar

LGI Homes, Inc. - Chairman & CEO

* Rachel Lyons Eaton

LGI Homes, Inc. - CMO

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Conference Call Participants

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* Alex Barrón

Housing Research Center, LLC - Founder and Senior Research Analyst

* Carl Edwin Reichardt

BTIG, LLC, Research Division - MD

* James C McCanless

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Michael Jason Rehaut

JP Morgan Chase & Co, Research Division - Senior Analyst

* Nishu Sood

Deutsche Bank AG, Research Division - Director

* Stephen F. East

Wells Fargo Securities, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Welcome to the LGI Homes, Inc. First Quarter 2019 Conference Call. Today's call is being recorded and a replay will be available at the company's website later today at www.lgihomes.com. We have allocated an hour for prepared remarks and Q&A. (Operator Instructions) At this time, I will turn the call over to Rachel Eaton, Chief Marketing Officer at LGI Homes. Mrs. Eaton, you may begin.

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Rachel Lyons Eaton, LGI Homes, Inc. - CMO [2]

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Thank you. Welcome to the LGI Homes conference call discussing our results for the first quarter of 2019. Today's conference call will contain forward-looking statements that include, among other things, statements regarding LGI's business strategy, outlook, plans, objectives and confirmation of 2019 guidance. All such statements reflect current expectations. However, they do involve assumptions, estimates and other risks and uncertainties that could cause our expectations to prove to be incorrect. You should review our filings with the SEC, including our risk factors and cautionary statement about forward-looking statements section for a discussion of the risks, uncertainties and other factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

These forward-looking statements are not guarantees of future performance. You should consider these forward-looking statements in light of the related risks, and you should not place undue reliance on these forward-looking statements which speak only as of the date of this conference call.

Additionally, adjusted gross margin, a non-GAAP financial measure, will be discussed on this call. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. A reconciliation of adjusted gross margin to gross margin, the most comparable measure prepared in accordance with GAAP, is included in the earnings press release that we issued this morning and in our quarterly report on Form 10-Q for the quarter ended March 31, 2019, that we expect to file with the SEC later today. This filing will be accessible on the SEC's website and in the Investors section of our website at lgihomes.com.

Joining me today are Eric Lipar, LGI Homes' Chief Executive Officer; and Charles Merdian, the company's Chief Financial Officer. With that, I'll now turn the call over to Eric.

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [3]

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Thank you, Rachel, and welcome to everyone on this call. We appreciate your continued interest in LGI Homes. During today's call, I will summarize the highlights and results from the first quarter of 2019. Then Charles will follow up to discuss our financial results in more detail. After he is done, we will conclude with comments and open the call for questions.

For the first quarter, we closed 1,228 homes, generating approximately $288 million in home sales revenue, which represented a 3.1% increase for the first quarter of 2018. Throughout the first quarter, we saw continued demand for affordable homes, coupled with a positive response from buyers to lower interest rates. First quarter net orders were 1,948, an 8% increase over the first quarter of last year. While January and February were down year-over-year at 3% and 10%, respectively, March saw a very positive response from buyers resulting in a 32% increase in orders for the month. April continued this trend with net orders exceeding 30% year-over-year, reaffirming our optimistic outlook on the remainder of the second quarter.

For the first quarter, we averaged 4.9 closings per community per month company-wide. Absorption for the quarter was highlighted by performance in our Las Vegas, Sacramento and Dallas/Fort Worth markets. For the quarter, our top market on a closing per community basis was Las Vegas, averaging 11.8 closings per community per month; followed by Sacramento at 7.2 closings per community per month; and DFW at 7.1. Company-wide, we ended the first quarter with 87 active communities, more than a 10% increase over the 79 active communities that we had at the end of Q1 last year. The first quarter reflects investments and upfront costs related to our first quarter community count growth and our anticipated community count growth for the remainder of this year.

During the first quarter, we incurred 100% of the startup expenses related to the geographic and community count expansion that will be additive to active community count in the second quarter of this year such as increased construction overhead, costs associated with new office setup, training paid for new sales employees and marketing expenses, which led to 10 community grand openings that we held in March. All 10 of these communities will deliver closings in the second quarter.

