Q4 2020 LGI Homes Inc Earnings Call
Welcome to the <unk> homes fourth quarter 2020 conference call today's call is being recorded and the replay will be available on the company's website later today at Www Dot <unk> homes Dot com, we have allocated an hour for prepared remarks.
In the Q&A, if anyone should require operator assistance during the conference call. Please press Star zero at this time I'd like to turn the call of the Joshua <unk>, Vice President of Investor Relations at <unk> homes. Mr. Farrell you may begin.
Thanks.
Good afternoon, and welcome to the <unk> homes conference call to discuss our financial results for the fourth quarter and full year of 2020.
Before we begin I'll remind listeners that this call will contain forward looking statements that include among other things statements regarding <unk> homes business strategy outlook plans objectives and guidance for 'twenty and 'twenty one.
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 the management's expectations to prove to be incorrect.
You should review our filings with the SEC, including our risk factors and cautionary statement about forward looking statements section for a discussion of the risks uncertainties and other factors that could cause our actual results to differ materially from those anticipated from 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 of not place undue reliance on these forward looking statements, which speak only as of the date of this conference call. Additionally.
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 can be found in either of the earnings press release that we issued this morning and in our report on form 10-K for the fiscal year ended December 31, 2020, and we expect to file with the SEC. Later this week this filing will be.
Accessible on the SEC's website and in the investors section of our website.
Our hosts for todays call are Eric Leaper, LTI homes, Chief Executive Officer, and Chairman of the Board and Charles <unk>, Chief Financial Officer, and Treasurer, I'll now turn the call over to Eric.
Thank you Josh good afternoon, and welcome to everyone participating on our call today.
I am pleased to say, we delivered another remarkable year of growth and profitability meeting or exceeding all of our guidance expectations.
<unk> <unk> hundred 30 homes in December alone, an increase of 55% and our best month ever.
Putting that in perspective, we closed more homes in December than we did in all of 2013 of the year of our IPO.
For the quarter, we closed 3000, and 408 homes, an increase of over 35 per cent.
Again for comparison this was more homes than we closed in all of 2015.
Our ability to deliver such extraordinary results is a testament to our systems based processes and the talent and dedication of our people.
As a result of a great quarter, we outperformed our guidance closing 9339 homes in 2020, an increase of 21% over 2019, and our seventh consecutive year of double digit closings growth.
We finished the year with 116 active communities, an increase of over 9% year over year and in line with our guidance.
During the year, we expanded within our existing markets. In addition to establishing new markets in Daytona Beach in Sarasota, Florida, Greenville, South Carolina, and Richmond, Virginia.
For the fourth quarter of 2020, we averaged an impressive 10 closings per community per month companywide, a new quarterly record.
Our top five markets, where DFW with $15 six closings per community per month, Phoenix with $14 seven Austin with $14, one Sarasota was 13 and Seattle with $12 eight.
For the full year, we average seven closings per community per month companywide, a new annual record.
Our top five markets this year, where DFW with $10 eight closings per community per month, Austin was $9 nine Houston with $9 three San Antonio with nine and Phoenix with 819.
We generated homes sales revenue of approximately $2 $4 billion in 2020, an increase of 29% over 2019, marking our seventh consecutive year of double digit revenue growth.
Most importantly, we drove this growth while increasing our profitability.
Our pre tax net income margins were a record 18, 6% for the quarter and 15, 5% for the year.
We more than doubled our net income in the fourth quarter and finished the full year up 81% over 2019.
Delivering record return on equity of 32, 6%.
Finally, our significant cash flow generation and prudent management of our balance sheets resulted in an of net debt to capitalization ratio of just 36%.
A few additional highlights.
We were recently recognized as one of America's most trusted builders since our founding our mission has been to provide high quality homes and desirable locations at price points within the financial reach of families dreaming of their first home and this recognition is a testament to the success of that mission.
We build our homes with the goal of making sustainability affordable for our customers and we made great strides on the skull and 2020.
I am proud to say that 100% of the homes. We closed last year included water sense fixtures energy star appliances, and other energy saving products designed to improve our homes efficiency the.
These features ultimately save our customers money and reduced impacts on our environment.
During the fourth quarter, we launched a redesigned website.
Utilizing modern design this new site enhances our online presence to meet the rapidly evolving digital expectations of our customers and allows us to focus on delivering an industry leading user experience throughout every stage of our buyers' journey.
