Earnings Call: Q3 2020

Nov 3, 2020

Welcome to the LGI Homes Third Quarter twenty twenty Conference Call. Today's call is being recorded and a replay will be available on the company's website later today at www.lghomes.com. We are allocated an hour for prepared remarks and Q and A. At this time, I will turn the call over to Joshua Fodder, Vice President of Investor Relations at LGI Homes. Mr. Fodder, you may begin. Thank you. Good afternoon and welcome to LGI Homes' conference call to discuss our third quarter twenty twenty financial results. Before we begin, I will remind listeners that this call will contain forward looking statements that include, among other things, statements regarding LGI Homes' business strategy, outlook, plans and objectives. All such statements reflect management's current expectations. However, these statements do involve assumptions and estimates and are therefore subject to risks and uncertainties that could cause management's 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 sections 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, non GAAP financial measures will be discussed on this conference 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. 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 quarterly report on Form 10 Q for the quarter ended 09/30/2020, that we expect to file with the SEC later today. This filing will be accessible on the SEC's website at www.sec.gov and in the Investors section of the LGI Homes website at www.lgihomes.com. Our hosts for today's call are Mr. Eric Leeper, LGI Homes' Chief Executive Officer and Chairman of the Board and Mr. Charles Merdian, Chief Financial Officer and Treasurer. I will now turn the call over to Eric. Thank you, Josh. Good afternoon and welcome to everyone participating on our call today. We sincerely hope that you and your families are healthy and doing well. I'll open the call today with a few comments on recent demand trends and our performance this quarter. Charles will then provide details on our extraordinary financial results and I'll conclude with our outlook for the rest of 2020. Finally, we will open the call for your questions. We are extremely pleased with our performance this past quarter. As we move past the early impacts of the COVID-nineteen pandemic, we saw unprecedented levels of demand across all our markets, driven by continued low interest rates and undersupply of new and existing homes available for sale and renewed desire for the space, flexibility and the convenience that single family homes in suburban locations offer. The housing market is thriving and has proven to be a cornerstone of the nation's economic recovery. While these dynamics benefit our industry as a whole, we believe LGI's one hundred percent spec entry level focused model is especially well positioned to meet the needs of today's buyers. Given that positive backdrop, it should come as no surprise that this was another quarter for breaking company records. Net orders this quarter were the highest in our history, up 78% over the same period last year. Orders in July, August and September were all monthly records and August was the single best sales month in our company's history on both a gross and net sales basis. As a result of the surging demand, our backlog more than doubled year over year and was up nearly 70% sequentially. The consistent strength in demand supports our belief that we have worked through any pent up demand caused by the shutdowns early on and we are now operating in an environment driven by a secular shift in housing preferences. In the third quarter, we closed a record breaking 2,091 homes. In line with the expectations we provided on our last earnings call, home closings in July and August were muted as we ramped up our pace of starts to address the brief construction pause we took in March and April. As evidenced by the order trends just mentioned, the demand in orders were there, but time was needed to replenish our inventory. During the quarter, we successfully started approximately 3,500 homes compared to just under 2,000 last quarter. Our ability to ramp up so quickly underscores the strength of our efficient, even flow construction model that enables us to quickly put new homes on the ground to meet demand and is also a credit to the relationships and loyalty we've built with our trade partners over the last seventeen years. In August, our inventory began to catch up to demand and we finished the quarter by closing a record eight eleven homes in September, a 24% increase over the same month last year. Notably, September had the third highest number of closings in our company's history and was our best performance in a month other than December. In the third quarter, we averaged 6.4 closings per community per month nationwide. Sarasota was our top market with an impressive 12.3 closings per community per month followed by Dallas Fort Worth with 9.9 and Austin, Houston and San Antonio tied for third with 8.8 closings each. Next was Atlanta with 8.1 closings followed by Portland with eight closings per community per month. Congratulations to the teams in these markets for an outstanding performance this quarter. We ended the quarter with 110 active communities, a 6.8% increase over the third quarter of twenty nineteen. With that, I'll turn the call over to Charles for more details on our