At this time, I will turn the call over to Rachel Eaton, Chief Marketing Officer at LGI Homes. Ms. Eaton, you may begin.
Thank you. Welcome to the LGI Homes conference call discussing our results for the third quarter of 2019 and the nine months ended September 30th, 2019. Today's conference call will contain certain forward-looking statements that include, among other things, statements regarding LGI's business strategy, outlook, plans, objectives, and guidance for 2019. All such statements reflect current expectations. However, they do involve assumptions, estimates, and other risks and uncertainties that could cause our expectations to prove to be incorrect. You should review our filings with the SEC, including our risk factors and cautionary statement about forward-looking statements section for a discussion of the risks, uncertainties, and other factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. These forward-looking statements are not guarantees of future performance.
You should consider these forward-looking statements in light of the related risks, and you should not place undue reliance on these forward-looking statements, which speak only as of the date of this conference call. Additionally, adjusted gross margin, a non-GAAP financial measure, will be discussed on this call. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. A reconciliation of adjusted gross margin to gross margin, the most comparable measure prepared in accordance with GAAP, is included in the earnings press release that we issued this morning and in our quarterly report on Form 10-Q for the quarter ended September 30th, 2019, that we expect to file with the SEC later today. This filing will be accessible on the SEC's website and in the investor section of our website at www.lgihomes.com.
Joining me today are Eric Lipar, LGI Homes' Chief Executive Officer, and Charles Merdian, LGI Homes' Chief Financial Officer. With that, I will now turn the call over to Eric.
Thank you, Rachel, and welcome everyone on this call. We appreciate your continued interest in LGI Homes. During today's call, I will summarize highlights and results from the third quarter of 2019. Charles will follow up to discuss our financial results in more detail. After he is done, we will conclude with comments and open the call for questions. Before we get started, I wanted to recognize that this week marks the sixth anniversary of LGI Homes becoming a public company. At the time of our IPO, our objective was to fuel our growth and replicate our business model across the country. In the past six years, we have expanded into more than a dozen new markets, quadrupled the size of our organization, and seen tremendous appreciation in our stock price since our IPO at $11 per share in 2013.
We have accomplished all of this and more, all while preserving our culture and demonstrating that our unique operating model is sustainable. Over these past six years, we have maintained our intense focus on delivering strong results, breaking many LGI records along the way, and the third quarter was no different. For the third quarter of 2019, we produced record-setting closings, record-setting revenue, record-setting average home sales price, record-setting community count, and record-setting net income dollars. This quarter, we closed 2,003 homes, generating approximately $483 million in home sales revenue, which represented a 27% increase in revenue over the third quarter of 2018, bringing us to a total of 5,175 homes closed through the first nine months of the year, generating over $1.2 billion in home sales revenue. For the third quarter, we averaged 6.6 closings per community per month company-wide.
This was an increase from the third quarter of last year, with 6.5 closings per month. This increase was primarily due to an increase in closings per community per month in our Central Division, which increased from 7.4 to 8.6 closings per community per month for the quarter, and an increase in our West Division from 5.8 to 6.2 for the quarter. Absorption for the quarter was highlighted by performance in our San Antonio, Dallas-Fort Worth, and Houston markets. For the quarter, our top-performing market on a closing per community basis was San Antonio, averaging 10 closings per community per month, followed by Dallas-Fort Worth at 9.7 and Houston at 9.5. Company-wide, we ended the third quarter with 103 active communities, more than a 27% increase over the 81 active communities that we had at the end of Q3 last year.
Breaking it down, let's first look at highlights from our Central division operations. Comprised of results from the San Antonio, Dallas-Fort Worth, Houston, Austin, Oklahoma City, and Minneapolis markets, our Central operations generated 876 closings in the third quarter, which represented approximately 44% of our total closings. Of the remaining 56% of closings, which took place outside the Central division, a highlight of the third quarter was an increase in closings in our Southeast division. This quarter, we closed 420 homes, an increase of 19% in the Southeast compared to 352 homes closed in this division during the third quarter of last year. Our Southeast division also had an increase in community count of six communities, primarily located in Raleigh, with four new communities resulting from our acquisition of Wynn Homes. August 2nd marked our one-year anniversary of the Wynn Homes acquisition.
