LGI Homes, Inc. (LGIH) Q4 2021 Earnings Report, Transcript and Summary

0:02 Welcome to the LGI Homes Fourth Quarter and Full Year 2021 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 a Q&A. [Operator Instructions]. 0:25 At this time, I will turn the call over to Joshua Fattor, Vice President of Investor Relations at LGI Homes. Mr. Fattor, you may begin.

0:45 Thank you. Good afternoon, and welcome to our conference call to discuss our fourth quarter and full year 2021 results. I'll remind listeners that this call will contain forward-looking statements, that include statements regarding LGI Homes' business strategy, outlook, plans, objectives and guidance for 2022. All such statements reflect management's current expectations. However, these statements involve assumptions and estimates and are therefore subject to risks and uncertainties that could cause 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 from those presented in these forward-looking statements. You should consider all forward-looking statements in light of the related risks and not place undue reliance on these forward-looking statements, which speak only as of the date of this conference call and are not guarantees of future performance. 1:48 Additionally, we will discuss non-GAAP financial measures on today's call. Such information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the earnings press release that we issued this morning or our annual report on Form 10-K for the fiscal year ended December 31, 2021, that we expect to file with the SEC later today. This filing will be accessible on the SEC's website and in the Investor Relations section of our website. 2:28 Our hosts for today's call are Mr. Eric Lipar, LGI Homes' Chief Executive Officer and Chairman of the Board; and Mr. Charles Merdian, Chief Financial Officer and Treasurer. I will now turn the call over to Eric.

2:41 Thank you, Josh. Welcome to everyone who joined our call today. I'll open with highlights of our outstanding performance and key accomplishments in 2021. Charles will then provide details on our financial results. Finally, I'll conclude with our current view on the market and details of our guidance for 2022. 2:59 By every account, 2021 was an extraordinary year for LGI Homes. Despite numerous challenges, we again set new records for closings and revenues. For the second year in a row, full-year revenue increased nearly 29% to over $3 billion, driven by a 12% increase in closings to 10,442 homes, which was at the top end of our guidance in November and significantly higher than the closing guidance provided this time last year. This marked our eighth consecutive year of double-digit growth in both closings and revenue. 3:36 For the fourth quarter of 2021, we averaged over eight closings per community per month company wide. Our top five markets for the quarter were, DFW with 13.6 closings per community per month. Houston with 12.5, Daytona Beach and Nashville each with 12.3, and Las Vegas with 12. We averaged a record 8.3 closings per community per month company-wide in 2021. This was an increase of 20% year-over-year and 26% higher than our historical five-year average of 6.6. 4:17 Our number one market this year was San Antonio with 12.7 closings per community per month. Austin and Dallas Fort Worth tied for second place each with 12.4. Houston came in fourth with 10.8 and rounding out the top five was Charlotte with 10.5 closings per community per month. Our ability to translate our closings and industry-leading absorptions into consistent profitability continues to differentiate our business. We delivered all-time records in every profitability metric: gross margin, adjusted gross margin, EBITDA, pretax income, net income and EPS, together resulting in return on equity for the year of 34%, significantly outperforming both the S&P 500 and most of our sector. 5:12 In line with our November guidance, we finished the year with 101 active communities, and we expanded our geographic presence in the Mid-Atlantic with the addition of two new markets: Baltimore, Maryland and Norfolk, Virginia. A few additional highlights from 2021. We acquired two builders this year that added over 3,600 owned and controlled lots to our inventory. Both companies are fully integrated into our organization and are operating the LGI way. 5:42 For the second year in a row, 100% of the homes we closed included WaterSense fixtures, Energy Star appliances, LED lighting and other energy saving products designed to improve the efficiency of our homes, saving our customers money, easing stress on our infrastructure and reducing impacts to the environment. Additionally, 90% of the homes we closed in 2021 qualified for 45L Tax Credits. 6:12 With a focus on our future growth, we invested over $1 billion last year, expanding our land portfolio to 92,000 owned and controlled lots, an increase of 49%. Thanks to the efforts of our land acquisitions teams across the country, we continue to source new land that meets our strict underwriting standards and will fuel our profitable growth for years to come. 6:36 During the year, we made significant progress strengthening our balance sheet. In April, we amended our credit facility, increasing our capacity to $850 million while simultaneously lowering the cost. In June, we refinanced our $300 million senior notes due 2026, which in combination with the changes to our revolver, will result in nearly $14 million in annualized interest savings. During the year, we returned almost $194 million to shareholders through the purchase of 1.3 million shares of our common stock and this morning, we announced our Board's approval of an additional $200 million for future share repurchases. 7:23 Finally, I'm pleased to announce that LGI Mortgage Solutions, our joint venture with Loan Depot, is now licensed in 12 states, and we expect it to be operational in all of our markets by the end of the first quarter. 7:35 With that, I'll turn the call over to Charles for more details on our record financial results.

