Q1 2022 LGI Homes Inc Earnings Call
Ladies and gentlemen, please remain on your line your conference call will begin momentarily. Once again. Please remain on your line your conference call will begin momentarily. Thank you.
[music].
Welcome to LG I homes first quarter 2022 conference call.
Today's call is being recorded and a replay will be available on the company's website later today at Www Dot L. G I homes dotcom.
We have allocated an hour for prepared remarks and Q&A.
If anyone should require operator assistance during the conference call. Please press Star zero.
At this time I will turn the call over to Josh better Vice President of Investor Relations at L. G I hopes.
Thank you good afternoon, and welcome to our conference call to discuss our results for the first quarter of 2022.
I'll remind listeners that this call will contain forward looking statements that include statements regarding LTI homes business strategy outlook plans objectives and guidance for 2022.
All such statements reflect management's current expectations. However, these statements 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 SEC, 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 from those presented in these forward looking statements.
You should consider all forward looking statements in light of the related risks and not place undue reliance on these forward looking statements, which speak only as of the date of this conference call and are not guarantees of future performance.
Additionally, we will discuss non-GAAP financial measures on today's call.
Such information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the earnings release that we issued this morning and in our quarterly report on Form 10-Q for the quarter ended March 31, 2022 that we expect to file with the SEC later today.
This filing will be accessible on the SEC's website and in the Investor Relations section of our website.
Our hosts for todays call are Eric Lieber L. G at Home's, Chief Executive Officer, and Chairman of the Board and Charles Murnian, Chief Financial Officer and Treasurer.
I will now turn the call over to Eric Thanks.
Thanks, Josh good afternoon, and welcome to our earnings call.
With highlights on our first quarter and then Charles will provide more details on our financial results and finally I'll close with an update on our performance so far in the second quarter and our outlook for the rest of the year.
Despite ongoing supply chain headwinds, we delivered strong first quarter operational results.
Our average selling price was over $341000 an increase of 24% over the same period last year.
Absorptions for the quarter came in at six closings per community per month.
[noise] above our eight year first quarter average of five five.
Dallas Fort worth was our top market with 13 closings per community per month.
Houston was second with 11, three followed by San Antonio with 11 two.
Rounding out the top five where Nashville with $9 seven in Las Vegas with eight seven closings per community per month.
Congratulations to the teams in these markets on an impressive first quarter performance.
During the quarter cycle times continue to lengthen as we navigated supply shortages labor constraints and inspection delays.
Despite the impact these headwinds had on first quarter deliveries are systems based processes and continued pricing power enabled us to deliver record results in virtually all our profitability metrics.
<unk> margin and adjusted gross margin were up significantly coming in at all time highs of 29% and over 30% respectively.
EBITDA margins were also a first quarter record at over 19%.
Finally continued demand driven efficiencies and disciplined cost controls helped deliver a pre tax net income margin of over 18% and net income margin of over 14% both of which were first quarter Records.
As part of our commitment to providing exceptional customer service. We are re leasing homes for sale when they are within 60 days of closing.
Doing so provides the clearest view of course improves the accuracy of estimating closing dates limits customers time in backlog and eliminates interest rate risk, while they prepare to close.
Despite rising rates and a metering of our sales pace, our orders were up 32% over last quarter and we ended March with more than 2400 homes in backlog.
Given the attention on rising interest rates, we're closely monitoring the sales in our backlog and can report that over 96% of our backlog has no interest rate exposure.
Demand during the quarter was strong supported by positive underlying fundamentals, including favorable demographics.
Low unemployment, a strong economy tight inventory rising rents and the increased preference for homeownership born out of the pandemic.
Nevertheless prices of new and existing homes are up significantly and mortgage rates are expected to move higher.
As a result, we are seeing signs that demand is normalizing from the unprecedented levels witnessed throughout 2021.
We carefully monitor demand in each of our markets and while it's certainly not as hot as last year, we haven't seen the need to adjust our current course and.
In fact, with only 450 completed homes at quarter end and very few of those homes unsold. The primary constraint to closings continues to be longer cycle times and the opening of new communities.
