Welcome to the LGI Homes second quarter 2020 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&A. If anyone should require operator assistance during the conference call, please press star zero. At this time, I'll turn the call over to Joshua Fattor, Vice President of Investor Relations. Mr. Fattor, you may begin.
Thank you and good afternoon. Welcome to LGI Homes conference call to discuss our second quarter 2020 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-19 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 June 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 investor section of the LGI Homes website at lgihomes.com.
I am pleased to introduce our hosts for today's call, Mr. Eric Lipar, 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-19 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-19 and the restrictions imposed 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. 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-19.
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 million. 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 8.5 and 8.4 closings per month respectively. Rounding out the top five were Atlanta and Phoenix with 7.9 and 7.1 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 2019. As most of you know, June was designated as National Homeownership Month. We were especially proud to announce that we closed our 40,000th 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 customer's dreams of homeownership is what inspires us and why we started building and selling homes. Our 40,000th closing in June is another great milestone in LGI Homes' 17-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 Merdian, our Chief Financial Officer, for more details on our financial results.
Thanks, Eric. As previously highlighted, home sales revenues in the second quarter were $481.6 million based on 2,005 homes closed, a 4.3% increase over the second quarter of 2019. 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 $8.7 million of capitalized interest charged to cost of sales during the quarter and $1.3 million related to purchase accounting, together representing 210 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 million, or 6.2% of home sales revenues, compared to $33.9 million, or 7.3% of home sales revenue for the second quarter of 2019, 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-19 related uncertainties. We expect to increase our spend as needed in future quarters to support our closing objectives. General and administrative expenses totaled $20.2 million, or 4.2% of home sales revenues, compared to 4.1% for the second quarter of 2019, a 10-point 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&A will continue to vary quarter to quarter based on home sales revenue and the uncertainty related to the ongoing impacts of COVID-19. Uncertainties aside, we would expect our full-year SG&A as a percentage of revenue to range between 10.5% and 11%. Pre-tax income for the quarter was $68.6 million, or 14.2% of home sales revenue, an increase of 110 basis points over the second quarter of 2019. EBITDA for the quarter was an impressive $77.4 million, 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 $3.5 million benefit related to the extension of energy tax credits. We expect our full-year effective tax rate to range between 21% and 22%.
As Eric highlighted, our record-breaking second quarter net income increased 20.8% year-over-year to $55.6 million, 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. As of June 30th, we had 25.1 million shares outstanding. Second quarter gross orders were 3,018, and net orders were 2,253. Cancellation rate for the second quarter of 2020 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 million.
As of June 30th, 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 2020 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 million 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 $9.3 million, compared to $12.1 million in the same period last year, due to favorable interest rates and lower outstanding debt balances. As of June 30th, we had approximately $49 million in cash, and our available borrowing capacity was approximately $283 million, resulting in $332 million 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 610 and 615 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 8,000 and 8,800 homes at an average sales price of $245,000-$255,000 and end the year with 115 to 125 communities. We expect our wholesale business to make up 7%-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%-25% and adjusted gross margin in the range of 26%-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 fall 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. We 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 referred to as our frontline workers. This group of approximately 750 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. To ask a question, you'll need to press star one on your telephone. Again, to ask a question, press the star, then the one key on your touchtone telephone. In the interest of time, please limit yourself to one question and one follow-up, and then re-queue for any additional questions. 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? Are there any other supply side constraints that might be keeping you from delivering them in the back half of 2020, lot, municipality constraints, labor? 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. Yeah, 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 610 and 615 closings, primarily because of inventory, because July orders, as we talked about in the scripted remarks, was up over 60%. That has 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. Essentially, we're on a 90-day cycle time from a release and going through the permitting process and our construction time to get the house finished. It's going to be similar in August. We're going to close 600 houses. In May, we released 600.
