LGI Homes, Inc. (LGIH) Q3 2015 Earnings Report, Transcript and Summary

Welcome to the LGI Homes Third Quarter 2015 Conference Call. Today's call is being recorded and a replay will be available on the Company's website later today at www.lgihomes.com. We have allocated an hour for prepared remarks and Q&A. [Operator Instructions]. At this time, I would like turn the call over to Rachel Eaton, Chief Marketing Officer at LGI Homes. Ms. Eaton, you may begin.

Thank you. And welcome to the LGI Homes conference call discussing our results for the third quarter of 2015. Today's conference call will contain forward-looking statements that include among other things, statements regarding LGI's business strategy, outlook, plans, objectives and increased guidance for 2015 home closings and basic earnings per share. All such statements reflect current expectations. However, they do involve assumptions, estimates and other risks and uncertainties that could cause our expectations to prove to be incorrect. You should review our filings with the SEC, including our risk factors and cautionary statements 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. These forward-looking statements are not guarantees of future performance. You should consider these forward-looking statements in light of the related risks and you should not place undue reliance on these forward-looking statements, which speak only as of the date of this call. Additionally, certain non-GAAP financial measures will be discussed. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP are included in the earnings press release that we issued this morning and in our quarterly report on Form 10-Q for the third quarter of 2015 that we expect to file with the SEC later today. This filing will be accessible on the SEC’s Web site and in the Investors section of our website at www.lgihomes.com. Joining me today are Eric Lipar, LGI Homes’ Chief Executive Officer and Chairman of the Board; Charles Merdian, the Company's Chief Financial Officer, Secretary and Treasurer; and Meg Britton, the Company's Chief Administrative Officer. With that, I will now turn the call over to Eric.

Thank you, Rachel, and hello everyone. We appreciate you joining us today. This week we are celebrating our second anniversary as a public company. At the time of the IPO our objective was to access capital to fuel our growth and replicate our model across the country. Over the past few years we've expanded in multiple new markets and more than doubled the size of our organization while maintaining our culture and demonstrating at our unique operating model is sustainable. This could not have been accomplished without the hard work and dedication of our very talented and committed employees. So to all the LGI employees, thank you. It's been a great first two years as a public company. During this morning's call, I'll summarize highlights from our third quarter and 2015 year-to-date. Then Charles will follow up to discuss our financial results in more detail. After he has done I will conclude with comments on our expectations for the remainder of 2015 and then we’ll open the call for questions. LGI Homes delivered outstanding results with another record setting quarter for closing and revenue paving the way for 2015 to be another year of solid growth and performance. We closed 934 homes during the quarter with approximately 174 million of home sales revenue which represents 68% increase in the number of homes sold and an 88% increase in revenue over the third quarter of 2014. Notably this is the fifth consecutive year that we've increased closings revenue in the third quarter. We finished the first nine months of the year with the total of 2,458 closed which represents the 44% increase over the first nine months of 2014. For the quarter our average sales price reached a new high, just above $186,000. We ended the quarter with 50 active communities which is an increase of 16 communities or 47% over the third quarter of last year. Looking now at some of our market highlights. We’re excited to announce that we moved in our 11,000 family during the third quarter. This home closing milestone occurred at our Pine Tree community one of our top performing project in the Houston market. Overall our presence in Texas continues to be strong and as our leading division representing approximately 53% of our closings. During the third quarter we had 491 closings across the state. This is a 26% increase over the 389 homes closed in Texas during the third quarter of 2014. The Houston market in particular remains solid especially in light of challenges faced in the energy industry. With eight access selling communities we closed 208 homes during the third quarter at an absorption pace of 8.7 closings per community per month. In addition our average sales price in Houston was $181,800 for the third quarter up slightly from the previous quarter. We've continued to diversify our revenue base during the third quarter. We closed a total of 443 homes in our divisions outside of Texas representing an increase in the percentage of homes closed in these divisions from 30% of our home closings during Q3 2014 to 47% in Q3 2015 or 164% increase over the same quarter last year. Our Southwest and our Southeast divisions each contributed 17% of our home closings this quarter and our Florida division generated 13% of our home closings. Each of these divisions experienced year-over-year increase of more than 130% in the number of homes closed during the third quarter. For the quarter we averaged 6.3 closings per community, per month companywide. On closings per community per month basis, we closed an average of 7.1 in Texas, 7 in Florida, 5.7 in our Southeast division and 4.8 in our Southwest division. These results reflect our first home closing in five of our new communities demonstrating the strength of our system to produce above average absorption rates in existing and new markets. In addition our systems and processes enable us to continue to meet our gross margin and profitability objectives as we have further debt and leverage to our current markets. Consistent with the previous quarter, every division in LGI reported adjusted gross margins, north of 25%. And LGI Homes we believe our culture is key to our success and important element of this culture is providing our employee with the training they need to succeed. Our training philosophy is based on our six LGI core values of exceptional customer service, integrity, ethical behavior, loyalty, efficient use of time and resources and profitability. We empower our new home consultant in our entire organization to uphold these values. Each of our new home consultants and management across every division is immersed in our culture through our in-depth in-house 100-day training program, which has enabled us to continue to expand the LGI brand, leverage our systems and maintain our focus on a great customer experience. For more detailed financial results, I will now turn it over to our Chief Financial Officer, Charles Merdian.