7:42 Thanks, Eric. As highlighted in the press release this morning, revenue for the fourth quarter was $801.1 million, a decrease of 10.7% year-over-year due to lower community count and absorptions, offset by a 20.4% increase in average selling price. Revenue was up 6.6% sequentially and up 28.8% year-over-year to $3.1 billion. 8:13 During the quarter, we closed 2,526 homes, including 369 homes sold through our wholesale business this quarter, representing 14.6% of our total closings compared to 360 homes or 10.6% of our total closings in the same quarter last year. As Eric highlighted, we closed a record 10,442 homes in 2021, an increase of 11.8% year-over-year and our closings included 1,515 homes sold through our wholesale business this year, representing 14.5% of our total closings and generating $349.3 million in revenue. We currently expect that our wholesale business will represent approximately 10% of our total closings in 2022. 9:08 During the fourth quarter, we continued to raise prices to cover rising costs. Our average sales price during the fourth quarter was a record $317,132, a 20.4% increase year-over-year and a 5.4% increase over the prior quarter. Increases were primarily driven by a favorable price environment, higher price points in certain new markets and changes in product mix. 9:37 For the full year, our average sales price was $292,104, an increase of 15.2% year-over-year. Higher average sales prices were primarily driven by a favorable demand environment, higher price points in certain markets and were partially offset by the higher percentage of wholesale closings this year compared to 2020. 10:02 Gross margin as a percentage of sales in the fourth quarter was 26.4% and adjusted gross margin was 27.6%. Adjusted gross margin excludes $7.8 million of capitalized interest charged to cost of sales during the quarter and $1.8 million related to purchase accounting, together representing 120 basis points. For the full year, our gross margin was a record 26.8% compared to 25.5% for the full year 2020, an increase of 130 basis points. Excluding the impact of our wholesale closings, gross margin was up 170 basis points year-over-year. 10:44 Full year adjusted gross margin was also a new company record at 28.2% compared to 27.4% for full year 2020, an increase of 80 basis points. Adjusted gross margin excludes $37.5 million of capitalized interest charged to cost of sales during the year and $5 million related to purchase accounting, together representing 140 basis points. 11:10 Combined selling, general and administrative expenses were 8.8% of revenue for the fourth quarter and 8.9% for the full year. Our full-year result represented a 120 basis point improvement over 2020 and was the lowest ratio we have reported as a public company. Selling expenses for the quarter were $42.6 million or 5.3% of revenue compared to $50.2 million or 5.6% of revenue for the fourth quarter of 2020, a 30 basis point improvement. As a percentage of revenue, selling expenses were essentially flat sequentially and represented the lowest level we have reported as a public company. 11:57 In addition to operating leverage realized from the increase in revenue, our quarterly advertising spend was lower year-over-year as a result of favorable demand tailwinds. For the full year, our selling expenses were $170 million or 5.6% of revenue compared to $148.4 million or 6.3% of revenue in 2020, a 70 basis point improvement. This was the lowest level we have delivered as a public company, driven by continued operating leverage and lower advertising expenses when compared to the prior year. 12;34 General and administrative expenses totaled $27.9 million or 3.5% of revenue in the fourth quarter compared to 3.1% of revenue last year. For the full year, our general and administrative expenses were approximately $100.3 million or 3.3% of revenue compared to 3.8% of revenue in 2020, a 50 basis point improvement, primarily driven by operating leverage. We expect advertising and operating expenses to increase this year as we grow community count. As a result, we currently expect our full year 2022 SG&A expense as a percentage of revenue will range between 9% and 10%. Full year EBITDA was a record $581.5 million, an increase of 42.2% over 2020. Full year EBITDA margin was 19.1%, a 180 basis point improvement over the prior year and a new company record. 13:37 Pretax income for the quarter was $143.4 million or 17.9% of revenue. For the full year, we generated pretax net income of $542.8 million, an increase of 47.6% over 2020. Our pretax net income represented 17.8% of revenue, an increase of 230 basis points over the prior year. This was the highest annual pretax net income and margin in our company's history. 14:10 Our full year tax rate was 20.8% in 2021 compared to 11.9% in the previous year. The year-over-year increase was the result of $29.7 million in retroactive federal energy tax credits recognized in 2020. Based on our current outlook and information available to us at this time, we estimate our full year effective tax rate for 2022 will range between 23.5% and 24.5%. At the midpoint, this is approximately 300 basis points higher than 2021 as a result of the expiration of the 45L Energy Tax Credits. 14:50 Our fourth quarter reported net income was $111.3 million or 13.9% of revenue, resulting in earnings of $4.61 per basic share and $4.53 per diluted share. Our full year reported net income increased 32.6% year-over-year to a record $429.6 million or 14.1% of revenue. This resulted in full year earnings of $17.46 per basic share and $17.25 per diluted share, representing year-over-year increases of 35.5% and 35.2%, respectively. 15:37 Fourth quarter gross orders were 1,907, a 37.3% increase sequentially as we released more homes for sale in the fourth quarter. Net orders were 1,489 and the cancellation rate for the fourth quarter was 21.9%. Full year gross orders were 11,813, net orders were 9,533 and the cancellation rate was 19.3%. We ended this year with 2,055 homes in backlog valued at $659.2 million. During the year, we invested over $1 billion acquiring and developing attractive land positions to support our long-term growth objectives. As of December 31, our land portfolio consisted of 91,845 owned and controlled lots, a 49.3% increase over 2020. 54,867 or 59.7% of our lots at year-end were owned. Of these owned lots, 3,709 were completed homes, information centers or homes in process. 8,415 were finished vacant lots and the remaining 42,743 lots were raw or under development. 36,978 or 40.3% of our lots at year-end were controlled. 17:10 And of those controlled lots, 85% were raw and undeveloped compared to 78% at the end of 2020 and just 46% at the end of 2019. I'll conclude with an update on our capital position. We ended the quarter with $2.1 billion of real estate inventory and total assets in excess of $2.4 billion. As of December 31, we had $817.4 million in total debt, and we ended the year with $371.8 million of total liquidity, including $50.5 million of cash and $321.3 million available under our revolving credit facility. 17:53 As a result of our strong operating results, we ended the quarter with over $1.4 billion in total book equity, a 22.5% increase year-over-year, and a net debt to capitalization ratio of 35.1%. Over the last year, we returned $193.8 million to shareholders through the repurchase of 1.3 million shares of our common stock, and we ended the year with 23.9 million shares outstanding. 18:22 While land investment to fuel future growth remains our primary capital allocation priority, we will continue to systematically and opportunistically repurchase shares of our common stock. On February 11, 2022, our Board of Directors approved a $200 million increase to our share repurchase authorization, bringing the aggregate total amount available to $306.6 million, including the $106.6 million that was remaining at year-end under the Board's previous authorization. 18:55 At this point, I'll turn the call back over to Eric.