financial results. Thanks, Eric. As highlighted in the press release we sent out this morning, home sales revenues in the third quarter increased 10.6% year over year to 534,200,000 This was our second best quarter in company history surpassed only by our performance in the fourth quarter of twenty nineteen. As Eric highlighted, during the quarter, we closed 2,091 homes, an increase of 4.4% year over year and 4.3% sequentially. Home closings included 92 homes sold through our wholesale business this quarter, representing 4.4% of our total closings compared to 127 homes or 6.3% of our total closings in the same quarter last year. Average sales prices realized from homes closed during the third quarter was a company record of $255,477 a 5.9% increase over the same period last year and a 6.4% increase sequentially, driven primarily by higher price points across our markets, closeouts and transitions to new communities at higher price points, a favorable demand environment that supported price increases ahead of rising input costs and fewer wholesale closings. Gross margin as a percentage of sales this quarter increased 120 basis points year over year to 25.3% driven by price increases, lower interest and overhead offset by higher lot costs. This was our highest gross margin since the third quarter of twenty eighteen. Excluding wholesale closings, our gross margin was up 100 basis points year over year and 50 basis points sequentially. Given the backdrop of home price increases offset by higher costs associated with recent starts and our expectation that wholesale closings will increase as a percentage of total closings, we would expect our gross margins in the fourth quarter to be lower sequentially resulting in our full year margins to be in line with our year to date result of 24.5%. Our adjusted gross margin was 27.3% this quarter compared to 26.3% for the same quarter last year, a 100 basis point increase. Adjusted gross margin excludes $9,200,000 of capitalized interest charged to cost of sales during the quarter and $1,400,000 related to purchase accounting together representing 200 basis points. Combined selling, general and administrative expenses for the third quarter were 10.8% of home sales revenue compared to 10.9% last year and 10.4% in the second quarter of twenty twenty. Selling expenses for the quarter were $35,500,000 or 6.6% of home sales revenues compared to $33,500,000 or 6.9% of home sales revenues for the third quarter of twenty nineteen, a 30 basis point decrease. In addition to operating leverage realized from the increase in home sales revenues, our quarterly marketing spend was down 40% year over year driven by strong demand this year that reduced our need to spend on advertising. Sequentially, selling expenses were up 40 basis points as we increased our marketing spend compared to the second quarter of twenty twenty and recognized our frontline workers with a one time cash bonus. General and administrative expenses totaled $22,300,000 or 4.2% of home sales revenues compared to 4% for the third quarter of twenty nineteen, a 20 basis point increase. The increase in general and administrative expenses as a percentage of home sales revenues is primarily related to the identification and certification of available energy efficient home tax credits and to a lesser extent higher personnel costs associated with the increase in active communities during the quarter. We believe that SG and A will continue to vary quarter to quarter based on home sales revenue and uncertainty related to the ongoing impacts of the COVID-nineteen pandemic. Uncertainties aside, we would expect our full year SG and A as a percentage of revenue to be between 10.310.8% for the full year. EBITDA for the quarter was an impressive $87,200,000 and EBITDA margin was 16.3%, a 90 basis point improvement over the same period last year and a 10 basis point improvement sequentially. Pre tax income for the quarter was $77,800,000 or 14.6% of home sales revenue, an increase of 120 basis points over the third quarter of twenty nineteen. We reported a tax benefit of $11,200,000 for the quarter related to the recognition of a $29,400,000 credit resulting from federal energy tax credits, dollars 27,100,000.0 of which related to homes closed in prior years and the first half of twenty twenty. We plan to receive additional tax credits during the fourth quarter and estimate our full year effective tax rate to be between 1012%. Our third quarter reported net income increased 80.4% year over year to $89,000,000 or 16.7% of home sales revenue and our third quarter reported EPS was $3.55 per basic share and $3.52 per diluted share. Excluding the $27,100,000 income tax benefit related to energy tax credits, our adjusted net income was $61,900,000 or 11.6% of home sales revenue, an increase of 140 basis points over the same period last year. Excluding federal energy tax credits, our third quarter adjusted EPS was $2.47 per basic share and $2.45 per diluted share, an increase of approximately 27% year over year and 11% sequentially. Third quarter gross orders were 4,368. Net orders for the quarter were 3 thousand 5 hundred and 40 4 compared to nineteen ninety in the third quarter of twenty nineteen, an increase of 78%. The cancellation rate for the third quarter of twenty twenty was 18.9%. Driven by strong demand, we finished the third quarter with a backlog of 3,580 homes. This is the highest backlog in our history and represents an increase of 119% year over year and 68% sequentially. The value of our backlog on September 30 was a record $933,000,000 In line with starting more homes in the quarter, we also ramped up our land acquisition activities. During the third quarter, we added almost 3,000 new lots to our owned inventory and nearly doubled our total number of controlled lots to 24,557. In total, at September 30, our land portfolio consisted of 57,185 owned and controlled lots, a 17.2% year over year increase and a 29.1 increase sequentially. 