Earnings Call: Q4 2019

Feb 25, 2020

Welcome to the LGI Homes Fourth Quarter twenty nineteen Conference Call. Today's call is being recorded and a replay will be available on the company's website later today at www.lgihomes.com. We have allocated an hour for prepared remarks and Q and A. At this time, I would like to turn the call over to Rachel Eaton, Chief Marketing Officer at LGI Homes. Homes. Ms. Eaton, you may begin. Thank you. Welcome to the LGI Homes conference call discussing our results for the fourth quarter and full year 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 guidance for 2020. 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, certain non GAAP financial measures will be discussed. 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. Reconciliations of these non GAAP financial measures to the most comparable measures prepared in accordance with GAAP are included in the earnings press release that we issued this morning and in our annual report on Form 10 K for the fiscal year ended December 3139 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 lghomes.com. Joining me today are Eric Leeper, 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. Thank you, Rachel, and welcome to everyone on this call. We appreciate your continued interest in LGI Homes. During today's call, I will share some highlights about our outstanding performance in 2019. Then Charles 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 this quarter and our expectations for 2020 before we open the call for questions. Let me start by saying this has been an excellent quarter and year end for LGI Homes. At the start of 2019, we provided guidance announcing our expectations to deliver between 913,800 homes for the year. We also forecasted further growth in community count, achieving 105 to 115 active communities by the end of the year and to deliver basic earnings per share to our investors in the range of $7 to $8 all while maintaining our gross margin at or near industry leading levels between 23.525.5% and adjusted gross margin between 25.527.5%. Today, I am pleased to announce that for 2019, we met or exceeded our guidance in all areas. As a result, this not only marks our sixth full year as a public company, but highlights our sixth consecutive year of delivering strong results to the market, reaching or exceeding our annual guidance in every metric. Our fourth quarter provided an impressive finish to 2019 with a record breaking 2,515 homes closed highlighted by our best month in LGI history with ten fifty two closings in the month of December, bringing us to a record breaking total of 7,690 closings for the year and making 2019 our tenth consecutive year of closings growth. With 106 active communities at year end, we met our community count forecast increasing community count for the year by 20% with the addition of 18 new communities continuing our national expansion of the LGI footprint and broadening our reach to 31 markets in 2019. All 18 of the new communities were from outside the state of Texas further contributing to our geographic diversification of our business. For the year, we achieved significant growth in home sales revenue generating just over $1,800,000,000 which represented a 22% increase in revenue over 2018. This was driven by an 18% increase in home closings combined with a 3.5% increase in average sales price for the year. These strong results enabled us to deliver basic earnings per share of $7.7 which is at the high end of our market guidance of $7 to $8 per share. Over the last six years since our IPO, we have grown substantially by expanding our operations from nine markets across four states to 31 markets across 18 states. As we have continued to grow, we have maintained the LGI culture demonstrating that our unique operating model is sustainable. We believe our employees are our most vital assets and continue to make the difference. It is through the dedication and outstanding performance of our employees that we are able to leverage our systems and processes to deliver exceptional customer service to more than 35,000 homebuyers over the last sixteen years and we appreciate and thank you for your commitment, loyalty and hard work which have produced another year of record setting results. To share a few highlights from 2019, Houston, where our company was founded, was our number one market in 2019 with twelve forty six closings. This established a new record for the most closings we have ever had in the Houston market and set a company record for the most closings in any market in a single year. We also had strong growth in closings in our Dallas Fort Worth and Central Texas markets. We ended the year with 10 active communities and closed a total of nine ninety homes at DFW in 2019, an 8% increase over 2018. Central Texas, which consists of the San Antonio and Austin markets, also experienced strong results, ending the year with nine fifty five homes closed, a 15% increase over 2018. A few highlights from outside the state of Texas were that our Western division increased closings from $627,000,000 to $1,056,000,000 dollars resulting in revenues of over $271,000,000 compared to $151,000,000 in the prior year. Also in the West, our first community in California generated over 55,000,000 in its first full year of operations making it our number one community in terms of total home sales revenues. For the quarter, we averaged eight closings per community per month companywide, a new quarterly record. On a closings per community per month basis, we saw strong performance across the nation. Our top three markets for the quarter were all outside of Texas. Great job to our Arizona team with Tucson and Phoenix finishing as our top two markets in closings per community for the quarter and also great performance in Charlotte averaging more than 12 closings per community per month for the quarter. One of the greatest accomplishments of the year was averaging 6.7 closings per community per month company wide. This matches the 6.7 closings per month from 2017 and 2018. That is three consecutive years of maintaining our absorptions at this industry leading level, while increasing our community count, expanding into a number of new markets, growing our