Finally, we closed our 45000 tell me December a significant landmark for our company and for the families that have entrusted us to fulfill their goal of homeownership.
Now I'll turn the call over to Charles for details on our record financial results.
Thanks, Eric.
As highlighted in the press release this morning homes sales revenue for the fourth quarter increased 48, 2% year over year to $897 4 million.
This was the single best quarter in our company's history.
Home sales revenues for the year totaled nearly $2 $4 billion a.
A 28, 8% increase over 2019.
As Eric noted during the quarter, we closed a record 3408 homes, an increase of 35, 5% year over year and 63% sequentially.
Home closings included 360 homes sold through our wholesale business this quarter, representing 10, 6% of our total closings compared to 344 homes for 13, 7% of our total closings in the same quarter last year.
For the full year, we closed a record 9339 homes, an increase of 21, 4% year over year.
Home closings included 850 homes sold through our wholesale business. This year, representing nine 1% of our total closings and generating 176 $6 million in revenue.
We currently expect that our wholesale business will represent 10% to 15% of our total closings in 2021.
Average sales prices realized from homes closed during the quarter was a record 263000 from $321 a nine 3% increase over the same period last year and a three 1% increase sequentially.
For the full year, our average sales price was $253553 an increase of six 1% compared to full year of 2019.
Higher average sales prices were primarily driven by a favorable demand environment that supported price increases ahead of the rising input costs in all of our markets higher price points in certain markets and closeouts and transitions to new communities at higher price points.
Last quarter, we delivered our highest gross margin since the fourth quarter of 2016.
Gross margin as a percentage of sales in the fourth quarter was 27, 1% compared to 23, 5% in the fourth quarter of 2019, and 25, 3% in the third quarter of 2020.
This represented an increase of 360 basis points year over year, and 180 basis points sequentially.
Our gross margin improvement was primarily driven by lower overheads, resulting from operating leverage lower capitalized interest and our ability to successfully raise prices.
In the fourth quarter 2020, we delivered our highest adjusted gross margins since the fourth quarter of 2014.
Adjusted gross margin in the fourth quarter was 28, 8% compared to 25, 5% in the fourth quarter of 2019, and 27, 3% in the third quarter of 2020.
This represented an increase of 330 basis points year over year, and 150 basis points sequentially.
Adjusted gross margin excludes $13 $6 million of capitalized interest charged to cost of sales during the quarter and $1 $6 million related to purchase accounting together, representing 170 basis points.
For the full year gross margin was 25, 5% compared to 23, 7% for the full year 2019, an increase of 180 basis points.
Adjusted gross margin. This year was 27, 4% compared to 25, 8% for full year 2019, an increase of 160 basis points.
Adjusted gross margin excludes $44 million of capitalized interest charged to cost of sales during the year and $4 $9 million related to purchase accounting together, representing 190 basis points.
Combined selling general and administrative expenses for the fourth quarter were eight seven percentage of revenues compared to nine 6% in the fourth quarter of 2019, and 10, 8% sequentially.
For the full year, our combined selling general and administrative expenses were 10, 1% compared to 11, 4% in the prior year, a 130 basis point improvement and the lowest rate we have reported as a public company.
Selling expenses for the quarter were $50 2 million or five 6% of homes sales revenue.
Compared to $37 4 million or.
For six 2% of homes sales revenue for the fourth quarter of 2019.
The 60 basis point improvement.
Selling expenses were down 100 basis points sequentially and as a percentage of revenues were the lowest level, we have reported as a public company.
In addition to operating leverage realized from the increase in home sales revenue our quarterly advertising spend was lower year over year as a result of strong demand tailwind.
For the full year, our selling expenses were $148 4 million.
Or six 3% of homes sales revenue compared to $131 6 million or seven 2% of homes sales revenue in 2019, and 90 basis point improvement.
General and administrative expenses totaled $27 6 million for.
Or three 1% of homes sales revenue in the fourth quarter compared to three 4% of homes sales revenue last year of 30 basis point improvement that was driven primarily by operating leverage resulting from increased revenue.
For the full year, our general and administrative expenses were approximately $90 million or three 8% of homes sales revenue compared to four 2% of homes sales revenue in 2019, a 40 basis point improvement, primarily driven by operating leverage and to a lesser extent cost savings, resulting.
