Welcome to the LGI Homes Fourth Quarter 2020 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'd like to turn the call over to Joshua Fattor, Vice President of Investor Relations and LGI Homes. Mr. Fattor, you may begin.

Thanks. Good afternoon, and welcome to the LGI Homes conference call to discuss our financial results for the fourth quarter and full year 2020. Before we begin, I'll remind listeners that this call will contain forward-looking statements that include, among other things, statements regarding LGI Homes business strategy, outlook, plans, objectives and guidance for 2021. All such statements reflect management's current expectations, however, these statements do involve assumptions and estimates and are, therefore, subject to risks and uncertainties that could cause management's expectations to prove to be incorrect. You should review our filings with the SEC, including our risk factors and cautionary statement about forward-looking statements sections 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 not place undue reliance on these forward-looking statements, which speak only as of the date of this conference call. Additionally, non-GAAP financial measures will be discussed on this conference call. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in either the earnings press release that we issued this morning and in our report on Form 10-K for the fiscal year ended December 31, 2020, that we expect to file with the SEC later this week. This filing will be accessible on the SEC's website and in the Investors section of our website. Our hosts for today's call are Eric Lipar, LGI Homes' Chief Executive Officer and Chairman of the Board; and Charles Merdian, Chief Financial Officer and Treasurer. I'll now turn the call over to Eric.

Thank you, Josh. Good afternoon, and welcome to everyone participating on our call today. I'm pleased to say we delivered another remarkable year of growth and profitability, meeting or exceeding all of our guidance expectations. We closed 1,630 homes in December alone, an increase of 55% at our best month ever. Putting that in perspective, we closed more homes in December than we did in all of 2013, the year of our IPO. For the quarter, we closed 3,408 homes, an increase of over 35%. Again, for comparison, this was more homes than we closed in all of 2015. Our ability to deliver such extraordinary results is a testament to our systems-based processes and the talent and dedication of our people. As a result of our great quarter, we outperformed our guidance, closing 9,339 homes in 2020, an increase of 21% over 2019 and our seventh consecutive year of double-digit closings growth. We finished the year with 116 active communities, an increase of over 9% year-over-year and in line with our guidance. During the year, we expanded within our existing markets in addition to establishing new markets in Daytona Beach and Sarasota, Florida; Greenville, South Carolina; and Richmond, Virginia. For the fourth quarter of 2020, we averaged an impressive 10 closings per community per month company-wide, a new quarterly record. Our top five markets were DFW with 15.6 closings per community per month, Phoenix was 14.7%, Austin with 14.1, Sarasota was 13 and Seattle was 12.8. For the full year, we averaged seven closings per community per month company-wide, a new annual record. Our top five markets this year were DFW with 10.8 closings per community per month, Austin with 9.9, Houston with 9.3, San Antonio with nine and Phoenix with 8.9. We generated home sales revenue of approximately $2.4…

Thanks, Eric. As highlighted in the press release this morning, home sales revenue for the fourth quarter increased 48.2% year-over-year to $897.4 million. This was the single best quarter in our company's history. Home sales revenues for the year totaled nearly $2.4 billion, a 28.8% increase over 2019. As Eric noted, during the quarter, we closed a record 3,408 homes, an increase of 35.5% year-over-year and 63% sequentially. Home closings included 360 homes sold through our wholesale business this quarter, representing 10.6% of our total closings compared to 344 homes or 13.7% of our total closings in the same quarter last year. For the full year, we closed a record 9,339 homes, an increase of 21.4% year-over-year. Home closings included 850 homes sold through our wholesale business this year, representing 9.1% of our total closings and generating $176.6 million in revenue. We currently expect that our wholesale business will represent 10% to 15% of our total closings in 2021. Average sales prices realized from homes closed during the quarter was a record $263,321, a 9.3% increase over the same period last year and a 3.1% increase sequentially. For the full year, our average sales price was $253,553, an increase of 6.1% compared to full year 2019. Higher average sales prices were primarily driven by a favorable demand environment that supported price increases ahead of rising input costs in all of our markets, higher price points in certain markets and closeouts and transitions to new communities at higher price points. Last quarter, we delivered our highest gross margin since the fourth quarter of 2016. Gross margin as a percentage of sales in the fourth quarter was 27.1% and compared to 23.5% in the fourth quarter of 2019 and 25.3% in the third quarter of 2020. This represented an increase of 360…

