Q3 2019 Earnings Call

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Welcome to Oh, Gee, I <unk> third quarter 2019 conference call.

Today's call is being recorded in a replay will be available on the company's website later today at www.

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Dot com.

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Hello, Richard Rachel Eaton, Chief Marketing Officer at L.D. I Hope you may begin.

Thank you welcome to the LDR <unk> conference call discussing our results for the third quarter 2019, and the nine month ended September Thirtyth 2019.

This conference call will contain certain forward looking statements that include among other things statements regarding L.D. I business strategy outlook plans objectives and guidance for 2019.

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.

Should review our filings with the FCC, including our risk factors and cautionary statement about forward looking statement section for discussion of the risks uncertainties and other factors that could cause our actual results could differ materially from those anticipated and these forward looking statement.

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. It presentation of this information is not intended to be considered in isolation, whereas a substitute for the financial information presented in accordance with gap.

A reconciliation of adjusted gross margin to gross margin and most comparable measure prepared in accordance with gas 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 30 in 2019 that we expect to file with the Fccs later today.

It's filing will be accessible on the I think he's website and any investor section of our website at www Dot LG I homes Dot com.

Joining me today, our air Sleeper, LDR Hunkers, Chief Executive Officer, and Charles Merdian, Okay, I houses Chief Financial Officer with that I'll now turn the call Liberty Eric.

Thank you Rachel and welcome everyone on this call. We appreciate your continued interest in L. James.

During today's call I will summarize highlights and results from the third quarter of 2019 ventral follow up.

I'll discuss our financial results in more detail outreach Dawn will conclude with comments and open the call for questions.

Before we get started I want to recognize that this week marks the sixth anniversary or they'll dry homes, becoming a public company.

At the time of or 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 it does the new markets quadruple the size of organization and see tremendous appreciation in our stock price since our IPO at $11 per share in 2013.

We have accomplished all of that then more all while preserving our culture and demonstrating that our unique operating model is sustainable.

Over the past six years, we have maintained our intense focus on delivering strong results breaking many Lj 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 2003 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 5175 homes closed through the first nine months alere generating over $1.2 billion and home sales revenue.

For the third quarter, we averaged 6.6 closings per community per month companywide.

This was an increase from the third quarter of last year was 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 core.

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 closings per community basis, what San Antonio averaging 10 closings per community per month, followed by Dallas Fort worth at 9.7 in Houston at 9.5.

Companywide, we ended the third quarter with a 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 closes.

Oh, the remaining 56% of closings, which took place outside the Central Division.

Highlight of the third quarter was an increase in closings and our southeast Division.

This quarter, we close 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 when homes.

August socket marked our one year anniversary of the when homes acquisition.

This acquisition was instrumental in our community count growth for 2019, expanding our footprint and one of the top housing markets in the southeast.

Our West Division close to 140 homes compared to 173, and 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 in a positive response from buyers to lower interest rates.

With that I'd like to turn the call over Charles Merdian, Our Chief Financial Officer for 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 2003 homes closed a 27% increase over the third quarter of 2018.

Sales prices realized from homes closed during the third quarter ranged from the one fortys to over $600000 and averaged $241179, a 1.5% year over year increase.

In the third quarter by segment approximate average sales prices were $221000 and central 363000 in the northwest 218000 in the southeast 207000 in Florida and 256000 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 others 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 and 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 were 6.9% of home sales revenues compared to $27.9 million were 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 were 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 operator operational leverage realized from the increase in home sales revenues.

We expect fourth quarter as China 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 2625, and net orders were 1990, a 22.3% increase over the prior year third quarter.

Ending backlog for the third quarter was 1635 homes compared to 1212 last year and the cancellation rate for the third quarter of 2019 was 24%.

We ended the third quarter with a portfolio of 48803 owned and controlled lots as of September Thirtyth 31759 were 65% were owned.

And of this amount 6974 were finished vacant lots 20156 were either raw or under development and 4629 were either completed homes information centers or homes and process.

Weighted shares outstanding for calculating diluted earnings per share are impacted by our outstanding convertible notes maturing this month.