With that I'll turn the call over to Charles more details on our financial results.
Thanks, Eric.
During the quarter, we closed 1599 homes, a 37, 6% decrease year over year as a result of fewer active communities.
As noted our pace of absorptions in those active communities remained above historical averages.
Of our total closings during the quarter 213 homes were sold through our wholesale business, representing 13, 3% of our total closings compared to 283 homes or 11, 1% of our total closings in the same quarter last year.
Our revenue in the first quarter was $546 1 million a decline of 22, 7%, resulting from fewer closings and partially offset by higher average selling prices compared to the same period last year.
As Erik highlighted our average sales price increased 23, 9% over the same period last year, and seven 7% sequentially to a record $341495 <unk>.
This increases were primarily driven by a favorable demand environment that allowed us to pass through cost increases in all of our markets.
Gross margin this quarter came in at 29%, a 210 basis point improvement over the same period last year and a new company record the.
The improvement resulted from our success in passing through cost increases lower capitalized interest expense and lower lot costs as a percentage of average selling price, partially offset by a larger percentage of wholesale closings.
Our adjusted gross margin. This quarter was also a new company record at 33%, a 180 basis point improvement over the same period last year.
Adjusted gross margin excludes approximately $4 $5 million of capitalized interest charged cost of sales during the quarter and $2 $3 million related to purchase accounting together, representing 130 basis points.
Combined selling general and administrative expenses for the quarter were 11, 5% of revenue compared to nine 6% during the same period last year.
Selling expenses for the quarter were $34 4 million or six 3% of revenue compared to $42 $8 million or six 1% of revenue for the first quarter of 2021.
General and administrative expenses totaled $28 $3 million or five 2% of revenue compared to $24 7 million or three 5% of revenue for the same quarter last year.
The 170 basis point increase was driven primarily by lower overall revenue compared to the same time last year as well as investments in our people, including additional head count in our construction and land acquisition and development departments to support our continued community count growth.
EBITDA for the quarter was $104 $4 million.
Or 19, 1% of revenue a 10 basis point improvement over the same period last year and a new first quarter record.
Adjusted EBITDA was $102 9 million or 18, 8% of revenue a 20 basis point decrease from the same period last year adjusted.
Adjusted EBITDA excludes approximately $3 $8 million of other income and $2 $3 million related to purchase accounting together, representing approximately 30 basis points.
Pre tax net income was $99 6 million or 18, 2% of revenue a 70 basis point improvement over the first quarter of 2021, and a new first quarter record.
Our effective tax rate in the first quarter was 21% compared to 19, 2% in the same period last year.
And our first quarter reported net income was $78 7 million or 14, 4% of revenue a first quarter record and our earnings were $3 30 per basic share and $3 25 per diluted share.
First quarter gross orders were 2339, a decrease of 59, 9% and net orders were 1973, a decrease of 62, 3% year over year.
As we noted last quarter the expected decline in our orders is primarily due to record prior year comps and our decision to defer sales to later in the construction process and limit our customers time and backlog are.
Our cancellation rate for the first quarter was 15, 6%.
We finished the first quarter with a backlog of 2000, and 429 homes representing over $849 million in value.
As of March 30, <unk>, our land portfolio consisted of 93270 owned and controlled lots, a 38, 6% increase year over year and a one 6% increase sequentially.
We added over 5800, new lots to our owned inventory and ended the quarter with 59079 owned lots an increase of 53, 4% year over year and seven 7% sequentially.
Of our owned lots only 7419 were finished vacant lots and 47222 were either raw land or land under development.
During the quarter, we started over 'twenty 300 homes and as of March 31st at 4438 completed homes information centers or homes in process.
Excluding information centers in homes related to our leasing initiatives only 450 homes were complete a.
A decline of 36% compared to the 648 complete homes at the end of the first quarter last year and significantly less than the 1648 complete homes at the end of the first quarter in 2020.
Finally at quarter end, we had 34191 controlled lots an increase of 18, 8% year over year and a decrease of seven 5% sequentially as more of those lots were converted to owned.