From reduced travel and other pandemic related savings.
These savings were partially offset by costs related to the identification and certification of available federal energy efficient homes tax credits.
We believe that SG&A will continue to vary quarter to quarter based on homes sales revenue and we would expect our full year 2021, SG&A as a percentage of revenue to range between 10, 3% and 10, 8%.
EBITDA for the quarter was an impressive $184 million an increase of 87, 2%.
Over the fourth quarter of 2019.
EBITDA margin was 21% a 420 basis point improvement over the same period last year, and a 380 basis point improvement sequentially.
Full year EBITDA was a record $408 9 million an increase of 52, 8% over 2019 and EBITDA margin was 17, 3% for the full year, a 270 basis point improvement year over year.
Pre tax income for the quarter was $166 5 million or 18, 6% of homes sales revenue an increase of 460 basis points over the same period in 2019, and the highest quarterly pretax net income dollars and.
Margin in our history.
For the full year, we generated pre tax net income of $367 8 million or 15, 5% of homes sales revenue and.
An increase of 290 basis points over the prior year.
This was the highest annual pre tax net income result, and margin in our company's history.
Federal energy efficient homes tax credits recognized during the year totaled $41 2 million of which $29 $7 million related to homes closed and prior tax years.
In December of 2020, this tax credit was extended through 2021.
And based on our current outlook and information available to us at this time, we estimate our full year effective tax rate will range between 21, 5% and 22, 5%.
Our fourth quarter reported net income more than doubled year over year, increasing 110, 3% to $136 $4 million for 15, 2% of homes sales revenue, resulting in earnings per share of $5 40.
<unk> <unk> per basic share and $5 34 per diluted share.
Excluding the $4 $2 million income tax benefit related to the retroactive energy tax credits, our adjusted net income in the fourth quarter increased 103, 8% to $132 $2 million for.
<unk> thousand 14, 7% of homes sales revenue, an increase of 400 basis points over 2019.
And our fourth quarter adjusted EPS was $5 28 per basic share and $5 18 per diluted share an increase of approximately 105, 6% year over year.
Our full year reported net income increased 81, 3% year over year to $323 9 million or 13, 7% of homes sales revenues, resulting in full year earnings per share of $12 and 89 per basic share and <unk> 12.
Dollars and <unk> 76 per diluted share.
Excluding the $29 $7 million of income tax benefit related to the retroactive energy tax credits.
Our adjusted net income increased 64, 7% to $294 2 million or 12, 4% of homes sales revenue an increase of 270 basis points over 2019, and our full year adjusted EPS was $11 70 per <unk>.
Basic share of $11 59.
<unk> per diluted share.
An increase of approximately 65, 1% year over year.
Fourth quarter gross orders were 3692 and net orders were 2792, an increase of 32, 1%.
Cancellation rate for the fourth quarter was 24, 4%.
For the full year net orders increased 33, 4% to 11070 and the cancellation rate was 21, 6%.
Driven by continued strong demand during the quarter, we began 2021, where the backlog of 2960 for homes, a 144% increase year over year.
And the value of our backlog at December 31 was.
$775 5 million.
A 167% increase over 2019.
Investment and attractive land positions to support our long term growth remains our top capital allocation priority.
As of December 31 of.
Our land portfolio consisted of 61500 for owned and controlled lots.
A 28% year over year increase.
35268, or 57, 3% of our lots at year end were owned.
And all of our owned lots of 9270 for work finished vacant lots.
The 22132 were either raw or under development.
We ended the year with 3862 completed homes information centers or homes in process.
And during the fourth quarter, we added over 6000, new lots to our owned inventory and increased our total number of controlled lots of six 8% sequentially to 26236.
78% of our controlled lots for undeveloped compared to 46% at the end of 2019.
I'll conclude with an update on our balance sheet, which has never been stronger.
We ended the quarter with $35 $9 million in cash $1 6 billion of real estate inventory and total assets in excess of $1 8 billion.
As of December 31, we had $546 6 million and total debt outstanding under our senior notes and revolving credit facility and our available borrowing capacity was $392 $5 million.
Resulting in $428 million of total liquidity.
As a result of our strong operating results we ended the quarter with over $1 1 billion and total book equity a 34, 8% increase year over year, and a net debt to capitalization ratio of 36% down 550 basis points sequentially and significantly.