Second quarter costs will be more of the same as we continue to incur start-up cost to support additional communities that will realize closings in Q3. From an operations standpoint, nothing is different than before. The impact of these expenses is just more pronounced due to the lower closing volume from the first quarter and elevated community count increase. We are investing heavily in the first and second quarters of this year to hit our timelines to open each of these new communities. In April, we increased by 5 to 92 active communities, up 16.5% year-over-year. We expect to be at 100-plus communities by the end of July and believe this will have a positive impact on closings during the second half of the year.

In addition to the stated increases in marketing spend related to new communities, for the first quarter, we increased marketing spend on existing communities to offset the potential impact of a rising rate environment based on the results of the fourth quarter. As previously reported, orders during the fourth quarter of 2018 and the first 2 months of 2019 were not as strong, therefore, we took a more cautious approach to price increases for the first quarter and did not raise prices as much as we have in the past. Another factor impacting our pricing strategy was the anticipated rollout of a new interior fit and finish initiative which we will speak about later on this call.

With that, I'd like to turn the call over to Charles Merdian, our Chief Financial Officer, for a more in-depth review of our financial results.

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Charles Michael Merdian, LGI Homes, Inc. - CFO & Treasurer [4]

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Thanks, Eric. As mentioned earlier, home sales revenues for the quarter were $287.6 million based on 1,228 homes closed, a 3.1% increase over the first quarter of 2018. Sales prices realized from homes closed during the first quarter ranged from the $140,000s to over $500,000, and averaged $234,197, a 4.4% year-over-year increase. This increase in the average sales price per home was primarily due to changes in product mix, higher price points in certain new markets, such as the addition of Sacramento and Las Vegas, and to a lesser extent, increases in sales prices in existing communities.

In the first quarter by division, approximate average sales prices were $215,000 in Central, $366,000 in the Northwest, $228,000 in the Southeast, $204,000 in Florida and $256,000 in the West, which was up from $206,000 for the first quarter of 2018.

Gross margin as a percentage of sales was 23.1% this quarter compared to 24.8% for the same quarter last year, a decrease of 170 basis points. During the quarter, we closed 58 homes, generating approximately $17 million in revenue related to homes acquired in the Wynn acquisition. In addition to purchase accounting, gross margins realized on these homes were below our company average. This had a 40 basis point impact to our overall margins compared to the prior year. We also saw a 50 basis point decrease in gross margin associated with an increase in construction overhead as a result of our geographic expansion and lower closings per community in our Florida and Northwest divisions. Gross margins were also impacted due to an increase in overall construction costs, lot costs as a percentage of revenues and a more cautious pricing, as Eric mentioned earlier. Our adjusted gross margin was 25.1% this quarter compared to 26.4% for the first quarter of 2018, a 130 basis point decrease. Adjusted gross margin excludes approximately $5.4 million of capitalized interest charged to cost of sales during the quarter, representing 188 basis points, approximately 30 basis points higher than the same quarter last year primarily due to an overall increase in the average cost of debt with the issuance of $300 million in our senior notes in 2018 and a slight increase in LIBOR year-over-year. Adjusted gross margin also accounts for $630,000, a step-up associated with the Wynn Homes acquisition. We currently expect our gross margin to slightly increase in the second quarter and end the year within our previously stated guidance.

Combined selling, general and administrative expenses for the first quarter were 15.7% of home sales revenue compared to 13.8% in the prior year and 16.8% for the first quarter of 2017. Selling expenses for the quarter were $26.8 million or 9.3% of home sales revenue compared to $22.9 million or 8.2% of home sales revenue for the first quarter of '18, a 110 basis point increase. The increase in selling expense as a percentage of home sales revenue reflects additional operating expenses associated with personnel and advertising.

We spent an additional $1.7 million in the first quarter this year compared to the first quarter of 2018 in advertising expense, comprising of additional cost due to community count growth and increased spend in our existing communities. We also added additional sales staff related to community count growth and incurred costs associated with the opening of new offices.