Thanks, Eric. Home sales revenues for the quarter were $174 million, based on 934 homes closed, which represented a 67.7% increase over the third quarter of 2014. Our average sales price was $186,248 for the third quarter, a 12.1% year-over-year increase. Increased average home sale prices have contributed to our strong revenue performance. This increase in average sales price year-over-year reflects changes in product mix, a favorable pricing environment and new or replacement communities, added during 2014 and the first nine months of 2015 that have higher price points. Sales prices realized from homes closed during the third quarter range from the 130s to the 470s. This includes 10 homes in our [Toronto] communities which had an average net sales price of approximately $410,000. Excluding [Toronto], we experienced third quarter year-over-year price appreciation of 10.7%. Adjusted gross margin was 27.5% this quarter, compared to 28.3% for the third quarter of 2014 which is within our expected range. This primarily reflects the net impact of increase construction cost, slightly higher developed cost, investments in new markets and the transition between communities with an existing markets all offset by higher average home sale prices. Adjusted gross margin excludes approximately $1.8 million of capitalized interest charges in cost of sales during the quarter, representing 105 basis points and we expect this to ranges between 100 to 125 basis points for the fourth quarter. Combined selling, general and administrative expenses for the third quarter were 13.2% of revenues and 14.1% for the nine months ended September 30. As a percentage of revenues we believe that SG&A will be between 13% and 14.5% in the fourth quarter of this year, primarily depending on fourth quarter home sales revenue. Selling expenses were 14.1 million or 8.1% of home sales revenue compared to 9.2 million or 10% of home sales revenue for the third quarter of 2014, a 190 basis point improvement. Selling expenses have the percentage of home sales revenue improved 30 basis points from the previous quarter, primarily as a result of operating leverage realized related to advertising cost. General and administrative expenses were 5.1% of home sales revenue compared to 6.6% of home sales revenue for the third quarter of 2014, a 150 basis point improvement and consistent with the second quarter of this year. Pre-tax income for the quarter was 23.2 million or 13.3% of home sales revenue, an increase of 190 basis points over the same quarter in 2014 and 360 basis points over the first quarter of this year. We had net income of $15.4 million or 8.9% of home sales revenue for the third quarter, which represents earnings per share of $0.77 per basic share and $0.76 per diluted share. Third quarter net orders were 908, ending backlog for September was 755 units and the cancellation rate for the third quarter was 29.1%. We ended the quarter with a portfolio of approximately 23,400 owned and controlled lots. We believe our lot inventory generally represents three to five years of supply in our current markets and we remain disciplined in our evaluation of our land acquisitions and expansion opportunities. At September 30, approximately 11,000 of our 16,700 owned lots are either raw or under development. As of September 30, we had approximately 36 million in cash, 460 million of real estate inventory and total assets of 547 million. In addition, we had 170 million outstanding under our $225 million revolving credit facility and 51.6 million available to borrow. Our credit facility has $75 million accordion feature that enables us to increase this facility to 300 million and we expect to add this additional capacity as it becomes available to us. In addition we have $85 million of our convertible notes outstanding at the end of the quarter. Our gross debt to capitalization was approximately 52% and net debt to capitalization was approximately 49%. During the quarter we filed the universal self-registration statement were up to $300 million certain types of security. In September we issued perspectives under the shelf to issue up to $30 million of our common stock from time-to-time and aftermarket program. During September we issued 100,000 shares of our common stock under the program and received net proceeds of approximately 2.8 million. Going forward we expect to utilize the aftermarket program as needed to manage our balance sheet. As mentioned on previous calls weighted shares outstanding for the purpose of calculating diluted earnings per share are impacted by the convertible notes. Prior to April 30th we used if the converted method and subsequently we have been able to use treasury stock method to calculate the dilutive effect of these notes. Under the treasury stock method the convertible notes are dilutive if the market price of our stock exceeds the $21.52 per share conversion price of the notes. In the third quarter our average stock price was [23.59] exceeding the [21.52] conversion price and therefore the convertible notes were determined to be dilutive. This resulted in an approximately 347,000 share increased to the weighted average shares outstanding for the diluted EPS calculation. For the nine months ended September 30, the convertible notes were not considered to be dilutive under the treasury segment because the average stock price from May through September was less than the conversion price. Consequently diluted EPS for the nine months ended September was only impacted by the effect of if converted method. I would like to turn it back over to Eric.