Lower than the 43, 6% we reported at this time last year.
This was our lowest net debt to capitalization ratio since June of 2014, reflecting our successful commitment to conservatively manage our balance sheet utilize free cash flow to fund our operations and decrease leverage.
Our current expectation is to maintain our leverage in the range of 30% to 40%.
As a result of these and other achievements over the year. We recently received a one notch upgrade by Moody's to <unk> three.
During the fourth quarter, we repurchased 151965 shares of our common stock at an average price of $110 20 per share, bringing the total number of shares repurchased over the course of 2020 to 718993.
At an average price of $66 84, a share.
As of December 31, 2020, we had $304 million remaining under our share repurchase program and we ended the year with 25 million shares outstanding.
At this point I'd like to turn the call back over to Eric.
Thanks, Charles our first quarter is off to a strong start and our markets continue to benefit from unprecedented demand for new homes.
As we reported earlier this month the goal of 650 homes in January and the increase of roughly 50% over a strong comp of 430 for closings last January.
With that background, we are providing the following guidance for 2021.
We expect to close between 9000 209800 homes and we expect to have 112 to 120 active selling communities at year end.
During 2021, we will be expanding within our existing geographic footprint and in new markets, such as suburban Baltimore, Maryland, and Norfolk, Virginia.
Our average sales price is expected to be in the range of 260 to $270000. We.
We expect gross margin will be between 24, and 26% and adjusted gross margin between 26 and 28%.
I'll provide some color on the land market and our available inventory for sale this year, which will influence our expected closings this year.
So as demand picked up back in May the market has experienced the significant shortage of finished lots available for sale.
Where there are finished lots of Dubai the prices for those deals are reflective of the supply demand imbalance in the current market and in such cases, LTI will not be the winning bid.
We are focused on maintaining our profitability rather than growing at any cost.
We continue to underwrite our lands of the same high standards, we always have targeting both return and margin minimums of 25%.
The deals we've been pursuing over the last nine months are largely self development opportunities that are expected to the lower lots of 18 to 24 months after we close.
In 2021, we plan to maintain our industry, leading returns and margins conservatively manage our balance sheet and prudently build our land supply with a view to expand our community count and continue on our path to becoming a top five builder.
I'll close by noting how pleased we are with our incredible results. During what was the year of uncertainty. Despite the challenges we delivered our most successful and profitable year, achieving double digit closing and revenue growth and record breaking profitability.
I want to personally thank our employees you made these accomplishments possible because of your dedication passion and professionalism, we have significant momentum going into 2021 and are well positioned to achieve all of our long term goals as we continue to make our customers' dreams of homeownership a reality.
Now, we'll be happy to take your questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone for your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Aaron Hecht from JMP Securities. Your question. Please.
Hey, guys nice quarter and thanks for taking my questions.
Obviously, Texas has had a really tough weather situations and energy situation you guys have pretty significant exposure there any impact on an annual basis from from this whether in your view that's something you can overcome any detail there would be helpful.
Yeah Erinn. Thanks for your question for the question. This is Eric I can start yes, no impact because of the weather on LG.
Thank goodness all of our employees are safe our customers in the field that are that we're living in Alger homes. So far we've heard of minimal damage to those homes and everyone seems to be doing pretty well all things considered the other thing that we're extremely proud of here at <unk> Gi.
As our payroll.
Matt This last week with all the employees get paid the team really stepped up and made sure all of our trades GAAP paid on schedule last week, so accounts payable of getting into the office to make sure of buy got paid so they would have the dollars available to take care of their their workers and their families. So the team's done a remarkable job no.
No delays in our schedule no no delays in forecasting.
Any hit the closings or anything like that so all of those good here at LTI in Texas.
It's great to hear it sounded like a tough situation.
In terms of the land market.
You know you noted how hyper competitive it is right now is that kind of result in any changes to geographic mix and the future of that.
The may not have occurred yet.
The more normal land market.
At the banking markets, where you just aren't really participating because you think it's gotten out in front of the itself.
Which ones do you think might be a little bit more attractive.
Yes, it's a good question Eric I don't think we look at it as much as geographically just like we talked about in the prepared remarks more of the finished lot of opportunities are really get priced up.
