Q1 2021 LGI Homes Inc Earnings Call
Okay.
Welcome to LG <unk> homes first quarter, 'twenty or 'twenty, one conference call.
Today's call is being recorded and a replay will be available on the company's website later today at www that Archie I homes dotcom.
We have allocated an hour for prepared remarks on <unk>.
If anyone should require operator assistance during the conference call. Please press star Zero and at this time I will turn the call over to Josh.
Vice President of Investor Relations.
Homes.
Thank you Laura.
Good afternoon, and welcome to LG <unk> homes conference call to discuss our results for the first quarter of 2021.
Today's call contains forward looking statements regarding our business strategy outlook plans objectives and guidance for 2021.
These statements, which speak only as of today's call and are based on management's expectations are not guarantees of future performance and are subject to risks and uncertainties.
You should review our filings with the SEC, including our risk factors and cautionary statement about forward looking statements 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.
L. J homes assumes no obligation to publicly update or revise any forward looking statements.
Reconciliations of any non-GAAP financial measures discussed on today's call to the most comparable measures prepared in accordance with GAAP are included in the press release issued this morning and on our quarterly report on form 10-Q for the quarter ended March 31, 2021 that we expect to file with the SEC.
Today.
This filing will be accessible on the SEC's website and on the Investor Relations section of our company website.
Our hosts today are Eric <unk>, Chairman, and Chief Executive Officer, and Charles <unk>, Chief Financial Officer, and Treasurer on.
I'll now turn the call over to Eric.
Thanks, Josh good afternoon, and welcome to everyone participating on today's call.
2021 is off to a tremendous start and we're very pleased to share our results with you today.
A remarkable performance was a direct result of our continued focus on sales and closings our commitment to maintaining gross margins by raising home prices ahead of ongoing cost inflation.
Managing our supply chain and effectively delivering on our backlog.
The demand strength, we saw last year has continued unabated into 2021 and is being driven by several key factors.
First interest rates.
Despite a 30 basis point increase since December mortgage rates are still almost 40 basis points lower.
Then they were at this time last year and remain at historical lows.
Not only is this fueling demand is directly supporting our ability to raise home prices I had on the input cost inflation without impacting our sales pace.
In fact, despite an 11% increase in our average sales price over the last year.
Demand for our homes has never been higher.
The second factor is the supply demand imbalance.
Across the country home inventory is limited and existing home inventory is at historic lows pre owned homes are selling in a matter of weeks and Austin at prices above asking price due to competitive bidding among buyers.
This dynamic has increased attention on the new home market, especially within the entry level product segment, where we focus.
We would expect this trend to continue as long as the total supply of homes remains constrained.
The third factor is increased interest in homeownership when.
On the housing market began to accelerate last may one of the ideas floated what that demand is being fueled by People's freedom to work from home How's.
However, as the economy has reopened and many workers have returned to their offices, we haven't seen less demand for homes, but more.
We believe this is explained by a deeper fundamental shift in how the homes valued.
This is also a trend we expect to continue for the foreseeable future.
In short it remains the strongest housing market, we've ever experienced supported by dynamics that the <unk> business model is uniquely well positioned to capitalize on them.
Here are a few highlights of our recent performance net orders during the quarter were the highest in our history.
Up over 110% year over year, which in turn drove a 200% increase in our backlog.
Closings in the first quarter were up 40% over last year to 2561.
We generated record revenue of $706 million, an increase of 55%, while delivering meaningful increases on all profitability metrics.
This was highlighted by a 350 basis point improvement in our gross profit margin on <unk>.
490 basis point improvement in our EBITDA margin.
A 540 basis point improvement in our pre tax profit margin.
And a 137% increase in our earnings per diluted share.
During the first quarter, we averaged eight closings per community per month companywide.
Dallas Fort worth was our top market with $12 four closings per community per month, followed by San Antonio with $12, two and Austin with 11 four.
Phoenix came in four with 11 closings per community per month, followed by Denver with 10 six.
Finally, we had our first closings in our new Baltimore market and are now officially operating in 35 markets across 19 states.
With that I'll turn the call over to Charles for more details on our financial results.
Thanks, Eric.
As highlighted in our press release. This morning revenue in the first quarter increased 55, 2% year over year to $706 million.
This was our second best quarter in company history surpassed only by our performance in the fourth quarter of 2020.
As Eric noted, we closed 2561 homes, an increase of 39, 6% year over year.
Closings included 283 homes sold through our wholesale business this quarter, representing 11, 1% of our total closings compared to 199 homes or 10, 8% of our total closings in the same quarter last year.