In the third quarter 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 Thirtyth, 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 and total debt outstanding under our revolving credit facility convertible notes and senior notes are available borrowing capacity was approximately $145 million, our gross debt to capitalization was 49.5% and net debt.

Capitalization was 47.9%.

At this point I would like to turn the call back over share.

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.

So 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. The now is the time for consumers to make their money.

And as a result, we're able to drive more leads to our communities, resulting in increased sales October results were positive and we expect a momentum we are experiencing now to carry throughout the remainder of the year.

We expect to publish October monthly closings after the market closes later today.

We had a strong month and we'll 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 that 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 our updating our guidance to reflect our expectation to close between 7100 7600 home.

Thanks for the full year.

In addition, we believe our average sales price for the year will be between 235 and $240000.

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, and a half and 24.5%.

We expect adjusted gross margin, which excludes the effects of interest and purchase accounting to end the year between 26 and 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 and $7.60 per share now 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 one key on your Touchtone telephone. If your question has been answer for you wish or move yourself from the Q. Please press the pound King once again ask a question. Please press Star then one now.

And our first question comes from Truman Patterson from Wells Fargo. Your line is open.

Thanks actually this is Paul.

I was wondering if interest rates.

First half of September than we've seen that again kind of Richard itself and October did you notice any doesn't have any impact on either your traffic or your orders.

Elevated.

Yes, I know 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. So we we haven't been talking a lot about interest rate spiking, it's more of how low they are and how great. It environment we are in.

October like we talked about in the scripted presentation October was our make make your move national sales event and really talked about historically speaking celebrate rates are and how that leads to more affordable payment. So October was a good solid strong mountain similar to the third quarter.

Speaking of the National sales event should we expect maybe an even higher than than seasonal bump in December closings.

Of those close before year end.

Yes, I think we look at the event as very positive as it was really to get out our I get the information out of the consumer that's great time to move because of interest rates and also because of the inventory that we add on the ground. We did the the national that last year as well, so I think as far as a fourth quarter in December closings.

We gave guidance for our full year. So I think everybody should expect that will be inside that guidance.

Okay, and then on the on the gross margin decline you mentioned that.

We don't part that's a higher land costs is that really just due to increased land pricing in your core markets or is that more.

Towards you know option lot mix and some of your energy or geography.

Yes, Paul this is Charles yes. So our finished lot cost averaged this past quarter about 19.5% of our average sales price. So that was up year over year, just over 100 basis points.

And just up slightly sequentially. So I think the comparable that we referenced in the earnings call and in the script is really more on the year over year comp.

But we do continue to price our houses based and account for both just land cost and increasing construction cost, we expect that land and construction costs will continue to rise over time.

And there does and there is competition in the entry level, which.

Certainly we see in the market right now.

Okay I 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 the competition state when I wanted to find out are you guys seeing an elevated level of incentives from from some of your entry level competitors and or or you are you expecting that you guys are gonna have to be running some type of incentives.

The rate start to move up to drive volume.

Hi, Jay This is Eric I'll I'll take a shot at that this question I think from that can competition incentives, we really havent seen that and incentives isn't a isn't a big part of our program as well maybe some incentives that some older houses that are that are still in inventory the finish out the year, but.

Yes, we still think it's a very positive environment out there with us and all the other builders and are seeing a lot of lot of incentives because rates rates are still really good demand is good supply as low as it feels pretty good out there with us and the other builders.

Got it and then on the 127 wholesale homes. This quarter, how does that compare to last year and <unk> are you guys do you guys still believe or.

The the net Moreover, the operating margin I guess from those wholesale homes is still in line with a home that you sold to a retail customer.

Yes that is correct, yes, we know that for a fact that the.

Margins are similar to selling it to a retail customer gross margins overall or less about we make up that and reduced commissions advertising et cetera. So operating margins are very similar and compared to last year last year with those 104 wholesale homes. The third quarter. So very similar percentage this year, 6.3% and very similar for.

Thanks for that last year.

Okay. So that's a that increase in wholesale probably didnt have a big impact on the gross margin. It was more the land cost, which you just talked about talking about claim cost.

