Welcome to the LGI Homes First Quarter 2019 Conference Call. Today’s call is being recorded and 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 will turn the call over to Rachel Eaton, Chief Marketing Officer at LGI Homes. Mrs. Eaton, you may begin.

Thank you. Welcome to the LGI Homes conference call discussing our results for the first quarter 2019. Today's conference call will contain forward-looking statements that include among other things, statements regarding LGI's business strategy, outlook, plans, objectives, and confirmation of 2019. 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 statement about forward-looking statement section 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 conference call. Additionally, adjusted gross margin, a non-GAAP financial measure, will be discussed on this call. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. A reconciliation of adjusted gross margin to gross margin, the most comparable measure prepared in accordance with GAAP, is included in the earnings press release that we issued this morning and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 that we expect to file with the SEC later today. This filing will be accessible on the SEC's website and in the Investors Section of our website at lgihomes.com. Joining me today are Eric Lipar, LGI Homes' Chief Executive Officer; and Charles Merdian, the Company's Chief Financial Officer. With that, I will now turn the call over to Eric.

Thank you, Rachel, and welcome to everyone on this call. We appreciate your continued interest in LGI Homes. During today's call, I will summarize the highlights and results from the first quarter of 2019, then Charles will follow-up to discuss our financial results in more detail. After he is done, we'll conclude with comments and open the call for questions. For the first quarter, we closed 1,228 homes, generating approximately $288 million in home sales revenue, which represented a 3.1% increase over the first quarter of 2018. Throughout the first quarter, we saw continued demand for affordable homes coupled with a positive response from buyers to lower interest rates. First quarter net orders were 1,948, an 8% increase over the first quarter of last year. While January and February were down year-over-year at 3% and 10% respectively, March saw a very positive response from buyers resulting in a 32% increase in orders for the month. April continued this trend with net orders exceeding 30% year-over-year reaffirming our optimistic outlook on the remainder of the second quarter. For the first quarter, we averaged 4.9 closings per community per month company-wide. Absorption for the quarter was highlighted by performance in our Las Vegas, Sacramento and Dallas/Fort Worth markets. For the quarter, our top market on a closing per community basis was Las Vegas averaging 11.8 closings per community per month, followed by Sacramento at 7.2 closings per community per month and DFW at 7.1. Company-wide, we ended the first quarter with 87 active communities, more than a 10% increase over the 79 active communities that we had at the end of Q1 last year. The first quarter reflects investments and upfront costs related to our first quarter community count growth and our anticipated community count growth for the remainder of this year.…

Thanks, Eric. As mentioned earlier, home sales revenues for the quarter were $287.6 million based on 1,228 homes closed, a 3.1% increase over the first quarter of 2018. Sales prices realized from homes closed during the first quarter range from the $1.40s to over $500,000 and averaged $234,197 a 4.4% year-over-year increase. This increase in the average sales price per home was primarily due to changes in product mix, higher price points in certain new markets such as the addition of Sacramento and Las Vegas and to a lesser extent increases in sales prices in existing communities. In the first quarter by division, approximate average sales prices were $215,000 in Central, $366,000 in the Northwest, $228,000 in the Southeast, $204,000 in Florida and $256,000 in the West, which was up from $206,000 for the first quarter of 2018. Gross margin as a percentage of sales was 23.1% this quarter compared to 24.8% for the same quarter last year, a decrease of 170 basis points. During the quarter, we closed 58 homes generating approximately $17 million in revenue related to homes acquired in the Wynn acquisition. In addition to purchase accounting, gross margins realized on these homes were below our company average. This had a 40 basis point impact to our overall margins compared to the prior year. We also saw a 50 basis point decrease in gross margin associated with an increase in construction overhead as a result of our geographic expansion and lower closings per community in our Florida and Northwest divisions. Gross margins were also impacted due to an increase in overall construction costs, lot costs as a percentage of revenues and a more cautious pricing as Eric mentioned earlier. Our adjusted gross margin was 25.1% this quarter compared to 26.4% for the first quarter of 2018, a…