Cost inflation remains a key headwind, we monitor on an ongoing basis, our lumber costs have more than doubled since last year.
However, demand tailwind have enabled us to push through price increases in all of our markets to mitigate this pressure and maintain our industry leading gross margins.
Our average sales price during the first quarter was a company record of $275655 on the 11, 2% increase over the same period last year, driven primarily by the favorable demand environment as well as an increase in closings in certain mark.
With higher price points and changes in product mix.
Gross margin as a percentage of revenue this quarter was 26, 9%.
Compared to 23, 4% during the same period last year.
It's exceeded our expectation and represented an increase of 350 basis points year over year, driven by our success passing through cost increases lower capitalized interest and continued operating leverage partially offset by higher lot costs.
Our adjusted gross margin as a percentage of revenue was 28, 5% this quarter compared to 25, 5% for the same quarter last year, a 300 basis point increase.
Adjusted gross margin excludes approximately $10 7 million of capitalized interest charge to cost of sales during the quarter and $812000 related to purchase accounting together, representing approximately 160 basis points.
Combined selling general and administrative expenses for the first quarter were nine 6% of revenue compared to 11, 6% at the same time last year.
Selling expenses for the quarter were $42 8 million or six 1% of revenue compared to $32 8 million or seven 2% of revenue for the first quarter of 2020, a 110 basis point improvement.
In addition to operating leverage realized from increased revenue our quarterly marketing spend was down nearly 40% year over year, driven by continued strength in demand, reducing advertising expenditures, partially offset by higher commissions paid to realtors as a percentage of revenue.
General and administrative expenses totaled $24 7 million or three 5% of revenue compared to four 4% for the first quarter of 2020.
90 basis point improvement driven primarily by operating leverage resulting from higher revenue.
As a percentage of revenue, we expect full year SG&A expense to be between nine 5% and 10%.
EBITDA for the quarter was $134 $2 million and EBITDA margin as a percentage of revenue was 19% a 490 basis point improvement over the same period last year.
Pre tax income for the quarter was $123 3 million or 17, 5% of revenue an increase of 540 basis points over the first quarter of 2020.
For the first quarter, our effective tax rate of 19, 2% was lower than our annual expected effective tax rate.
Merrily due to the result of deductions in excess of compensation costs or windfalls per share based payments.
We would expect that our effective tax rate for the remainder of the year will range between 21 and 22%.
Our first quarter reported net income increased 132, 6% year over year to $99 7 million or 14, 1% of revenue in our first quarter earnings were $3 99 per basic share and $3 95 per diluted.
Sure.
First quarter gross orders were 5840, an increase of 92, 4% and net orders were 5229, an increase of 110, 8% year over year and the cancellation rate for the first quarter was 10, 5% a record low.
Low.
Driven by strong demand we finished the first quarter with a record backlog of 5632 homes. This was the highest backlog in our history and an increase of 199, 7% year over year.
The value of our backlog on March 31 was a record $1 6 billion, an increase of 257, 6% year over year.
Continued investment and attractive land positions to support our long term growth objectives remains our top capital allocation priority.
As of March 31.
Our land portfolio consisted of 67286 owned and controlled lots.
33, 8% year over year increase and a nine 4% increase sequentially.
We added almost 5800, new lots to our owned inventory and finished the quarter with 38500 into owned lots an increase of 22, 5% year over year.
7938 of these lots were were finished vacant lots and 26213 were either raw or under development.
During the quarter, we started over 3000 homes and ended with 4351 completed homes information centers or homes in process.
During the first quarter, we increased our total number of controlled lots 52, 7% year over year to 28000 <unk>.
784.
Turning to the balance sheet, we ended the quarter with approximately $48 million on cash $1 6 billion of real estate inventory and total assets in excess of $1 8 billion.
At the end of March we had $414 million in total debt outstanding under our senior notes and revolving credit facility and our available borrowing capacity under the facility was approximately $518 million, resulting in total liquidity of $566 million.
We ended the quarter with over $1 $2 billion in total equity and as a result of our strong operating results and profitability delivered an industry, leading return on equity of 36, 6% for the trailing 12 month period.
At March 31, our net debt to capitalization ratio ratio was 23, 1%.
Compared to 42, 1% at this time last year, our lowest net debt to capitalization ratio since June of 2014, and a 750 basis point improvement sequentially.
On April 28, we entered into our fifth amended and restated credit agreement, which increased commitments under the facility from $650 million to $850 million with the option for an additional $100 million increase.
The revised agreement provides for significantly more attractive terms and conditions that are reflective of our continued growth in business diversity improved credit metrics and consistent financial performance across cycles.