32,628 or 57.1% of those lots were owned. And of our owned lots, 7,622 were finished vacant lots and 19,814 were either raw or under development. And finally, we ended the quarter with 5,192 completed homes, information centers or homes in process, a 12.2% increase over the same period last year and an increase of 43.9% sequentially. Our balance sheet remains strong even as we have ramped up our starts and land acquisitions activities. We ended the quarter with approximately $46,000,000 in cash, $1,500,000,000 of real estate inventory and total assets of $1,800,000,000 At the September, we had $628,000,000 in total debt outstanding under our senior notes and revolving credit facility and our available borrowing capacity under the facility was $3.00 $7,000,000 As a result of our strong operating results and the resulting cash flows, we ended the quarter with over $1,000,000,000 in total book equity and a net debt to capitalization ratio of 36.1%, down approximately 90 basis points sequentially and significantly lower than the 47.9% we reported at this time last year. This was our lowest net debt to capitalization ratio since June of twenty fourteen. We ended the quarter with 25,100,000.0 shares outstanding and $17,200,000 remaining on our existing stock repurchase program. On 10/30/2020, our Board of Directors approved an additional $300,000,000 in our stock repurchase program, increasing the total authorization under the program to $317,200,000 available to purchase shares of our common stock. I'll now turn the call back over to Eric. Thanks, Charles. Let me provide some thoughts on what we are seeing thus far in the fourth quarter and share our outlook for the full year. We continue to see strong demand for our homes and October was another record month for closings. Subject to our normal review and verification of fundings, tomorrow aftermarket close, we expect to formally report between 08:15 and 08:20 closings for the month of October, which would result in a year over year increase of approximately 14% over a strong comp of seven fifteen closings in October of twenty nineteen, which prior to this year was our best October on record. With that backdrop, our share outlook for the rest of the year. We expect to have 115 to 120 active selling communities at year end, and we are updating our guidance to reflect our expectation to close between 417,000 homes for the full year with our wholesale business expected to make up 7% to 10% of our total closings. In addition, we expect an average sales price for the year between $245,000 2 hundred and 50 5 thousand dollars As Charles mentioned, we expect full year gross margin in the range of 2425% similar to our year to date results through September and expect full year adjusted gross margin between 2627%. I'll conclude by saying how proud I am of the team here at LGI and everything we have accomplished this quarter. Despite the challenges of the last eight months, our dedication to providing high quality affordable homes for our customers has positioned us for success this year and for years to come. We will now open the call for questions. Thank you. Our first question is from Truman Patterson with Wells Fargo. Please go ahead. Hey, good morning or early afternoon, everyone. So nice results. I wanted to touch on your order growth, 78% in 3Q. How has that trended throughout the quarter or at least in October? Have you seen any fall off at all? And I'm asking this because there's been a lot of concern around affordability. I'm hoping if you all could dig in, have you done any sensitivity around pricing or rates? How much pricing your buyer can absorb? And part of the October question is, I imagine you all have pushed pricing fairly aggressively over the past three or four months. Have you seen a large negative impact on demand elasticity from that pricing? Thanks, Truman. Great question. Good morning. This is Eric and I can start. And I'll start with October remains strong after 78% order growth in Q3. Gross orders in October are up approximately 20%. So we clarify that as a very strong October, especially taking into consideration our backlog is so strong, nearly doubled over last year and almost $1,000,000,000 in our pipeline. So we really even in October didn't need to spend the necessary marketing dollars because pretty much everything is already sold for the fourth quarter, which is a great position to be in. And you saw through our average sales price increasing to $2.55 for the third quarter that we have increased prices really under the traditional LGI model of just offsetting costs, but costs have been up. Everybody knew about the lumber cost increases and we raised prices to offset that cost and that relates in consistent gross margins for us. So