Q3 2020 LGI Homes Inc Earnings Call
[music].
Welcome to the L.D.A. Holmes third quarter Twentytwenty Conference call today's call Weve seen recorded and a replay will be available on the company's website later today.
Www Dot L.G.I. homes Dotcom, we are allocating hour for prepared remarks and killing it.
Anyone should require operator assistance during the conference call. Please press Star Zero at this time I will turn the call over to Josh a fighter Vice President of Investor Relations at LG I home with the battery you may begin.
Thank you.
Good afternoon, and welcome to LG I homes conference call to discuss our third quarter 2020 financial results.
We begin I will remind listeners that this call will contain forward looking statements that include among other things statements regarding LG I homes business strategy outlook plans and objectives also.
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 managements expectations to prove to be incorrect.
You should review our filings with the FCC, including our risk factors and cautionary statement about forward looking statements sections for a discussion of the risks uncertainties and other factors that could cause our actual results to differ materially from those anticipated in these forward looking statements.
These forward looking statements are not guarantees of future performance you should consider these forward looking statements and lights are related risks and you should not place undue reliance on these forward looking statements, which speak only as of the date of this conference call.
Additionally, non-GAAP financial measures will be discussed on this conference call. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP are included in the earnings press release that we issued this morning and in our quarterly report on form 10-Q for the quarter ended September Thirtyth 2020 that we expect to file with the FCC later today.
This filing will be accessible on the Fccs website at Www FCC Dot Gov and in the investors section of the LG at Home's website, Www LG I homes Dot com.
Our hosts for todays call are Mr., Eric LIBOR, LG, I Homes', Chief Executive Officer, and Chairman of the Board and Mr., Charles Merdian, Chief Financial Officer, and Treasurer, I will now turn the call over to Eric.
Thank you Josh good afternoon, and welcome to everyone participating on our call today, we sincerely hope that you and your families are healthy and doing well.
Oh on the call today with a few comments on recent demand trends and our performance. This quarter. Charles will then provide details on our extraordinary financial results and I'll conclude with our outlook for the rest of 2020 finally, we'll open the call for your questions.
Were extremely pleased with our performance this past quarter as we move past the early impacts of the COVID-19 pandemic, we saw unprecedented levels of demand across all our markets driven by continued low interest rates and undersupply of new and existing homes available for sale and renewed desire for the space flexible.
Really and the convenience that single family homes in suburban locations offer.
The housing market is thriving and has proven to be a cornerstone of the nation's economic recovery.
While these dynamics benefit our industry as a whole we believe LG I is 100% spec entry level focused model is especially well position to meet the needs of today's buyers.
Given that positive backdrop, it should come as no surprise that this was another quarter for breaking company Records.
Net orders this quarter were the highest in our history up 78% over the same period last year.
Orders in July August and September we're all monthly records and August was the single best sales month in our company's history on both the gross and net sales basis.
As a result of the surging demand our backlog more than doubled year over year and was up nearly 70% sequentially.
The consistent strength and demand supports our belief that we have worked through any pent up demand caused by the shutdowns early on and we are now operating in an environment driven by a secular shift in housing preferences.
In the third quarter, we closed a record breaking 2091 homes in line with the expectations. We provided on our last earnings call home closings in July and August were muted as we ramped up our pace of starts to address the brief construction pause we took in March and April.
As evidenced by the order trends just mentioned the demand and orders were there, but time was needed to replenish our inventory.
During the quarter, we successfully started approximately 3500 homes compared to just under 2000 last quarter are.
Our ability to ramp up so quickly underscores the strength of our efficient even flow construction model that enables us to quickly put new homes on the ground to meet demand and it's also a credit to the relationships and loyalty we've built with our trade partners over the last 17 years.
In August our inventory began to catch up to demand and we finished the quarter by closing a record 811 homes in September a 24% increase over the same month last year.
Notably September had the third highest number of closings in our company's history and was our best performance in a month other than December.
In the third quarter, we averaged 6.4 closings per community per month nationwide.
Sarasota was our top market with an impressive 12.3 closings per community per month, followed by Dallas Fort Worth was 9.9, and Austin, Houston and San Antonio tied for third with 8.8 closings each now.
Next was Atlanta was 8.1 closings followed by Portland with eight closings per community per month, congratulations to the teams in these markets for an outstanding performance this quarter.