Thanks, Charles. Our first quarter is off to a strong start, and our markets continue to benefit from unprecedented demand for new homes. As we reported earlier this month, we closed 650 homes in January, an increase of roughly 50% over a strong comp of 434 closings last January. With that background, we're providing the following guidance for 2021. We expect to close between 9,200 and 9,800 homes, and we expect to have 112 to 120 active selling communities at year-end. During 2021, we will be expanding within our existing geographic footprint and in new markets, such as suburban Baltimore, Maryland and Norfolk, Virginia. Our average sales price is expected to be in the range of $260,000 to $270,000. We expect gross margin will be between 24% and 26%, and adjusted gross margin between 26% and 28%. I'll provide some color on the land market and our available inventory for sale this year, which will influence our expected closings this year. Since demand picked up back in May, the market has experienced a significant shortage of finished lots available for sale. Where there are finished lots to buy, the prices for those deals are reflective of the supply demand imbalance in the current market. And in such cases, LGI will not be the winning bid. We are focused on maintaining our profitability rather than growing at any cost. We continue to underwrite our land to the same high standards we always have, targeting both return and margin minimums of 25%. The deals we've been pursuing over the last nine months are largely self-development opportunities that are expected to deliver lots 18 to 24 months after we close. In 2021, we plan to maintain our industry-leading returns and margins, conservatively manage our balance sheet and prudently build our land supply with a view to expand our community count and continue on our path to becoming a top five builder. I will close by noting how pleased we are with our incredible results during what was a year of uncertainty. Despite the challenges, we delivered our most successful and profitable year, achieving double-digit closing and revenue growth and record-breaking profitability. I want to personally thank our employees, you made these accomplishments possible. Because of your dedication, passion and professionalism, we have significant momentum going into 2021 and are well positioned to achieve all of our long-term goals as we continue to make our customers' dreams of homeownership a reality. Now we'll be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Aaron Hecht from JMP Securities. Your question please.

Nice quarter and thanks for taking my question. Obviously, Texas has had a really tough weather situation and energy situation. You guys have pretty significant exposure there. Any impact, on an annual basis, from this weather in your view, is this something you can overcome? Any detail there would be helpful.

Yes, Aaron. This is Eric. I could start. Yes, no impact because of the weather on LGI. Thank goodness, all of our employees are safe, our customers in the field that are living in LGI homes. So far, we've heard of minimal damage to those homes, and everyone seems to be doing pretty well, all things considered. The other thing that we're extremely proud of here at LGI is our payroll was met this last week with all the employees getting paid. The team really stepped up and made sure all of our trades got paid on schedule last week. So accounts payable, getting into the office, make sure everybody got paid. So they would have the dollars available, take care of their workers and their families. So the team has done a remarkable job no delays in our schedule, no delays in forecasting any hit to closings or anything like that. So, all is good here at LGI in Texas.

It's great to hear. It sounded like a tough situation. In terms of the land market, you noted how hypercompetitive it is right now. Is that going to result in any changes to geographic mix in the future that may not have occurred, if you had a more normal land market? Has there been any markets where you just aren't really participating because you think it's gotten out in front of itself? And which ones do you think might be a little bit more attractive?