employee base and increasing our average sales price, which is quite an accomplishment. For the full year, our top three markets were DFW with 9.8 closings per community per month, Houston with 9.4 and San Antonio with 8.8. For more detailed financial results, I will now turn it over to our Chief Financial Officer, Charles Merdian. Thanks, Eric. Home sales revenues for the quarter were $605,600,000 based on 2,515 homes closed, which represents a 42.5% increase over the fourth quarter of twenty eighteen. Home sales revenues for the year totaled $1,800,000,000 a 22.2% increase over 2018. Our average sales price was $240,815 for the fourth quarter, a 4.9% year over year increase and our average sales price for the year was $239,032 a 3.5% increase and in line with our annual guidance. The increase in average sales price year over year is primarily related to our geographic mix with the addition of California and Nevada in our West Division and increases within existing communities as a result of our Complete Home initiative. Gross margin was 23.5% this quarter compared to 24.1% in the third quarter, down 60 basis points, primarily related to our increase in wholesale activity. During the fourth quarter, wholesale closed three forty four homes or approximately 14% of overall closings, impacting margins by 120 basis points. As a comparison, in the third quarter, wholesale closed 127 homes or approximately 6% of overall closings with a 60 basis point impact to gross margin. Excluding wholesale, gross margins were consistent sequentially at 24.7%. Gross margin as a percentage of home sales revenue for the fourth quarter of twenty nineteen was lower by 90 basis points from 24.4% for the fourth quarter of twenty eighteen. And this decrease in gross margin on a year over year basis as a percentage of home sales revenue is primarily due to higher lot costs and higher capitalized interest costs recognized for the fourth quarter of twenty nineteen as compared to the fourth quarter of twenty eighteen. Gross margin as a percentage of home sales revenue for the full year was 23.7 as compared to 25.3% for the prior year. The impact of wholesale closings on gross margin were similar on a year over year basis. We closed five eighty three homes during 2019 or 7.6% compared to four sixty six or 7.2% during 2018. Our expectation is that wholesale closings will be similar as a percentage of our overall business in 2020 as compared to 2019. Combined selling, general and administrative expenses for the fourth quarter were 9.6% of revenues. The increased percentage of wholesale closings had a favorable impact on operating expenses as a percentage of revenue. For the full year, our combined selling, general and administrative expenses were 11.4% compared to 12% in the prior year, a 60 basis point improvement and the lowest we have reported as a public company. As a percentage of revenues, we believe that the full year 2020, we will continue to achieve operating leverage in our existing markets offset by initial operating costs in new communities. Overall, we expect SG and A as a percentage of revenue to be generally similar in 2020 compared to 2019 with up to 40 basis points of leverage improvement based on revenues. We typically expect the first quarter to have the highest SG and A ratio as our first quarter generally results in the lowest closings on a per community basis during the year. Pre tax income for the quarter was $84,900,000 or 14% of home sales revenue, an increase of 80 basis points over the same quarter in 2018. For the year, we generated $231,800,000 in pretax income or 12.7% of home sales revenue. Our annual effective tax rate for the year was 23% and we believe our effective tax rate for 2020 will range between 23.524.5% for the full year. We generated net income of $64,900,000 or 10.7% of home sales revenue for the fourth quarter of twenty nineteen, which represents earnings per share of $2.69 per basic share and $2.52 per diluted share. In the fourth quarter of twenty nineteen, our convertible notes matured. We issued approximately 2,400,000.0 shares on November 15 and for purposes of calculating basic earnings per share for the quarter, the average shares outstanding were impacted by approximately 1,200,000.0 shares, representing 24,200,000.0 weighted shares outstanding for the quarter, and we ended the year with 25,300,000.0 shares outstanding. For the year, we generated net income of $178,600,000 or $7.7 basic earnings per share and $7.02 diluted earnings per share. Fourth quarter gross orders were $2,717 and net orders were $2,113 and ending backlog for the year was twelve thirty three homes and the cancellation rate for the fourth quarter was 22.2% and for the year, our cancellation rate was 20.6%. Of our 48,000 owned and controlled lots, approximately 20,600 of our 31,900 owned lots were either raw or under development and we ended the year with 3,715 homes in inventory in various stages of construction. As of December 31, we had approximately $38,000,000 of cash, $1,500,000,000 of real estate inventory and total assets of 1,700,000,000 Also at December 31, we had $699,600,000 outstanding under our revolving credit facility and senior notes and our borrowing capacity was approximately $228,000,000 Our gross debt to capitalization was approximately 45% and net debt to capitalization was 43.6%. At this point, I would like to turn it back over to Eric. Thanks, Charles. In summary, we had another impressive quarter and a phenomenal 2019. This past year marked another year of outstanding financial performance continuing the LGI legacy. Since commencing operations in 02/2003, we have constructed and sold over 35,000 homes, have been profitable every year despite the downturn, and have never taken an inventory impairment. A year ago, as interest rates were rising, challenging affordability for our target first time homebuyers, we took the opportunity to evaluate and enhance our product offering with the introduction of our Complete Home and Complete Home Plus packages. This new added value and streamlined approach to our interior finishing offering was quite the success contributing to our ability to maintain industry leading absorptions. And we believe we are well positioned for