August closings are going to be similar to July, in that 600 to 650 range, more than likely. 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 starts. We're building up that inventory. Our cycle time is about 90 days, and then we'll ramp up in the fourth quarter to hit our guidance goal of 8,000 to 8,800 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?
We've ramped up to match demand, so it's July and August where we have released more than 1,000 starts to the field.
Okay.
That's what demand trends dictate. 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. 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 the same place.
Okay, great. By year-end, it'll be kind of flush with where you wanted to be. Thinking about that as well, gross margins were up 100 basis points sequentially, I believe, including wholesale. You all were guiding to flat. Can you walk us through the biggest driver of this delta? 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? Did you push pricing a little bit harder as we moved through the quarter?
Sure, Truman, this is Charles. As we mentioned in our prepared remarks, the driver year-over-year was more on the interest and the construction overhead, so we were a little more efficient.
Okay.
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. 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. Year-to-date, we're at 10.4% for our wholesale closings compared to about 3.5%. 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.
A 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, Truman.
Thank you. Our next question comes from Jay McCanless with Wedbush. Your line is open.
Thanks. Thanks for taking my questions. I guess the first question I have, Eric, is what are y'all seeing on the land development front? Are y'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. Land development is back started again. We took a pause for a couple of months on starting new sections. Our current sections continue to develop. Really, the active community count's 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. Then we'll ramp back up to 115-125 by the end of the year. 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.
How we measure community count really comes down to whether those new communities have a closing by year end or the first closing in those communities end up going to the first quarter. It'll really depend on that last month of closings. 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.
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, 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.
Yeah, it's a great question, Jay. 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, as strong as it ever has been. 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 wholesale is going to be 7%-10% of our business. I think that is also somewhat inventory constrained. We are maxed out on some of the closings we can have from the wholesale business. We're really focusing now on 2021 closings. 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. 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? Is everyone that you and your competitors enjoying a 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?
I think, Jay McCanless, great question. Also going on Charles Merdian's 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, and we haven't discounted since then. What we've been hearing, and same thing you've been reading on other builders' transcripts and what they're talking about in their 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. 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.
Yeah. When should we expect the higher lumber prices to affect your gross margin?
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, great. Thanks for taking my questions.
You're welcome.
Our next question comes from Michael Rehaut with JPMorgan. Your line is open.
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? With the full year outlook on an adjusted basis, 26%-27%, kind of puts you closer to the range that you were doing in 2017, 2018. I was curious with the recent strength or momentum that you're starting to see in pricing, if you think that as we look past this year, that the 2017, 2018 type of adjusted gross margin is within reach, more at the 27% level.
Yeah, Mike, this is Charles. I can start. Really going back to 2019, from the first quarter of early 2019 through this quarter, we've been ranging between 23% and 24.5%. This was the high end of that scale, so this was the highest gross margin we've posted since early 2019, 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. We were able to say we mentioned, $9.3 million in interest costs this quarter compared to $12.1 last year.
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 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. That's going to benefit us down the road as well.
Just to understand, obviously forecasting 2021 is not what you want to do at this point, 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, you're already talking about 26%-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.
Yeah. Mike, it's a great question. This is Eric. Yeah, we're certainly not giving 2021 guidance today on adjusted gross margin. 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. When we say similar, within 200 basis points of every year in our historical gross margin. 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 we're buying finished lots at a takedown. 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. 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. 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. No, I appreciate that, Eric. Thank you. I guess secondly, just wanted to focus in on the lots and the owns and options and the community count. Obviously, you reiterated your community count outlook, I believe, for the end of the year. That's despite the dip that you saw this past month. Your lots are down on a total control basis, 18% year-over-year. 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? Do you feel that this might impact the ability to grow your community count next year?
Yeah, I think as far as what we're seeing in the land business and controlled lots over the next couple of quarters, we're 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 across the markets. Our sales pace and absorptions and margins that we're seeing are all extremely positive. It gives our acquisitions employees a lot of room to make sure that that deal is underwritten, because we're underwriting to current demand trends, which is very strong. We approved five new projects at our acquisitions committee yesterday. We've got a couple more coming today. We're seeing a good pipeline of deals coming through.