This acquisition was instrumental in our community count growth for 2019, expanding our footprint in one of the top housing markets in the Southeast. Our west division closed 240 homes compared to 173 in the third quarter last year. This 39% increase in homes closed year-over-year was primarily driven by the increase of three new active communities, which includes the addition of the Sacramento and Las Vegas markets. In addition, we continue to develop the wholesale side of our business. This quarter, we closed 127 homes with three different investment groups, generating $26 million in revenue. Overall, throughout the third quarter, we saw continuous demand for affordable homes coupled with community count expansion and a positive response from buyers to lower interest rates. With that, I'd like to turn the call over to Charles Merdian, our Chief Financial Officer, for a more in-depth review of our financial results.
Thanks, Eric. As mentioned earlier, home sales revenue for the quarter were $483.1 million based on 2,003 homes closed, a 27% increase over the third quarter of 2018. Sales prices realized from homes closed during the third quarter ranged from the 140s to over $600,000, and averaged $241,179, a 1.5% year-over-year increase. In the third quarter by segment, approximate average sales prices were $221,000 in the central, $363,000 in the Northwest, $218,000 in the Southeast, $207,000 in Florida, and $256,000 in the west. Gross margin as a percentage of sales was 24.1% this quarter, compared to 25.6% for the same quarter last year, a decrease of 150 basis points, primarily as a result of higher land, construction, and capitalized interest costs. Sequentially, gross margins were consistent compared to the second quarter of this year.
Our adjusted gross margin was 26.3% this quarter, compared to 27.4% for the third quarter of 2018, and consistent with the second quarter of this year. Adjusted gross margin for the third quarter excludes approximately $9.5 million of capitalized interest charged to cost of sales during the quarter, representing 197 basis points and consistent with the previous quarter. We currently expect our gross margin and adjusted gross margin to be similar in the fourth quarter. Combined selling, general, and administrative expenses for the third quarter were 10.9% of home sales revenue, compared to 12% in the prior year, reflecting operating leverage from more homes closed and higher average sales prices. Selling expenses for the quarter were $33.5 million, or 6.9% of home sales revenues, compared to $27.9 million, or 7.3% of home sales revenue for the third quarter of 2018, which is a 40 basis point decrease.
The decrease in selling expenses as a percentage of home sales revenue reflects operating leverage realized from the increase in home sales revenue. General and administrative expenses were $19.1 million, or 4% of home sales revenue, compared to 4.7% for the third quarter of 2018, a 70 basis point decrease. The decrease in general and administrative expenses as a percentage of home sales revenues reflects operational leverage realized from the increase in home sales revenues. We expect fourth quarter SGA expenses as a percentage of revenue to be similar to the third quarter. Pre-tax income for the quarter was $64.7 million, or 13.4% of home sales revenue. We generated net income in the quarter of $49.3 million, or 10.2% of home sales revenue, which represents earnings per share of $2.15 per basic share and $1.93 per diluted share.
Third quarter gross orders were 2,625 and net orders were 1,990, a 22.3% increase over the prior year third quarter. Ending backlog for the third quarter was 1,635 homes, compared to 1,212 last year, and the cancellation rate for the third quarter of 2019 was 24%. We ended the third quarter with a portfolio of 48,803 owned and controlled lots. As of September 30th, 31,759, or 65%, were owned. Of this amount, 6,974 were finished vacant lots, 20,156 were either raw or under development, and 4,629 were either completed homes, information centers, or homes in process. Weighted shares outstanding for calculating diluted earnings per share are impacted by our outstanding convertible notes maturing this month. In the third quarter of 2019, our average stock price was $76.42, resulting in an approximate 2.3 million share increase to the weighted average shares outstanding for the diluted EPS calculation for the quarter.
With respect to the conversion of the convertible notes, we have elected to settle the notes using a combination of cash to pay the principal amount and shares of our common stock. We expect that our average stock price through conversion could be slightly higher than the third quarter treasury stock method calculation. We would then expect to issue approximately 2.5 million shares in November, increasing our basic shares outstanding to approximately 25.5 million shares. As of September 30th, we had approximately $37 million in cash, approximately $1.5 billion of real estate inventory, and total assets of $1.6 billion. Also, at the end of September, we had roughly $760 million in total debt outstanding under our revolving credit facility, convertible notes, and senior notes. Our available borrowing capacity was approximately $145 million. Our gross debt to capitalization was 49.5%, and net debt to capitalization was 47.9%.
At this point, I would like to turn the call back over to Eric.