General and administrative expenses were $18.4 million or 6.4% of home sales revenue compared to 5.5% for the first quarter of '18, a 90 basis point increase. Increase in general and administrative expenses as a percentage of home sales revenue reflects the additional overhead with the increase in community count both realized and expected for the remainder of the year.

We believe that SG&A will vary quarter-to-quarter based on home sales revenue. And for the full year, we expect combined SG&A as a percentage of revenue to be 20 to 50 basis points higher compared to our 2018 full year results, driven primarily by increases in selling expenses related to advertising and new community openings.

Pretax income for the quarter was $21.7 million or 7.5% of home sales revenue. For the first quarter, our effective tax rate of 15.5% is lower than our annual expected effective tax rate primarily due to result of deductions in excessive compensation costs or windfalls for share-based payments. We would expect that the second through fourth quarter effective tax rate will range between 23.5% and 24.5%.

We generated net income in the quarter of $18.3 million or 6.4% of home sales revenue, which represents earnings per share of $0.81 per basic share and $0.73 per diluted share. First quarter gross orders were 2,359 and net orders were 1,948, an 8% increase over the prior year first quarter. Ending backlog for the first quarter was 1,344 homes compared to 1,370 last year and the cancellation rate for the third quarter of 2019 was 17.4%. We ended the first quarter with a portfolio of 50,700 owned and controlled lots. And as of March 31, 29,978, or 59% of these were owned. And of this amount, 8,600 were finished vacant lots, 18,087 were either raw or under development and 3,291 were either completed homes, information centers or homes in process.

Weighted shares outstanding for calculating diluted earnings per share impacted by our outstanding convertible notes. And in the first quarter of 2019, our average stock price was approximately $58, resulting in approximately 2 million share increase to the weighted average shares outstanding for the diluted EPS calculation for the quarter. As of March 31, we had approximately $35 million in cash, approximately $1.3 billion of real estate inventory and total assets of over $1.4 billion. Also at the end of March, we had $685 million in total debt outstanding under our revolving credit facility, convertible notes and senior notes. Our available borrowing capacity was approximately $75 million. Our gross debt-to-capitalization was approximately 50.4% and net debt-to-capitalization was 48.6%.

Yesterday, on May 6, we entered into our fourth amended and restated credit agreement which provides for a $550 million revolving credit facility, which can be increased at the request of the company by up to $100 million, subject to the terms and conditions of the credit agreement. This recent amendment has substantially similar terms and includes the removal of a security trigger and increases our available borrowing base, as of March, from approximately $75 million to $116.5 million on a pro forma basis.

At this point, I'd like to turn the call back over to Eric.

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [5]

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Thanks, Charles. 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 great start with 612 closings in April, up slightly from the 606 closings in April of last year. The 612 closings came from 92 active communities, resulted in a very solid absorption pace, averaging 6.7 closings per community per month. As I mentioned earlier on this call, we'll be rolling out a new interior fit and finish. The introduction of complete home is our 2019 initiative to make our product more consistent on a national basis and includes the most desired new home features, all while providing the greatest value to homebuyers at affordable price. All new communities opening in 2019 and all new starts in our existing communities from the beginning of the second quarter forward, will include a complete home interior fit and finish package. The complete home showcases enhancements such as upgrade appliances, hard surface countertops, garage door openers, ceiling fans, USB plugs and more. All of these features will become standard in our new inventory, offering our homeowners greater value for their dollar. Homebuyer response to the new complete home fit and finish package has been positive. And since we have begun selling this new inventory in select communities, sales have been robust. We believe one of the factors contributing to the increase in March and April sales is the rollout of the complete home. Very few of the closings in the first quarter included this package. We expect a larger percentage in the second quarter, and by the third quarter, the majority of our inventory and closings will include the new complete home package. Construction of the new complete home package is currently underway in all communities nationwide. We are planning a press release later this month, rolling out this new product to the public, which we believe will maintain positive sales momentum.

