13th Annual J.P. Morgan Homebuilding & Building Products Conference

May 18, 2020

Slides

Welcome to the LGI Homes Second 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.lgihomes.com. We have allocated an hour for prepared remarks and Q and A. At this time, I will turn the call over to Joshua Fatter, Vice President of Investor Relations. Mr. Fatter, you may begin. Thank you, and good afternoon. Welcome to LGI Homes' conference call to discuss our second quarter twenty twenty financial results. I'll remind listeners that this call will contain forward looking statements that include, among other things, statements regarding LGI Homes' business strategy, outlook, including the impact of the COVID-nineteen pandemic, 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 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, 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 release that we issued this morning and in our quarterly report on Form 10 Q for the quarter ended 06/30/2020, that we expect to file with the SEC later today. This filing will be accessible on SEC's website at sec.gov and in the Investors section of the LGI Homes website at lghomes.com. I am pleased to introduce our hosts for today's call, Mr. Eric Lieber, LGI Homes' Chief Executive Officer and Chairman of the Board and Mr. Charles Merdian, LGI Homes' Chief Financial Officer and Treasurer. I'll now turn the call over to Eric to discuss our second quarter. Thanks, Josh. Good afternoon and welcome to everyone participating on our call today. We sincerely hope that you and your families are remaining safe and healthy as we continue to navigate these unprecedented times. When we held our last earnings call, the majority of the country was still under stay at home orders, businesses were only beginning to reopen, and our industry was navigating new safety and health guidelines, rising levels of unemployment and a future that is anything but certain. Though the pandemic is still with us today, the landscape in our business has completely changed. The period from April to June was full of positive surprises that demonstrated the strength of our business model, the uncompromising dedication of our employees and the depth of Americans' desire for homeownership. Reflecting back on our second quarter, it's clear that the COVID-nineteen pandemic has caused a momentous shift in the importance Americans place on homeownership. In the aftermath of the Great Recession, the nation saw a decline in many people's interests in owning a home. The combined impacts of record foreclosures and a painful recession caused many to abandon the idea of homeownership and accept that they would likely be renters for life. However, the arrival of COVID-nineteen and the restrictions opposed to control its spread has reminded people of the value, desirability and safety of owning a home. Customers visiting our information centers have openly expressed their dissatisfaction with apartment living in a post COVID world. Shared halls and stairways, limited parking, close proximity to neighbors and lack of flexible space have reawakened many to the desirability of homeownership. Renters who dreamed of owning a home have urgently moved up their timelines. Others who have never considered ownership an option have been inspired to explore the idea for the first time only to realize that the American dream is within their reach. In either case, the value of a single family home is undeniable. From our perspective, this renewed appreciation for homeownership is evidence of a broader secular shift that will drive higher rates of homeownership for years to come. Further, we believe that LGI Homes with its suburban 100% spec entry level focus is particularly well positioned to benefit from this dynamic. On our last earnings call, we highlighted steps we had taken to protect the health of our employees, customers and trade partners. During the second quarter, we continued to prioritize health and safety across our company. Travel has remained limited, corporate employees continue to work from home and marketing has been targeted to drive a sales pace that facilitates social distancing in our information centers. We now require face coverings and all our sales and construction interactions and meetings with customers remain by appointment only. In partnership with our preferred lenders, we pivoted to a virtual loan application process that reduces direct contact between individuals. In May, we announced our plan to hire more employees to support our growth. For our July sales training class, this quarter we hired teams to staff three new communities. Instead of holding new employee training at our corporate headquarters as we have done traditionally, for the health and safety of our new employees, we chose to conduct separate small training classes in the regions where these new employees will work. While we do plan to return to our normal process as soon as it is safe to do so, our ability to delegate this quarter's training to our division leadership speaks to how