I'll conclude with an update on our capital position.
We ended the quarter with $53 $3 million in cash over $2 $3 billion in real estate inventory and total assets of nearly $2 6 billion.
Total debt at quarter end was $1 billion, resulting in debt to capitalization ratio of 41, 4% and a net debt to capitalization ratio of 40%.
We expect our leverage ratio will remain in the range between 35% and 45%.
As of March 31, we had total liquidity of $161 $6 million.
Consisting of the $53 $3 million of cash on hand, and approximately $108 million available to borrow under our credit facility.
On April 29, we successfully increased our liquidity through an amendment of our existing credit agreement that increases total commitments by $250 million, bringing the total facility size to $1 $1 billion.
In the last year, our shareholders' equity increased by $204 million to over $1 $4 billion and we delivered a return on equity of 39% over the same period.
During the first quarter, we returned $57 $7 million to shareholders through the repurchase of 475055 shares of our common stock and we ended the quarter with $23 7 million shares.
Since 2018, we have now repurchased over two 5 million shares of our common stock and as of March 31, <unk> had approximately $249 million remaining on our stock repurchase program.
At this point ill turn the call back over to Eric Thanks, Charles during April cost pressures and supply chain bottlenecks continue to impact our operations slowing construction cycle times and delaying the opening some new communities. We expect these challenges to continue for the foreseeable future and are working closely with our trade partners.
And the municipalities, where we operate to limit impacts on our customers. Despite these.
Headwinds our second quarter is off to a solid start and pending verification of fundings. We expect to report that we closed 703 homes and 91 active communities in April .
Though absolute closings were down due to the lower community count the absorption pace of seven seven closings per community exceeded our eight year historical average for the fourth straight month this year.
As highlighted in our press release. This morning, we are revising upward our pricing and margin guidance.
Based on our results to date visibility into our backlog and outlook for the rest of the year. We now expect selling prices for the full year to be in a range between 335 and $350000.
Gross margins between 27, and 29% and adjusted gross margins between 28, and a half and 35%.
Our other guidance metrics for the full year are unchanged.
To conclude I want to thank our employees for their hard work loyalty to our company and commitment to our customers.
LG I homes was recently named as one of America's most trusted companies a distinction that recognizes our employee's commitment to our core values of exceptional customer service and.
Integrity and ethical behavior.
Dedication has enabled us to manage through numerous industry challenges and consistently deliver outstanding results in the first quarter was no exception, we'll now open the call for questions.
Thank you ladies and gentlemen, if you have a question. Please press star one on your telephone.
And if your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Our first question comes from the line of depot, Raghavan <unk> with Wells Fargo.
Hi, good afternoon, everyone. Thanks for taking my question.
You you Eric you kept your original closings guidance nine to 10, but just given the slower start.
I might have been.
Since closing.
But just given the slower start should we think about risks to the high <unk> or <unk>.
Assuming anything within your supply chain that actually so.
The higher end of guidance.
Much in Oh.
The works.
Yes deepa.
Great Great question, Yes, no. The closing guidance remains unchanged 9000 to 10000 closings for the year.
We're off to a solid start but because of the way we're selling houses within 60 days of closing.
Demand remains solid I think it's just a question of where we end up in the range is really what the back half of the year. It looks like still seeing solid demand, even though rates are up and our costs are up but it really depends on getting the houses Bell we have a number of new communities opening in the third and fourth quarters that will impact that closing number still.
Seeing really solid demand from the single family rental industry to buy our houses. So the range is still in play for sure.
Right.
How should they chose this one is probably for you how should we think about your cash.
Cash flow this year your inventory stepped up a little bit more than I would've expected.
Maybe not a big surprise, but at the same time, you're calling for some demand moderation.
Should we assume you're starting to take some defensive measures here and start to see your cash flow ton strongly profitable brand of the year.
Yeah. Thanks, Deepa Great question I think the way we're thinking about it from an inventory standpoint is that we still expect to increase our community count. So we see increases to community count we.