We ended the quarter with a 110 active communities a 6.8% increase over the third quarter of 2019.
With that I will turn the call over to Charles for more details on our financial results.
Thanks, Eric.
As highlighted in the press release, we sent out this morning home sales revenues in the third quarter increased 10.6% year over year to $534.2 million.
This was our second best quarter in company history surpassed only by our performance in the fourth quarter of 2019.
As Eric highlighted during the quarter, we closed 2091 homes, an increase of 4.4% year over year and 4.3% sequentially.
Home closings included 92 homes sold through our wholesale business this quarter, representing 4.4% of our total closings compared to 127 homes were 6.3% of our total closings in the same quarter last year.
Average sales prices realized from homes closed during the third quarter was a company record of $255477, a 5.9% increase over the same period last year, and a 6.4% increase sequentially driven primarily by higher price points across our markets.
Closeouts and transitions to new communities at higher price points.
Favorable demand environment that supported price increases ahead of rising input costs and fewer wholesale closings.
Gross margin as a percentage of sales this quarter increased a 120 basis points year over year to 25.3% driven by price increases lower interest and overhead offset by higher lot costs.
This was our highest gross margin since the third quarter of 2018.
Excluding wholesale closings, our gross margin was up 100 basis points year over year, and 50 basis points sequentially.
Given the backdrop of home price increases offset by higher costs associated with recent start and our expectation that wholesale closings will increase as a percentage of total closings. We would expect our gross margins in the fourth quarter to be lower sequentially, resulting in our full year margins to be in line.
With our year to date result of 24.5%.
Our adjusted gross margin was 27.3% this quarter compared to 26.3% for the same quarter last year, a 100 basis point increase.
Adjusted gross margin excludes $9.2 million of capitalized interest charged to cost of sales during the quarter and $1.4 million related to purchase accounting together, representing 200 basis points.
Combined selling general and administrative expenses for the third quarter were 10.8% of home sales revenue compared to 10.9% last year and 10.4% in the second quarter of 2020.
Selling expenses for the quarter were $35.5 million or 6.6% of home sales revenues compared to $33.5 million or 6.9% of home sales revenues for the third quarter of 2019, a 30 basis point decrease.
In addition to operating leverage realized from the increase in home sales revenues, our quarterly marketing spend was down 40% year over year, driven by strong demand this year that reduced our need to spend on advertising.
Sequentially selling expenses were up 40 basis points as we increased our marketing spend compared to the second quarter of 2020 and recognized our frontline workers with a onetime cash bonus.
General and administrative expenses totaled $22.3 million or 4.2% of home sales revenues compared to 4% for the third quarter of 2019, a 20 basis point increase.
The increase in general and administrative expenses as a percentage of home sales revenues is primarily related to the identification and certification of available energy efficient home tax credits and to a lesser extent higher personnel costs associated with the increase in active communities during the quarter.
We believe that SDMA will continue to vary quarter to quarter based on home sales revenue and uncertainty related to the ongoing impacts of the COVID-19 pandemic.
Uncertainties aside we would expect our full year EPS DNA as a percentage of revenue to be between 10.3% and 10.8% for the full year.
EBITDA for the quarter was an impressive $87.2 million and EBITDA margin was 16.3% a 90 basis point improvement over the same period last year, and a 10 basis point improvement sequentially.
Pre tax income for the quarter was $77.8 million or 14.6% of home sales revenue an increase of 120 basis points over the third quarter of 2019.
We reported a tax benefit of $11.2 million for the quarter related to the recognition of a 29.4 million dollar credit, resulting from federal energy tax credits.
$27.1 million of which related to homes closed in prior years and the first half of 2020.
We plan to receive additional tax credits during the fourth quarter and estimate our full year effective tax rate to be between 10 and 12%.
Our third quarter reported net income increased 80.4% year over year to $89 million or 16.7% of home sales revenue and our third quarter reported EPS was $3.55 per basic share and $3.52 per diluted share.
Excluding the $27.1 million income tax benefit related to energy tax credits. Our adjusted net income was $61.9 million or 11.6% of home sales revenue an increase of 140 basis points over the same period last year.
Excluding federal energy tax credits, our third quarter, adjusted EPS was $2.47 per basic share and $2.45 per diluted share an increase of approximately 27% year over year and 11% sequentially.