demand environment is really strong, haven't seen a drop off at all and it's really positive. Okay. Okay. And then your starts during the quarter pretty much matched your backlog at I think 3,500 units or so. This is another investor concern, but have you seen a lengthening of your construction cycle or a lengthening or ability from pulling the permit to actually starting the home? And I'm really thinking bigger picture with the 78% order growth. Are you able to deliver those homes in an acceptable timeframe based on labor, materials, local muni constraints? Is there anything that's really getting in the way there? Yes, Truman, this is Charles. Good morning and another great question. We have not seen any significant delays. I think earlier on in the quarter and late last quarter, we may have seen some challenges in terms of getting permits and getting starts rolling. But as Eric mentioned, 3,500 starts for the quarter more than we're averaging over 1,000 starts right now on a monthly basis. So we are not expecting any delays in our traditional construction delivery times. I think an advantage that we have and have had is that we've been a high volume builder as part of our normal program. So I think our trade partners are available and labor is available. So we have not had any issues ramping up production. So we're very comfortable with making sure that we can deliver the units to meet our guidance. Okay, okay. That's really helpful. And then one final one for me. The land market's always competitive, but you all have started to reaccelerate your purchases and you all are usually pretty cautious regarding your gross margin and you usually pull back if you're seeing land pressure heat up. So I guess the question really is, would you consider the land market overheated in any areas that you operate? Or is it kind of business as usual and you're not necessarily seeing a whole lot of land inflation currently, land cost inflation? Yes. Truman, this is Eric. I describe it as more business as usual for the LGI business. And after $50,000 owned and controlled at the end of Q1, we dropped down to 44,000 and really pushed a lot of our acquisition spend to make sure we were certain on what was happening with the pandemic. And then this quarter reporting 57,185, so a big increase in owned and controlled. A lot of those were the same deals that came back that we got back under contract. And also what we're looking at is really raw land pieces. We're really comfortable with development. We're comfortable with the larger sizes. We like to capture that developer profit as well, which leads to our industry leading gross margins. So the raw land piece is a little bit further out that are a few hundred acres that leads to communities of 500 homes or larger. We're very comfortable doing those, especially in Texas. And we put a number of those under contract. I think it is overheated in any developer or any finished lots that become for sale because a lot of builders are looking for finished lot supply to add to their 21 pipeline. We're probably not going to win that bid, but that's okay. We'll let someone else go that route and we'll focus on the land development, which isn't as competitive. Okay. Thanks guys. Good luck on the upcoming quarter. Thank you. Thanks. Thank you. Our next question comes from Michael Reaugh with JPMorgan. Please go ahead. Hi, thanks. Good afternoon, everyone. First question, I just wanted to delve into the community count a little bit. I think understandably taking off the prior high end of the range that was out there before, I guess narrowing it to 115 to 120 by the end of the year, which would still be a nice move from where you currently are. How should we think about 'twenty one? I know you're not at the point to give out formal guidance, but just directionally in the past, obviously you have kind of targeted anywhere from 10% to 20% type of community count growth. At this point, you're out on working off of a bigger footprint. So just any thoughts there actually on community count from a growth standpoint over the next year or two would be very helpful. Sure, Mike. This is Eric. Yes, December 2019, we ended the year at 106 active communities. You're correct and taking off the high end of our community count guidance for 2020. That's really a very positive message to the market, if you will, and to all of our investors because it's the result of closing out communities faster than anticipated. And because of COVID and about a quarter delay in development, some of the new communities are got delayed by a quarter. So we'll end the year up this year 01/2015 to 01/2020. And I think you're correct and we're not ready to give specific guidance as far as percentage increase or numbers for 2021 yet. But directionally, we do expect 2021 community count at the end of the year to be higher than the end of the year 2020 community count. So we expand on growing next year. Okay. I appreciate that. I guess, secondly, I love your thoughts around credit availability currently. Correct me if I'm wrong, but I recall you saying even last quarter that credit availability had kind of bounced back maybe off of some temporary pauses early on in the pandemic, but it bounced back maybe to pre COVID levels. So if I'm recalling that right or in either case, how do you see credit today to continue to improve or is it more