Thanks, Charles. Let me provide some guidance and thoughts on what we are seeing thus far in the fourth quarter and looking ahead into the remainder of the year. Far in the fourth quarter, we are seeing sustained demand and positive response to lower interest rates. We just wrapped up our national sales event promoting the idea that now is the time for consumers to Make Your Move. As a result, we're able to drive more leads to our communities, resulting in increased sales. October results were positive, and we expect the momentum we are experiencing now to carry throughout the remainder of the year. We expect to publish our October monthly closings after the market closes later today. We had a strong month and will report 718 closings for the month of October. This final number is subject to our normal review and verification of fundings.
718 closings would result in a year-over-year increase of more than 50% from the 468 closings in October of last year. The first 10 months have put us on track to hit all of our key metrics. For the remainder of 2019, we expect our community count to end the year between 105 and 115 active selling communities and are updating our guidance to reflect our expectation to close between 7,100-7,600 homes for the full year. In addition, we believe our average sales price for the year will be between $235,000-$240,000. We expect our gross margin for the year to be similar to our year-to-date results through September and end the year between 23.5%-24.5%. We expect adjusted gross margin, which excludes the effects of interest and purchase accounting, to end the year between 26%-27%.
Given our guidance for home closings, average sales price, gross margins, and active community count, we believe our full-year basic earnings per share will be between $7.00 and $7.60 per share. We'll be happy to take your questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star followed by the number 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, to ask a question, please press star and then 1 now. Our first question comes from Paul Przybylski from Wells Fargo. Your line is open.
Thanks. Actually, this is Paul. I was wondering, interest rates spiked in the first half of September, and then we've seen that again kind of repeat itself in October. Did you notice any, did that have any impact on either your traffic or your orders when those rates were elevated?
Yeah, I don't think so, Paul. This is Eric speaking. It seems like we had a real positive October. I think historically, we're still talking about really low interest rates. We haven't been talking a lot about interest rates spiking. It's more of how low they are and how great an environment we are in. October, like we talked about in the scripted presentation, October was our Make Your Move national sales event and really talked about, historically speaking, how great rates are and how that leads to a more affordable payment. October was a good, solid, strong month and similar to the third quarter.
Speaking of the national sales event, should we expect maybe an even higher than seasonal bump in December closings as those close before year-end?
Yeah, I think we look at the event as very positive. It was really to get the information out to the consumer that it's a great time to move because of interest rates and also because of the inventory that we had on the ground. We did the national event last year as well. I think as far as the fourth quarter, December closings, we gave guidance for our full year. I think everybody should expect that we'll be inside that guidance.
Okay. On the gross margin decline, you mentioned that it's due in part to higher land costs. Is that really just due to increased land pricing in your core markets, or is that more towards option lot mix in some of your newer geographies?
Paul, this is Charles. Our finished lot cost averaged this past quarter about 19.5% of our average sales price. That was up year-over-year just over 100 basis points, and just up slightly sequentially. I think the comparable that we referenced in the earnings call and in the script is really more on the year-over-year comp. We do continue to price our houses based and account for both just land cost and increasing construction costs. We expect that land and construction costs will continue to rise over time. There is competition in the entry-level, which certainly we see in the market right now.
Appreciate it. Thank you very much.
You're welcome.
Thank you. Our next question comes from Jay McCanless from Wedbush. Your line is open.
Hey, thanks for taking my questions. Charles, if I could pick up on that competition statement. I wanted to find out, are you guys seeing an elevated level of incentives from some of your entry-level competitors and/or are you expecting that you guys are going to have to be running some type of incentives as the rates start to move up to drive volume?
Hi, Jay, this is Eric. I'll take a shot at this question. I think from the competition incentives, we really haven't seen that, and incentives isn't a big part of our program as well. Maybe some incentives on some older houses that are still in inventory to finish out the year. We still think it's a very positive environment out there with us and all the other builders, and aren't seeing a lot of incentives, because rates are still really good, demand is good, supply is low. It feels pretty good out there with us and the other builders.
Got it. On the 127 wholesale homes this quarter, how does that compare to last year? Do you guys still believe or the net or the operating margin, I guess, from those wholesale homes is still in line with a home that you sell to a retail customer?
Yes, that is correct. Yeah, we know that for a fact that the margins are similar to selling it to a retail customer. Gross margins overall are less. We make up that in reduced commissions, advertising, et cetera. Operating margins are very similar. Compared to last year, we closed 104 wholesale homes in the third quarter. Very similar percentage. This year is 6.3% and very similar percentage to that last year.
Okay, that increase in wholesale probably didn't have a big impact on the gross margin. It was more the land cost, what you just talked about, what you guys talked about, land costs.
Correct. Getting more closings coming from outside the state of Texas, which also tends to lead to a lower gross margin compared to Texas.