the future. Now let me provide some guidance and thoughts on what we are seeing for the upcoming year. The first quarter of twenty twenty is off to a great start with four thirty four closings in January, representing a year over year increase of 61.3%. February will also be a strong month of closings for us. We expect to close between 506 homes this month, representing significant year over year growth compared to last year's February total of three ninety three closings. Based on our strong performance to date and assuming a continuation of today's housing market conditions for the remainder of this year, we offer the following guidance. As we previously announced, we expect another strong year of closings growth ending the year within the range of 417,400 homes closed. We believe throughout 2020, we will continue to grow our community count primarily by going deeper in our existing markets and end the year with between one hundred and twenty and one hundred and thirty active selling communities. We believe our average sales price in 2020 will be similar to 2019, ending the year with an overall average sales price between $235,000 and $245,000 Guidance for gross margin will be between 22.524.5%. We expect adjusted gross margin, which excludes the effects of interest and purchase accounting, will continue to be strong, ending the year between 24.526.5%. In summary, we are very pleased with our results for the fourth quarter and the full year of 2019. We are poised to take advantage of continued growth opportunities in existing and new markets and believe we are well positioned to continue to grow our revenues, community count and earnings, allowing LGI Homes to continue on our journey to achieve our long term goal of becoming a top five builder and creating market leading returns for our shareholders. Now we'll be happy to take your questions. Thank you, sir. Our first question comes from Michael Rehaut from JPMorgan. Please go ahead. Hi. This is Elad Hillman on for Mike. First, I just wanted to ask kind of the absorption pace in the West, which was up almost 64% this quarter. And I was wondering what were some of the drivers of the stronger performance and which markets in the West did you see the most improvement? And finally, how sustainable do you see this rate? Yes, great question. Yes, we do see the loss as sustainable on a per community basis. We had a really good year there, really good quarter, highlighted by our first community in California getting off to a great start. For the full year in California, we averaged 8.7 closings per community per month. So that's above the company average at obviously a very strong average sales price. Also had a great start in Las Vegas. We averaged 8.4 closings per month per community in Las Vegas as well. So real strong year in the West. We talked about how much it was up year over year. And we do believe the strength in absorptions will continue like we talked about overall as a company 6.7 for three straight years. And then we also already released our January closings number up 61. So we're off to a great start in 2020 as well. Okay, perfect. That leads to my next question because when I look at the 2020 closings and community count growth guidance ranges, they seem to imply roughly flat, maybe even a little bit down absorption rate year on year for the full year. So I was wondering what were some of the drivers of that guidance of the flattish absorption rates? Yes. I think it looks at where we are in our guidance. We think between 417,400 closings, it's in that six to 6.7 closings per community, depending on how quickly the new communities come online. And 6.7 for three straight years has obviously been very strong community performance. And we expect our existing communities to have similar closings per community, but cautious a little bit on our new communities coming online and then also most of our growth is going to be outside of the state of Texas, especially in Florida and the Southeast that overall average less closings per community as well. Okay, great. Thank you. You're welcome. Thank you. Our next question comes from Carl Reichardt from BTIG. Please go ahead. Thanks. Hi, guys. I wanted to ask Eric, maybe talk a little bit about the or Charles, the community count cadence as you look through the quarters, is it pretty equivalent quarter to quarter or is there a load in the front or back half of the year? Yes. Great question, Carl. We already reported our January community count of 105, so we're down one over twenty nineteen. We expect February also to be at 105 or maybe one up or down off of January, so very similar community count for the February. And then our guidance is 120 to 130. We think from March on through the end of the year, it will be pretty consistent community count growth leading to our guidance. Okay. Thanks, Eric. And then just a curiosity more than anything, you have in the past at this point in the year given an earnings per share guide. And I'm just kind of curious why you didn't do it this year. Yes. I think it's just a matter of we are focused on the things that we can control that relate to the earnings per share. And we thought it was important over the last couple of years when we had the convertible debt instrument and the share account was pretty confusing to a lot of people. And this year, we're just going to focus on the components that make up the earnings per share. And then it's really just a math equation for everybody to figure out where we're going to be in our guidance. But we're real comfortable we're going to be in the range of all the components that make up earnings per share. And the range gets really wide if you take the low end and high end of every component of that. So that's really it. Okay. That makes sense. Thanks a lot, fellas. You're welcome. Thank you. At this time, I'm not showing any further questions. I'd like to turn the call over to Eric Leeper, LGI Home's CEO, for closing remarks. Thanks everyone for participating on the call and for your interest in LGI Homes. We are anticipating another solid year ahead and look forward to updating you and sharing our achievements as the year unfolds. Have a great day. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.