Thanks Charles. Let me provide some guidance and thoughts and what we are seeing thus far in the second quarter and looking ahead into the remainder of the year. The second quarter is off to a great start with 612 closings in April up slightly from the 606 closings in April of last year. The 612 closings came from 92 active communities, resulted in a very solid absorption pace averaging 6.7 closings per community per month. As I mentioned early on this call, we'll be rolling out a new interior fit and finish. The introduction of complete home is our 2019 initiative to make our product more consistent on a national basis and include the most desired new home features, all white providing the greatest value to homebuyers at affordable price. All new communities opening in 2019 and all new starts in our existing communities from the beginning of the second quarter forward will include a complete home interior fit and finish package. The complete home showcases enhancements such as upgrade appliances, hard surface countertops, garage door openers, ceiling fans, USB plugs, and more. All of these features will become standard and our new inventory offering our homeowners greater value for their dollar. Homebuyer response to the new complete home fit and finish package has been positive and since we have the gun selling this new inventory and select communities, sales have been robust. We believe one of the factors contributing to the increase in March and April sales is the rollouts of the complete home. Very few of the closings from the first quarter included this package. We expect a larger percentage in the second quarter and by the third quarter the majority of our inventory and closings will include the new complete home package. Construction of the new complete home package is currently underway in all communities nationwide. We are planning a press release later this month rolling out this new product to the public, which we will believe will maintain positive sales momentum. Looking at the rest of the year, we believe throughout 2019 we will continue to grow our community count and end the year between 105 and 115 active selling communities. In addition, we believe our average sales price for the year and will continue to increase ending 2019 with an overall average sales price between $235,000 and $245,000. We maintain our gross margin guidance for the year and the range of 23.5% and 25.5%. We expect adjusted gross margin which excludes the effects of interest and purchase accounting will continue to be in line with previous expectations ending the year between 25.5% and 27.5%. Given our reaffirm guidance of average sales price, gross margins and community count, we continue to believe our full-year basic earnings per share will be between $7 and $8 per share. Now we'll be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Michael Rehaut with JPMorgan Chase. Your line is open.

Thanks. Good afternoon, everyone. First question I had was on the fit and finish initiative, and it sounds interesting. I was curious, you had mentioned that you had received or as a result of where the communities that you rolled out that it kind of supported some better monthly results in March, April. I was curious if you could give us a sense of – if you've observed like a difference in sales pace in those communities perhaps before and after? Or do you have any sense, I don't know if these are new communities where you can't really get a feel for what they were selling at before, if they started off the go with the fit and finish. But if you could give us any kind of sense for what it does from a sales pace standpoint that would be helpful?

Yes. Mike, this is Eric. Great question. We're excited about the new fit and finish initiative called the complete home package. And I think that's one of the reasons that sales have been so strong in March and April. It’s all the new communities that we've rolled out and all the grand openings we've had that fit and finish. And I know I've been out in the field with our teams and with the sales people and listening to the customer's reaction and it's been perceived very positively. It gives us the consistency that we're looking for. I also think the value to the customer as we put a nicer product out there with a little bit more upgrades fit and finish. And our average sales price now consistently over $200,000, I guess shows the value to the customers, especially the more qualified customers and gives us a lot of consistency across the country. In the existing communities and we've been cautious not to promote the new package too much because we do want to sellout of our existing inventory. But we are starting to see results where the communities that are selling both of the packages, certainly the customers are willing to pay premium price, which is going to help our margins to have that upgraded fit and finish.

Okay. Thank you for that Eric. I guess secondly on the quarterly results, I think you kind of called out some of the drivers to the higher SG&A as a percent of sales. And obviously I think that was one of the big differences in terms of your actual results versus our estimate, probably Street expectations as well. You said that you would expect if I heard it right, a similar type of dynamic. I don't know if that means a similar type of year-over-year discrepancy or you – it was up about 200 basis points year-over-year. So just trying to get a sense, when you talk about getting to a full-year that would still be up 20 to 50 bps, is part of that cadence you're looking for kind of a similar year-over-year increase in the second quarter and then some leverage in the back half or how should we think about the cadence there?