The amendment extends our maturity from 2023 to 2025 and among other improvements reduces our current borrowing rate to less than 2%, a 36% reduction in our cost of debt related to the facility.
During the first quarter, we repurchased 216221 shares of our common stock for $25 $8 million or a weighted average price of $119 45 per share.
We ended the quarter with $24 9 million shares outstanding and $274 $6 million remaining on our existing stock repurchase program.
<unk> remained committed to returning capital to shareholders and as a component of our broader capital allocation priorities, we expect to be a regular and systematic buyer of our shares going forward.
At this point I'll turn the call back over to Eric.
Thanks, Charles let me provide some thoughts on what we're seeing thus far in the second quarter and update you on our outlook for the remainder of the year.
The second quarter is off to a great start and a strong demand we experienced last quarter has continued into April.
Subject to our normal review and verification of fundings, we expect to formally reports approximately 945 closings for the month of April.
This is our best April result on record and represents a year over year increase of 56% over the same month last year.
Based on our current outlook on the market visibility into our backlog and view of finished lots available to close in 2021, we are updating our guidance.
We now anticipate closing between 9000 710300 homes, an increase of 500 homes at both ends of our prior guidance range at an average sales price between 275 and $285000 we.
We maintain our prior expectation of 112 to 120 active communities at year end.
Finally, we are raising our full year gross margin guidance by 70 basis points to a range between 24, 7% and 26, 7% and our adjusted gross margin guidance by 50 basis points to a range between 26, 5% and 28 five.
Percent.
I'll conclude with a few comments on LG on mortgage solutions are exciting new joint venture with our preferred lending partner loan depot.
Since 2015 loan depot has worked side by side with us to make the dream of homeownership, a reality for our buyers over those years loan depot consistently demonstrated its willingness and ability to scale its operations to match, our expanded deans and established its position as the most qualified partner for.
Ross to continue to grow our business with <unk>.
We believe this new partnership will further enhance the quality of our customers borrowing experience, while creating meaningful value for our shareholders that concludes our comments on the quarter and we will now open the call for questions.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
To withdraw your question price.
Cool.
Again that is star then one to ask a question at this time.
Our first question comes from Aaron Hecht with JMP Securities.
Hey, guys great quarter.
Thank you Eric question sure I had a question around the guidance and.
And the orders, which are obviously outside.
On a per community basis.
Usually you guys deliver you know almost 100% of your backlog look.
Look at that backlog today over 5500 homes over 2500 close in the first quarter.
Does that imply that there's going to be longer cycle times for deliveries now.
How should we be thinking about the delivery pace relative to the pace that you are booking these orders.
Yeah, Eric This is Eric Great question, and no sales and orders were very strong in the first quarter and you are correct on the cycle time from sale to close because sales is ahead on construction right now.
We're choosing to keep selling houses and build in our inflation that we projected costs continuing to rise.
But we went ahead and taken customers' deposits and keep selling out into the second and third quarter.
We think that strategy is working.
So our construction time has not slowed meaningful but certainly the orders we're taking the contract to close will be extended into the second and third quarters.
So go on a little deeper into it.
Contract cycle, if the demand remains robust do you see that.
Continuing out into the future or do you try to scale that back over time and go with your more traditional.
Delivery model, how do you think that plays out over the course of the cycle.
Yes, I think it will naturally sell back because we have so many communities that are that are sold.
Sold out if you will that our opportunity is to keep selling houses at least over the next quarter or two is going to be limited. We got strong demand on our retail side, we got strong demand on our wholesale side, we're selling focused on 2021 right now not focused on 2022, we will get there over the next couple of quarters.
Selling into 2022, but right now the focus on is on contracts that can deliver in 2021.
Great makes sense, thanks, a lot Eric great quarter, but youre welcome. Thank you.
Our next question comes from Stephen Kim with Evercore ISI.
Hey, this is actually Brian items on for Steve Congrats on the great quarter, guys and thanks for taking my question.
Unsurprisingly, if youre in a lot of very positive price to the commentary on the call and was just wondering how many of your homes are now selling above the FHA loan limits right now and maybe how that compares to your historic norm.
Yes, Brian this is Eric.
I don't know the exact number.
I can say, it's very few just historically being entry level price point, we historically are selling below FHA limits now that being said what.
And the communities that are Bob FHA limits are set of three 5% down payment you are looking at a minimum of 5% down payment.
It does not seem to be a headwind for sales in this market selling above the FHA limit, but it's certainly below 10% of our overall closings above FHA.
Got it that's very encouraging to hear I, just one quick follow up for me.
There are other builders have mentioned that they perform stress tests on their backlog to kind of take a look at the effect of a 50 or 100 basis point moving mortgage rates to see how.