18:58 Thanks, Charles. Our achievements in 2021 reflect the unprecedented strength of the housing market and our ability to deliver outstanding results despite the numerous challenges that impacted our industry. Tight supply chains, labor shortages, rising input costs and a limited supply of available lots were challenges that resulted in input price volatility and long delays in construction and development timelines. We expect these dynamics will continue until lead times and product availability normalize. We have built our guidance with a view that supply constraints and cost inflation will continue while demand remains strong throughout the year. 19:40 On February 4, we reported January closings of 442 homes. This represented 4.9 closings per community per month, which was well in excess of the average of 4.0 closings per community per month achieved in the same month over the prior eight years. As highlighted, we experienced a decrease in community count in 2021 due to accelerated absorptions, time lags between closed-out communities and their replacements and shortages of finished lots in some markets. This dynamic has continued into 2022 and will likely persist until additional active communities open. We expect to finish the year with 110 to 120 active selling communities. 20:29 Thereafter, we expect the lots we've acquired over the last two years will begin to fuel accelerating community count in 2023, 2024 and beyond. Additionally, we expect that 2022 will bring some normalization of demand. The desire for homes over the last two years has been unlike anything we've experienced before. And while we believe demand will remain strong, we don't expect that an absorption rate of 8.3 homes per month is sustainable long term. 21:01 While it looks like absorption rates will move lower compared to the record set last year, we believe they will remain well above historical levels and will likely be more than the seven closings per community per month we saw in 2020. In combination with our community count expectations, this should result in full year closings between 9,000 and 10,000 homes this year. Throughout the year, we increased selling prices to cover costs and maintain margins. 21:33 In the fourth quarter, our ASP increased 5% over the prior quarter, and we continued to see cost inflation in January, resulting in additional price increases last month. Despite these increases and the news around rising interest rates, affordability concerns have not had a measurable impact on the demand for our homes. We attribute this to the nation's healthy employment rate, strong wage growth, low inventory of homes for sale and the reality that both current and expected interest rates remain some of the most attractive we've seen in our lifetime. We'll continue to raise prices as needed to cover costs and believe our average sales price for the full year will be in the range of $315,000 to $330,000. 22:20 Finally, we believe our margin profile over the last eight years has been one of the highest and most consistent in our industry. We expect to maintain that attractive consistency, delivering full year gross margins between 26.5% and 28.5% and adjusted gross margins between 28% and 30%. 22:43 In conclusion, we are extremely pleased with our results this year. Despite the numerous challenges, we delivered our most successful and profitable year ever, achieving double-digit closing and revenue growth and setting new records for profitability in every category. This year is off to a strong start, and we're well positioned to achieve all of our objectives and deliver significant value to our shareholders this year and for years to come. 23:09 Now we'll be happy to take your questions.