Yes. It's a good question, Aaron. I don't think we look at it as much as geographically, just like we talked about in the prepared remarks, more of the finished lot opportunities are really getting priced up. Not seeing a lot of finished lot opportunities from developers or deals that are going to result in additional community count or closings in 2021. Most of what we're focused on are the larger land positions, obviously, an entry-level type locations, a little bit further out. But we're comfortable doing our own development. We're comfortable with the larger land positions, 200 to 500 homes in a community plus. A lot of builders really are focused on being asset-light right now, and want to buy those finished lots. So, I'm not seeing a lot of crazy inflation in the land prices where we're looking. But certainly, it's more of a timing issue where we talk about 18 to 24 months from the time we close on these pieces, really to turn them into sales and closings. I think the hottest markets, as everybody probably suspects and what we talked about, just leading the way in our closings for the fourth quarter of the year, are all the Texas markets, markets like Phoenix, markets like Seattle, Charlotte, really leading the way.

Thank you. Our next question comes from the line of Carl Reichardt from BTIG. Your question please.

Thanks, good morning or good afternoon. It's nice to talk about it's not been hot in Houston I guess. Charles, could you talk a little bit about the puts and takes to the margin guide for '21 in the 20.5 in 20 -- 24 to 26 is the guide. What's kind of your expectations for cost increases, land labor materials? And how much pricing or operating leverage are you also assuming in that guide for next year?

Yes, sure. Great question, Carl. So yes, when we thought about gross margin for 2021, we then took a look at what's currently happening and what we're currently seeing. Obviously, lumber being the most significant cost pressure that we're seeing and certainly haven't seen lumber at some of the prices that we're seeing today in at least my career. We haven't seen them this high. So there's rising costs in general is a risk for us. So our overall thought for gross margin guidance was looking at what we achieved in 2020, kind of putting a little bit of a factor for rising costs. We also have a significant amount of closeouts and transitions happening this year, which typically will add a little bit of uncertainty to our gross margin expectations as we move from one community to another. And then the other factor, we guided to a higher percentage of wholesale closings this year for 10% to 15%, coming off of 9.1% for 2020. So that was certainly a factor as well. And then if you look at our five-year average, Carl, our adjusted gross margin average for the last five years since 2016 is at 27%. So, right there, kind of in the midpoint of where our 2021 guidance is.

That's very helpful. And then a bigger picture question. On the website, which wouldn't necessarily be a topic we discussed in the conference calls, but given the sales process, which you've operated for a long period of time and alteration to sending customers to the website is a bit of a change, at least in my view. Can you talk just a little bit about how that rollout has gone in terms of driving traffic or interest? And how it fits with the sales process you've been using so successfully for so long?

Carl. This is Eric. I can take that one. I would look at it is not as a change to our process. Certainly, we're excited about our new website. The team did a great job putting it together, certainly an enhanced experience for the customer more information on the website. I think in this day and age, obviously, a lot of our customers are coming to us through digital channels, are spending more time looking at the website before they contact us. But no change in our process, still believe in directly marketing to that consumer. Still want them to pick up the phone and call our sales reps and set an appointment and still have that one-on-one interaction. So the website is just a tool to generate more leads and make sure the customer has a better experience.

Thank you. Our next question comes from the line of Nischal Sood from UBS. Your question please.

So first question I wanted to ask was around, just kind of the cash flow generation. The very, very strong demand this year and then obviously, the land market conditions that you mentioned, Eric, led to your first year of kind of positive cash flow, brought your debt-to-cap down to 31%. And obviously, I think this is the highest year of share buybacks you've had as well since you've gone public. Are we setting up for another year with a similar dynamic where we could see kind of higher than normal share buybacks, given that you're already at the lower end of your target debt to cap?