I wanted on the October 718 closings, that's a great number. What was the ending community count for the month or the average community count for October?
Yeah, we're still tying all the numbers out for October and going through our normal processes and make sure everything's funded and all the paperwork's complete. Normally, going through that process, one, two, or three closings may fall into the next month. At this point, when we release the numbers later today, we're very confident our closing number is going to be between 715 and 718 and very likely on a community count of 104.
Okay, great. Thanks for taking my questions.
You're welcome.
Thank you. Our next question comes from Michael Rehaut from J.P. Morgan. Your line is open.
Hi, thanks. Good morning or good afternoon, everyone. Appreciate you taking my questions. I just wanted to get a little bit of kind of drilling down on some of the guidance for the year, given, obviously, three quarters in. With the particular on the ASP, I'm sorry, on the adjusted gross margin and reported or post-interest gross margin, you said you expect 4Q to be similar to 3Q. That would put your full year right around 26 on the adjusted side, 24 even on the post-interest. I was just curious, those numbers put you obviously towards the lower end on the adjusted for the full year range and kind of towards the middle.
Just want to make sure I'm thinking about that right, because you were pretty specific on 4Q, and to get something a little different on the full year, there'd have to be a bit more movement relative to 3Q. Just want to make sure I'm thinking about that right, I'm doing the numbers right.
Yeah, this is Charles. No, you're right on. That is accurate. If the fourth quarter margins come in similar, that would weight the actual results for the full year to trend towards the bottom of the adjusted gross margin range and more towards the midpoint on the gross margin range. We go into every quarter and our outlook for every year evaluating a number of factors that go into the gross margin. Certainly, there's variability between introducing new communities, transitioning between communities, geographic mix, and certainly wholesale all come into play. Really adjusting the top end of the margin down was, as you may have done, is that it would have to take an exceptional quarter to really push past to get to the top end of the range.
Right. Okay, similarly, Charles, on the ASP side, I would assume, to get to the low end of the range, you'd have to plug in a number for 4Q on the ASP side, something around $230 or even a little less, which is, you haven't done that in three quarters, and you've been trending pretty consistently upwards. Just want to make sure again that I'm thinking about that right, that all else equal, it would seem like you'd be towards the high end of the ASP range.
Yeah, year-to-date we're at $238 in terms of an ASP. Our strongest markets, as we mentioned in the script, are in Texas, which generally tend to be on the lower end of the average ASP company-wide. Carolinas, which we've done a lot of expanding this year, tends to be on the lower end of the ASP. Taking into account that geographic mix, certainly we feel comfortable with the range that we republished. You're right, it would definitely seems to be that we would likely kind of stay where we're at or just within that range. It's just tightening up the range a little bit.
Okay. Appreciate that. I just guess thinking about, I know obviously you're not giving out 2020 guidance, but directionally, when you think about community count, in 2018, by the end of the year-over-year, you were up about 10%. If you hit the midpoint of your guidance this year, you're going to be up around 25%, so a very big difference there. How should we think directionally when you look at those 2 types of numbers over the last couple of years, this year and last, how should we think about directionally where that community count could be by the end of 2020? As part of that question, maybe perhaps you could review how you're thinking about your geographic expansion plans to the extent there are new communities, new markets, areas that you feel like you have better penetration opportunities, such as possibly like a California.
Maybe you could kind of overlay some comments around your geographic expansion strategy into that as well.
Okay. Thanks, Mike. This is Eric. Great year for community count growth this year. We've invested a lot last year. A lot of community count growth this year, aided by the Wynn Homes acquisition that we made last year at this time. It's been a very strong year, and I think where we're going to see the dividends pay off from all the community count growth and the openings this year is really in the closings next year and getting these communities open and experiencing closings for the full year 2020. You're correct, we haven't given guidance for 2020 yet. Certainly, it should be another year of community count growth, but really depends also on how we end the year.
Our guidance remained the same at 105 to 115, the difference there is really getting a lot of our new communities open by the end of the year. If they don't open by the end of the year, they certainly will open in the first quarter of next year. It could be at the low end of the range, and that's going to result in more positive community count growth next year, or if it's at the high end of the range, probably more muted growth for next year. We really end up at the same place, and we're positive about that. As far as the new markets go, the new markets we've talked about on calls previously, I don't think there's anything new to add.