Third quarter gross orders were 4368 net orders for the quarter were 3544 compared to 1990 in the third quarter of 2019, an increase of 78%.
The cancellation rate for the third quarter of 2020 was 18.9%.
Driven by strong demand, we finished the third quarter with a backlog of 3580 homes is of the highest backlog in our history and represents an increase of 119% year over year and 68% sequentially.
The value of our backlog on September Thirtyth was a record $933 million.
In line with starting more homes in the quarter, we also ramped up our land acquisition activities.
During third quarter, we added almost 3000, new lots to our owned inventory and nearly doubled our total number of controlled lots to 24557 until.
In total at September Thirtyth, our land portfolio consisted of 57185 owned and controlled lots, a 17.2% year over year increase and a 29.1% increase sequentially.
32628, or 57.1% of those lots were owned.
And of our owned lots 7622 were finished vacant lots and 19814 were either raw or under development.
And finally, we ended the quarter with 5192 completed homes information centers or homes and process, a 12.2% increase over the same period last year and an increase of 43.9% sequentially.
Our balance sheet remains strong even even as we have ramped up our starts and land acquisitions activities.
We ended the quarter with approximately $46 million in cash $1.5 billion of real estate inventory and total assets of $1.8 billion.
At the end of September we had $628 million and total debt outstanding under our senior notes and revolving credit facility and our available borrowing capacity under the facility was three.
$307 million.
As a result of our strong operating results in the resulting cash flows we ended the quarter with over $1 billion in total book equity and a net debt to capitalization ratio of 36.1% down approximately 90 basis points sequentially and significantly lower than the 47.9% reported.
At this time last year.
This was our lowest net debt to capitalization ratio since June of 2014.
We ended the quarter with 25.1 million shares outstanding and $17.2 million remaining on our existing stock repurchase program.
On October Thirtyth 2020, our board of directors approved an additional $300 million in our stock repurchase program, increasing the total authorization under the program to $317.2 million available to purchase shares of our common stock.
I will now turn the call back over to Eric.
Thanks, Charles let me provide some thoughts on what we're seeing thus far in the fourth quarter and share our outlook for the full year.
We continue to see strong demand for our homes and October was another record month for closings subject to our normal review and verification of fundings Tomorrow. After market close we expect to formally report between 815 and 820 closings for the month of October.
Which would result in a year over year increase of approximately 14% over a strong comp of 715 closings in October of 2019, which prior to this year was our best October on record.
With that backdrop, our share our outlook for the rest of the year. We expect to have 115 to 120 active selling communities at year end and we are updating our guidance to reflect our expectation to close between 80 409000 homes for the full year with our wholesale business expected to.
Make up 7% to 10% of our total holdings.
In addition, we expect an average sales price for the year between 245 and $255000 as Charles mentioned, we expect full year gross margin in the range of 24, and 25% similar to our year to date results through September and expect full year adjusted gross margin between 26 and 27.
<unk> percent.
Conclude by saying how proud I am of the team here at LG and everything we have accomplished this quarter.
Despite the challenges over the last eight months, our dedication to providing high quality affordable homes for our customers has positioned us for success this year and for years to come we will now open the call for questions.
Thank you and I'm, Sorry reminder, ladies and gentlemen to ask a question you will need to press star one on your telephone to withdraw your question just passed the house.
Our first question is from Truman Patterson with Wells Fargo. Please go ahead.
Hey, good morning, or early afternoon.
Everyone. So.
Nice results I wanted to touch on your order growth, 78% in three Q.
How is that trended throughout the quarter or at least in the October have you seen any fall off at all and.
Asking this because there has been a lot of concern around affordability.
Hoping you know if you all could dig in a have you done any sensitivity around pricing or rates, how much pricing your buyer can absorb and part of the October question is yes.
I imagine you all have pushed pricing fairly.
Fairly aggressively over the past three or four months have you seen a large negative impact on demand elasticity from that pricing.
Hey, Thanks drew and great. Great question. Good morning. This is Eric and I can start Dan I'll start with October remained strong after 70%, 78% order growth in Q3.
Gross orders in October are up approximately 20%. So we collect clarify that as a very strong October, especially taking into consideration. Our backlog is so strong nearly doubled over last year and almost a $1 billion and our pipeline. So we really even october didn't need to spend the necessary marketing dollars.