deeply embedded the LGI culture is in our organization. We thank everyone who stepped up to help with these trainings and we welcome our new hires to the LGI family. Even with the safety focused limitations we placed on our operations, we saw strong demand materialize into continued growth and profitability in our second quarter. Charles will share more details of our performance shortly, but here are a few highlights. Our net orders in the month of April were down approximately 67% year over year due to stay at home orders and other efforts to reduce the spread of COVID-nineteen. As conditions improved and the economy began to reopen, our pace of sales rebounded and our net orders were up in May and June over strong comps in the previous year. Demand continued to increase in July and our net orders for the month were up more than 60 year over year. During the second quarter, we closed a record breaking 2,005 homes and our revenues increased to $482,000,000 Our industry leading gross margin percentage was up this quarter and we delivered record breaking net income as a percentage of home sales. On a closings per community per month basis, Austin was our top market in the second quarter, averaging nine closings per community per month. Close behind were Dallas Fort Worth and Houston with eight point five and eight point four closings per month respectively. Rounding out the top five were Atlanta and Phoenix with seven point nine and seven point one closings per community per month. Congratulations to the teams in these markets for an outstanding performance. We ended the second quarter with 117 active communities, a 25.8% increase over the second quarter of twenty nineteen. As most of you know, June was designated as National Homeownership Month and we were especially proud to announce that we closed our forty thousandth home during this event. For seven years now, our company has celebrated this month long event by making the focal point in our sales and marketing as we educate renters and help them become homeowners. Fulfilling our customers' dreams of homeownership is what inspires us and why we started building and selling homes. Our forty thousandth closing in June is another great milestone in LGI Homes' seventeen year history, I want to thank our employees for their dedication to making homeownership a reality for so many families across the nation. I'll now turn the call over to Charles Berdan, our Chief Financial Officer, for more details on our financial results. Thanks, Eric. As previously highlighted, home sales revenues in the second quarter were $481,600,000 based on 2,005 homes closed, a 4.3% increase over the second quarter of twenty nineteen. Sales prices realized from homes closed during the second quarter averaged $240,200 a 1.1% year over year increase and a 3.1% decrease from our first quarter due to changes in geographic mix, driven by fewer closings in our Northwest Division as a result of community transitions and stay at home restrictions in Washington, which directly impacted our ability to build and sell homes in that state. Gross margin as a percentage of sales was 24.5% this quarter compared to 24.1% for the same quarter last year, an increase of 40 basis points, primarily due to lower interest costs and lower construction overhead as a percentage of home sales revenue. We closed 199 homes through our wholesale business this quarter, representing 9.9% of our closings compared to 82 homes or 4.2% of our closings in the same quarter last year. Gross margin, excluding wholesale closings, was up 80 basis points year over year and up 90 basis points sequentially. Our adjusted gross margin was 26.6% this quarter compared to 26.3% for the same quarter last year, a 30 basis point increase. Adjusted gross margin excludes approximately $8,700,000 of capitalized interest charged to cost of sales during the quarter and $1,300,000 related to purchase accounting, together representing two ten basis points. Combined selling, general and administrative expenses for the second quarter were 10.4% of home sales revenue compared to 11.4% in the prior year, resulting from lower advertising and other expenses in addition to higher home closings and higher average selling prices. Selling expenses for the quarter were $30,000,000 or 6.2% of home sales revenues compared to $33,900,000 or 7.3% of home sales revenue for the second quarter of twenty nineteen, a 110 basis point decrease. We reduced our quarterly marketing spend by nearly 70% year over year. And this reduction was due to our ability to quickly tailor our marketing to react to COVID-nineteen related uncertainties, and we expect to increase our spend as needed in future quarters to support our closing objectives. General and administrative expenses totaled $20,200,000 or 4.2% of home sales revenues compared to 4.1% for the second quarter of twenty nineteen, a 10 increase. The increase in general and administrative expenses as a percentage of home sales revenues reflect costs associated with an increase in active communities compared to the prior year. 