Yes, great question, Nishu. This is Charles. So yes, as far as the success this year, it was really driven by the accelerated volume. Meaning our inventory turns from a direct construction standpoint really picked up in the back half of the year as we ramped up production post summer, if you will, when we saw the demand was really picking up. And we were really able to efficiently build and close our vertical construction. And at the same time, when we took a pause early in the pandemic, from an acquisitions and development standpoint, that kind of delay if you will, kind of benefited our cash flow because that pushed out a quarter's worth of acquisitions. So ending the year with really net inventory up $70 million compared to our net change between '18 to '19 and '17 to '18 of roughly $250 million to $300 million increase in inventory is really what helped accelerate the ability to bring our leverage down this year. And then transitioning into share repurchases. So certainly, we feel, from a capital standpoint, that our first priority is to invest in projects and continue to grow the Company. Eric had mentioned buying more raw land deals. We're investing more in raw land than finished lots. We mentioned in the prepared remarks that 78% of our controlled lots are now raw compared to 46% last year. So, we'll -- first priority will be to continue to invest in inventory and have the available inventory to grow community count and then maintaining 30% to 40% leverage. So that's a goal of ours from a capital allocation standpoint. And then from there, we have options, really. So our options are either to explore M&A opportunities if they become available. And if there's nothing left and no other opportunities, then we have the opportunity to participate in share repurchases. So, we think it's a part of our capital strategy going forward and certainly look to be opportunistic in terms of execution.

Got you. Got you. Great. That's very helpful. And then you mentioned that 10% or 15% of your closings might come from the single-family rent operators. Clearly, a lot of activity in that arena, and I think in particular, a lot of those folks seem to be focusing on the outlying areas where you folks traditionally operate. How has that affected the competition for -- how has that affected the land market side of things? And perhaps those folks are the ones driving up the finished lot prices. Is it also having an effect on the kind of development deals that you folks have been switching your emphasis to?

Yes. Yes, a real positive, Nishu, from the wholesale side. You're correct. We are definitely seeing strong demand from the single-family REIT side. Their appetite to buy our LGI homes and entry-level locations in the entry-level markets is strong as it ever has been, so that's real positive. We don't look at it as direct competition going back to our earlier point. Certainly, the single-family rental operators, some of them have their own construction companies. They're looking to buy finished lots. They're looking forward to turn those into rental units pretty quickly. So I think, again, it's probably having a factor at any finished lot opportunity or some of the smaller opportunities that are out there. But the bigger land positions that we're really focused on, I don't think it's having an impact. But from the retail side and the wholesale side, demand is as good as we've ever seen it. One thing that we'll mention is our gross and net orders in January, were both up over 100%, both on the retail and wholesale side. And our gross orders are up approximately 50% so far for the first three weeks in February. So we're seeing strong demand, wholesale and retail.

Our next question comes from the line of Ken Zener from KeyBanc. Your question please.

So let's just -- if we could start with -- you talked about closeouts, which affected your '21 community count growth versus what you thought, I guess, in November, thereabouts. Can you talk about -- give us some -- quantify what percent of your communities close out this year versus like '19, just to get a sense of that magnitude that led to the lower community count?

Yes. I don't think we have that information in front of us, Ken. I mean, it's a lot of transition going on, and it's really just a timing factor. Sales and closings are so robust. And obviously, everybody can see from the fourth quarter numbers. The communities are just closing out quicker. And it's a little bit of a counterintuitive notion. But if we want to close as many homes, our community count actually would have been higher to end the year because we'd add more communities still actively selling. And same thing with this year on our community count guidance of 112 to 120. The more closings that we have this year is probably going to result -- or will result in a lower community count. And if we're closer to the lower end of our guidance on closing, it's probably going to result in a higher community count. So a little counterintuitive, but all good challenges to have, but really just timing issues when it comes to communities.

Right. No good deed goes unpunished. I wonder if the SG&A trend that you kind of laid out that range, how would you compare that 10.3, I think, to 10.9. Could you kind of put that in context of the volatility we saw or the swings we saw 1Q to 4Q in '20? And if we're going to see that entry year cadence swing as high? Or could you explain that a little bit, if you could?