Looking at the rest of the year, we believe throughout 2019, we will continue to grow our community count and end the year between 105 and 115 active selling communities. In addition, we believe our average sales price for the year will continue to increase, ending 2019 with an overall average sales price between $235,000 and $245,000. We maintain our gross margin guidance for the year in the range of 23.5% and 25.5%. We expect adjusted gross margin, which excludes the effects of interest and purchase accounting, will continue to be in line with previous expectations, ending the year between 25.5% and 27.5%.

Given our reaffirmed guidance of average sales price, gross margins and community count, we continue to believe our full year basic earnings per share will be between $7 and $8 per share.

Now we'll be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Michael Rehaut with JP Chase Morgan -- JP Morgan Chase.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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First question I had was on the fit and finish initiative, and it sounds interesting. I was curious, you had mentioned that you'd received, or as a result of where -- the communities that you rolled out, that it kind of supported some better monthly results in March, April. I was curious if you could give us a sense of, if you've observed like a difference in sales pace in those communities perhaps before and after? Or do you have any sense, I don't know if these are new communities where you can't really get a feel for what they were selling at before, if they started off the go with the fit and finish. But if you could give us any kind of sense for what it does from a sales pace standpoint, that would be helpful.

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [3]

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Yes, Mike, this is Eric. Great question. Yes, we're excited about the new fit and finish initiative called the complete home package. And I think that's one of the reasons that sales have been so, so strong in March and April. It's all the new communities that we've rolled out and all the grand openings we've had, had that fit and finish, and I know I've been out in the field with our teams and with the salespeople and listening to the customer's reaction and it's been perceived very positively. It gives us the consistency that we're looking for. I also think that the value to the customer, as we put a nicer product out there with a little bit more upgrade fit and finish, and our average sales price now consistently over $200,000, I guess shows the value to the customers, especially the more qualified customers and gives us a lot of consistency across the country. In the existing communities, so we've been cautious not to promote the new package too much, because we do want to sell out of our existing inventory, but we are starting to see results where the communities that are selling both of the packages, certainly the customers are willing to pay a premium price, which is going to help our margins to have that upgraded fit and finish.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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Okay. I guess secondly, on the quarterly results, I think you kind of called out some of the drivers to the higher SG&A as a percent of sales, and obviously, that was one of the big differences from -- in terms of your actual results versus our estimate, probably Street expectations as well. You said that you would expect, if I heard it right, a similar type of dynamic. I don't know if that means a similar type of year-over-year discrepancy or you had a -- it was up about 200 basis points year-over-year. So just trying to get a sense, when you talk about getting to a full year that would still be up 20 to 50 bps. Is part of that cadence you're looking for kind of a similar, year-over-year increase in the second quarter and then some leverage in the back half? Or how should we think about the cadence there?

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Charles Michael Merdian, LGI Homes, Inc. - CFO & Treasurer [5]

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Yes, Mike, this is Charles. I can take it first. I think what we're saying, on certainty on the selling side is that the second quarter year-over-year comparisons should be similar to what we saw in year-over-year comparisons for the first quarter. On the G&A side, I think if you look back and look at the cadence of G&A spend throughout 2018 is that we would expect that to taper. In terms of the year-over-year comps, June of '18 was $18.3 million in G&A cost compared to the $18.4 million that we reported for this quarter. So we would see the G&A side not see as much of an increase on the year over accounts for the rest of the year. Selling, primarily more in the second quarter. And then like you mentioned, seeing some of that leverage pay off in the third and fourth quarters as these communities open and start to generate closings.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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Great. And one last one, if I could sneak it in. On the gross margin, I just didn't hear, one of the drivers you said in terms of the first quarter performance was, you had mentioned 50 -- 40 bps impact from purchase accounting and then a 50 bp impact from, and I missed that. If you could repeat that. And then when you talk about the second quarter, your expectations for a slight increase, I just wanted to clarify if you meant sequentially or year-over-year.