Not seeing a lot of finished lot opportunities from developers or deals that are going to result in additional community count our closings in 2021.
Most of what we're focused on are the larger land positions, obviously in entry level type locations, a little bit further out, but we're comfortable doing our own development, we're comfortable with the larger land positions two to 500 homes in a community plus a lot of builders really are focused on being asset light right now.
And one of the Idose finished lot so not seeing a lot of crazy inflation in the land prices, where we're looking.
But certainly that.
It's more of a timing issue, where we're talking about 18 to 24 months from the time, we close on these pieces related to turn them into.
Sales and closings 90 of the hottest markets.
As everybody probably of suspects and what we talked about just leading the way in our closings for the fourth quarter of the year or all of the Texas markets markets like Phoenix markets like Seattle Charlotte.
Really leading the way.
Makes sense, Eric Thanks for the time I'll jump into the queue.
Thank you.
Thank you. Our next question comes from the line of Colorado Correct from <unk>. Your question. Please. Thanks, good morning, guys or afternoon good day.
Afternoon.
It's nice to talk about it not being hot Houston I guess.
The Charles could you talk a little bit about the puts and takes to the margin guide for 'twenty. One 'twenty. The half in 2024 to 26 is the guide what's kind of your expectations for the cost increases land labor materials, and how much pricing where operating leverage the U S. We're assuming in that guide for next year.
Yes sure Great question, Carl So so yes, when we thought about gross margin for 2021 and took a look at what's currently happening in what we're currently seeing and obviously.
Lumber being the most significant <unk> cost.
Pressure that we're seeing and certainly haven't seen lumber at some of the prices that were that we're seeing today and at least my career.
Haven't seen them the tie so theres rising costs in general is the risk for us so.
So our overall thought for our gross margin guidance was.
Looking at what we achieved in 2020 kind of putting a little bit of fat.
<unk> factor for rising costs.
We also have a significant amount of closeouts and transitions happening this year.
Which typically will add a little bit of uncertainty to our gross margin expectations as we move from one community to another.
And then the other factor, we guided to a higher percentage of wholesale closings this year for 10% to 15% coming off of $9 one for 2020.
So that was certainly a factor as well.
Then if you look at our five year average.
For all our adjusted gross margin average for the last five years since 2016 is at 27%.
So right there of kind of in the midpoint of where our 2021 guidance.
That's very helpful. Thanks, and then.
The bigger picture question.
On the website, which wouldn't necessarily be a topic, we discussed in the conference calls, but given the sales process, which would you.
The operated for a long period of time and alteration descending customers to the web site is.
The net of a change at least in my view can you talk just a little bit about how that rollout has gone in terms of of driving traffic or interest in how it fits with the sales process you'd been using so successfully for so long.
Yes. Thanks, Carla this is Eric I can take that one I would look at it as not as the change to our process certainly we're excited about our new website. The team did a great job putting it together.
Certainly enhance the experience for the customer more information on the website I think in this day and age obviously a lot of our customers are are coming to us through digital channels are spending more time looking at the website before they contact us, but no change in our process still believe and directly marketing to that consumer is still one of them.
Pick up the phone and call of our sales routes and set an appointment and still have that one on one interaction. So the website is just the tool to generate more leads and make sure of the customer has a better better experience.
Okay. Thanks, very much Eric.
Yes.
Thank you. Our next question comes from the line of Nishu Sood from UBS. Your question. Please.
Thanks. Thanks.
So.
The first question I wanted to ask was.
Around just kind of of the cash flow generation.
At the very very strong demand this year.
And then obviously the land market conditions that are that you mentioned Eric.
To your first year of kind of positive cash flow brought your debt to cap down to 31% and obviously I think this is the highest year of share buybacks, you've had as well since you've gone public are we setting up for another year with a similar dynamic where we could see kind of higher than normal.
Share buybacks given that you're already at the lower end of your target debt to cap.
Yes, Great question Nishu. This is Charles so.
So yes as far as the success this year.
That was really driven by the accelerated volume, meaning our inventory turns from the direct construction standpoint really picked up in the back half of the year as we ramped up production post Cutler.
Summer if you will when we when we saw the demand was really picking up and we were really able to efficiently build and close our vertical construction and at the same time when we took a pause early in the in the pandemic from an acquisitions and development standpoint.
The kind of delay if you will.