Thanks Charles. In summary we had another impressive quarter, let me provide some guidance and thoughts on what we’re seeing for the remainder of 2015. The fourth quarter is off to a solid start with 264 closing up 10% over the prior year. In addition year-to-date we've closed 2,722 homes which exceeds the same period of the year prior year by 40%. We believe that demand for home ownership will remain strong. During the third quarter we received over 65,000 leads from potential customers enquiring about home ownership and continue to see steady traffic at our information centers. Based on our pipeline we expect closings in November to exceed those in October and compare very favorably to the 165 closings we had in November of 2014. On previous calls we mentioned our plan to expand into five new markets, Seattle, Nashville, Jacksonville and Raleigh-Durham and Colorado Spring. We believe these new markets will be accretive to our operations. Our expansion in the Seattle is underway, we closed on our first land acquisition in September and commenced construction this week and that will be our first community in this new market. We expect to open for sales late in the first quarter of 2016. In addition in October we closed on our first lot option take down for our second community in the Greater Seattle area. We expect close on the first set of allotment in the Nashville during November and plan to begin home construction after the first of the New Year with home closings soon following in the second half of 2016. Our expansion in the Jacksonville Florida is the furthest along in the five new markets. We’re currently constructing our sales office in open for sales next month. We expect to move our first customer in to their new LGI Home during the first quarter of next year. In each of these three new markets Seattle, Nashville and Jacksonville we’re very fortunate to be able to relocate the existing LGI management to oversee sales. We believe their seasoned leadership will cultivate the LGI way in these new markets and enable us to become successful more quickly. Our expansion in [indiscernible] is on track with our first project expected to open in mid-2016 as an extension of our Charlotte operation. In addition Colorado Springs the new submarket for us that will be managed by our Denver leadership team. We will close on our first land acquisition this week and expect to start home construction near the end of this year. We expect to have closings in the second quarter of 2016. In all five of these new markets we are buying finished lots that are either complete or will be purchased on a lot option take down as development is completed. We believe this is the wise strategy in new markets to minimize our upfront investments, minimize development risk and increase the return on our equity for these new markets. Because we’re a systems made company with proven processes in place we believe our expansions into these new markets are well positioned for success. Our goal is to simply duplicate what we have accomplished thus far in our current markets. Our expectation is that each of these new markets will perform at a high level and produce results consistent with our existing communities. Based on our strong performance today and assuming a continuation of today's housing market conditions for the remainder of this year we offer the following guidance. We had originally committed to deliver 2,800 to 3,200 home closings for the year. On last quarter's call we raised the home closing guidance to 3,000 to 3,300 home closings. Based on our pipeline we now believe that 2015 closings will follow the range of 3,250 to 3,400 closings. We saw a very slight increase in average sales price over this past quarter. We believe our average sales price in the fourth quarter was generally be flat again and coming between $185,000 and $190,000. We expected our adjusted gross margin, which excluded the impact of interest and purchase accounting will continue to be in our target range of 27% to 29% of home sales revenues. On our last call, we indicated our basic earnings per share for 2015 was expected to be in the range of $2.15 to $2.50. Due to our increased guidance of delivering 3,250 to 3,400 home closings and expected consistent average sales price, cost, adjusted gross margins and SG&A leverage, we believe our basic earnings per share for the full year 2015 will be in the range of $2.45 to $2.65. The midpoint of our EPS guidance of $2.55 per share would represent basic EPS growth of approximately 92% over 2014. In summary, we are pleased with our results for the third quarter and are looking at a strong finish to the year. This is a function of the solid performance across our organization and I'd like to thank our employees for delivering such strong results. Looking ahead to 2016, we are [ready] to take advantage of continued growth opportunities in existing and new markets. We will provide guidance for the upcoming year at [later] day. However, we believe we are well positioned to continue to grow our revenues, community count and earnings, allowing LGI Homes to continue our forward momentum, propelling us towards our long-term goals and objectives. Now, we'll be happy to take your questions.