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Charles Michael Merdian, LGI Homes, Inc. - CFO & Treasurer [7]

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Yes. So on the 50 bps was related to construction overhead. So although our revenues were similar nationwide, we had lower closings per community in our Florida and Northwest divisions, which were made up in the West, primarily, and also in the Central. So what that meant is we incurred similar construction overhead related costs in those 2 divisions with lower revenues. So the overall impact on our construction overhead, what flows through gross margin, was about 50 basis points. In terms of the gross margin expectations, that's sequentially. So typically, construction overhead is -- has its largest impact in the first quarter, just because of overall closings per community. So we would see that -- expect to see a little bit of pickup, if nothing else from that. The impact of Wynn will be marginalized slightly as well, and then just kind of normal operations from there. So we would expect it to be up sequentially.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [8]

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And then with further improvement in the back half I presume, or...

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Charles Michael Merdian, LGI Homes, Inc. - CFO & Treasurer [9]

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Correct.

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Operator [10]

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And our next question comes from the line of Nishu Sood with Deutsche Bank.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [11]

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I wanted to start off on the gross margins as well. The first quarter, obviously, the demand trends coming into the year were pretty widely affected across the market. So the not increasing prices at the usual cadence to go along with the construction costs make sense. Did that include any price reductions? Or was it merely not increasing? And also, actually, I'll pause there, because I wanted to follow up on that.

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [12]

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Yes, Nishu, this is Eric. We did have some decreases, some specials, if you would, to close out some older communities. That's pretty consistent with how we do it. We don't negotiate on prices but when we're closing out a community, we'll run some discounts to get rid of older inventory. But generally that wasn't the primary driver. Primary driver was just -- we didn't raise prices going into the tougher environments, anticipated higher interest rates in the first quarter, which fortunately didn't happen. So more -- and the cost kept increasing. So we're still seeing increased costs and when we don't have the price increases as aggressively as we once did, had a negative impact on margins for the quarter.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [13]

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Got it. Now demand sounds like, from the 30%-plus year-over-year pace in March and April, sounds like it has picked up a lot. And obviously, reflecting the fit and finish program and lower rates, perhaps. So with demand returning, should we think about the delays in -- or the lack of price increases in 1Q as a onetime adjustment to a new environment? Or is there the potential to kind of catch up and to kind of drive gross margins back up to where they have been in recent years?

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [14]

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Yes, that will be the optimistic side of the equation, as demand is very strong, March and April, very strong months. We look at our leads. You mentioned the word traffic, how we look at it, as in the first quarter, we had over 100,000 inquiries into homeownership. So the demand is still there, and it's a lot stronger demand and a lot stronger pull-through to contracts and closings than we saw in the fourth quarter and at the beginning of the year. So it's trending in the right direction and your assumption is correct. If sales remain strong, obviously, we'll be increasing prices to offset the costs but also increasing prices because the demand is there. And it's a great environment to increase pricing. So hopefully, that's the case through the rest of the year. We anticipate that happening and demand remaining strong. And if it does happen that way, which we expect it to, then gross margins will continue to increase every quarter, like Charles talked about with Mike.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [15]

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Got it. And the fit and finish program, sounds really exciting to have a national standard for the fit and finish. There are, obviously, I can see some of those things that you described, increasing cost but then on the other hand, if there's a consistent standard, maybe there's some incremental purchase synergies. So how should we think about the impact of the fit and finish on your profitability longer term? And where would it be? I would imagine it would be mostly in gross margins, but if you could just walk us through that as well, please.