Kind of benefited our cash flow because that.
Pushed out of quarters worth of acquisitions, so ending the year with really net inventory up 70.
Compared to our net change between 18% to 19% and 17 to 18 of roughly 250% of $300 million increase in inventory is really what helped.
Accelerate the ability to bring our leverage down this year.
And then the.
Transitioning into share repurchases so.
Certainly we feel from a capital standpoint that our first priority is to invest in projects and continue to grow the company.
Eric had mentioned buying more raw land deals.
Investing more in raw land than finished lots we mentioned in the prepared remarks that 78% of our controlled lots are now raw compared to 46% last year.
So we will first priority will be to continue to invest in the inventory.
And have the available inventory to grow community count.
And then maintaining 30% to 40% leverage so that's a that's a goal of ours from a capital allocation standpoint.
And then from then we have options really so our options are either to explore M&A opportunities if they become available.
And if there is nothing left and no. Other opportunities then we have the opportunity to.
Participate in the share repurchases. So we think it's a part of our capital strategy going forward.
Certainly looked at the opportunistic in terms of execution.
Got you that's great that's very helpful and then.
Okay.
You mentioned, the 10 or 15% of your closings.
It might come from the <unk>.
Family rent operators.
Clearly a lot of activity and in that arena and.
In particular, a lot of those folks seem to focusing on the outlying areas where are you folks traditionally operate.
How has that affected the competition for how does that affect the the land land market side of things and perhaps those folks are the ones driving up the the.
Finished lot prices is it also having an effect on the kind of development deals that you folks have been switching of emphasis.
Yes, yes, the real positive an issue for the wholesale side, you're correct. We are definitely seeing.
Drawing demand from the single family REIT side their appetite to buy our <unk> homes and entry level locations of natural level of markets is as strong as it ever has been so thats real positive we don't look at it as drag competition going back to our earlier point.
Certainly the single family rental operators some of them have their own construction companies Theyre looking to buy finished lots, they're looking for to turn those into rental units pretty quickly.
So I think again, its probably having a factor on any finished lot opportunity or some of the smaller opportunities that are out there, but the bigger land positions that were really focused on.
I don't think it's having a pit impact, but from the retail side and the wholesale side.
The demand is as good as we've ever seen it one thing that will mentioned.
As our growth the net orders in January were bolt up up over 100% both on the retail and wholesale side.
And our gross orders are up approximately 50% so far for the first three weeks in February so we're seeing strong demand in wholesale and retail.
Got you great. Thanks, so much.
Youre welcome.
Thank you. Our next question comes from the line of Kensington of from Keybanc. Your question. Please.
Afternoon, Eric Charles.
Good afternoon.
Good to be here. So, let's just if we could start with you talked about closeouts, which affected your 'twenty one community count growth versus what you thought I guess in November thereabouts could you talk about give us some quantify what can we present of your communities close out this year versus like 19, just to get a sense of that magnitude.
Two that led to the lower community count.
Yes, I don't think we have that information in front of the scan.
A lot of transition going on and it's really just the timing factor.
All of the closings of so robust and obviously everybody can see from the fourth quarter numbers. The communities are just closing out quicker and it's a little bit of a counterintuitive notion, but if we want to close as many homes our community count actually we've been higher to end the year, because we had AD know our community is still actively selling and same thing with this year on our <unk>.
Unit count guidance of 112, the 120, the more closings that we have this year is probably going to results or will result in a lower community count and if were closer to the lower end of our guidance on closing Thats, probably going to result in higher community counts, So a little counterintuitive, but all good challenges the house, but really just timing issues when it comes.
The communities.
Right no good deed goes unpunished.
I wonder if the SG&A trend that you've kind of laid out that range. How would you compare that temporary I think the tonight.
Could you kind of put that in context of the volatility we saw or the swings we saw <unk> to <unk> <unk> and 'twenty and.
If we're going to see that entry year cadence.
Swing as higher could you explain that a little bit if you could share of that.
Sure. Ken. This is yes. This is Charles so so yes, so I think last year being.
Being as unique it was given given the circumstances in terms of how the the cadence kind of went through throughout the year.
What were thinking if you take 2019 and 2020 SG&A percentage 2019 was 11 for 2020 of $10. One of the average of those two years is 10, 8%. So I think our philosophy is that as we continue to to grow we <unk>.