How many buyers drop off have you guys done something similar.
Yes, I would say interest rates are something that we're always looking at the income to debt ratios for our customers on monthly payments certainly are impacted from.
Right I think we do have an advantage over builders still even though we're talking about selling out into the future. Most of our customers that are under contract or be closing relatively soon rather in comparison to other builders wing lock in their rates. Accordingly, So I would say we haven't necessarily on the stress test, but we're always.
Looking at our pipeline and comfortable even with a 50 to 100 basis point move in interest rates, we're not going to lose lose a big part of our pipeline by any reason.
Awesome, alright, thanks, Eric and congrats again guys.
Thank you.
Our next question comes from Carl Reichardt with BTG.
Thanks, Good morning, guys. Thanks for taking my question on <unk>.
I'll talk about SG&A, a bit so I understand the marketing costs falling in the leverage you've got Eric.
Can you talk just a little bit about hiring new folks as you look out to your growth and starting to expanding your community count next year whats that process been like obviously COVID-19 COVID-19 impacted it early on that's kind of changed I'm just wanted to get a sense, Steve how are you finding getting new sales folks.
The staff new communities as yourself.
Yes, it's a great question, Carl I'll talk about recruiting and Charles can add on the SG&A leverage if you'd like to but from a recruiting standpoint. The focus during COVID-19 is really focused on construction managers to build the house acquisition on development personnel to tape out ahead of acquisitions buying land getting the development done we're doing a lot of development.
Sure.
We actually have been higher hiring very few salespeople over the last couple of quarters because sales have been very robust we have very few very little turnover in our in our sales staff everybody is doing extremely well, making good compensation everybody's got a lot of backlog.
And we're selling through these communities very quickly. So we have as we didn't increase our community count guidance, even though our closings guidance went up primarily because of our absorptions per community is up certainly as we get into adding to our community count over the next couple of years, we'll certainly be recruiting salespeople.
We think with LG with our sales philosophy, our commission rate our culture no challenges in the future recruiting salespeople.
Great. Thanks, Eric and then on the on the lot side I think you said 28 28000 under control now.
Ken I would just say historically I think you've attended one itself developed to capture the margin can you talk about whether or not that's beginning to change or are these all pay per lot options are you still going to develop are you starting to use land bankers and are beginning to move towards.
Finishing out plain vanilla finished lot options, if there are any out there.
Yes, we're not doing any land banking and also our philosophy hasnt changed probably even more so land development opportunities gets finished lot opportunities are so rare in this in this market. So we are we are buying raw land to development that cycle time is at least as long as it's ever been if not added three to six months.
Sure to that timeline for development timing plan approvals et cetera.
Over the last 12 months, if you compare our owned and controlled were up 16, 17000 lots, which we describe as right on track. So we're adding inventory need is really about timing and getting these new communities online.
It's probably pushing into 2023 for anything that we're buying right now.
Great. Thanks, Eric I'll get back in queue.
Thank you.
Our next question comes from Ken <unk> with Keybanc.
Hello, everybody.
Hello, Good morning.
And this morning on the West Coast.
On.
Pretty amazing so.
Eric question. So your inventory units you said about 4300 I assume about half of those will be closing just given kind of cycle times and the forward quarter.
On.
That's generally I think about a six month construction cycle. If you could just kind of talk about that if you're making any comments about <unk>.
Yeah, Hey, Ken this is Charles.
I think we've seen over the last six months or so just with our inventory turns we've actually we've actually seen a shift into fewer completed units than we typically normally would so at the end of March we had less than 700 completed units and our inventories are the bulk of those units.
Our work in process. We also mentioned we started.
Around 3000 houses in the first quarter. So I think what we're seeing from an inventory flow is just.
Net sales as Eric mentioned are ahead of the construction pace. So we're just we're building them the cycle time itself to build the houses is generally consistent.
We've just got a deep backlog so we're closing them.
Soon as we finish them.
Right and the reason I kind of asked that.
3000, you start basically lucky here, but you had on inventory closed an equity and that's kind of how I calculate the starch.
And I'm trying to think about the out year, obviously as this year unfolds I think your guidance kind of assumes will be at that similar start level, which is all called out your capacity. If you will add on.
I'm trying to think about next year as you kind of get back to your more normalized.
15% give or take community count growth should we think youre.
Paucity.
We'll ramp up along with your community count is that a reasonable way to think about.
You know what you guys can be building not what the market is demanding because you're obviously your business model is production building. So I'm just thinking about as you think about your capacity does that kind of just match here.
Our community count growth.
As we think about next year.