Because pretty much everything is already sold for the fourth quarter, which is a great great position to be in and you yell you saw through our average sales price increasing to 255 for the third quarter.
That we'd have increased prices really under the TRID traditional LG I model of just offsetting cost, but also have been up by new about the the lumber cost increases and we raised prices off that offset that cost and that relates and consistent gross margins for us so demand environments.
Really strong havent seen a drop off at all and it's really positive.
Okay, Okay and.
Your starts during the quarter pretty much matched your backlog at I think 3500 units or so.
You know this is another investor concern, but have you seen a lengthening of your construction cycle.
No or lengthening or builder you from pulling the permanent tax really starting the home.
And I'm really thinking bigger picture with the 70% order growth are you able to deliver those homes in an acceptable timeframe based on labor materials local muni constraints is there anything that's really giving them away there.
Yes sure I mean, this is Charles good morning, and another great question.
We have not seen any significant delays I think earlier on in the quarter and late last quarter.
We may have seen some challenges in terms of getting permits and getting starts rolling.
But as Eric mentioned 3500 starts for the quarter more than we're averaging over 1000 starts right now on a monthly basis.
So we are not expecting any delays in our in our traditional construction delivery times I think an advantage that we have and have had is that we're we've been a high volume builder.
As part of our normal program. So I think our our trade partners are.
Available and labor is available so we have not had any issues.
Ramping up productions were very comfortable with making sure that we can deliver the units to meet our guidance.
Okay. Okay. That's really helpful. And then one final one for me you know that.
The landmark it's always competitive but you all have started to reaccelerate your purchases and you all are usually pretty.
Cautious regarding your gross margin and usually pull back if you are seeing land pressure heat up. So I guess the question really is is you know would you consider the land market overheated and in any areas that you operate or is it kind of business as usual and you're not necessarily seeing a whole lot of.
Land inflation currently land cost inflation.
Yes, Hi, Truman and this is Eric I describe it as more business as usual.
For the LNG business and after 50000 owned and controlled at the end of Q1, we dropped down to 44000 and really pushed a lot of our acquisition spend to make sure. We are certain that what was happening with the pandemic and then this quarter reporting 57185, so a big increase in.
No in a controlled a lot of those were the same deals that came back that we got back under contract and also what we're looking at is really raw land pieces were really comfortable development were comfortable at the larger sizes, we like to capture that developer profit as well, which leads to our industry leading gross margins.
So the raw land pieces, a little bit further out that are few hundred acres that leads to communities of 500 homes or larger we're very comfortable doing no, especially in Texas and we put a number of those under contract.
I think it is overheated and any developer or any finished lots to become become for sales because a lot of builders are looking for finished lots supply to add to their 21 pipeline.
We're probably not going to win that bid, but but thats. Okay. I will let someone else go that route and will focus on the land development, which isn't as competitive.
Okay. Thanks, guys. Good luck on the upcoming quarter.
Thanks.
Thank you. Our next question comes from Michael <unk> with JP Morgan. Please go ahead.
Hi, Thanks good.
Good afternoon, everyone.
First question I, just wanted to delve into the community count a little bit.
I think.
Understandably taking off.
Prior high end of the range that that was out there before I guess now going into 115 to 120 by the end of the year.
There will be a nice move from where you currently are.
Yeah, how should we think about 21.
No.
You're not at the point to give out.
Formal guidance, but just directionally in the past.
Obviously, you have kind of targeted anywhere from 10% to 20%.
As a community count growth.
At this point you're at on working off of a bigger footprint.
So just any thoughts directionally on community count from a.
Growth standpoint over the next year or two would be very helpful.
Sure. My guess is there again, yes December 19, we ended the year at 106 active communities.
Aircraft and taking off the high end of our community count guidance for 2020 that's.
Thats really a very positive message to the market. If you will it's all of our investors because it's the result of closing out communities faster than anticipated and because of cold and about a quarter delay and allow development. Some of the new communities are got delayed by a quarter.
So we'll end the year up this year 115 to 120, and I think you're correct and we're not ready to give specific guidance as far as percentage increase or or numbers for 21, yet, but directionally. We do expect 21 community count at the end of the year to be higher than the end of year 20 community count. So we expand on growing growing next year.
Okay.
I appreciate that I guess, secondly, I love your thoughts around credit availability currently.
Correct me, if I'm wrong, but I recall, you, saying even last quarter that.