Thank you. [Operator Instructions] And the first question is from Nishu Sood of Deutsche Bank. Your line is open.

I wanted to ask about your land strategy, the capital intensity and of your business and what implies for your capital needs? Now, obviously your lot supplies, you mentioned you have an effective three to five year supply planned, a lot of [raw lots] which you're going to bringing into market in the coming years but in the new markets, Eric, I think you mentioned that Charles, I'm sorry, you mentioned that you're doing more finished lots and taking those down, at the same time obviously the capital intent of your business has grown overtime as well. So, how should we expect that to trend going forward? Should we view the large raw development opportunities as something you do once you become more mature in the market and what does that imply then for your lot supply and how it's going to grow as you expand in to these new markets for the next year or two?

Thanks, Nishu. This is Eric. I'll start off and Charles can follow up. When we go into a new market, we think it's very prudent do not take a lot of development risk like we talked about on the call. So the five new markets that we mentioned, we've had the ability to buy either finished lots or give its local developers and go under contract and rolling takedown and how the developers put lots on the ground for us. So our first project in all five new markets we're eliminating that risk. The other factor is in Texas where we have a lot of development expertise; there is not a lot of developers putting finished lots underground especially in the entry level type areas where we do most of our construction. So we're doing most of our development in Texas and [indiscernible] mix but it's really not as much development airing towards finished lots or doing it on rolling options takedowns.

Yes, I'll just add Nishu that, as we look at our balance of inventory in lots and whether they've finished around in -- under development, I think we'll see for Texas for example as we moved away from finished lots into land development, our out of state market that has deeper, if you will supply a finished lots will continue to buy them there, in some of those markets are shift more towards land and land development but then some of our newer markets that we expect to add overtime we would expect to see opportunities in finished lots in some of those market as well.

Got it. Now, that's really helpful. And of course that the implication that investors are considering and thinking about this is, what does this imply for your capital needs going forward? The capital intent of your business has naturally grown; it seems to have stabilized here in the third quarter. So if you look at it just on a sales to inventory basis going forward, are we at the normalized range and I guess even the more important question that's behind that is, you have this 30 million capacity to rate shares, would you be considering a larger equity offering because you’ve had terrific very successful growth or do you think that with your -- and you are at 52%, I believe you said on the gross debt to capital. So, is that 30 million going to be enough, how long does that take you out in terms of your capital needs and would you [indiscernible] to do a larger equity offering?

Sure so I will take it first and Eric can add. Our philosophy is to evaluate each market. We’re very disciplined in our acquisition approach, ideally our objective is to deliver the amount of inventory that we need based on our expected absorption really going to as needed or really just in time type of approach. So I think as we look at the balance sheet, we feel like we can manage our acquisitions, we have flexibility and have been successful historically to negotiate the terms of the deals. So whether they're land deals or takedowns or structure of the deals so that we can manage how much inventory we have on the balance sheet. I think you're absolutely accurate when we first post IPO I think we received comment that the balance sheet is accelerating quickly and you see that’s stabilizing, now we’re in the range in terms of our targeted debt to capitalization. So I think the short answer is, is that we just continue to manage it on a quarter-to-quarter basis, as we see the opportunities and as opportunities accelerate and we see them quicker we’ll make a decision based on that information and if we move into the markets little bit slower just based on what’s available and that will dictate really how much capital we need going forward.

And then the hot topic obviously has been labor, and Eric you've commented on this when we talked about at the last conference call. You folks have been able to manage through the issues; it doesn't seem to have delayed your closings at all. It seems to have worsened on the ground for the majority of builders, you did not mention that and obviously that’s pretty notable, but Charles, as you went through the gross margin discussion you did mention some rising cost there. So I was wondering if you could flesh that out a little bit. Was that a material part of the gross margin variation within the range? What are you seeing on the grounds, do you have an concerns, any comments there would be great.

I think we’re not feeling the effects of labor like some of the other builders are talking about issue. Obviously raising our closing guidance, we’re feeling very comfortable that we’re going to get the house build and delivered to our new members for 2015. From a cost basis I think labor costs are part of the gross margin decrease but we look at it as not really material and we've got development cost increase and slight cost increase that we were totally able to offset with a retail price but we think our gross margin still in our expected range of 27 to 29 and expect it to be there in the fourth quarter as well.