There are still some potential for operating leverage from SG&A.
All of things, we highlighted throughout the year travel meals and entertainment some of those discretionary expenses were significantly down this year due to the pandemic. We also given the strong demand environment, we're able to be very efficient in our advertising. This year. So our assumption for 'twenty one.
Assumes that both of those factors that.
That we would expect to see more travel more more training events throughout the year plus the need to spend more on the advertising and marketing, particularly in the back half of the year.
Then the final thing for this year is that we have a number of open positions that we're actively recruiting for primarily in our acquisitions and development.
The department, so looking for folks across the country. So that's going to factor in so.
Typically our first quarter, we're usually talking on this call to make sure everybody understands that the first quarter SG&A percentages are typically higher we may not see that this year just given the fact that we're coming into the first quarter with such a strong backlog and that are.
As Eric mentioned, 50% of for January certainly its going to adjusted so we're really thinking of it more in line of the full year guidance, rather than just the quarter by quarter guidance.
Thank you gentlemen.
Thank you you bet.
Thank you. Our next question comes from the line of Michael Rehaut from Jpmorgan. Your question. Please.
Thanks.
Thanks, everyone I hope everyone glad to hear everyone's safe down there in Texas with the.
With the weather challenges so good news there I appreciate it.
Thanks.
A few questions here if I could.
First of all on the gross margins.
You kind of understanding.
Taking into account some of the the factors you mentioned in terms of the 50 bps decline.
If youre looking at the mid points after.
Interest amortization, but when you look at your fourth quarter, obviously at 27.1.
We're maybe 27 three if you exclude the purchase accounting after interest.
How should we think about getting towards that 25 flat mid point.
If you're talking about rising lumber costs, which I would presume would be a big factor in the overall full year.
Is that something that you expect the hit more immediately.
Or should we see some typhoons.
Okay.
Decline throughout the year in gross margin coming off of the 27.
And could that even result in the end of the year being below.
At 25, even mid point that you're at this point.
Modeling.
Yes sure sure Mike This is Charles so so yes I think.
The absorptions coming in in the fourth quarter at 10.
Then the full year coming in at seven.
Our highest absorptions. So I think that that has a factor in terms of how we allocate our overhead and how it comes through in the closings so very efficient.
To Eric's point, I mean, our feel.
<unk> operations, our construction managers did an amazing job this year, particularly ramping up production later in the summer when we saw the demand came through and our our philosophy for years has been high volume and so we were able to take advantage of that by increasing production in a way to.
Meet the demand.
And particularly for the closings in the fourth quarter. So we saw that at the end of the year of the back half of the year, we came in gross margins above.
We're our guidance.
On our last call we had.
So I think part of that was just things were really good it's a really strong fourth quarter.
We kind of acknowledging that and sort of repeat it necessarily it may not be there.
Theres a little conservatism in there I guess, if you will to say that he has such a strong quarter and do expect to repeat what we were able to do.
It may not be the smart goal.
So that is a that is certainly a factor.
The closeout and transition comes into play.
Typically when a community closes out it's achieving its highest gross margins in the lifecycle of the community and then typically as we go into a new community those are generally.
The starting point, where it's lower in the in the lifecycle of that community as well so when there's more volatility and transition between communities that tends to.
Give us the expectation that gross margins may be slightly lower.
I think the other piece is that the pricing environment was really strong.
This year as well with interest rates being low we were able to successfully raise prices, which allowed us to maintain margins, which our outlook at the end of last year was was not as favorable that we were able to keep up with that and I think thats a factor coming into 2021 is that it's going to be lumpy. If you will.
Is that we may not be able to get.
All of the cost increases initially, but then maybe get it later over time or we may just have to absorb a little bit and thats why we give the range.
The range for that and then the last piece was wholesale.
Obviously wholesale we sell at a discount but still achieve a similar operating margin. So if youre looking just at gross margin that certainly should be factored in for 2021.
Okay.
No I appreciate that I know theres, a lot of moving pieces in.
And maybe I will follow up.
Later this afternoon, when we scheduled to talk.
Just a couple of others here.
Is it possible for you to give us a sense of sometimes you are able to give the current months, what youre thinking of in terms of closings and perhaps even March.
Yes, Mike I think last February close of <unk>, we're expecting it to be positive year over year. It's still a couple of days early to get get retail really detailed on February of closings, but we expect it to be up year over year.