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [16]

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Yes. No, a great question. And just to go a little bit more specific on that, when we were looking at our fit and finish across the country, we start with we want more consistency. Also we had taken some fit and finishes out of the house, that we weren't sure was a great decision and put some of that back in. Hard surface countertops or granite countertops is an easy one to use as an example. Probably 80% of our communities offer granite or hard surface countertops and 20% was at a Formica stage, just focused on affordability. And really when we delve into it and looked at all the advantage about adding granite in those communities that had Formica, and the additional cost of anywhere from $800 to $1,500 per house and per plan, we thought that was really great value. And then it gives us the tool from a marketing standpoint, in consistency, in pictures that every house nationwide started up by LGI from the second quarter forward is going to have hard surface countertops. A lot of our communities already had hard surface countertops so we're adding items like a ceiling fan and a garage door opener. So we think that creates the value and only a few hundred dollars in cost. But I would say, on averages -- on the average, we probably added $1,000 or $2,000 per cost to every LGI Home, and we think we can get $3,000 to $5,000 more in revenue per home. So that's going to increase margins and also increase the absolute dollars and overall average sales price. And we think it's also going to increase sales.

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Nishu Sood, Deutsche Bank AG, Research Division - Director [17]

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Got it. So just to close that out then. The revenue benefit or the sales price benefit is still to come? Or was it incorporated into each of these communities as you're revamping them or rolling out new ones under the new fit and finish standards?

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [18]

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Well, it's still to come from a closing standpoint. Of our first quarter closings, only 70 of the closings in the first quarter, which I believe is around 6%-ish of our closings in the first quarter, had the new fit and finish package, complete home package.

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Operator [19]

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Our next question is from Stephen East with Wells Fargo.

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Stephen F. East, Wells Fargo Securities, LLC, Research Division - Senior Analyst [20]

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Eric, maybe could you, just one more gross margin question. You all mentioned lot costs are up and higher construction cost. Just any color on those 2 metrics, and what you're seeing there.

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Charles Michael Merdian, LGI Homes, Inc. - CFO & Treasurer [21]

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Hey Stephen, it's Charles. Yes, so we accounted for 90 basis points between the Wynn closings and the 50 basis points on construction overhead. The majority of the difference of the 170 basis points change year-over-year is related to increased house costs -- lot costs were about 20 basis points, up to 18.8% of our average sales price. But again, that goes back to the cautious pricing messaging, meaning that we normally would have just translated that and pushing through on an average sales prices.

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Stephen F. East, Wells Fargo Securities, LLC, Research Division - Senior Analyst [22]

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Sure, I got you. Okay. And then, FHA, the manual underwriting, what percent of your business would be affected by that? Are you seeing any rejections yet from FHA? Is it affecting your overall demand? Just any color there.

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Charles Michael Merdian, LGI Homes, Inc. - CFO & Treasurer [23]

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Yes. It's not affecting demand. Demand has been strong. FHA is a big part of our business. It's still running. About 70% of our customers choose FHA as their vehicle for financing and their mortgage. We really haven't seen the negative impacts of the tightening, Stephen. We assume it's somewhat there, getting really into the weed, but customers that have higher ratios and need to pay down debt or save up more money for down payment, we assume some of that's happening in the field, but based on where we see closings, based on our pull-through, where we see contracts, it doesn't seem to be having at least a material impact on our business in the field.

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Stephen F. East, Wells Fargo Securities, LLC, Research Division - Senior Analyst [24]

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Okay. I've got you. About what percentage of your customers do you think fall into that manual underwriting?

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [25]

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Yes, we're not sure because we don't measure that. I mean, we do know our average customer has a 650 credit score and our average debt-to-income ratio always runs in the low 40s. So math would say that a lot of customers fall into that bucket, but it doesn't seem to be getting them declined for a loan. It's not that they're declined, it's just the underwriting, as you take a little closer look at the file, but we haven't seen a lot of cancellations, the other customers that are in that bucket.

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Stephen F. East, Wells Fargo Securities, LLC, Research Division - Senior Analyst [26]

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Okay. All right. If -- one quick question. You talked about your absorptions being better than your legacy on your fit and finish. What type of difference are you seeing between your legacy and the fit and finish?

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [27]

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Yes. I don't think we have that information, Stephen. That's one of the metrics that we calculated, primarily because the communities that have the complete home fit and finish are really the March grand openings that we just had that are now just starting to have closings. So with only 70 closings, the true absorption pace really hasn't been measured yet, but from an order or a sales standpoint, it just seems to be really, really positive was happening, and you can see it in our orders in March and April.