Yeah. So this is Charles again, I'll take that I mean, I think it's really more dependent on finished lot deliveries given the fact that we're spending more of our efforts on developing lots than buying finished lots at the current moment that it's going to really be starts are going to be dependent on when the lots are going.
To be available to be built so.
There may be a little bit of a disconnect there between the community count itself and then the ability or the capacity as you mentioned in terms of what we have available to start.
We're really thinking about it in terms of when the lots will be flattish and delivered and like Eric mentioned thats pushing in late 'twenty, two and into 'twenty three.
Just based on our development timelines.
And is there anything that stands out given your long history of land development about what we're seeing now is or is it.
Just to double scoop of permitting or I mean is there anything really exceptional I mean, so many trades are strained right now is it still coming from the municipalities or is it that the contractors you just can't get them or they're asking too much or.
Any thoughts would be useful thank you very much.
Yeah. Thanks, Kevin This is Eric Yeah, I think the land development cycle times, just low longer than it was but nothing in particular just.
A lot of demand on those trades right now, but normally even a normalized market. If you will so it's two years.
And most of our markets to buy a piece of raw land and turn it into finished lots of what we're acquiring right now being under contract total turn into construction sales and closings.
In 2023 and also since you since you brought it up on the 15% historical community count growth.
That may or may not happen for next year right now, we're thinking similar to community count growth because our absorptions have been so strong.
Our community count assumptions for this year, but if absorptions were not as strong as they are our community count would be would be higher.
So we're looking at probably based on pretty strong absorption that free strong market continuing well against similar community count next year compared to this year.
Thank you very much for those comments you are welcome.
Our next question comes from Truman Patterson with Wolfe Research.
Hey, good afternoon, everybody. Thanks for taking my question so.
Eric wanted to follow up here on the prepared remarks, you said very strong pricing and I believe you said.
Stripping inflation rate.
Really strong first quarter gross margin performance when I look at your guide going forward. It implies maybe on a 100 bps of deterioration at the midpoint I'm just hoping to.
To understand some of your assumptions and if anything might be weighing on it going forward the expansion into new markets or new communities coming online.
Yes, the reason on the wholesale.
Was just going to say when I look at the breakout on the wholesale mix to me it doesn't seem like it might weigh on it quite that much. So just looking for a little color.
Yes, I think to start with your comments on the prior prepared remarks is just how strong the market is if you would've told us last year. Our average sales price will be 275000, this quarter and our absorptions will be up 40%. We would not have believed that and thats all store on the market is and we've been able to increase our.
Our gross margins over 300 basis points year over year and take on those additional costs and.
Pass that onto the consumer and increased closings. So that's all straw on the market is I think going forward. Our gross margin guide is really based on we anticipate costs continuing to rise and based on our average sales price guide going up we plan on continuing to pass that through to consumers that's very strong.
But overall.
Putting the guide.
Less than this first quarter makes sense to us hopefully that's conservative and hopefully we don't have the cost inflation that we're forecasting but we want to make sure. We have enough cost inflation built in because we're not seeing any slowdown currently in that in that metric.
Okay. Okay. Thank you for that.
Encouraging.
And then just a quick two parter for me on.
On my follow up so.
<unk> competition, we've heard is intensifying across the board and we've even heard that oftentimes. The development profit really gets competed away clearly you all based on the margins you all don't compete that away, but just hoping you can give us an update on on competition.
What youre seeing in the markets is it getting a little more difficult to find land and then just on part two follow up on your loan depot JV comments can you just give a little bit more color there and potential profitability.
Sure.
Start with the land question Truman.
It's pretty clear that there's a lot of competition for land there is a lot of interest in homebuilding.
Every builder wants to increase their clean unique al lot of single family rental operators are looking for land positions as well.
We're still finding we're still finding deals as evidenced by our own and control backlog on what we're seeing but we're also I think one of the things that we stress and it's important for our investors.
Not going to go out and buy land deals that don't make sense, we're not going to just focus on increasing revenue increasing community count and sacrifice the developer profit like you've talked about you were going to focus on margins, we're going to focus on absorptions are going to focus on net return on equity, which we're very pleased with our results from this quarter and that's going to continue.
Good to be the focus and we're going to continue to make a decision. So I think we're in really good shape from a land side will continue to make good decisions.
On the loan depot joint venture, yes exciting announcements.
Our joint venture with loan depot, they been preferred partner since 2015.
They were up to more than 60% of our loan originations with low depot anyway. So we felt like it was natural timing on it.
As far as profitability and building assumptions into the model. We look at this year, meaning 2021 as a year that joint venture is getting started we're going through a lot of licensing in the different stage right now.