We obviously have the capital to buy those deals. That's one of the advantages we have, because most of what we're seeing out there are raw land opportunities rather than finished lots. Land opportunities takes not only the expertise but a lot more capital, which obviously us and the other larger publics have the ability to do. 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 2022 and 2023 community count.
Fair enough. If I could sneak in one more, if you don't mind.
Sure.
The SG&A guidance against the closings guidance. Looks like the closings guidance, if you take the midpoint, you're kind of talking roughly flat closings year-over-year for the back half. Whereas to get to your midpoint of your SG&A, you're looking at SG&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&A side.
Yeah, sure, Mike, this is Charles. Yeah, 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. That's going to be coming into the financials in the third quarter. 750, approximately, employees at $2,000 a piece. There's $1.5 million that's going to be coming in the third quarter that wouldn't normally be there when you look at comparative to prior years. 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 2021.
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. 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 am I to take that you are planning for some degree of community count growth for next year? When you look at the SG&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. Yeah, Mike, this is Eric. Certainly, growth in community count in 2021 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. We're reporting 111 active communities currently at the end of July. We're expecting to be above that number next year for sure.
Great. Thanks a lot.
You're welcome.
Thank you. Our next question comes from Carl 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 off of 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 price states like Washington sort of flow back into the mix after not contributing in Q2?
Yeah, that's a great question, Carl, and that's definitely a component. 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. We've been fairly consistent year-after-year in terms of raising prices within existing communities. That can be anywhere from 1%-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. 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. 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-19? Thanks.
Yeah, 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 the shared hallways and the elevators, and they want a yard, and they want more bedrooms. Considering the fact that we haven't changed our floor plans 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. 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 on 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 Terrata Homes of three communities in the second quarter, so it's 1.5% of our total closing units. It's not a big percentage, but we're very pleased in only three communities to close 30 houses for the quarter at an average sales price that was likely above $400,000. It's been positive. We're seeing positive demand there as well, even though it's more of a move-up type of buyer. We're seeing strength across all of our price points right now.
Great. Thanks a lot.
You're welcome.
Thank you. As a reminder, if you would like to ask a question, press the star, then the one key on your touchtone telephone. Our next question comes from Alex Barron with Housing Research Center. Your line is open.
Yeah. Thank you, guys. Great job in bouncing back. I guess it's understandable 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?
Yeah. 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. Again, July very positive at up over 60% year-over-year.
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, it's just going to depend on demand. We base our starts based on the demand we're seeing in the market. Right now, we're seeing strong demand, and we're comfortable in our guidance of 8,000-8,800 homes this year. Next year's strength in sales and closing is to be determined. We're optimistic that the idea of homeownership is here to stay, and there will be demand. The pace of demand and the pace of closings is just going to depend on what's happening at a later timeframe.
Okay. I guess you guys had slightly less expenses on the SG&A line, the sales and marketing specifically. Were you guys investing a little bit less in mailers and those kind of things, or was it just the lower travel and some of those 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.
A couple of things I'd point to. Great question, Alex. Throughout the quarter, first of all, in April, we were more conservative with our spend because of the uncertainty. We really didn't spend hardly any dollars on driving leads to the community, really focused on health and safety and minimizing the number of customers in our offices. Then we gradually ramped up the marketing spend in May or June. 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. 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, et cetera. We are bringing back and doing more marketing and direct mail in Q3. We think the spend will increase over Q2. 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. 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. 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?
I think we could say, in general, lower rates helps all of us. Lower rates leads to a more affordable monthly payment. It will allow some more individuals to qualify. It will allow customers to look at a larger floor plan than they previously would have been able to. That's a little bit into our average sales price as well, we believe. 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, Alex.
Thank you. I'm showing no further questions at this time. I'd like to send 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.