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 COVID-nineteen. But uncertainties aside, we would expect our full year SG and A as a percentage of revenue to range between 10.511%. Pre tax income for the quarter was $68,600,000 or 14.2% of home sales revenue, an increase of 110 basis points over the second quarter of twenty nineteen. EBITDA for the quarter was an impressive 77,400,000 and EBITDA margin was 16.1%, a 200 basis point improvement sequentially and a 100 basis point improvement over the same period last year. For the second quarter, our effective tax rate of 18.9% was lower than the federal statutory rate due to a $3,500,000 benefit related to the extension of energy tax credits. We expect our full year effective tax rate to range between 2122%. As Eric highlighted, our record breaking second quarter net income increased 20.8 year over year to $55,600,000 or 11.5% of home sales revenue, an increase of over 150 basis points over the same period last year. Our second quarter EPS was $2.22 per basic share and $2.21 per diluted share. And as of June 30, we had 25,100,000.0 shares outstanding. Second quarter gross orders were $30.18 and net orders were 2,253. Cancellation rate for the second quarter of twenty twenty was 25.3%. We finished the second quarter with a backlog of 2,127 homes, an increase of 29% year over year with a value of $558,000,000 As of June 30, our land portfolio consisted of 44,307 owned and controlled lots, an 11.9% year over year decrease, primarily driven by our decision in March of twenty twenty to delay or cancel a number of land acquisition contracts, reducing our number of controlled lots from approximately 19,000 to 12,500. Of our owned lots, 7,674 were finished vacant lots, 20,506 were either raw or under development and 3,608 were either completed homes, information centers or homes in process. Our focus on cash management has resulted in positive cash flow. During the quarter, we paid down $155,000,000 on a revolving credit facility, which in combination with our strong operating results contributed to a net debt to capitalization ratio of 37%, a decrease of over 500 basis points from March 2020 and the lowest ratio since 2014. Additionally, total interest incurred this quarter was $9,300,000 compared to $12,100,000 in the same period last year due to favorable interest rates and lower outstanding debt balances. As of June 30, we had approximately $49,000,000 in cash and our available borrowing capacity was approximately $283,000,000 resulting in $332,000,000 in liquidity. At this point, I would like to turn the call back over to Eric. Thanks, Charles. As we mentioned earlier, strong demand has continued into July, resulting in an increase of over 60% in net orders year over year. Pending verification of funding, we will issue a press release tomorrow after the market closes announcing between six ten and six fifteen home closings in 111 communities for the month of July. The decline in closings is primarily due to our decision to start less than 50 homes in April, resulting in us starting July with a lower inventory of completed homes. Once we were comfortable with the direction of demand trends, we accelerated our pace of starts and began actively acquiring land to support our growth plans. We released 600 new starts in May to backfill our inventory of homes available to close in August. We expect our closings in August to be similar to July. Even with the benefit of hindsight, we still believe it was the right decision to slow our pace of construction at that time. We've always accomplished our goals in a measured and conservative way that protects the long term interests of our employees and shareholders. Given our strong second quarter results and the demand we're seeing in our markets, we are providing guidance for 2020. For the full year, we expect to close between 16,800 homes at an average sales price of $245,000 to $255,000 and end the year with 115,000 to 125 communities. We expect our wholesale business to make up 7% to 10% of our 2020 closings. Despite the challenges caused by the pandemic, we maintained a strong sales pace, while raising prices and controlling costs, which resulted in strong gross margins in the second quarter. We believe this trend will continue for the duration of the year and expect full year gross margin to be in the range of 24% to 25% and adjusted gross margin in the range of 26% to 27%. One final and important announcement before we turn the call over for questions. On our last earnings call, we stated that we had no plans for layoffs or furloughs. Since our founding, we've prided ourselves on hiring the best people and investing significant time and resources into their training. Retaining 100% of our workforce regardless of demand increase or fell in the short term was the right thing to do if we expect to reach our shared goals. We're thankful we made that decision and want to thank each of you for your dedication and commitment to LGI and our customers during this uncertain time. We also know that