We are optimistic that we'll be putting loans to the joint venture later in 2021.
Probably breakeven this year, but certainly not add add earnings in 2021 is not the expectation and then 2020 to be fully operational on all the states and putting the vast majority of our loans through the joint venture in 2022.
Okay. Thank you all for that and good luck on the upcoming quarter.
Thank you. Thank you.
Our next question comes from Deepa Raghavan with Wells Fargo.
Hi, good morning, everyone.
Eric Charles.
Are there any levers you can pull to raise your gross profit from here I mean in the past years, you have done much better than this 26 hitting 27.
Curious how much if you were able to raise is there any structural.
Items, he could do it you'll end too.
Keep them get them higher from where you currently are.
Well this is Charles Deepak I can start I mean I think.
First of all we are very very per.
Proud of our consistent results I think the way, we think of ourselves as.
Really from a cost plus type of.
Mentality, meaning that as cost increases come through.
Pushing those through I think in terms of look going forward where.
Some of our upside may be is that if cost inflation decelerates were likely to keep sales prices similar so there could be some upside if costs decelerate, we're not assuming that in our model. We're assuming that cost will continue to increase.
The other piece, we highlighted in our adjusted gross margin guidance is that the.
The announcement, we made in our revolving credit facility significantly reducing our overall desktop we also intend to access the markets to refinance our high yield.
Of note this year that will reduce our interest cost, which will have a favorable.
The impact to gross margins, but a.
Not impact to adjusted gross margin. So I think just constantly managing our pricing working with our trades managing costs, which is not anything different than what we're used to.
But if we do.
Do that very well then there is some potential upside to gross margins.
Got it that's helpful.
Are you able to talk about any metrics.
It was perhaps below your expectations in the quarter on maybe even talk about how trends and do you think there could be or not.
It could be supply chain on convenient the region's inflation.
Or maybe I don't know cancellation rates within your.
Bookings et cetera.
I think day, but it's a great question I think we can always learn and improve and train and get better as part of our culture here at <unk> one of the things that we're that we're improving on is just make sure. We understand all of the cost before we put a price on a house, even if we're selling out in front and make sure. We're building it up inflation some of the houses that we have attracted on.
Fourth quarter, two construct and close over the first couple of quarters here first few months of the year. We would have built in enough lumber and costs have really went up more than we expected.
<unk> learned from that and we are assuming the higher cost Inflations continue so thats one area that we're continuously looking at and make sure we're pricing our homes accordingly to meet our margin requirements.
Great. That's helpful. Thanks, so much for taking my questions.
Youre welcome.
Our next question comes from Michael Rehaut with Jpmorgan.
Hi, This is a lot hillman on for Mike Congrats on the results and thanks for taking my questions.
I'll first.
Sorry, if I missed this but.
What are you assuming in terms of wholesale closings as a percentage of total closings for 2021 and the guidance.
Yes, our guidance for wholesale Hasnt changed its between 10 and 15% of our overall closings will come from wholesale.
Great.
Net income by 1% in first quarter, so similar similar percentage of healthier.
Perfect. Thank you and then.
I was curious if you could just sort of expand on the drivers of the stronger closings. This quarter and then in your guidance even after the raise it seems to imply deceleration on the <unk> closing level some of the future quarters. So any color you could share on how we should think about the puts and takes in terms of the ability to deliver homes through the end of the year.
Yes, it's really lot availability I mean strong first quarter with eight closings per month up basically 40% over last year's five six.
Yes.
Sales are continuing to be strong April as another strong per month for sales.
We're disclosing a lot of communities closing out a section so our ability we have to we wanted to raise our closing guidance for the year up to 90 710300, so that implies a similar closing.
After 2500 for first quarter, you multiply that by four you at 10000 ish closings. So we think we're right on track on community Count is going to increase from here slightly so we think absorptions will be similar the rest of the year.
Okay, Great. That's helpful. And then just on SG&A, just coming back to that for a minute.
<unk> is kind of 200 basis points higher year on year, and then or better year on year.
And then I know last year, you had some lower costs and now SG&A seems to be roughly flattish for the rest of the year as implied in your guide. So just any of the puts and takes there in terms of advertising marketing spend.
For the rest of the year be helpful.
Yes sure. This is Charles I think it's really more driven on the absorptions comment that Eric just made I mean coming in at eight in the first quarter.
Is significantly higher than what we typically would see normally we're describing the first quarter as a higher percentage just given the absorptions and where that typically comes through so we think the cadence. This year is just going to be very similar between the second third and fourth quarter.