We're factoring in how we think about our inventory management in terms of vertical construction.
Just on what we're seeing in terms of expected absorption. So we kind of adjust accordingly, if you will so as we move inventory into one we are still predominantly seeing if not all of our deals that are coming to acquisitions Committee a raw land deals. So they're taking time, if you will to spend.
That cash to get those sections ready as.
As we've been talking about delivering community count into 2023 and 2024.
So I think I'd describe it as we're right in line with our.
Expectations in terms of what we're investing in terms of land land under development.
And then as we mentioned on the call just managing variable inventory completed inventory is significantly below where it.
Normally would be so we'll should see as things normalize completed inventory start to move up into its normal ranges.
Understood. Thanks for the color I'll pass it on good luck.
Thank you. Thank you.
Thank you.
Our next question comes from the line of Mike Rehaut with J P. Morgan.
Hi, Doug Wardlaw on for Mike I.
I was wondering if you could give some further color on kind of your outlook for lumber inflation and just because of potential for cost to grow throughout the remainder of the year and how much of that was already embedded in the guidance.
Yes, Doug Great question. This is Eric.
We're expecting cost to increase continue to increase that spend the trend so far.
This year, our most recent startup costs were still up and that was off an all time high.
So we're expecting cost to continue to increase and we're expecting to pass on those costs to consumers and maintain our gross margins in the in a very strong area like we like we did by raising our gross margin guidance by 50 basis points, but we expect costs continue to go up.
Awesome. Thank you and then just in terms of your current level of incentives I'm. Just curious on if that has changed or do you envision that changing especially as rates rates continue to rise and you know maybe theirs.
On a tapering in demand is that something that you guys have.
Bauble bar come across to implement in the future.
Yes, no no no change in that at all right now still seeing a very strong demand environment. We have very few houses to sell and when we do put houses on the price list. They are generally still selling.
Not quite as strong as it was but coming off the the comparisons of the best all time sales environment in history. So I'll still solid no reason increase incentives.
Right now we're doing a discounting at all so we have no no houses are no inventory finished and our costs are still increasing so we're still raising prices to offset costs.
Awesome. Thank you guys.
Youre welcome.
Thank you.
Next question comes from the line of Jay Mccanless with Wedbush Securities.
Okay, all right. Good afternoon, everyone and thanks for taking my questions. I guess my first question I think you said in your prepared comments.
96% of the backlog has no interest rate risk did I hear that correct.
That is correct.
So is that.
Mortgage locks on consumers as well as some institutional buyers and the mix is that the way to think about it.
Correct, Yeah, that's a great way to think about and also because of our the way that we're selling to make sure. The customer has great experience and make sure we're hitting our closing days of not having interest rate exposure and make sure. We understand our costs. We are not putting any houses on our price list for sale until we are within 60 days of closing which is around.
The first day of sheet rock and our construction cycle.
Doing that we can limit our interest rate exposure. So we sell houses within 60 days of closing.
We are confident in the closing date delivering more that close we take out a lot of supply chain risks the customer has a better experience we have a better experience and no have no interest rate exposure. So our backlog at the end of Q1 was 24 129 homes and our assumption is that all of those are most of those.
<unk>.
Are all scheduled to close in the second quarter.
So every day everything is locked and then those that arent locked going into third quarter. The majority of those are cash buyers.
Investors.
You stole my second question and thank you for answering it before asked it.
I guess my my follow up to that is.
Unpredictability, we've seen out of the supply chain et cetera have you talked with your mortgage partner about potentially extending some walks whether they're willing to do so I mean, we heard on another call last week.
Most lenders are coming with one year locks and have those types of programs available. So just any discussions you've had with your mortgage partner in case, the supply chain <unk> municipal issues get away from you.
Yeah.
We've had those discussions J, but we came to the conclusion of the best approach was just the shorten the cycle time and not have to worry about interest rate exposure and I think as we're selling house within 60 days of closing really helps us because we don't have those customers out there like most builders that have longer cycle times, we don't have the <unk>.