Correct and getting more closings coming from outside the state of Texas, which also tend to lead to a lower gross margin compared to Texas.

Yes.

And then I wanted on the October 718 closings.

Great number what what was the ending community count for the month, where the average community count for October .

Yes, we're still tying all the numbers out for for October and going through our normal processes and make sure everything's funded at all the paper is complete normally going through that process, one two or three closings may fall into the next month, but at this point.

When we released the numbers later today were very confident or closing numbers going to be between 715, and 718 and very likely on a community count of 104.

Okay, great. Thanks, taking my questions you're welcome.

Thank you.

Our next question comes from Michael Rehaut from Jpmorgan. Your line is open.

Hi, Thanks, Oh, good morning, or good afternoon, everyone. I appreciate you taking my questions.

First just wanted to get a little bit of kind of drilling down on some of the guidance for the year given you know obviously three quarters in.

With fee a particular.

You know on the ASP I'm, sorry on the adjusted gross margin.

And and reported or.

Post interest gross margin you said you expect for Q to be similar to three Q.

That would put your full year right around 26 or on the adjusted side 24, even though.

Post interest.

So just curious that you know those numbers.

Could you obviously towards the lower end on the adjusted for the full year range and kind of towards the middle.

You know just wanted to make sure I'm thinking about that right. Because you are pretty specific on for Q.

And to get something a little different on the full year you'd have to be a bit more you'd have to be a bit more.

Movement relative to Threeq, you. So just want to make sure I'm thinking about that right I'm doing the numbers right.

Yeah, This Charles and I get that you're right on that is that is accurate if the fourth quarter margins come in similar that that would wait.

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.

And we go into every every quarter.

And our outlook for every year.

Valuating.

A number of factors that go into the gross margins certainly there's variability between introducing new communities transitioning between communities geographic mix and certainly whos sale.

Ill come into play.

And really adjusting the top end of the the margin down was as you as you as you may have done is that it would take have to take.

An exceptional quarter to really push past.

To get to the top end of the range. So.

Right Okay.

Okay, and then similarly Charles.

The A.S.P. side, you know I would assume.

You know to get to the low end of the range you'd have to plug in a number for Q on Da's Pete's ASP side, something around 230, or even a little less which is.

You know you haven't done that in three quarters, and you've been trending pretty consistently.

Upwards so.

Just want to make sure again that I'm thinking about that right that all else equal you would seem like you'd be towards the high end of the A.S.P. range.

Yes, I mean year to date, we're at 238 in terms of an ASP I mean, our strongest markets as we mentioned in the script or in Texas, which generally tend to be on the lower end.

Of the average ASP companywide also Carolinas, which we've done a lot of expanding this year tends to be on the lower end of the ASP. So if we are taking into account that geographic mix.

That certainly we feel comfortable with the with the range that we republished but.

But you're right it would.

It would definitely seems to be that we would likely kind of stay where were at or just within that within that range is just tightening up the range a little bit.

Okay.

And then.

Appreciate that and then I discussed thinking about.

I know, obviously, you're not giving out 2020 guidance, but.

Directionally when you're talking about community count.

2018.

No you're by the end of the year year over year, you're up about 10%.

You know if you kind of hit the midpoint of.

The.

A a for your guidance this year, you're going to be up around 25% sort of a very big difference there.

How should we think directionally wouldn't <unk> when you look at those two types the numbers over the last couple of years. This year and last you know how should we think about directionally, where that community <unk> community count could be by the end of 2020 and as part of that question. You know, maybe perhaps you could review how.

You're thinking about you know your geographic geographic expansion plans you have to the extent their new communities, new new new markets. You know areas that you feel like you have better penetration opportunities.

Such as possibly like a California.

So you know maybe you can kind of overlay. Some comments are around your geographic expansion strategy into that as well.

Okay. Thanks. Thanks, Mike This is Eric Yeah, great year for community count growth this year.

We've invested a lot last year.

Lot of community count growth this year aided by the when homes acquisition that we made.

Last year at this time, so it's been a very strong year and I think we're going to see the dividends payoff 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 we haven't given guidance for 2020 yet.