Yes. Mike, this is Charles. I can take it first. I think what we're saying certainly on the selling side is that the second quarter year-over-year comparisons should be similar to what we saw in year-over-year comparisons for the first quarter. On the G&A side, I think if you look back and look at the cadence of G&A spend throughout 2018, is that we would expect that to taper in terms of the year-over-year comps, June of 2018 was $18.3 million in G&A cost compared to the $18.4 million that we reported for this quarter. So we would see the – the G&A side not see as much of an increase on the year over comps for the rest of the year selling primarily more in the second quarter. And then like you mentioned, seeing some of that leverage pay-off in the third and fourth quarters as these communities open and start to generate closings.

Great. And one last one if I could sneak it in. On the gross margin, I just didn't hear one of the drivers you said in terms of the first quarter performance was – you'd mentioned you're 40 bps impact from purchase accounting and then a 50 bps impact from – and I missed that, if you could repeat that. And then when you talk about the second quarter, your expectations for slight increase, I just wanted to clarify if you meant sequentially or year-over-year?

Yes. So the 50 bps was related to construction overhead. So although our revenues were similar nationwide, we had lower closings per community in our Florida and Northwest divisions, which were made up in the West primarily and also in the Central. So what's that meant as we incurred similar construction overhead related costs in those two divisions with lower revenues, so the overall impact on our construction overhead, what flows through gross margin was about 50 basis points. In terms of the gross margin expectations that sequentially, so typically construction overhead is, has its largest impact in the first quarter just because of overall closings per community. So we would see that – expect to see a little bit of pickup if nothing else from that, the impact of Wynn will be marginalized slightly as well, and then just kind of normal operations from there. So we would expect it to be up sequentially.

And then with further improvement in the back half, I presume?

Correct.

Great. Thanks so much.

You bet.

Thank you. And our next question comes from the line of Nishu Sood with Deutsche Bank. Your line is open.

Thank you. I wanted to start off on gross margins as well. The first quarter obviously the demand trends coming into the year where pretty widely affected across the market. So the – not increasing prices at the usual cadence to go along with the construction costs makes sense. Did that include any price reductions or was it merely not increasing and also actually I'll pause there and I – because I wanted to follow up on that.

Yes. Nishu, this is Eric. Yes, we did have some decreases, some specials if you would to close out some older communities. That's pretty consistent with how we do it. We don't negotiate on prices, but when we're closing out of community, we'll run some discounts to get rid of older inventory. But generally that wasn't the primary driver, a primary driver was just – we didn't raise prices going into that tougher environment, anticipated higher interest rates in the first quarter, which unfortunately didn't happen, so more in the cost kept increasing. So we're still seeing increased costs and when we don't have the price increases as aggressively as we once did had a negative impact on margins for the quarter.

Got it. Now demand, it sounds like from the 30% plus year-over-year pace in March and April, sounds like it has picked up a lot obviously reflecting the fit and finish program and lower rates perhaps. So with demand returning, should we think about the delays and or the lack of price increases at 1Q as a one-time adjustment to a new environment or is there the potential to kind of catch up and to kind of drive gross margins back up to where they have been in recent years?

Yes. That would be the optimistic side of the equation. Demand is very strong. March and April, very strong months. We look at our leads. You mentioned the word traffic, how we look at it. As in the first quarter, we had over a 100,000 inquiries and the home ownership. So the demand is still there and that's a lot stronger demand and lot stronger pull through to the contracts and closings than we saw in the fourth quarter and the beginning of the year. So it's trending in the right direction and your assumption is correct. If sales remain strong, obviously we'll be increasing crisis to offset the costs, but also increasing prices because of the demand is there and it's a great environment to increase pricing. So hopefully that's the case through the rest of the year. We anticipate that happening and demand remaining strong. And if it does happen that way, which we expect it to then gross margins will continue to increase every quarter, like Charles talked about with Mike.