<unk> out that are there that are scheduled to close in the third and fourth quarter right now that have to worry about where rates are going we're just going to sell them and write a contract at the current rate, we will lock them in and they're going to be within 60 days of closing and.
We'll feel really good about our pipeline under that situation.
Okay that sounds great I'll turn it over thank you.
Thank you Jay.
Thank you and our next question comes from the line of Truman Patterson with Wolfe Research.
Hey, good morning, everybody or good afternoon, everyone and thanks for taking my questions.
Just for clarity Eric on those interest rate locks that you were talking about could you just you.
I don't think I heard the cost on the prior answer.
Yes, no no cost normal normal operating business, we are not paying a fee for forward commitments or locking interest rates and we don't need to because going back to the comment that we expect our entire pipeline to close within 60 days or 96% of it.
Very little interest rate risk in our pipeline and no additional expense.
Okay, Okay and then.
Just on on your target buyer mortgage rates continue moving higher.
So to home prices.
But we also have a heavy degree of rental inflation as well I'm just trying to understand what your mom.
Monthly mortgage payments spread as compared to that of some of the median rents.
Some of the buyers that you're targeting.
Yeah, I think both the bank going up you're right on our monthly payment on.
Most value oriented house and all of our communities is higher there is no question in and we're in the affordable housing business and focus on that first time homebuyer and with the combination of rates going up and Asps going up it's not as affordable as it used to be but I do believe that is being offset in why we're still seeing <unk>.
<unk> demand is because rental rates are also increasing.
And the single family rental operators demanded by house them from US is very strong and there is still a very low supply of finished inventory out there.
So as of now when we put houses on the price list. They are selling very quickly we.
We do believe that demand is going to moderate because we're coming off such a strong demand environment and eventually I'm not sure of the timing of it but eventually the word we used in our prepared remarks, and the press release and what we talk about internally is going back to a normalized demand environment.
And from 2014 through 2020 for US that was six months to seven closings per community per month, and just the last couple of years have been hotter than that but we do expect it to return to normalized at some point.
Okay, Okay, and then on the SG&A line I noticed that your selling expenses ticked up I think it was like 20 basis points year over year is that simply due to.
I don't know if loss closings leverage might impact that or are you actively increasing your AD and marketing spend.
I'm just trying to understand how we should you know.
View your strategy there.
Maybe some some guidance around the metrics moving through 'twenty two.
Yes short term and this is Charles.
Not an increase in advertising spend on our advertising spend in terms of direct advertising as a percentage of revenue was very similar year over year, we did see a slight increase in co broker as we continue to have limited inventory, we see brokers on deals more frequently than we.
Then we used to or historically so.
So we think so.
So also some some delevering there in terms of the revenue being down year over year, and then pacing out through the rest of the year I think selling certainly kind of demonstrates that it's predominantly variable, whereas G&A is predominantly more fixed.
So I think as revenue increases throughout the year, we will see some some.
Leverage there to get us into our original guidance range of 9% to 10% expected for the full year.
Alright, Thanks for taking my questions and good luck in the coming year Alright.
Alright, Thanks, Jeremy Thanks, Jeremy.
Thank you.
Our next question comes from the line of Carl Reichardt with <unk>.
Hey, guys. Thanks for taking my question.
But are you seeing any shift at all Eric in the consumers who are looking to go to arms as opposed to a fixed rate right now.
We haven't.
Company doesn't even offer arms at this point, we're just focused on fixed rates.
And then just as a housekeeping to as the percentage of backlog.
429, how much of that is is <unk>.
Bulk wholesale to single family rental operators.
How about about 10% that's still our guidance for the year is approximately 10% of the closings. This year will come from the single family rental space.
And am I right that the stuff that's in backlog now it's in backlog, but I think it's six to 12 months before you begin vertical construction on that or is that is that accelerated right now.
I'm just wondering if that 10% closes this year based on the footnote in the release.
Yes, yes, no everything under backlog, we would expect to close this year this year.