Certainly should be another year of community count growth, but it really depends also on how we end the year our guidance remain the same at 105 to 115 and the difference there is really getting a lot of our new communities opened by the end of the year.

And if they don't open by the ended the year. They certainly will open in the first quarter of next year. So it could be at the low end of the range and Thats going to result in more positive, meaning how growth next year orbits at high end of the range probably.

More muted growth for next year, but we really end up at the same 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 theres anything new to add.

The the markets were focused on getting opened for the next couple of quarters and getting into sales and closings tend to be the smaller markets that thats run out of our hubs.

Some examples are Sarasota, Florida, Daytona, Florida Greenville.

We are going into southern California should ever first closings in the Riverside area over the next couple of months first communities getting ready to open in Richmond, Virginia here over the next quarter or too so.

Lot of growth continuing a lot in new markets.

But it also depends on the market and what we're seeing out there from prices for land sellers will be diligent and 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 and right now, it's a pretty pretty positive environment for the sellers and.

In asking prices are high.

Great and then one last quick question on the modeling side, Charles how should we thinking about tax rate for fourth quarter.

Yes should be similar to third.

Great. Thank you.

Yes.

Thank you. Our next question comes from Carl Reichardt from B T. G. Your line is open. Thanks, Hi, guys I'm or could you talk about complete home 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, I complete home the rollout has been very positive I think was 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 that LG I or our sales personnel and people in the field very positive response from the.

Buyers that are seeing it.

Really bowzer response from the marketing team and those of us that our corporate that support field operations because it really it 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 prices getting into the mid two hundreds. So overall overall very positive it wasn't meant to necessarily increase margins.

But put a nicer product on the ground that everybody proudest selling more appealing to the consumer and keep our sales pace elevated and I think it's done exactly that.

Okay. Thanks, I appreciate that and then just on your lot Count I think it's down 9% year on year on year, if I've got it right and when.

And your but perspective again, knowing that theres competition for lots and 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's kind of flatten year over year or would you expect some type of the of the an increase in in spend there to get the lot count growing again.

Yeah, I think it'd be flattish or even down possibly because it's because the market. We're in and also on the year over year comps. We had the wind acquisition last year. So I think that artificially inflated at temporarily to the higher side. So it's you know we are down but I'd artificially high comp I think and then you know during this this quarter just ask.

Some larger projects fall out during the feasibility periods. So 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, but generally speaking I do think right now we're going to be cautious with new projects under contract at.

And this market would lead to us not 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, Eric.

Youre welcome.

Thank you and again, ladies and gentlemen to ask a question. Please press Star then one now.

Our next question comes from Alex Barron from housing Research Center. Your line is open.

Yes, Thanks, I guess, given you know all the positive things going on in the market right now a 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 year closings guidance because that implies about 600 closings for the next two months, so what could possibly.

Cause you guys to be on the low end.

Yeah, I think I think Alex you know, we we normally don't think about the low end to the guidance that is kind of a worst case scenario and I think the biggest unknown. Because we are we've already reported October closings are obviously know what October closings are going to be it's really water sales looking like in the next six weeks and we think they're going to be very positive and have no reason to think other.

A wise about one year.

Putting guidance out to the market you always want to have a little bit of cautiousness to that so that would be under scenario. The sales are not very good over the next six weeks, which is out there was that.

Okay got it so just being conservative.

Correct and then Charles do you have the backlog dollar number.

Yes.

Let's see soon have handy would give me just one second chance.

[noise] [noise] apologize.

Okay.

Yes, well, you're finding that I heard you mentioned I think it was riverside.

And in Southern California is there any other submarkets within Southern California, you go to cities that you guys are targeting in the next 12 months.

We do have some of the pipeline in California is a big expansion area for us I'm not necessarily in southern California, but I know, we got to project in Stockton.

Thats on the horizon for the next couple of quarters as an example of that.

Got it.

And Alex the ending backlog value is $410.5 million.

All right appreciate it thanks you bet.

Thank you and I am showing no additional questions from our phone lines.

Okay. Thanks, everyone for participating on today's call in for your continued interest in L. Jack homes have a great afternoon.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program email disconnect everyone have a wonderful day.