Credit availability, you had kind of bounce back.
You often some temporary pauses early.
Early on in the endemic but it bounced back maybe to pre co bid levels.
So you know if I'm, recalling that right or in either case.
How do you see credit today to continue to improve or is it more just stable.
Any types of changes that you might want to highlight.
Sure Yeah I described the credit market is certainly stable and not have the same response as last quarter. The mortgage market feels exactly the same as it did pretty cold it and outside of the <unk> really a 45% to 60 day period, where there was a lot of uncertainty around March or April.
I would describe it is back to normal very consistent very much available obviously lower interest rates helps all of us in homebuilding and leads to an affordable payment and although interest rates are probably about 25 basis points higher than than a month ago.
Still seeing strong demand. So so no changes in the mortgage company.
It's very consistent all the mortgage companies are busy they're busy as refinances. So we've seen our underwriting times.
Ill elongate by a few days, but other than that real positive.
Okay, and then switch quick quickly this.
Put someone there one more question.
Price increases in the cadence there how.
How would you characterize your cadence of price increases over the last three months and you see that kind of continuing at a steady rate or.
Given how we've heard about different builders, maybe experiencing a little bit of a flex up in pricing.
Should that should that kind of moderate maybe as he deal with any types of.
Just trying to make sure that the affordability equation remains reasonable.
Yes, Brent pricing for us is really.
Cost plus model that we use so we have been in an environment last three or four months, where we've really seen a lot of cost inflation, probably more than we have in our in our history of pricing. So we've had to be more aggressive on our price increases.
Weve raised prices over the quarter and 100% of our communities because costs are often a 100% of our communities now.
Now lumber seems to be coming off to some extent, but still elevated and we'll see how the next three to six months ago is if costs are flat.
That our pricing increases will be more muted and as we buy more deals and they come online we'll be able to offer more affordable price if you would.
Costs continue to rise then we'll have to raise our prices to match those costs due to keep our gross margins consistent.
Thank you.
Youre welcome.
Thank you. Our next question comes from car right chart with BP I G. Please go ahead, great. Thanks, everybody.
So Eric I wanted to ask about.
I think part of the successful for a long time is pretty unique approach to sales I think one of our worries encoded hit was high.
How do you continue to train folks your reliance on in person sales.
Could be muted can you kind of talk about how that's evolved and now that we're sort of in a in a string semi stabilize world. The coated in terms of are you able to find people are you able to train them. The way you. What are your stores largely open are you selling the way you were pre coated I'd just like to get a sense of how it's impacted your your system because it's so unique.
Yes, Thanks, Karl Great question, and what we're dealing with is the coal that situation and first of all I think just to point out that the teams doing a fantastic job and in all of our frontline workers, we gave to the onetime bonus to last quarter, certainly well deserved and everybody just doing about a fantastic job.
Wearing that social distancing TTOT customers riding in separate cars. So we certainly are taking all the precautions necessary to keep everyone say safe and healthy.
That being said our sales process is exactly the same cost.
Customers are still calling the demand for homeownership is as strong as ever we strongly believe in that.
Direct to consumer approach and walk into customers through face to face our process first time homebuyers have had a tongue a ton of questions.
Really really like the hand holding process if you will.
To make sure their questions answered walking through because we have spec inventory walking them through the house and get to see exactly what they're going to be buying I'm, it's working great recruiting wise.
I think recruiting is really good spot right now, we havent had a lot of turnover.
We are recruiting talented people and because of the unfortunate layoffs and other industries. There is a lot of top talent available and we're seeing that come through our system.
We've had to minimize our travel and we've relied more on the field to do training and the personnel in the field doing a fantastic job. So yes outside of keeping everybody safe and healthy Carl the team's doing a great job and we're operating with the same system, we always have.
Thank you it's a nice comprehensive overview and then I wanted to ask you also just a bit about the balance sheet and as you're you're obviously cash bounce around quite a bit this year pretty aggressively ramped your lot count.
This quarter as you're sort of looking forward, what's your comfort on your on your on your gross debt to cap, Charles where would you think you'd ideally like to run the business over the course the next two to three years. Thanks, Yes.
Yes, great question, Carl So we're comfortable with gross debt to cap in the Fortys I.
I think our balance sheet management is really driven by our real estate inventory and and that can tend to be lumpy as we buy deals.