just stable and any types of changes that you might want to highlight? Sure, Mike. Yes, I'd describe the credit market as certainly stable and I have the same response as last quarter. The mortgage market feels exactly the same as it did pre COVID and outside of really a forty five to sixty day period where there was a lot of uncertainty around March or April, I would describe it as back to normal, very consistent, very much available, Obviously, lower interest rates helps all of us in homebuilding and lease doing affordable payments. And although interest rates are probably about 25 basis points higher than a month ago, still seeing strong demand. So no changes in the mortgage company. It's very consistent. All the mortgage companies are busy. They're busy with refinances. So we've seen our underwriting times elongate by a few days, but other than that, real positive. Can I switch quickly just put one more in there, one more question? Price increases in the cadence there, how would you characterize your cadence of price increases over the last three months? And do you see that kind of continuing at a steady rate or given how we've heard about different builders maybe experiencing a little bit of a flex up in pricing, should that kind of moderate maybe as you deal with any types of just trying to make sure that the affordability equation remains reasonable? Yes. Pricing for us is really a cost plus model that we use. So we have been in an environment last three or four months where we've really seen a lot of cost inflation probably more than we have in our history of pricing. So we've had to be more aggressive on our price increases. We've raised prices over the quarter in 100% of our communities because costs are up in 100% of our communities. Now lumber seems to be coming off to some extent, but still elevated and we'll see how the next three to six months go. If costs are flat, then our pricing increases will be more muted and as we buy more deals and they come online, we'll be able to offer more affordable price, if you would. If costs continue to rise, then we'll have to raise our prices to match those costs to keep our gross margins consistent. Thank you. You're welcome. Thank you. Our next question comes from Carl Reichardt with BTIG. Please go ahead. Great. Thanks, everybody. Eric, I wanted to ask about, obviously, part of what's made you successful for a long time is a pretty unique approach to sales. I think one of our worries when COVID hit was how do you continue to train folks, your reliance on in person sales could be muted. Can you kind of talk about how that's evolved now that we're sort of in a strange semi stabilized world with COVID in terms of are you able to find people, are you able to train them the way you want, Are your stores largely open? Are you selling the way you were pre COVID? I'd just like to get a sense of how it's impacted your system because it's so unique. Yes. Thanks, Carl. Great question. And we're dealing with the COVID situation. And first of all, I think just to point out that the team is doing a fantastic job. And all of our frontline workers, we gave the one time bonus to last quarter, certainly well deserved. And everybody is just doing a fantastic job, wearing masks, social distancing, customers riding in separate cars. So we certainly are taking all the precautions necessary to keep everyone safe and healthy. That being said, our sales process is exactly the same. Customers are still calling the demand for homeownership is as strong as ever. We strongly believe in that direct to the consumer approach and walking the customers through face to face our process. First time homebuyers have a ton of questions and really like the hand holding process, if you will, and make sure their questions are answered, walking through because we have spec inventory, walking them through the house to get to see exactly what they're going to be buying. It's working great. Recruiting wise, I think recruiting is in really good spot right now. We haven't had a lot of turnover. We are recruiting talented people and because of the unfortunate layoffs in other industries, there is a lot of top talent available and we're seeing that come through our system. We've had to minimize our travel and we rely more on the field to do training and the personnel in the field is doing a fantastic job. So outside of keeping everybody safe and healthy, Carl, the team is doing a great job and we're operating with the same system we always have. Thank you, Eric. That's a nice comprehensive overview. And then I wanted to ask you also just a bit about the balance sheet. And as you're obviously, cash has bounced around quite a bit this year and you've aggressively ramped your lock count this quarter. As you're sort of looking forward, what's your comfort on your gross debt to cap, Charles? Like where would you think you'd ideally like to run the business over the course of the next two to three years? Thanks. Yes. Great question, Carl. So we're comfortable with gross debt to cap in the 40s. I think our balance sheet management is really driven by our real estate inventory and that can tend to be lumpy as we buy deals. Eric had mentioned most of what we're currently looking at and have under control are raw land deals. So we'll continue to monitor our real estate needs from an inventory standpoint and then