Got it. And the fit and finish program sounds a really exciting to have a national standard for the fit and finish. There are, obviously I can see some of those, the things that you described, increasing costs, but on the other hand, if there's a consistent standard, maybe there's some incremental purchase synergies. So how should we think about the impact of the fit and finish on your profitability, a longer-term and where would it be? I would imagine it would be mostly an in gross margin, but if you could just walk us through that as well please.

Yes. Great question, and just to go a little bit more specific on that, when we were looking at our fit and finish across the country. We start with we want more consistency. Also we have taken some fit and finish out of the house that we weren't sure was a great decision and put some of that back in. Hard surface countertops are granite countertops is an easy one to use. As an example, probably 80% of our community's offered granite or hard surface countertops and 20%, was that a formica stage, just focused on affordability. And really when we dove into it and let's all the advantage about adding granite in those communities that had formica and the additional cost of anywhere from $800 to $1,500 per house and per plan. We thought that was really great value. And then it gives us the tool from a marketing standpoint and consistency and pictures that every house nationwide started up my LGI in the second quarter forwards is going to have hard surface countertops. A lot of our communities already had house or hard surface countertops. So we're adding items like a ceiling fan and a garage door opener. So we think that creates the value in only few $100 in costs. But I would say on averages, on the average, we probably added a $1,000 or $2,000 per cost every LGI home and we think we can we can get $3,000 to $5,000 more in revenue per home. So that's going to increase margins and also increase the absolute dollars and overall average sales price and we think it's also going to increase sales.

Got it. So just to close that out then, that the sale or the revenue benefit or the sales price benefit is still to come, or was it incorporated into each of these communities as you're revamping them or rolling out new ones under the new fit and finish standards?

Well, it still to come from a closing standpoint of our first quarter closings only 70 of the closings in the first quarter, which I believes around 6%-ish, of our closings, the first quarter have the new fit and finish package, complete home package.

Got it. Okay, great. Thank you.

You're welcome.

Thank you. Our next question is from Stephen East with Wells Fargo. Your line is open.

Thank you, and good morning, guys. Eric, maybe could you just one more gross margin question. You all mentioned light costs are up and you know higher construction costs. Just any color on those two metrics in what you're seeing there.

Hey, Stephen, it’s Charles. Yes, so we accounted for 90 basis points between the win closings and the 50 basis points on construction overhead. The majority of the difference of the 170 basis points change year-over-year related to increased house costs – the lot costs we're up about 20 basis points up to 18.8% of our average sales price. but again, that goes back to the cautious pricing, messaging meaning that we normally would have just translated that and pushing through on average sales prices.

Sure. I've got you. Okay. And then FHA, the manual underwriting, what percent of your business would be affected by that? Are you seeing any rejections yet from FHA? Is it affecting your overall demand? Just any color there?

Yes, it's not affecting demand. Demand has been strong. FHA is a big part of our business is still running about 70% of our customers choose FHA. Is there a vehicle for financing and, and their mortgage? We really haven't seen the negative impacts of the tightening, Stephen. We assume that somewhat they're getting really into the weeds, but customers that have higher ratios and need to paydown debt or save up more money for down payment. We assume some of that's happening in the field, but based on where we see closings and base on our pull through what we see contracts, it doesn't seem to be having at least a material impact on our business in the field.

Okay. I've got you. About what percentage of your customers do you think fall into that manual underwriting?

Yes. We're not sure because we don't measure that. I mean, we do know our average customer has a 650 credit score and our average debt to income ratio always runs in the low-40s. So, you know, math would say that a lot of customers fall into that buckets. Uh, but it doesn't seem to be getting them declined for a loan. It's not that they're decline. It's just the underwriting is going to take a little closer look at the file. But we haven't seen a lot of cancellations. They're the customers that are in that bucket.

Okay. All right. One quick question, you talked about your absorption as being better than your legacy on your fit and finish. What type of difference are you seeing between your legacy and the fit and finish?