the heaviest burdens of navigating this crisis fell primarily on the shoulders of a select group of our employees. Those we refer to as our frontline workers. This group of approximately seven fifty individuals made up of our sales managers, office managers, new home consultants and construction managers leave home every day to interact directly with our customers and trade partners. These individuals have been and continue to be our boots on the ground. Their commitment to our customers has been nothing short of inspiring. We thank you and as a token of our gratitude, we're excited to announce that each of our frontline workers will be receiving a $2,000 bonus. Without you, it would have been impossible to fulfill our obligation as an essential business and help 2,005 families become homeowners this quarter. We're proud of your accomplishments and grateful for everything you do for our customers and for our company. Now we will open the call for questions. Thank you. Our first question comes from Truman Patterson with Wells Fargo. Your line is open. Hey, good morning guys. Thanks for taking my questions and nice quarter. First, wanted to touch on, you said that you were maybe behind a little bit on starts or specs and July orders are up 60%, very strong. Could you just give a timing of when you think those will actually close? Or are there any other supply side constraints that might be keeping you from delivering them in the back half of 20 lot municipality constraints, labor? And if you could also discuss just some of your construction cycle times, that'd be appreciated. Sure, Truman. Thanks for the question. This is Eric. I can start and Charles can add if he'd like. But yes, with the sales backlog and pipeline we have going into this month of August is the strongest it's ever been. July, we're going to announce between 06:10 and 06:15 closings, primarily because of inventory, because July orders, as we talked about in the scripted remarks, was up over 60%. And that is primarily driven the number of closings by the lack of releases in April. Looking back to April, we had made a decision to start very few houses, less than 50 houses. And essentially, we're on a ninety day cycle time from a release and going through the permitting process and our construction time to get the house finished. And it's going to be similar in August. We're going to close 600 houses in May, we released 600. So August closings are going to be similar to July in that $600,000,000 to $650,000,000 range more than likely. And then what we have done over the last couple of months because we're seeing such strong demand trends is really ramped up our releases. May or excuse me, in June, we released over 800 houses. In the last two months, we've released over 1,000, both for the last two months of start. So we're building up that inventory. Our cycle time is about ninety days and then we'll ramp up in the fourth quarter to hit our guidance goal of 8,000, eight thousand eight hundred homes. Okay. Are you pretty much where you would like to be on those starts being at 1,000, I believe you said in June and July? Or is that still a little bit behind where you'd like to be given the strong July order trends? Yes. I mean, we've ramped up the match demand. So it's July and August where we have released more than 1,000 starts to the field. And that's what demand trends dictate. So it's a temporary shortage of inventory, which results in a few shortage closings months. We certainly would have closed more in July and we would close more in August if we had more inventory. But when you purposely slow down starts for a few months due to all of the uncertainty that all of us had to deal with, it's a temporary shortage, but by the end of the year, we'll be able to ramp back up and end up at same place. Okay, okay, great. So by year end, it will be kind of flush with where you wanted to be. Thinking about that as well, gross margins were up 100 bps sequentially, I believe, including wholesale. You know, you all were guiding to flat. Can you walk us through the biggest driver of this delta? And it looks like in the back half of the year, looking at your guidance, we should see further improvement. Could you maybe discuss some of the price cost actions that you all took? Could you push pricing a little bit harder as we move through the quarter? Sure, Truman. This is Charles. So as we mentioned in our prepared remarks, I mean, the driver year over year was more on the interest and the construction overhead, so we're a little more efficient. One of the things about being a little bit behind, if you will, like Eric mentioned, is that we're being more efficient in how we're taking our houses through the production cycle. So there, once they're being completed, their cycle time from completing the house and closing the customer is quicker than it historically has been as well, which is gaining some operating leverage efficiencies for us. We were up 80 basis points year over year, excluding our wholesale closings. Wholesale in the second quarter