Eric had mentioned most of what we're currently looking at and have under control. There are raw land deals. So we'll continue to monitor our real estate needs from inventory standpoint, and then manage the balance sheet in the Fortys.
Okay, Great and I'm, sorry, I wanted to ask one quick one too are your are you expecting this particular quarter for your your closings has historically been a little more last month loaded December loaded does that pattern going to look roughly the same. This this coming quarter as it has in past quarters or will you be more spread evenly through the month.
Yeah, I would anticipate December is going to be really strong month for us I think november's can be higher than October and December is much higher than November so pretty traditional flow through the quarter.
Thanks, a lot.
Youre welcome.
Thank you.
Our next question comes from Susan Maklari with Goldman Sachs. Please go ahead.
Thank you good afternoon, everyone.
Good afternoon.
Eric My question is.
Jerry you suggested that we have realized a lot of the pent up demand on that you know we kind of soften the started the pandemic over the course of this quarter and I'm trying to eat.
Really yeah.
I think that we've met that pent up demand with the fact that you're continuing to see some really strong orders coming through I mean, I think you mentioned October up about 14% or so year over year we.
We think about those two comments and in kind of contrast, and what do you think that that really means as we look to 21% and the potential for growth.
Yes, Great question, Susan and I think our comment was really focused around.
Making sure I understood. The demand is still strong I think there was some opinions that for the first couple of months Post Cup coal that Theres a lot of really pull forward demand now I think we're just really emphasizing even through the month of October and even through last weekend, we're still seeing strong demand and we're still seeing.
The amount of dollars, we're spending on marketing and compare to how many leads we got common and the efficiencies. We're getting is still very strong and also letting everybody know we think this is going to continue a secular shift in 2021, the concept of the co bid and getting out of tight dense living situations and getting into your own.
Home with the yard and more space in and working from home those type of trends are certainly going to be with us at least for next few years is how we feel so we are very optimistic about homeownership demand trends for both the short and long term.
Got you. Okay. That's helpful. And then my follow up question is you know we've seen that Theres been plan.
Relative differences in some of the geography based on local economies in some of the factors. There can you talk to what you've seen maybe across some of your markets in this quarter and especially how some of those markets that maybe lagged a bit how they've trended over the last couple of months.
Yeah, Weve seen consistent strong demand one of the numbers that I could point to as every region in the country.
Every everywhere have at least five closings per month for the quarter.
Every area average sales price was up over last year last quarter. So it's pretty consistent demand nationwide of course, some markets are always doing better than others, but we emphasize on the call Sarasota.
Market in Florida. The most people are familiar with only one community in Sarasota about 37 closings last quarter shows. So is the strength of that market also highlighting besides the Texas markets that historically always been strong Atlanta in Portland at North It north of eight closings per community Phoenix, Seattle and Arbor.
Turkey were all north of seven so pretty widespread and consistent strength of.
Our top 10 markets in revenue last quarter.
Using our top 10 communities than revenue those top 10 communities came from five different states in seven different markets. So widespread success sand demand across the country.
Okay. Thank you and good luck. Thank you.
Thank you. Our next question comes from Jay Mccanless with Wedbush. Please go ahead.
Hey.
Good afternoon, Thanks for taking my questions great quarter. Thank.
Thank you. The first question I had the Eric you said that the demand and the traffic Haven.
Haven't slowed down you're still seeing what you what seems to be very strong demand I guess have you seen any change in your average buyer is have you seen.
Maybe the age of that average buyer coming down is as the millennials and disease are starting to really aggressively go towards home ownership.
We havent Jay.
Our average age your buyer. She has been between 38 42 really every quarter that was consistent again in the third quarter.
And we're still seeing strong demand October off approximately 20% wasn't quite as strong as 78% up for the quarter, but 20% year over year strength in the middle of a pandemic with everything going on we think it's just fantastic demand.
Yeah absolutely.
[music].
The second question I had just thinking about the seven to 600 videos. You said you had and then you're.
You're starting a thousand homes a month approximately I mean is that historically that Kim or feel given the video number out before but does that roughly six or seven months supply. What you have historically had or youre trying to build in a little extra right now.
Yes, Jay this is Charles So 7600, we typically give that every quarter in terms of the video sales. It has trended down a little bit in terms of our expectation in the sense that we have typically managed our inventory with one year supply of videos is what we're really looking.
Do you have kind of in the queue. So we also had.