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Operator [28]

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And our next question is from the line of Jay McCanless with Wedbush.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [29]

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So the first one I had, with the ASP guidance you've given, relative to this new information on complete home and then some of the older legacy neighborhoods that you need to sell through, should we think about keeping our ASP assumptions maybe towards the lower end of the guidance as you all discount and clear through some of the older homes to get yourself in position to open these newer communities with complete home?

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [30]

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That sounds reasonable to us, Jay. I mean we were at the low end or just below the low end of our guidance for the first quarter so I think Charles and I would think the average sales price is probably increasing as we raise prices throughout the year. The fit and finish is going to increase the overall costs on exactly the same floor plan by a few thousand dollars, but the customers, they'll be selective in their floor plans, and qualifications and we'll see what rates do and what floor plan is selected. So there's a lot of mix and a lot of geography in our average sales price, but I think that would be a good way to look at it, I think.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [31]

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The second question I had and apologies if you already mentioned it, what were your wholesale sales in the quarter? And are you guys still thinking that the total percentage of wholesale this year may be a little less than what you did in '18?

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Charles Michael Merdian, LGI Homes, Inc. - CFO & Treasurer [32]

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Yes, sure Jay, this is Charles. In the first quarter of this year we had 30 wholesale closings, so that compares to 31 in the first quarter of '18. So very similar.

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [33]

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And then for the year, we're selling -- expecting about 5% of our businesses comes from the wholesale business.

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James C McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [34]

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And then, just the last question I had, in terms of pricing power, I mean, what percentage of your communities now do you feel like you have pricing power? And how does that compare maybe to the beginning of the year?

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [35]

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Yes. I think it's substantially more at the beginning of the year. As robust as sales have been and excitement around our complete home package and where rates are, and the demand that we're seeing, I think we're going to expect to raise prices in 80%, 90% of our communities plus over the near term.

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Operator [36]

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Our next question comes from the line of Carl Reichardt from BTIG.

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Carl Edwin Reichardt, BTIG, LLC, Research Division - MD [37]

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I will ask about community count, the guide for the year. As you're sort of looking at that, are there particular regions where you've got some more flex built into that community canon? Is there a cadence for the year that you're kind of looking for there? It's the, it's 10 communities you've -- in the time had, add that versus your absorption, that's a lot of deliveries, that could come from more or fewer communities. So I'm just trying to get a sense of how we should think about that.

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [38]

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Yes, we just had a good bump-up in April, we're up to 92 communities coming off our January training class and opening up with 10 grand openings in March. And then the next big point, well we just had our largest training class in history in the April training class. We have about 12 communities gearing up for grand openings. So like I said on the call, a lot of expense on the second quarter gearing up for these grand openings, but it's going to be a big payoff in July when we push north of 100 active communities for the month. And then probably equally weighted so that from July on, to get 105 to 115 for the year.

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Carl Edwin Reichardt, BTIG, LLC, Research Division - MD [39]

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And the regional focus, Eric, is where you say your markets are growing, yes?

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [40]

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Yes. Relatively going deeper in the existing markets. A lot of growth in the Southeast as far as community count goes, with the acquisition of Wynn Homes, that's really driving a lot of our community count going into Columbia, further into Alabama. Also, the Mid-Atlantic, opening our first community in Virginia. Florida was down 2 active communities in the first quarter, we're getting that back up and going plus adding more communities in the state of Florida. So that gives you some color into that.

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Carl Edwin Reichardt, BTIG, LLC, Research Division - MD [41]

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And then just back to the complete home. And you talked a little bit about the potential impact on margins per house, that was very helpful. I'm thinking in terms of the decision-making process, so when did you sort of decide that this was a move that you wanted to make nationwide? Was this in part a function of the move of some of your peers towards lower price points? Or was this sort of something you saw in terms of competition with resale that helped you? And then, I think Nishu asked this, or someone did, about sort of the impact on vendors, if there's national purchasing leverage that you could get here that was greater than the package you were offering prior?