A little different than what we normally would see with absorptions lower in the first quarter, and then picking up and typically being heavier in the fourth so I think thats the.
On the basis, if you will behind the SG&A guide.
Great. Thanks, that's very helpful.
Yes.
Our next question comes from Jay Mccanless with Wedbush.
Hey, good afternoon. Thanks for taking my questions. Congrats on the quarter what was the community count at the end of April.
Well, we haven't reported that Jay well put our closing number and community Count Tomorrow evening.
We have said 945 projected closings, we have to verify that they are finding but it would be very close to that number what we report and community accounts can be on that 105 106 range I believe.
Okay.
Alright.
And so I guess that.
Asking Michael's question.
Different way.
Youre going to maintain eight per month through the rest of the year.
I mean, when should we expect the community count increase to really kick in is it going to all hit in the fourth quarter. How are you all thinking about.
Yes, I think it would be backend weighted from here.
Towards the end of the year I mean, we're comfortable at 112 to 120, but the absorptions real strong so that the higher we are on our guidance. The closer we are to 10300 closings for the year, the lower we're going to be on community count.
And if we're at the low end of our guidance 9700 closings were better.
As a better chance of being more towards the 120 is just the acceleration of these communities and how quickly they close out.
Got it and then you were talking earlier about your timing from buying a robot deal or a rolling on deal and turning it into finished lots, where whereas that cycle time, now and how does that compare to historical.
Yes, it's different for every market Jay we internally use 24 months somewhat as a as a guide if we buy a piece of raw land, it's going to take about 12 months for engineering and plant approvals in about 12 months to FERC.
Our cash option to get into construction of the homes. So 24 months is a pretty good guide.
And Thats, a similar timeframe that we've been using over the last couple of years, but it's certainly not not.
<unk> up if you will.
Has potential to be the longer than 24 months based on what's happened in the market over the next couple of years.
And is that just a function of.
People out because of COVID-19 municipality holdups.
Is there anything specific you can call out there because what we've heard from some builders on the municipal headwinds, we're starting to lessen but it sounds like now that those are starting to tighten up again.
Yes.
It's so market specific day, it's tough to make a broad statement value generally because theres a lot of platts going through the system. There is a lot of people looking to develop land.
Utilities and those contractors play into it somewhat out of our control.
So most of our schedule is on most of our time on timing. We are building in some extra hopefully it's conservatism extra caution to our schedules to make sure. We can deliver on time and have a good visibility into our future growth.
Got it appreciate you taking my questions.
Youre welcome.
Our next question comes from Alex Barron with housing Research Center.
Yes, thanks, guys and great job on the quarter.
I wanted to ask about the order.
Sorry.
Thank you said you started a little bit over 3000.
Houses on I'm trying to reconcile that also vs. The delivery guidance on I guess I'm just kind of asking is are you guys just trying to be conservative on.
On the deliveries and also.
Unreasonable to expect that starts pace next quarter would be closer to this 5000.
Sales pace.
Yes, Alex This is Eric you broke up a little bit I think I got to just to your question. Yes. It is unreasonable that we're going to SAR 5000 houses next quarter that that will not happen.
Other thing about the backlog on the orders that we haven't talked about.
Wholesale closings were 11, 1% of our closings in the first quarter. We believe it is going to end up the year at 10% to 15% of our closings, but our wholesale units in backlog.
Charles read this in the prepared remarks, I believe was up 300%.
So we've got a big backlog of wholesale now, we just need to get them get them close there won't be a lot of new orders on the wholesale business, that's going to deliver in 2021.
And we won't have a lot of new sales I mean, with our with our April closing or as reported plus plus what we have in the pipeline we have.
Got a lot of sales baked in for this year now we got to get them built and closed.
Okay. So what you're saying is a lot of the order upside. This quarter came from wholesale orders is there a way you can tell us what what that was wholesale orders versus kind of.
Consumer to consumer orders.
To understand that better.
This is Charles Doug I can tell you at the ending backlog we had just over 1300 wholesale units at the end of the first quarter. This year compared to 338 at the end of the first quarter last year. So we were up over 1000 units in the backlog per related specifically to wholesale.
Okay. That's very helpful. Thanks again guys.
Welcome.
Our next question comes from Carl Reichardt with AT&T.
Thanks, Thanks for letting me get a follow up on here guys. So on the topic of wholesale.
To Alex's.
Question.
We talked before about margins in wholesale being well lower on the growth side, but no SG&A costs. So the operating margin impact is.
Secondly, not dissimilar from consumer sold homes.
Having said that one of your peers has talked about margins in the wholesale side beginning to increase fairly rapidly given the number of firms with capital chasing this business and finding it hard to get units put together is there a profile change in your gross margin from wholesale demand that youre seeing right now whether it's.