was roughly about 10% compared to 4.2% last year in the second quarter and year to date we're at 10.4% for our wholesale closings compared to about 3.5%. So we saw that start to materialize when we raised prices in July, really started seeing that in April, excuse me, in April when we raised prices as well. So big driver is raising prices and then more efficient from a construction cycle time. Okay. Thank you all and good luck on the upcoming quarter. Thanks, gentlemen. Thank you. And our next question comes from Jay McCanless with Wedbush. Your line is open. Thanks for taking the questions. I guess the first question I have, Eric, is what are you all seeing on the land development front? Are you all more comfortable with the higher end or the low end of the community guidance that you put out for the full year? Sure. Thanks, Jay. Lane development is back, started again. We took a pause for a couple of months on starting new sections. Our current sections continue to develop. And really the active community count is going to come down to the end of the year. We're going to trend down to 111. We plan on announcing tomorrow evening as far as active community counts because we had quite a few projects sell out in the month of June. And then we'll ramp back up to $115,000,000 to $125,000,000 by the end of the year. And really the difference between the low end and the high end of the guidance is the same as every year. We've got a number of different communities that we'll start construction on over the next couple of months and start sales in the fourth quarter. And how we measure community count really comes down to whether those new communities have a closing by year end or the first closing of those communities end up going to the first quarter. So it really depends on that last month of closings and the high end of the guidance, if we didn't get there in December, we'd anticipate getting there in the first quarter of next year. And then in terms of the wholesale business, the nice pickup there, are you more inclined just to build up a little more cash flow and help get yourself set up for some new land. Are you more inclined to sell into that channel right now or do you want to hold off in case you see a bigger pickup in retail demand and consumer demand? I guess just looking at the two buckets of demand and trying to figure out which one's more preferable for you guys right now and which one's easier to go out and get that business? Yes, it's a great question, Jay. And the good thing is and it's a great position to be in is our retail business selling to the consumers that are currently renting is very strong, I mean, as strong as it ever has been. And also our wholesale channel selling to investors that are leasing houses to individuals that want to get out of rental situations because of the same dynamics is also strong. We gave guidance on the call or on the scripted remarks that wholesales can be 7% to 10% of our business. And I think that is also somewhat inventory constrained. So we are maxed out on some of the closings we can have from the wholesale business. We're really focusing now on 2021 closings. But they're both strong and we're going through both of them and building inventory as fast as we can to satisfy both fronts. Got it. And then just the other question I had. What are you seeing out of competitors? Are you having to respond to any type of discounting right now? Or is everyone that you and your competitors enjoying situation where demand is moving higher, everyone's taking reasonable price hikes, and there's no real need to get aggressive on a widespread basis? Yes. I think, Jay, great question. And also going on Charles' answer about gross margin, we never discounted even when things got slower from an order standpoint, we knew it was a temporary situation. So we never discounted earlier that affected Q2 gross margins. We haven't discounted since then. And what we've been hearing and same thing you've been reading on other builders' transcripts and what they're talking about in the earnings calls, I think the demand is strong for all of us new home builders and we're all seeing increased demand and sales are going extremely well. So I think we're all raising prices. I know LGI has really focused on raising prices because of the demand and also to offset the increases that we're seeing in our costs, especially around lumber. When should we expect that lump the higher lumber prices to affect your gross margin? Well, it won't affect our gross margin negatively. It's going to remain consistent because we have already raised prices to offset the cost of lumber. As we do every quarter, no matter what the cost increases, we raise prices to offset that, so our margins can be consistent. Okay, perfect. Thanks for taking my questions. You're welcome. Our next question comes from Michael Rehaut with JPMorgan. Your line is open. Thanks. Thanks for taking my question. Good morning, everyone. First, I just wanted to focus on the gross margins as well a little bit and the pricing