And too early to early March.
Okay.
Also the.
Share repurchase I just wanted to hit on that I believe you said you bought back.
About 150000 shares during the quarter.
And at the end of the year I believe it's your basic shares were at 25 million Ethan.
But in any case.
Just wanted your thoughts on share repurchase in 2021, particularly if you expect to maintain.
More or less the current leverage profile.
But you are at today.
Notwithstanding land purchases.
<unk>.
Based on your modeling just curious if youre expecting any.
Incremental share repurchase.
Given your expectations around.
Operating cash flow.
Yes, Mike you're absolutely right is that the first capital allocation going to two inventories. So as this year kind of plays out it's going to depend a little bit in terms of how those acquisitions come in.
The development spend throughout the year.
You mentioned maintaining leverage of 30% to 40%. So that's certainly a key component of our strategy and really based on that is then that gives us the flexibility to participate or not depending on our available free cash flow. So I think.
We look at it as a permanent part of our long term capital strategy.
So we think we will be active in share repurchases over time, but no specific guidance in terms of actual share count for 'twenty one at this point.
Okay. One last one if I could just on community Count you mentioned during your remarks around.
Trying to invest in continuing to invest in development opportunities that have a little bit of of longer.
The timeline in terms of coming online and so.
That's part of what's going on with the with.
With the share count with the community count outlook for 2021.
Any kind of early directional guidance you can give on 2022.
It would be really helpful.
It sounds like you would expect.
A.
From some type of a stronger growth trajectory of the resume in 'twenty two based on the type of land you're purchasing in kind of this lag effect.
Love to get any kind of sense of.
Historically, I think you've tried to.
Shoot for community count growth in the.
Anywhere from 10% to 20%.
Obviously, you are working off of a much larger base today so.
Any kind of directional guidance you could give at this point for 'twenty two would be helpful.
Yes, Mike I could touch on that not giving guidance for 'twenty, two but I think it also goes back for the same story as 2020 and what happens in 2021 and how strong sales are and then just that lead time and buying land. So we just we just approved six new deals at acquisitions Committee here in the month of February and one's going to open.
In 'twenty, two and five are going to open in 2023, so any deal that where we're closing on an underwriting right. Now is really impacting 23 community count, but over the last six months and Charles mentioned in his prepared remarks owned and controlled lots of overall were up 28%. So the deals are the buying over the last six months really can be impact.
The Dominion gallon I would just model it more heavily weighted in the back half of 'twenty, two and then accelerating into 'twenty three.
Great. Thank you for.
Youre welcome.
Thank you our final question for today comes from the line of Jay Mccanless from Wedbush. Your question. Please.
Alright, Thanks for taking my questions and actually the that was going to be my first question, Eric with the 78% raw lots this year versus the 40% of number you have the at the end of 19 is that that's how we should read that that it's going to be.
The flex higher community count in the back half of 'twenty, two and then the 23.
Yes, yes that would be a good assumption used the 24 months for all land turning into finished lots of closings.
Okay.
And then with the small move higher we've seen in mortgage rates.
Just based on the $2 50 average price you guys had this year it looks like the average monthly payment for your buyers probably gone up by about 50 or 60 Bucks off of the lows. So is there any way to quantify what percentage of your average consumers that's knocked out of the box.
The <unk> has rates and not being able to qualify become more of a challenge since the beginning of the year.
Yes, not at all of the J not so far I mean mortgage rates are still at historic lows and even though the 10 years increased here, we haven't seen that pull through through mortgage rates yes.
It's really hard to talk about any any headwinds in rates yet because of our sales are so strong like I talked about orders being up 50% year over year. So far in February so just a really strong dynamic sales environment, obviously, when it comes to our guidance and what we're forecasting we're a little bit more conservative because if rates.
Google off the we do expect them to creep up throughout the year.
That will be of headwind to sales, but we still think it's from a very positive sales environment through the end of the year.
Okay, that's great to hear thanks for taking my questions.
Thanks Jay.
Thank you. This does conclude the question and answer session I would like to hand, the program back to management for any further remarks.
Thanks, Jonathan and thanks to everyone for participating on the call today and your interest in <unk> homes, we look forward to sharing our achievements of 2021 throughout the year. Thank you.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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