Sure, Ken. Yes, this is Charles. So yes, so I think last year, being as unique it was, given the circumstances in terms of how the cadence kind of went throughout the year, I think what we're thinking -- if you take 2019 and 2020, SG&A percentage 2019 was 11.4%, 2020 at 10.1%, the average of those two years at 10.8%. So, I think our philosophy is, is that as we continue to grow, we think there are still some potential for operating leverage from SG&A. A couple of things we highlighted throughout the year, travel, meals and entertainment, some of those discretionary expenses were significantly down this year due to the pandemic. We also, given the strong demand environment, were able to be very efficient in our advertising this year. So our assumption for '21 assumes that both of those factors that we would expect to see -- more travel, more training events throughout the year, plus the need to spend more on advertising and marketing, particularly in the back half of the year. And then the final thing for this year is that we have a number of open positions that we're actively recruiting for, primarily in our acquisitions and development department, so looking for folks across the country. So that's going to factor in. So typically, our first quarter, we're usually talking on this call to make sure everybody understands that the first quarter SG&A percentages are typically higher. We may not see that this year, just given the fact that we're coming into the first quarter with such a strong backlog. And that our pace, as Eric mentioned, 50% up for January, certainly is going to adjust it. So we're really thinking of it more in line of the full year guidance rather than just a quarter-by-quarter guidance.

Our next question comes from the line of Michael Rehaut from JPMorgan. Your question please.

Glad to hear everyone's safe down there in Texas with the weather challenges, so good news there. I appreciate it. A few questions here, if I could. First, on the gross margins, kind of understanding taking into account some of the factors you mentioned in terms of the 50 bp decline if you're looking at the midpoints after interest amortization. But when you look at your fourth quarter, obviously at 27.1 or maybe 27.3 if you exclude the purchase accounting after interest, how should we think about getting towards that 25 flat midpoint? If you're talking about rising lumber costs, which I would presume would be a big factor in the overall full year, is that something that you expect to hit more immediately? Or should we see some type of decline throughout the year in gross margin coming off of the 27? And could that even result in the end of the year being below that 25, even midpoint that you're at this point, modeling?

Yes, sure, Mike. This is Charles. So yes, I think the absorptions coming in, in the fourth quarter at 10 and then the full year coming in at seven, our highest absorptions, so I think that has a factor in terms of how we allocate our overhead and how it then comes through in the closings, so very efficient. To Eric's point, I mean, our field operations, our construction managers did an amazing job this year, particularly ramping up production later in the summer when we saw the demand came through. And our philosophy for years has been high volume. And so, we were able to take advantage of that by increasing production in a way to meet the demand, particularly for the closings in the fourth quarter. So, we saw that at the end of the year, the back half of the year. We came in gross margins above where our guidance on our last call, we had published. So I think part of that was its just things were really good. It's a really strong fourth quarter. We're kind of acknowledging that. And to repeat it, necessarily, may not be -- there's a little conservatism in there, I guess, if you will, to say that, hey, such a strong quarter and to expect to repeat what we were able to do may not be the smart goal. So that is certainly a factor. The closeout and transition comes into play. Typically, when a community closes out, it's achieving its highest gross margins in the life cycle of the community. And then typically, as we go into a new community, those are generally a starting point where it's lower in the life cycle of that community as well. So when there's more volatility and transition between communities, that tends to give us the expectation that gross margins may be slightly lower. And I think the other piece is that the pricing environment was really strong this year as well, with interest rates being low. We were able to successfully raise prices, which allowed us to maintain margins, which our outlook at the end of last year was not as favorable that we were able to keep up with that. And I think that's a factor coming into 2021, is that it's going to be lumpy, if you will. It's that we may not be able to get all of the cost increases initially, but then maybe get it later over time or we may just have to absorb it a little bit. And that's why we give the range for that. And then the last piece was wholesale. Obviously, wholesale we sell at a discount, but still achieve a similar operating margin. So if you're looking just at gross margin, that certainly should be factored in for 2021.

Okay. No, I appreciate that. I know there's a lot of moving pieces. And maybe I will follow-up later this afternoon when we're scheduled to talk. Just a couple of others here. Is it possible for you to give us a sense of sometimes you're able to give the current month, what you're thinking of in terms of closings and perhaps even March?