The city are selling out of or just demand generally.
Yes, I think Carl what has changed is demand is strong on the retail side and the wholesale side. So any available lots of houses that we have to sell through either channel needs to be priced with better margin, just because theres limited limited supply and limited availability and there is a lot.
Demand from the wholesale channel day by our houses so are our idea of how much discount. They they get has changed now that being said on that a lot of that hasn't flowed through GAAP and some of the prices we committed through through the wholesale channel at the end of last year that are delivering for the first couple of months or first couple of quarters. This year.
Not going to make the margin as expected because we didn't build in enough inflation. So it's balancing.
And Thats why we have similar gross margins and very strong gross margins guided going forward.
That's perfect. Thank you, Eric and then Doug just a little bit about new markets any for this year.
And then maybe refresh our memories as to what Youre planning for 'twenty two.
Yeah.
Thanks to our well we own our first piece of property in Salt Lake City, Utah, So that timeline on getting in developed speech property, we're going to develop it wont be into sales and closings until later in 'twenty, two or even 'twenty three in the Salt Lake market. So smaller markets, we announced our prepared remarks, we've just had our first closing in the Baltimore market.
We're now in Norfolk, Virginia, but again I think we would emphasize more than new markets going forward is really just going deeper in our existing markets. We're in 36 markets now I believe.
So just focusing on going deeper on all of those markets is going to be the primary initiative.
Okay. Thank you appreciate it guys.
You bet.
Our next question comes from Alex Barron with housing Research Center.
Yes. Thanks.
As far as the share buyback you said youre going to be more more systematic I was just trying to understand how you guys are thinking about it is it can be.
Just roughly a certain amount of shares a quarter or is it more on a percentage of your net income.
If you have any guidance on how you guys are thinking about that.
Yeah sure Alex is Charles I think were first thinking our main priority is to continue to grow the balance sheet and invest in real estate inventory net generally tends to be fairly lumpy, we're not giving specific 'twenty one guidance other than the fact that we think that there is an opportunity.
To just participate in share repurchases on a regular basis, we did about $26 million in the first quarter.
We'll continue to evaluate it on a quarter reported basis, but I think the messages, we should expect to participate to some degree.
At this point on.
Further out.
Okay got it.
And then the other question was I think you mentioned that you expect that the community count to be roughly similar next year versus this year I guess my question is.
Is the size of your communities in general higher.
What you are acquiring now versus what you've been operating at in the past.
Yes, I would say there are similar if not slightly higher when you buy raw land parcels they tend to be higher than our more larger if you will than if youre buying finished lots, we've always bought a lot of raw land.
And we don't necessary based on size than our typical project is going to be three to five years, where we are developing <unk> got similar to what to spend on the past.
Okay, if I could ask one other one on the wholesale business.
In the past you guys were selling more individual homes within.
Some of your communities, but.
Mike correct that maybe now you guys have switched to.
<unk> entire communities and if so what's the average size of of that entire community I would think that we're probably going to see more.
Lump sum closings I guess, it's on.
Correct Yeah.
Yes, we haven't we haven't switched that dynamics of demand from the rental offers operators to buy larger sections or entire communities certainly there.
Currently we have two as part of our overall community count where we're under contract to sell entire communities.
So it's still a pretty small part of our business, but overall closings will be in that 10% to 15% range on that on the wholesale side.
Okay, Thanks, and great job guys. Thank you. Thank you.
Our next question comes from Jay Mccanless with Wedbush.
Hey, Thanks for taking my follow up just I just wanted to be clear here.
Or should we expect the gross margin percentage to decline sequentially from <unk>.
That part of the reason that the.
On the gross margin guide looks pretty conservative is it based on that wholesale business you were talking about.
Well Jay this is Charles I mean, I think we're not necessarily giving specific guidance for Q2, but we think that there is.
Your weight to the headwinds in terms of.
Do you have to be determined mix in some of the other factors that are going to come through the income statement on the second quarter. So we're really thinking about it for the remainder of the year.
Similar to slightly down is I think how we would describe it.
Okay, Alright thats helpful. Thank you.
Showing no further questions in queue at this time I'd like to turn the call back to Eric day part for closing remark.
Thank you and thank you for participating on today's call and for your continued interest in <unk> homes, everyone have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
[music].
Yes.
Okay.
Yes.
[music].
Okay.
Yes.
[music] revenue.
Net.
Sure.
Okay.
Okay.
Yes.
[music].
Sure.
[music].
Sure.
Yes.
Okay.
[music].
On the floor.
[music].