Yes, I don't think we have that information, Stephen, as that one of the Metrics that we calculate and primarily because the communities that have the complete home fit and finish are really the March grand openings that we just had that are now just starting to have closing. So with only 70 closings, a true absorption pace really hasn't been measured gap, but from a order or a sales standpoint, um, it just seems to be really, really positive what's happening and you could see it in our orders and in March and April.

Yes. Okay. Thanks a lot.

You're welcome.

And our next question is from the line of Jay McCanless with Wedbush. Your line is open.

Sorry about that. Thanks for taking my question. So the first one I had with the ASP guidance you've given relative to this new information on complete home and then some of the older legacy neighborhoods that you need to sell through. Should we think about, keeping our ASP assumptions maybe towards the lower end of the guidance as you all discount and clear through some of the older homes to get yourself in position to open these newer communities with complete home?

That sounds reasonable to us. I mean we were at the low end or just below the low end of our guidance for the first quarter. So I think Charles and I would think the average sales price is probably increasing as we raise prices throughout the year. The fit and finish is going to increase the overall cost on the exactly the same floor plan by a few thousand dollars. But the customers, they will be selective in their floor plans and qualifications and we'll see what rates do and what floor plan is selective. So there's a lot of mix and a lot of geography in our average sales price. But I think that'd be a good way to look at it, I think.

Okay. All right. Thank you. The second question I had and apologies if you already mentioned it. What were your wholesale sales in the quarter? And are you guys still thinking that the total percentage of wholesale this year maybe a little less than what you did in 2018?

Yes. Sure. Jay, this is Charles. In the first quarter of this year, we had 30 wholesale closings and that compares to 31 in the first quarter of 2018. So very similar.

Now for the year we're still expecting about 5% of our businesses comes from the wholesale business.

And then just the last question I had. In terms of pricing power, I mean, what percentage of your communities now you feel like you have a pricing power and how does that compare maybe to the beginning of the year?

Yes, I think it's substantially more from the beginning of year. I mean as robust as sales has been and the excitement around our complete home package and where rates are and the demand that we're seeing, yes, I think we're going to expect to raise prices and 80%, 90% of our communities plus over the near-term.

It sounds great. Thanks for taking my questions.

You're welcome.

And our next question comes from the line of Carl Reichardt with BTIG. Your line is open.

Thanks. Hi guys.

Hello, hey.

Hey. I’m going to ask about community count, the guide for the year. As you're sort of looking at that, are there particular regions where you've got some more flex built into that community count and is there a cadence for the year that you're kind of looking for there? It's 10 communities at that versus your absorption, so a lot of deliveries it could come from more or fewer community. So I’m just trying to get a sense of how we should think about that?

Yes. We just had a good bump up in April, we’re up to 92 communities coming off our January training class and opening up with 10 grand openings in March. And then the next big point, we just had our largest training class in history, in the April training class, we have about 12 communities gearing up for grand opening. So like I said on the call, a lot of expanse and the second quarter gearing up for these grand openings, but it's going to be a big payoff in July when we pushed north of 100 active communities for the month and then probably equally weighted from July on, so it gets you 105 to 115 for the year.

And the regional focus Eric is…

Yes, relatively going deeper in the existing markets. A lot of it goes in the Southeast as far as community count goes with the acquisition of Wynn Homes that's really driving a lot of our community count going into Columbia further into Alabama, also the Mid-Atlantic opening our first community in Virginia. Florida was down two active communities in the first quarter, so we're getting that back up and going, plus adding more communities in the state of Florida, so that gives you some color into that.

That’s significant. Okay, thanks. And then just back to the complete home and you talked a little bit about the potential impact on margins per house. That was very helpful. I'm thinking in terms of the decision making process, when did you sort of decide that this was a move that you wanted to make nationwide? Is this in part a function of the move of some of your peers towards lower price points? Or was this sort of something you saw in terms of competition with resale that helped you? And then, I think Nishu asked this or someone did about sort of the impact on vendors, if there is national purchasing leverage that you could get here that was greater than the package you were offering prior?