manage the balance sheet in the 40s. Okay, great. I'm sorry, I wanted to ask one quick one too. Are you expecting this particular quarter for your closings have historically been a little more last month loaded, December loaded? Is that pattern going to look roughly the same this coming quarter as it has in past quarters? Or will you be more spread evenly through the month? Yes. I would anticipate December is going to be a really strong month for us. Yes, I think November is going to be higher than October and December is going to be higher than November. So pretty additional flow through the quarter. Okay. Thanks a lot, fellas. You're welcome. Thank you. Our next question comes from Susan Maklari with Goldman Sachs. Please go ahead. Thank you. Good afternoon, everyone. Good afternoon. Eric, my first question is, in your commentary, you suggested that we have realized a lot of the pent up demand that we kind of saw from the start of the pandemic over the course of this quarter. And I'm trying to triangulate that the fact that we've met that pent up demand with the fact that you're continuing to see some really strong orders coming through. I mean, I think you mentioned October up about 14% or so year over year. How do we think about those two comments in kind of contrast? And what do you think that that really means as we look to 'twenty one and the potential for growth? Yes. It's a great question, Susan. And I think our comment was really focused around making sure everybody understood the demand is still strong. I think there was some opinions that for the first couple of months post COVID, there's a lot of really pull forward demand. I think we're just really emphasizing even through the month of October and even through last weekend, we're still seeing strong demand and we're still seeing the amount of dollars we're spending on marketing compared to how many leads we got coming in. The efficiencies we're getting is still very strong. And also letting everybody know, we think this is going to continue, a secular shift in 2021, the concept of the COVID and getting out of tight dense living situations and getting into your own home with the yard and and more space and working from home. Those type of trends are certainly going to be with us at least for the next few years is how we feel. So we are very optimistic about homeownership demand trends for both the short and long term. Got you. Okay, that's helpful. And then my follow-up question is, we've kind of seen that there's been some relative differences in some of the geographies based on local economies and some of the factors there. Can you talk to what you've seen maybe across some of your markets in this quarter? And especially how some of those markets that maybe lagged a bit, how they've trended over the last couple of months? Yes. We've seen consistent strong demand. One of the numbers that I could point to is every region in the country, everywhere had at least five closings per month for the quarter. Every area average sales price was up over last year and last quarter. So it's pretty consistent demand nationwide. Of course, some markets are always doing better than others, but we emphasized on the call Sarasota market in Florida that most people are familiar with, only one community in Sarasota about 37 closings last quarter shows the strength of that market. Also highlighting besides the Texas markets that have historically always been strong, Atlanta and Portland at north of eight closings per community, Phoenix, Seattle and Albuquerque were all north of seven. So pretty widespread and consistent strength of our top 10 markets in revenue last quarter or excuse me, our top 10 communities in revenue, those top 10 communities came from five different states and seven different markets. So widespread success and demand across the country. Okay. Thank you and good luck. Thank you. Thank you. Our next question comes from Jay McCanless with Wedbush. Please go ahead. Hey, good afternoon. Thanks for taking my questions. Great quarter. Thank you. So the first question I had, Eric, you said that the demand and the traffic haven't slowed down. You're still seeing what seems to be very strong demand. I guess, have you seen any change in who your average buyer is? Or have you seen maybe the age of that average buyer coming down as the millennials and the Zs are starting to really aggressively go towards homeownership? We have N. J. Our average age of our buyers has been between 38%, forty two % really every quarter. That was consistent again in the third quarter and we're still seeing strong demand. October up approximately 20%. Was it quite as strong as 78% up for the quarter, but 20% year over year strength in the middle of a pandemic with everything going on, we think it's just fantastic demand. Yes, absolutely. The second question I had, just thinking about the 7,600 VDLs you said you had and then you're starting at 1,000 homes a month approximately. I mean, is that historically and I can't remember if you all given the VDL number out before, but is that roughly six or seven month supply what you all have historically had or you all trying to build in a little extra right now? Yes, Jay, this is Charles. So 7,600, we typically give that every quarter in terms of the BDLs. It has trended down a little bit in terms of our expectation in the sense that we