Yes, Okay and then last question is when you talk about the change from sort of what has been transit to more moderation in more normalization. He said that before in terms of what you think normalized paces what are the actual signs of that that youre seeing as it related to traffic or conversion rates of traffic or some other element that is keeping.
You the sense that that things are slowing given that the orders themselves has seemed to be much more of a function of just not having the product to move.
Yeah, I think it's similar to what the other builders have said Karl as well.
It's been such a unbelievably hot market that is just called from there, but still solid demand when we release houses for sale sale may we don't sell every single one of them, but we sell most of them.
But we ended up selling them all before Theyre complete our wait list are not as robust as they used to be because we're going through our waitlist. We're.
We're still not spending a lot of money on advertising because we don't have the houses for sale. So we've got our advertising rate Yugo and can turn on the faucet.
<unk>.
But we're not there yet because we still don't have any finished houses.
So I guess, you'll just signs that it's slowing off peak, but still very solid market and the new community openings that.
You've done in the last sort of say quarter or so.
Guessing that you're still seeing really good traffic really good demand for those opening phases yet.
And we are we are opening three new communities. This week and we expect to see solid results as well okay. Thanks, Eric appreciate it alright.
Alright, Thanks Carl.
Thank you.
Question comes from the line of Alex Barron with housing research.
Yes, Thank you gentlemen.
I know historically, you guys used to target a lot of rental communities and mailers and stuff.
Given the jump in pricing and interest rates do you feel that.
That basic client base is changing is it now more.
Maybe buyers from coming from other builders or what do.
Eastern your client base in your marketing.
Yes, I mean, great question, Alex we're not doing much marketing right now and haven't since the pandemic started because sales have been so robust.
We haven't even before the pandemic, where it wasn't doing nearly as much as direct mail because everything is went to the digital space. If you will so a lot more socially social media Internet digital marketing and I think that trend will continue once we ramp up our marketing spend.
But I think our buyers exactly the same same buyer is someone that's currently paying rents.
But at today's prices and rates.
Customers, just scan to be able to afford a higher monthly payment.
Maybe they are going to select a smaller floor plan that gets keep that monthly payment as affordable as possible, but we still view ourselves as an affordable alternative to renting.
And with rental rates, increasing in the number of renters, increasing across the country. We think we're well positioned for the future.
Got it and I think somebody else sort of asked this next question, but I'll try to ask in a different way. So right now obviously the closings were $50 99.
I don't know if youll stay at the 700 pace for the next couple of months, but let's say that's the case it seems like a pretty big ramp up in the back half to hit the deliveries guidance. So are you guys starting a lot more.
Homes to get there or do you expect a lot more closings to come from.
Institutional buyers in the back half for <unk>.
What gets us there I guess, that's what I'm trying to ask.
Yeah, I think what's going to get US there is the increased community count increase inventory, we're still seeing strong demand. So we are starting construction on as many houses as we can nationwide because we wanted to get some minor inventory built we need to get some inventory bill because the demand we're seeing both from the from the wholesale.
Our investors and also the retail side. So it's really the ramp up of inventory community count is going to push us past that 9000.
<unk> to get to the high end of the range I think we're need we're going to need some relief on construction cycle times and supply chain disruption maybe that happens in the back half of the year, maybe it doesn't but I think that's the difference between 9% to 10000.
Got it alright, thanks, a lot of luck.
Thank you. Thank you.
Your next question comes from the line of Ken Zenner with Keybanc.
Afternoon, everybody.
Good afternoon.
I just want to give you some metrics maybe you can kind of respond to how you think it will unfold.
Because of all the public the larger public companies you guys have had I think the highest growth rate in terms of units market cap et cetera.
So your inventories up about 2% year over year about 20% from.
March 'twenty, let's call that right before COVID-19.
The industries.
Inventory overall, the public builders is up about 25% and about 65% and units since.
March 'twenty backlog period.
And rates are going up I know demand is very strong and deep as it relates to <unk>.
Institutional investors, but how do you think this kind of plays out given you know I think black Knight without the fact that affordability is almost at.
An all time low clearly you're at the lower end and farther out which I think has historically provided you very good dynamics, but the whole industry is totally more units because of the slower cycle time. However.