Yes. Mike. I think last February, we closed 606. We're expecting it to be positive year-over-year. Still a couple of days early to give retail -- really detailed on February closings, but we expect it to be up year-over-year, and too early in March.

Okay. Also, share repurchase, I just wanted to hit on that. I believe you said you bought back about 150,000 shares during the quarter. And at the end of the year, your -- I believe it was your basic shares, were at 25 million even. But in any case, just wanted your thoughts on share repurchase in 2021, particularly if you expect to maintain, more or less, the current leverage profile that you're at today, notwithstanding land purchases based on your modeling. Just curious if you're expecting any incremental share repurchase, given your expectations around operating cash flow.

Yes, Mike, you're absolutely right, is that the first capital allocation going to inventory. So as this year kind of plays out, it's going to depend a little bit in terms of how those acquisitions come in development spend throughout the year. You mentioned maintaining leverage at 30% to 40%. So that's certainly a key component of our strategy. And really based on that is, then, that gives us the flexibility to participate or not, depending on our available free cash flow. So I think we look at it as a permanent part of our long-term capital strategy. So we think we will be active in share repurchases over time. But no specific guidance in terms of actual share count for '21 at this point.

Okay. One last one, if I could, just on community count. You mentioned during your remarks around trying to invest in -- continue to invest in development opportunities that have a little bit of a longer time line in terms of coming online. And so that's part of what's going on with the share count, with the community count outlook for 2021. Any kind of early directional guidance you can give on 2022, I think would be really helpful. It would sound like you'd expect a some type of a stronger growth trajectory to resume in '22 based on the type of land you're purchasing and kind of this lag effect. Love to get any kind of sense of -- historically, I think you've tried to shoot for community count growth in the -- anywhere from 10% to 20%. Obviously, you're working off of a much larger base today. So any kind of directional guidance you could give at this point for '22 would be helpful?

Yes, Mike, I could touch on that. Not giving guidance for '22, but I think it also goes back to the same story as 2020 and what happens in 2021 and how strong sales are, and then just that lead time and buying land. So we just approved six new deals and acquisitions committee here in the month of February, and one is going to open in '22 and five are going to open in 2023. So any deal that we're closing on and underwriting right now is really impacting '23 community count. But over the last six months, and Charles mentioned in his prepared remarks, owned and controlled lots, overall, were up 28%. So the deals we've been buying over the last six months really going to be impacted community count. I would just model that's more heavily weighted in the back half of '22 and then accelerating into 2023.

Our final question for today comes from the line of Jay McCanless from Wedbush. Your question please.

Actually, that was going to be my first question, Eric, with the 78% raw lots this year versus the 40-some percent number you have at the end of '19, is that that's how we should read that, that it's going to be a flex higher community count in the back half of '22 and into '23?

Yes. Yes, that would be a good assumption, using 24 months for all land turning into finished lots and closings.

Okay. And then with the small move higher we've seen in mortgage rates just based on the 250 average price you guys had this year, it looks like the average monthly payment for your buyer has probably gone up by about $50 or $60 off of the lows. Is there any way to quantify what percentage of your average consumers that's knocked out of the box and has rates and not being able to qualify, become more of a challenge since the beginning of the year?

Yes, not at all, Jay. Not so far. I mean, mortgage rates are still at historic lows. And even though the 10-year has increased here, we haven't seen that pull-through mortgage rates yet. It's really hard to talk about any headwinds in rates yet because our sales are so strong, like I talked about orders being up 50% year-over-year so far in February. So, just a really strong dynamic sales environment, obviously, when it comes to our guidance and what we're forecasting, we're a little bit more conservative because if rates do go up, and we do expect them to creep up throughout the year, that will be a headwind to sales, but we still think it's going to be very positive sales environment through the end of the year.

Thank you. This does conclude the question-and-answer session. I'd like to hand the program back to management for any further remarks.

Thanks, Jonathan, and thanks to everyone for participating on the call today and your interest in LGI Homes. We look forward to sharing our achievements of 2021 throughout the year. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.