18000 in London, and raw so getting those units delivered Eric had mentioned, we had really taken a quarter pause.
There for Covance, so that's having some impact plus the increase.
In demand is churning through some of that inventory as well so.
We will continue to evaluate and rebuild it as we continue to develop new sections and put new lots on the ground.
Is there any sorry.
One more and is there any.
Fiscal issues there whether it's your your permitting planning environmental et cetera are you seeing any issues as you'll try to rebuild out across the canal.
No were not nothing nothing of significance in any of our.
Communities across the country.
Okay, great. Thanks for taking my questions you are welcome.
Thank you so much NFL reminder, ladies and gentlemen to ask a question simply press star one on your terms.
Our next question is from Alex Barron with housing Research Center. Please go ahead.
Yes, hey, guys, thanks, and great job on the quarter.
Thank you.
I wanted to ask.
Regarding to two different issues, one let the energy tax credits and the other was the.
Your buyback so on the energy tax credits is this the first time.
Yes, so chubb.
Credit and can you explain what has changed in the construction of new homes.
And what does that imply for tax rate going forward and then on the.
On the share buybacks.
So it's a pretty sizable authorization I'm, just hoping you can expand on your thoughts on.
We plan to use that is that going to be systematic.
What are your thoughts around doing the share buyback going forward.
Yes sure Alex This is Charles on the 45 Bell. So we did we did book about three and a half million in the second quarter and that was that was the first time.
That we had started the process to evaluate.
Our homes and whether they would would qualify for the credits that we focused on Earth.
Early on since it was announced in December of 19, we spent the first half of the year really just gathering the information we needed.
To evaluate whether we would qualify or not we focused on the west originally just places like California, where we felt like we should easily be able to.
Clear the hurdle and what we Didnt estimate or factor in as some of the success that we'd see in places like Texas.
And some of the other other markets overall, we had about 80% of our homes qualified so we're picking up.
For the all the years prior to 2020, we are picking up roughly about 20000 units that.
Overall in our estimate related to the years prior to 2020 so.
Well, we went into it not really knowing what to expect as we hadn't hadn't really evaluated it before so obviously very pleased with the fact that we had funnel.
Phenomenal success in terms of getting them to qualify.
On the share buyback comment I think we're just really looking at it more first as opportunistic I mean, I think for the last several quarters, we've really talked about how we are financing our growth.
And certainly getting to a size and scale to karl's comment earlier about how we're expecting managed balance sheet kind of think that gross debt to cap in the fortys is the right number for us long term.
In terms of how we see it from a strategic long term capital strategy.
So, we'll just manage the inventory and its opportunistic if we have some excess cash flow available in their.
Potential disconnects in the market then we will see that as a as an opportunity to deploy some of that capital.
Okay, great and if I could ask one more on the gross margin guidance.
I think you gave a range of 26 to 27, so given everything going on what what would cause it to come in on the lower end of the range. It would seem to me that you guys have momo.
Momentum so I'm just trying to understand what.
Lumber related could be.
Could cause it to come in at the lower end of the range.
Yeah sure I mean, really I think for the fourth quarter obviously.
Obviously with with three quarters in the books, if you will and coming in at roughly 26, and a half year to date really the only two components, we have going on in the fourth quarter is one is we expect wholesale to be a larger percentage. So just from a go.
Gross margin standpoint that tend to be a tailwind for example, if we moved from from 4% just over 4% this quarter to say up to 10% in the fourth quarter that could have a 50 to 60 basis point impact to our margins all things equal.
The other factor we have going on is that from the retail side. We started a lot of houses this quarter as we mentioned some of those homes were sold prior to starting construction. So there is some movement going on in terms of the timing of the delivery versus the sale of the home. So we would expect retail.
Overall to be slightly slightly down as well just until that catches back up into next year. So maybe 80 to 100 basis points.
Sequentially down.
I would put some brackets around it and that would mean that we would be.
Weighted average very close to where what we've achieved year to date, so we should be pretty close to that midpoint.
Okay, Great. That's very helpful and good luck for this year. Thanks.
Thank you. Thank you.
And Sir I'm, not showing any further questions Nicole.
They proceed with final come.
Thanks, everyone for participating on today's call and for your continued interest in L.J. homes have a great day. Thank you.
Ladies and gentlemen, thank you for participating in today's conference call.
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