situation. Obviously, kind of curious, number one, what component drove some of the upside to expectations for the second quarter? And with the full year outlook on an adjusted basis, '26 to '27 kind of puts you closer to the range that you're doing in 2017, '20 '18. I was curious with the recent strength or momentum that you started to see in pricing, if you think that as we look past this year that the 2017, '20 '18 type of adjusted gross margin is within reach more at the 27% level? Yes, Mike, this is Charles. I can start. So between really going back to 2019 from the first quarter of early twenty nineteen through this quarter, we've been ranging between 2324.5%. This was the high end of that scale. So this was the highest gross margin we've posted since early twenty nineteen. And I think raising prices in April was definitely a key driver. We saw stability in costs in the early part of the year, which allowed us to capture a little bit wider margin than we would have otherwise. Lower interest costs, both from LIBOR decreasing and from being efficient with our cash flow drove our average outstanding balances lower. So we were able to say we mentioned $9,300,000 in interest costs this quarter compared to 12.1 last year. So I think that is certainly going to be a tailwind for us as we maintain our debt to cap at the lower end of where we've been. We've been in the coming in at 37, the lowest that we've been since 2014 right after the IPO. We think we can manage the business in the high 30s and low 40s certainly for the foreseeable future from a leverage standpoint. So that's going to benefit us down the road as well. So just to understand, I mean, obviously, forecasting 2021 is not what you want to do at this point. But when you look back at the adjusted gross margin that you were able to hit around the 27% level, Looking forward, again, with kind of the price cost that you see today, I mean, you're already talking about 26% to 27% for this year. Just kind of curious about given your land book, given the cost basis that you see, if the current trends continue, if you think you can get back to that 27% type of a number on an adjusted basis? Yes, Mike, it's a great question. This is Eric. And yes, we're certainly not giving 21 guidance today on adjusted gross margin. But I can say, historically, we've always said and we would expect over the next couple of years for our gross margins to be similar, because that's how we price our houses. And when we say similar within a couple of hundred basis points of every year and our historical gross margin, but it also depends on a lot of different factors like you mentioned. One is the percentage of our wholesale business has an effect on that. How much development we're doing because our gross margins are different, whether we're taking the development risk, we price that in or whether they're buying finished lots on a takedown. And then also which markets we're building in and where most of our closings are. They're all generally in the same range, but Texas does produce the highest gross margin. We do a lot of development in Texas. And then what the other thing that you're likely to see as Jay talked about, we do believe costs are going to continue to increase. Land costs are likely to continue to go higher, labor costs, material costs, the fees of doing business with the respective cities, all likely to go higher. And when you are a cost plus builder to margin like we are, that's going to drive our average sales price higher as evidenced even this year with our increase in our guidance and average sales price. Right. I appreciate that, Eric. Thank you. I guess, secondly, I just wanted to focus in on the lots and the owned and options and the community count. Obviously, you reiterated your community count outlook, I believe, for the end of the year, and that's despite the dip that you saw this past month. Your lots are down on a total controlled basis 18% year over year. So I'm just trying to get a sense from you. Obviously, you've had tremendous community count growth this past year and this year and last year. Understanding that part of the decline this quarter is due to some of the deals put on pause, How do you think your controlled lot position might fare over the next couple of quarters? And do you feel that this might impact the ability to grow your community count next year? Yes. I think as far as what we're seeing in the land business and control lots over the next couple of quarters, we were optimistic that that number is going to start increasing. We are very much back in business, if you will, on looking at buying deals from the sellers out there, our cost to markets. Our sales pace and absorptions and margins that we're seeing are all extremely positive. So it gives our acquisitions employees a lot of room to make sure that that deal is underwrite because we're underwriting the current demand trends, which is very strong. So we approved five new projects at our acquisitions committee yesterday. We've got a couple more coming today. So we're seeing