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [42]

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Yes. I think the decision to go into this interior package was really more focused on internal and getting out and looking at a product for our executive team and the feedback we're getting from division presidents and also talking with our customers and seeing the results of pull-through in our percentages, a variety of contracts with customers, and looking at everything. Because a couple of years ago, we really had initiative to really value engineer everything and take fit and finishes out of the house and make it as affordable as possible. And we did a really good job at that. And probably too good a job in some cases, and when you go to a Houston community and you see a community that's got a lot of fit and finishes taken out, it's got Formica cabinets, and then you go to the next one that has granite, it just didn't make a lot of sense to us. So let's have consistent product. I know we had at our Annual Shareholders Meeting last week, the supplier that supplies us granite countertops and he supplies us granite countertops in every single Houston committee, and that's going to result in better pricing. So we do think there's leverage there at a regional and even a national level. I mean the Whirlpool appliance package that we're buying from Whirlpool is now 100% consistent. We're always using Whirlpool but the package was not consistent nationwide. Now every LGI home in the nation is going to have exactly the same stove in it.

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Operator [43]

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(Operator Instructions) Our next question comes from the line of Alex Barrón with Housing Research Center.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [44]

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So just to compare a home that is a completely packaged versus one that has Formica, how much extra would it cost the buyer to buy this home? And what's the difference on your margin on the same home, just from the upgrade?

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [45]

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For a community that had Formica countertops to start, and we're going to a hard surface countertop, we're adding a ceiling fan, we're adding a garage door opener, 36-inch upper cabinets that probably get an upgrade on their appliance package, the cost to the borrower is approximately $3,000. And that's about $20 to $25 a month in monthly payment.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [46]

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Okay. And -- but is there any incremental margin to you guys? Or are you just pretty much passing it along at cost?

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [47]

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No, no. There'll be an incremental margin to us, meaning we'll price it at least a 30% gross margin above our cost so we're making margins. So it won't be a negative to the overall company margin. I think in about a -- the way you look at the complete home as being at our historical levels. Margins at our existing inventory, that's where we've taken a margin hit, if you will, and that then as aggressive on raising prices.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [48]

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Got it. And then can you comment on, in and out as you spend more to get builders kind of realizing that there's good demand at the entry-level, what's happened to land prices? I guess for the last several years, you guys were one of the few that was kind of out, taking advantage of the entry-level demand while the other builders hadn't really realized that, that was a good segment to be in. But has that affected your land costs? Or what's your outlook there?

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [49]

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Yes, I think land prices over the last few years have always went up, and we predict they're going to continue to go up. There's certainly a lot of other builders talking about buying entry-level land, so I think that's driving prices. We certainly haven't seen price discounts in land. We think there's enough demand for all of us to have success in the entry-level market and we're confident in the buys that we've made. We have a little bit larger land supply than most builders, at 50,000 owned or controlled lots. So we're really in good position for our land so we don't have to make stretch decisions or we'll stick to our discipline in underwriting and acquisitions, but we do anticipate land prices continuing to go up.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [50]

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Okay. And are there any new markets on the horizon that you plan on entering?

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [51]

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Well I think the focus right now is primarily on the markets we've already invested the capital in and going deeper in those markets. We just had our first closing in the Mid-Atlantic market which is the Washington, D.C. area, so that's exciting. Starting to see results from the investment we spent out there. Columbia, South Carolina is on the radar, Richmond, Virginia is on the radar and then just going a lot deeper into the Sacramentos, the Las Vegases, about the world, deeper. We got some new markets, tertiary markets, if you will, in Florida that will be coming online this year. So a lot of growth across the country.

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Operator [52]

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And I'm not showing any further questions. I'll now turn the call back over to Mr. Eric Lipar for closing remarks.

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Eric Thomas Lipar, LGI Homes, Inc. - Chairman & CEO [53]

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Thank you, Bridget. Everyone -- and also everyone for participating on today's call and for your continued interest in LGI Homes. Have a great day.

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Operator [54]

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Ladies and gentlemen, this does conclude the program. You may now disconnect.