And the next question is from Michael Rehaut of JPMorgan. Your line is open.

First question just on the community count as you continue to expand and enter new markets, I believe this quarter you ended at 50, just wanted to ask about updated thoughts around 4Q and anything initial on 2016. I mean you would seen that the average community count for the full year you're on tracking to be around if you were to be up couple of communities in 4Q looks like right around 48 for the year that’s versus 31 for the previous year, 48, 46 something like that. I was just wondering if for 2016 if it's not unreasonable to think of a similar type of absolute step up or increase in the absolute count.

In our October closing report last night we released we have 52 communities through the end of October, our guidance was between 50 and 55 and we’re comfortable with that guidance, we’ll end the year between 50 and 55 active communities for 2015. We're certainly going to grow community in count in 2015 and that rate you give specific guidance yes but the exciting thing for us is in all five of those new markets that we mentioned, we talked about six different projects, so that will all be added into community count in 2016. We don't expect any of those markets to produce closings or count as a community in 2015.

And also on the closings growth guidance. I thought it's very positive in terms of raising the full year and because you're at first glance October closings up 10% is a much lower growth rate than what you've been doing so far this year particularly in the third quarter, it would seem that you're going against some pretty tough comp a year ago and that’s going to change very dramatically for November. Just any thoughts around the first glance would be that perhaps the labor issues in Texas might be finally have impacting you but it also doesn't seem to be the case given the improvement in closings growth in Texas that you had in 3Q, so maybe just talk about, if that's wasn't impact in October doesn't -- appeared to be but how you're growing your Texas business and thoughts around again the news around labor and closing delays and so forth

In October it was slower month and then in the third quarter and [importantly] because we had such a great third quarter we closed lot of our finished inventory and only a 10% -- Last November we closed 165 compared to 241 in October and we said on the call, we expect November closings to increase over October, so we expect that comparison to be up at least 60% year-over-year. Labor was not a challenge, they have things to do with October closings, coming in 264. We do have some developments in Texas that because sales and closings were so strong that we -- at the next sections done in time, October closings but we've got a very strong pipeline where those exceptions can be done for November and December closings. So that's another reason we're feeling optimistic and ending the year strong and where we look at is, we're -- if you will, we closed at exactly the same amount to 264 again in November, December that was put -- the lower end of the range of 3,250, which we consider the downside but certainly have upside in that number and that's how we created that range. So we look forward to a very strong November and December and closing out the year.

Great. One last quick question if I could, the gross margins, pre-interest last quarter had some modest impact from a purchase accounting charge last quarter looked -- I believe it was 50 basis points on the 27.7, if you can just tell us whether or not that would -- that affected 3Q and in general how much more of that you have to work through for 4Q and next year?

Sure. So the effects related to purchase accounting was nominal for this quarter. I think on the last call we had mentioned that we expected it now to be to take or off and carryover over the next couple of years and we're seeing that, we have just -- million dollars less on the balance sheet related to it, but it's primarily related to lots, which we're going to take little bit longer time to come through. So we don't expect that to have a material effect between financial and adjusted growth. The majority or essentially all of the delta between adjusted growth and financial growth will be related to capitalize interest.

Thank you. The next question is from [indiscernible] of Sidoti and Company. Your line is open.

I appreciate all the color on the absorption rate. Just housekeeping, I was wondering if the Houston only monthly absorption rate was any different than the 7.1 you mentioned for Texas as a whole.

Yes, the Houston absorption rate for the third quarter was 8.7 compared to 7.1 overall for Texas. Now Houston is our strongest market in Texas.

Okay. That's positive and then I was looking at the sequential movement in Florida and Southwest region absorption rate and it looks like you got a nice movement in Florida but not so much Southwest, so I was just wondering if you can give us a little bit a flavor of like how the entry level buyer there differs at all or anything you're seeing in those markets?

Southwest and Southeast was basically flat, over quarter over quarter. And we saw really good jump in Florida, primarily driven by the [indiscernible] market. We have [indiscernible] down there [indiscernible] that's really performing extremely well, focused on the entry level buyer, price points, low 200,000 range. So Florida produced in seven closings per community per month for the third quarter, really stood out as a positive.