The markets we're focused on getting open for the next couple of quarters and getting into sales and closings tend to be the smaller markets that's run out of our hubs. Some examples are Sarasota, Florida, Daytona, Florida, Greenville. We are going into Southern California, should have our first closings in the Riverside area over the next couple of months. First community is getting ready to open in Richmond, Virginia, here over the next quarter or two. A lot of growth continuing, a lot of new markets, but it also depends on the market and what we're seeing out there from prices for land sellers. We'll be diligent in protecting our gross margin and diligent in acquisitions. We're not going to grow just to grow.
We're going to make good decisions on underwriting of our land parcels. Right now it's a pretty positive environment for the sellers, and asking prices are high.
Great. Just one last quick question on the modeling side. Charles, how should I think about tax rate for the fourth quarter?
Yeah, it should be similar to third.
Great. Thank you.
You're welcome.
Thank you. Our next question comes from Carl Reichardt from BTIG. Your line is open.
Thanks. Hi, guys. Eric, could you talk about CompleteHome and the rollout to this point, and then maybe just chat a little about what has surprised you positively and what challenges you may have had, if any, during that transition?
Yeah. CompleteHome, the rollout's been very positive. I think from the results that everyone has seen this year, that's one of our 2019 initiatives, and certainly from our order growth, including this past quarter, our closings being up more than 50% in October. Very positive response from our employees at LGI, our sales personnel, and people in the field. Very positive response from the buyers that are seeing it. Really positive response from the marketing team and those of us that are corporate that support field operations, because it really was done to provide a lot of consistency in the product that we offer to the field. We think with the consistency of upgrading the appliances, going to hard surface countertops nationwide, ceiling fans, garage door openers, those are all what customers are starting to expect when our average sales price is getting into the mid-$200s. Overall, very positive.
It wasn't meant to necessarily increase margins, but put a nicer product on the ground that everybody can be proud of selling, more appealing to the consumer, and keep our sales pace elevated. I think it's done exactly that.
Okay, thanks. I appreciate that. Then just on your lot count, I think it's down 9% year-on-year if I've got it right. Would your perspective, again, knowing that there's competition for lots and peers are out there looking, is the expectation over the course of the next, say, two or three quarters that we'll see it kind of flatten year-over-year, or would you expect some type of an increase in spend there to get the lot count growing again?
Yeah, I think it'd be flattish or even down possibly because of the market we're in. On the year-over-year comps, we had the Wynn acquisition last year. I think that artificially inflated it temporarily to the higher side. We are down, but on an artificially high comp, I think. During this quarter, just had some larger projects fall out during the feasibility period. A lot of it has to do with what's in the pipeline and what ends up not getting through our acquisitions committee or getting through the due diligence period as much as new projects under contract.
Generally speaking, I do think right now we're going to be cautious with new projects under contract. This market would lead to us not being as aggressive or not putting as many new deals under contract and being patient because the deals will come again, as we all know.
Great. I appreciate it. Thanks, sir.
You're welcome.
Thank you. Again, ladies and gentlemen, to ask a question, please press star and then one now. Our next question comes from Alex Barron from Housing Research Center. Your line is open.
Yeah, thanks. I guess given all the positive things going on in the market right now, low interest rates, demand for entry level, so forth, and the number you just gave us for October, I'm trying to figure out under what scenario would you hit the low end of your closings guidance, because that implies about 600 closings for the next two months. What could possibly cause you guys to be on the low end?
Yeah, I think, Alex, we normally don't think about the low end of the guidance. That is kind of a worst-case scenario and I think the biggest unknown, because we've already reported October closings or obviously know what October closings are going to be. It's really what are sales looking like in the next six weeks. We think they're going to be very positive and have no reason to think otherwise. When you're putting guidance out to the market, you always want to have a little bit of cautiousness to that. That would be under a scenario that sales are not very good over the next six weeks, which is not what we expect.
Okay, got it. Just being conservative.
Correct.
Charles, do you have the backlog dollar number at the end of the quarter?
Let's see. I don't have it handy, but give me just one second. Apologize, one second.
I guess while you're finding that, I heard you mention, I think it was Riverside, in Southern California. Is there any other sub-markets within Southern California that you guys, or cities that you guys are targeting in the next 12 months?
We do have some in the pipeline. I think California is a big expansion area for us. Not necessarily in Southern California, but I know we got a project in Stockton that's on the horizon for the next couple quarters as an example of that.
Got it.
Alex, the ending backlog value is $410.5 million.
All right. Appreciate it. Thanks.
You bet.
Thank you. I am showing no additional questions from our phone lines.
Okay, thanks everyone for participating on today's call and for your continued interest in LGI Homes. Have a great afternoon.
Ladies and gentlemen, thank you for participating in today's conference. This does