a good pipeline of deals coming through. We obviously have the capital to buy those deals. That's one advantage as we have, because most of what we're seeing out there are raw land opportunities rather than finished lots. And land opportunities takes not only the expertise, but a lot more capital, which obviously us and the other largest larger publics have the ability to do. So I think we're going to be in good shape. The cycle time on land deals are longer. So most of what we're buying really impacts twenty two and twenty three community count. Fair enough. If I could sneak in one more, if you don't mind. The SG and A guidance against the closings guidance, looks like the closings guidance, if you take the midpoint, it's you're kind of talking roughly flat closings year over year for the back half. Whereas to get to your midpoint of your SG and A, you're looking at SG and A maybe being up a little bit year over year. Just want to make sure that the math on that is correct and what's driving that, I guess, negative leverage, if you want to say, on the SG and A side? Yes, sure, Mike. This is Charles. So, yes, if you look at quarter over quarter to your point about the midpoint of the guidance, it would look flat this year versus last year. We just announced our frontline workers bonus. So that's going to be coming into the financials in the third quarter. So seven fifty approximately employees at $2,000 piece. So there's $1,500,000 that's going to be coming in, in the third quarter that wouldn't normally be there when you look at comparative to prior years. And then really the back half of the fourth quarter is going to be determined depending on how community count starts to shape up for next year, as we build out our markets and make sure that we have the people and the infrastructure and everything in place for going into 'twenty one. And then the last thing I would just add is that we pointed out savings in our marketing and advertising spend by limiting travel. We did not host our normal July sales training class like we normally would. So this quarter is receiving some of the benefits, if you will, from the expense side related to COVID by not having some of those additional travel expenses and meeting expenses that we otherwise would incur. I appreciate that, Charles. And I guess just to understand the community count prep or towards the end of the year kind of preparing for community count next year, again, appreciating that you don't want to go too far into 2021 at this point, but it might just take that you are planning for some degree of community count growth for next year. So when you look at the SG and A in the back half, there is sort of some additional expenses in advance of some amount of growth on the community count side? Yes. Yes, Mike, this is Eric. Certainly, growth in community count in 'twenty one is planned. The percentage of growth really depends on where we end up this year, whether it's at the low end or high end of the range. But we're reporting 111 active communities currently at the July. So we're expecting to be above that number next year for sure. Thanks a lot. You're welcome. Thank you. Our next question comes from Karl Reichardt with BTIG. Your line is open. Hi, guys. I just wanted to ask on the guidance for pricing for the year, Charles, about it's growing obviously relatively fast up to this quarter, which was unusual. How much of that is the pricing that you're putting into place versus just a mix shift as higher priced states like Washington sort of flow back into the mix after not contributing in Q2? Yes. I mean, that's a great question, Carl, and that's definitely a component. I mean, we saw our Northwest Division was down this quarter. Our year to date average sales price is right around $243,000 So definitely implies an increase in the back half of this year. So we've been fairly consistent year after year in terms of raising prices in within existing communities that can be anywhere from 1% to 2% or so on a per community basis, on a quarter over quarter basis, and then entering in new communities in the West and continuing to expand primarily in California, and then reintroducing the communities in the Northwest with closings will balance that out. So a fairly well balanced mix, I would say, between individual communities and just price increases within them and then geographic making up the other half. Okay, that's perfect. Thank you, Charles. And then I'm curious if the kind of product that your customers are interested in has changed. Eric, you called out fairly specifically that your customers are saying we're not happy with multifamily living right now, we'd like to make a change. Has that actually changed the size or type of product that your customers are demanding now versus pre COVID? Thanks. Yes, Carl, I don't think so. Like we said in our remarks, the customers are looking at space, they're looking to get out of the apartment and shared hallways and the elevators and they want a yard and they want more bedrooms. But considering the fact that