Okay that helps and then, you mentioned that we -- as you do every quarters, I was just wondering if there has been any incremental changes either up or down in the response rate you're getting to those direct mailers, how are things tracking versus the first half of the year?

It's been very consistent. We mentioned in our last quarter 54,000 leads, this quarter 65,000 leads. So, we've seen consistent demand quarter over quarter, really year-over-year and every sense we -- business since 2003, we've seen consistent demand of the customers that want to go from -- situations in the home ownership.

Okay. And then someone ask about labor cost, just wondering if there any callouts in construction material and wondering as your business, you're thinking -- any purchasing economies and if yes, is that in your targeted gross margin range?

It is in our targeted gross margin range. I mean, we're seeing some scale as we grow but not whole lot and we have seen a lot of pressure on construction cost as well. We [predict] estimate pretty consistent for the fourth quarter and going forward.

Okay. Got it and then just couple of more, cancellation rate this quarter, did I miss that?

29.1

Okay. That also a little bit higher than the number I'm used to but any color there?

No, it's within the range, in terms of the mid to high 20s; it's about what we see.

And then more of a philosophical question, just wondering as your company gets obviously a lot bigger, how are you going to maintain this high touch and in just the quarter there because I know you've mentioned that you've had some of your top performing sales people switching regions, I just wanted to get any thoughts there?

As we continue to grow that becomes more of a challenge, no question. We've been very proud of our success so far and the ability to essentially grow 40% a year over the last four years while maintaining our absorption basis and gross margin and we believe that's all part of the LGI way starting with we have a process for every part of the company, we've structure in place and as we go to these new markets by putting existing LGI management in place and having a process that we feel is duplicatable our communities that we set up nationwide whether it’s an Orlando or San Antonio or Seattle they're all operate exactly the same way all the people get the same message we fly and spend the money to bring every sales throughout the manager that we hired nationwide to our corporate office in Texas to get trained by our President and Chief Operating Office for two weeks before they go online. So training and process is the short answer to that question.

And then last one, I think in the past you said that you system wide that we underwrite all the homes grew about 25% by initial gross margin and then that elevate two times. Is there any difference in that approach for your new higher price point homes, I am kind of thinking of the [indiscernible], I just curious.

No, same underwriting standards for all price points and all markets.

Ladies and gentlemen we ask you to please limit yourself to one question and one follow-up. The next question is from [indiscernible] Asset Management. Your line is open.

Two questions, first one in the family markets it looks like it will keep you pretty busy for the first half of the year, but are you looking at any incremental new markets that could open by the second half of the year 2016. And then my second question was could you just characterize a little bit what are you seeing on entry level demand in competition. Are you seeing any of the other larger builders to put a move down into the entry over space for, does it remain the case that other than your [indiscernible] express it's them and you guys mostly and you're not seeing much change.

On the new markets Barry great question. We certainly [indiscernible] for first half of the year likely talk about what five new markets we’re going to focused on down to start with, and our cultured LGI we’re going to drove as fast as we can but we need to be able to maintain our margins and our absorption basis. So we’re going to continue to grow but it's going to be scaled to a standpoint that we have to be producing the results. So as we get these new markets open, and they prove to be successful then we’ll look at the next markets on our radar. I can say that Portland, Oregon because its proximity to Seattle, Washington is certainly on our radar and we’ll look more in depth in that once we get Seattle up and running. From a competition standpoint I think you phrased the question has anything changed and I would say no, express is certainly out there we've been competing with [indiscernible] if you will ever since we've been in business both from an acquisitions and customer standpoint. We compete with a lot of private builders but at entry level buyer but the demand is strong in entry level, the buyer hasn’t changed that demand from going from a rental situation and home ownership is still there, depending on where that customer is in their life so we’re seeing strong demand, no increasing competition I would say everything is relatively stable in that regards.

Next question is from Jordan Hamowitz of Philadelphia Financial. Your line is open.

Almost all my questions been answered, congratulations. My one question is with the convert you guys offered basic earnings per share guidance for this year, next year because the convert's outstanding will that be dilutive for the full year.

So, Jordan its Charles. The effects of the convert are dilutive if the stock price is above the conversion price. So assuming and that’s one reason why we’re not giving dilutive guidance is because we’re not estimating where the stock prices are going to be. So as long as the stock price is above the conversion price the premium above the conversion price will be treated as dilutive.

, :

Thank you [indiscernible] and thank you everyone for participating on the call and for your interest in LGI Homes. We look forward to sharing our achievements as we finish out the rest of the year. Have a great day.