Or are you going to manage that.
What are you looking forward to see deceleration since Youre building.
<unk>.
In order to release them because of the construction cycle times.
The late like what are you looking at that would moderate the.
The outlook you have right now for the industry.
Yes.
Great question I think we're looking at everything is the answer we're looking at every community nationwide week by week, we're monitoring trapping word honoring sales cancellations closings and we don't know what the future holds we're optimistic about the future and I think a lot has to do with our people and the systems that we have in place.
No matter what happens over the next couple of quarters with rates in supply chain.
We think we have the systems in place to deal with that.
We do believe that demand will normalize just because the spend so so really strong over the last couple of years.
But if closings slow down we will adjust our inventory accordingly, we.
We believe that prices will remain high because our costs remain high and Thats really just a question of absorptions will adjust our inventory accordingly, and if things slow down considerably how we look at that as it creates opportunity for lgs, whether its M&A opportunity.
More finished lots or land acquisitions opportunity or stock buyback opportunities. So we're we're optimistic under any scenario that thrown at us and we have the systems in place to succeed at anything that's thrown at us.
And when you talk about normal we could talk about construction cycle times, we could talk about you know the.
The kind of six order.
Or the industry is closer to four.
We could talk about gross margins at 20, I mean do all those things really makes sense to you.
You know sooner versus later in terms of how you're managing your risk because youre, obviously more than other builders.
Self developing your land, which gives you.
Hypothetically a lot of embedded equity.
Yes, no I think that's accurate we think everything is going to normalize gross margin being above adjusted gross margin north of 30%. We don't think that that will continue long term either because our adjusted gross margin every year pre pandemic and pre last quarter is between 25 and 28%.
I think the key thing. We're also looking at is on land acquisitions, when we make a decision to go forward on a piece of property. We're buying is making sure we are underwriting that it normalized absorptions.
Foster elevated when we're looking at deals to buy we're not underwriting of that costs are going to come down.
We're not we're not estimating that the average sales price is going to come down either but the absorption. We are looking closely at and the deals. We are proving to proceed to closing and are based on historical absorb absorptions not absorptions over the last 12 months to 18 months.
Thank you very much gentlemen.
Youre welcome. Thank you.
Thank you and our next question comes from the line of Jay Mccanless with Wedbush.
Hey, Thanks for taking my follow ups.
First one I had when I look at your gross margin guidance for the full year.
Yeah.
Are you all expecting like some of your competitors, we've heard from earlier in this earning cycle that.
Potentially incentives indoor competition picks up and you might see back half gross margin to be a little bit lower than what youre seeing in the front half or.
Just maybe how you're always thinking about gross margin trajectory through the rest of the year.
Yes, Great question, Jay This is Charles I.
Youre right I think for us it really is just.
The back half of the year is just a little bit more unknown.
So we feel very confident in terms of what we see in the existing backlog.
But the third and fourth quarter or just yet to be determined. So I think it implies that we're moving towards that normalization that Eric was talking about.
And just we're gonna evolve back into that normal range and it seems like.
Likely or reasonable that that may occur in the back half.
And then just wanted to ask.
Fallen off Carl's question, why I guess why isn't your mortgage partner willing to offer or is it something to do with your buyer base or just not wanting to take that type of risk and a moving environment.
Yes, I've ratio inside we don't we don't offer arms I guess, if the customer wanted to really look at that but we just always.
Ran it as a company that the borrowers are better off getting a fixed rate mortgage.
Rates are still in the historical rounds still very good most of our customers are getting into.
Interest rates in the fives on a fixed rate.
So it's just we think it's a better option for most of our customers, but if there is someone that was passion about it our mortgage company certainly has the ability to offer arms if necessary.
Okay. Okay, great. Thanks, again for taking the follow up.
Youre welcome.
Thank you at this time I'm not showing any further questions.
Okay, well, we appreciate everybody's time today and thanks for participating and have a great day.
This concludes L. G I homes first quarter 2022 conference call have a great day.
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