Yes. I think the decision to go into this interior package was really more focused on internal and getting out and looking at our products for our executive team and the feedback we're getting from division presidents and also talking with our customers and seeing the results of pull through and our percentages, a variety of contracts with customers and looking at everything. Because a couple of years ago, we really had initiative to really value engineer everything and take fit and finish out of the house and make it as affordable as possible. And we did a really good job at that. And probably too good a job in some cases, and when you go to a Houston community and you see a community that's got a lot of fit and finish is taken out, it's got Formica Cabinets, and then you go to the next one that has granite. It just didn't make a lot of sense to us. Let's have consistent product. I know we had at our annual shareholders meeting last week, the supplier that supplies us granite countertops and he'd supplies this granite countertops and every single Houston community and that's going to result in better pricing. So we do think there's leverage there at a regional and even a national level. I mean, the Whirlpool appliance package that we're buying from Whirlpool is now 100% consistent. We were always using Whirlpool, but the package was not consistent nationwide. Now every LGI home in the nation is going to have exactly the same stop in it.

Hey, thanks for all the detail guys. I appreciate it.

You're welcome.

You're welcome.

[Operator Instructions] Our next question comes from the line of Alex Barron with Housing Research Center. Your line is open.

Yes, thank you. So just to compare a home that is a complete package versus one that has formica. How much extra would it cost the buyer to buy this home and what's the difference in your margin on the same home, just from the upgrade?

For a community that had formica countertops to start and we're adding – we're going to a hard surface countertop. We’re adding a ceiling fan. We’re adding a garage door opener, 36-inch upper cabinets. They're probably getting an upgrade on their appliance package. The cost of the borrower is approximately $3,000, and that's about $20 to $25 a month in monthly payment.

Okay. And – but is there an incremental margin to you guys or are you just pretty much passing it along at costs?

No, no, there will be an incremental margin to us meaning, we'll price it at least a 30% gross margin above our cost. So we're making a margin. So it won't be a negative. So the overall company margin. I think in Nevada, do we look at the complete home as being at our historical levels, margins that our existing inventory that's where we've taken a margin hit if you will, and then as aggressive on raising prices.

Got it. And then, can you comment on – now that there's been more builders’ kind of realizing that there's good demand at the entry level. What's happened to land prices, I guess for the last several years, you guys were one of the few that was kind of about, taking advantage of the entry level demand while the other builders hadn't really realized that that was a good segment to be in. But has that affected your land costs, o, or what's, what's your outlook there?

Yes. I think land prices over the last few years have always went up and we predict they're going to continue to go up. There are certainly a lot of other builders talking, about buying entry level land. So I think that's driving prices. We certainly haven't seen price discounts in land. We think there's enough demand for all of us to have success in the entry level market and we're confident in the buy that we've made. We have a little bit larger land supply then most builders, a 50,000 owned or controlled lots or really in good position for our land. So we don't have to make a stretch to decisions or we'll stick to our discipline and underwriting and acquisitions, but we do anticipate land prices continuing to go up.

Okay. And are there any new markets on the horizon that you plan on entering?

Well I think the focus right now is primarily on the markets. We've already invested the capital in and going deeper in those markets. We just had our first closing in the mid-Atlantic market, which is the Washington DC area. So that's exciting. Starting to see results from the investment we spent out there. Columbia, South Carolina is on the radar. Richmond, Virginia is on the radar and they just want a lot deeper into the Sacramento and Las Vegas, anther world deeper. We got some new markets, tertiary markets, if you will in Florida. That will be coming online this year, so a lot of growth across the country.

All right. And best of luck. Thank you.

All right. Thanks, Alex.

You're welcome.

Thank you. And I'm not showing any further questions. I'll turn the call back over to Mr. Eric Lipar for closing remarks.

Thank you, Rachel, and also everyone, for participating on the call and your continued interest in LGI Homes. Have a great day.

Ladies and gentlemen, this does conclude the program. You may now disconnect.