have typically managed our inventory with one year supply of BDLs is what we're really looking to have kind of in the queue. So we also had 18,000 in LUD and raw. So getting those units delivered, Eric had mentioned, we had really taken a quarter pause there for COVID, so that's having some impact, plus the increase in demand is churning through some of that inventory as well. So, we'll continue to evaluate it and rebuild it as we continue to develop new sections and put new lots on the ground. Is there any sorry, if I sneak one more in. Is there any municipal issues there, whether it's your permitting, planning, environmental, etcetera, are you seeing any issues as you all try to rebuild that across the country? No, we're not. I mean, nothing of significance in any of our communities across the country. Okay, great. Thanks for taking my questions. Yes, you're welcome. Thank you so much. Our next question is from Alex Barron with Housing Research Center. Please go ahead. Yes. Hey, guys. Thanks and great job on the quarter. Thank you. I wanted to ask regarding two different issues. One was the energy tax credits and the other was the share buyback. So on the energy tax credits, is this the first time that you guys get such a credit? And can you explain what has changed in the construction of your homes? And whether that implies the tax rates going forward? And then on the share buybacks, so it's a pretty sizable authorization. I'm just hoping you can expand on your thoughts on how you plan to use it. Is that going to be systematic? Or what are your thoughts around doing the share buyback going forward? Yes, sure. This is Charles. On the 45 Ls, so we did book about $3,500,000 in the second quarter and that was the first time that we had started the process to evaluate our homes and whether they would qualify for the credit. So we focused early on since it was announced in December of twenty nineteen, we spent the first half of the year really just gathering the information we needed to evaluate whether we would qualify or not. We focused on the West originally, just places like California, where we felt like we should easily be able to clear the hurdle. And what we didn't estimate or factor in is some of the success that we'd see in places like Texas and some of the other markets. Overall, we had about 80% of our homes qualified. So we're picking up for all the years prior to 2020, we're picking up roughly about 20,000 units that overall in our estimate related to the years prior to 2020. So, we went into it not really knowing what to expect because we hadn't really evaluated it before. So obviously very pleased with the fact that we had phenomenal success in terms of getting them to qualify. On the share buyback comment, I think we're just really looking at it more first as opportunistic. I mean, I think for the last several quarters, we've really talked about how we're financing our growth and certainly getting to a size and scale to Carl's comment earlier about how we're expecting managed balance sheet and kind of think that gross debt to cap in the 40s is the right number for us long term in terms of how we see it from a strategic long term capital strategy. So we'll just manage the inventory and it's opportunistic. If we have some excess cash flow available and there are potential disconnects in the market, then we'll see that as an opportunity to deploy some of that capital. Okay, great. And if I could ask one more on the gross margin guidance, I think you gave a range of 26% to 27%. So given everything going on, what would cause it to come in on the lower end of the range? It would seem to me that you guys have momentum. So I'm just trying to understand what is this number related or what could be that could cause it to come in on the lower end of the range? Yes, sure. I mean, really, I think for the fourth quarter, obviously with three quarters in the books, if you will, and coming in at roughly 26.5 to date, really the only two components we have going on in the fourth quarter is one is we expect wholesale to be a larger percentage. So just from a gross margin standpoint, that could be a tailwind. For example, if we move from 4% just over 4% this quarter to say up to 10% in the fourth quarter, that could have a 50 to 60 basis point impact to our margins, all things equal. The other factor we have going on is that from the retail side, we started a lot of houses this quarter, as we mentioned. Some of those homes were sold prior to starting construction. So there's some movement going on in terms of the timing of the delivery versus the sale of the home. So we would expect retail overall to be slightly down as well just until that catches back up into next year. So maybe 80 to 100 basis points sequentially down would put some brackets around it and that would mean that we would be weighted average very close to where what we've achieved year to date. So we should be pretty close to that midpoint. Okay, great. That's very helpful and good luck for the rest of the year. Thanks. Thank you. Thank you. Thank you. And sir, I'm not showing any further questions in the queue. You may proceed with final comments. Thanks everyone for participating on today's call and for your continued interest in LGI Homes. Have a great day. Thank you. Ladies and gentlemen, thank you for participating in today's conference call.