we haven't changed our floor plan nationwide and we're still seeing elevated sales, I'm going to say no because additional floor plans or any changes we just haven't made on our end. So I think just the desire for homeownership and getting more space. Is Terrata performing at a sort of similar growth rate to the or it's not absorptions obviously because it's higher end, but is there an alteration in demand in that side that's been as palpable as for your core product, Eric? Well, it's a very small part of our business. We closed 30, try to homes of three communities in the second quarter. So it's 1.5% of our total closing unit. So it's not a big percentage, but we're very pleased in only three communities closed 30 houses for the quarter at an average sales price that was likely above $400,000 So it's been positive. We're seeing positive demand there as well, even though it's more of a move up type of buyer. But we're seeing strength across all of our price points right now. Great. Thanks a lot. You're welcome. Thank you. Our next question comes from Alex Barron with Housing Research Center. Your line is open. Yes. Thank you guys. Great job in bouncing back. I guess it's understandable, and you took a pause in starts in April, but sounds like things have really picked up recently. I was hoping you could kind of fill in, you said April was down 67%, July up more than 60%. Would you mind filling in what May and June did? Yes. The quarter was flat year over year total since April was down 67%. May and June were roughly up 67% combined, making a flat year over year quarter. And then again, July very positive at up over 60% year over year. Okay. So I mean, if you're starting 1,000 homes now, I guess, unless I'm reading it wrong, it would suggest to me it might be similar to the kind of orders that you're seeing. Now is there any reason why you don't think you could hit that type of run rate next year, like 1,000 a month? Well, I just can spend on demand. We based our starts based on the demand we're seeing in the market. And right now, we're seeing strong demand. We're comfortable in our guidance of 8,000 to 8,800 homes this year. And next year's strength in sales and closing is to be determined. And we're optimistic that the idea of homeownership is here to stay and there will be demand. But the pace of demand and the pace of closings are just going to depend on what's happening at a later timeframe. Okay. And then I guess you guys had slightly less expenses on the SG and A line, the sales and marketing specifically. Were you guys investing a little bit less than mailers and those kind of things? Or was it just the less the lower travel and some of the other expenses that you mentioned? I guess I'm just trying to figure out going forward whether to assume a slightly lower run rate there or not? Yes. A couple of things I'd point to. Great question, Alex. Throughout the quarter, first of all, in April, we are more conservative with our spend because of the uncertainty. So we really just spent hardly any dollars on driving leads to the community, really focused on health and safety and minimizing the number of customers in our offices. And then we gradually ramped up the marketing spend in May or June. And then also what we've seen happening in May and June is the marketing team has done a great job and the demand has been so strong that our efficiencies with every dollar that we're spending in marketing is the best we've ever seen. So that's allowing us to spend fewer dollars. We actually did not do any direct mail in Q2 because of the uncertainty and the lead time it takes to do direct mail with the printing and mailing, etcetera. We are bringing back and doing more marketing and direct mail in Q3. So we think the spend will increase over Q2, but early indications through July is that still we're seeing a lot of efficiencies and seeing a lot of demand for the dollars that we're spending. Okay. And if I could ask one more. Sure. I guess a lot of the buyers that you guys deal with sometimes tend to be credit sensitive or rate sensitive. So now that interest rates are down, I'm wondering, are you guys seeing any buyers that maybe didn't qualify a quarter or two ago when rates were higher? Are you guys seeing some of that? Yes. I think we could say, in generally, lower rates helps all of us. Lower rates leads to a more affordable monthly payment. So it will allow some more individuals to qualify. It will allow customers to look at a larger floor plan than they previous would have been able to. So that's a little bit under our average sales price as well. We believe so there's certainly some of that and we do believe that the lower interest rate is helping demand right now. Okay, great. Best of luck. Thank you. All right. Thank you, Al. Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Eric for any closing remarks. Thank you, everyone, for participating on today's call and for your continued interest in LGI Homes. Please stay safe and have a great day. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.