23:13 Thank you. [Operator Instructions] Our first question comes from Deepa Raghavan with Wells Fargo Securities.

23:32 Hi, good morning, everyone. Thanks for taking my question. Eric, Charles, any initial buyer impact so far, just given the interest rate spike that you have seen in your backlogs or even your front log, your sales office, for example? Can you give us a little bit more color on what your thoughts are on how typically does it take for the buyer to react to such steep price increases? Or anything else that we should be aware of as you talk about this normalization of demand, and you point to some of these macro headwinds out there?

24:15 Yes. Thanks, Deepa. This is Eric, I can start. Great question. We're monitoring it week by week, office by office. And the reports so far are as we're continuing to see very strong demand. And I think that's reflective in our guidance projecting more than seven closings per community per month and even up to the date as of last weekend, we had a very good sales weekend in the field. We are still nationwide in a position that as we release inventory for sale, most of those sales are going to close in the next 30 to 90 days because we are waiting longer to release houses and the demand is really strong. Even though, we're selling homes to our consumers with interest rates about 100 basis points higher than they were a year ago, we're still seeing very strong demand.

25:10 How much of these motivated buyers are really out there that you would say maybe could benefit by pulling forward their purchasing decisions. Therefore, you see this in the first half, probably, we will have a stronger housing market. But then second half, we may have to see some moderation. I mean, is there any parallels you could draw from 2018 or generally based on your experience, just so we understand from a high level how to think about what's happening with the housing market?

25:44 Yes. I think, Deepa, from our standpoint, we are very pro homeownership. And people make housing decisions based on their lifestyle, what's happening in their life. We're also seeing a lot of investor activity. I think everybody's in agreement, rates are very likely to rise as they've already done and that's going to continue. So that creates urgency for our buyers. Anyone that's interested in buying a home, now's the time. And that's the message we're spreading in the field and spreading to our consumers and the demand is still there. 26:13 If interest rates continue to rise, we're assuming that's still in a very positive economic environment like we talked about in our scripted remarks. We do anticipate, if rates continue to rise, that monthly payment and qualification is important to our borrowers. But we can see that the, as we saw in 2018, maybe they select a smaller square footage floor plan. Even though the rates are higher, maybe they're selecting the 1,600 square foot house instead of the 1,800 square foot house as an example. So we think it remains a pretty strong housing market throughout the year.

26:48 Okay, that's fair. Thanks. Just my second question is on gross margin. Is there any first half-second half cadence we should be aware of? And anything specific you'd point to in Q1 quarter as we try to model some of those puts and takes, Charles? That's my final question.

27:08 Yes, sure. Thanks, Deepa. I don't think so. I think it's going to vary quarter-to-quarter. I think 2021, we saw the most consistent gross margin throughout the year. But it will vary from quarter-to-quarter, but we would expect it to range within our guidance range that we provided.

27:29 Thanks so much. I will pass it on.

27:33 Thank you. Our next question comes from Jay McCanless with Wedbush Securities. Jay, your line is open, are you muted? I'll go to the next question, Carl Reichardt with BTIG.

27:59 Thanks, everybody. I wanted to ask about the mix of communities that you're expecting to open in '22. So the southeast had a fairly good sized drop in communities in '21 versus '20 and you've got a fair amount of land. I think I saw seven years of owned or almost seven years of owned there. So are you likely to see a geographic mix shift in your store base in '22?

28:26 Not necessarily, Carl. I think it's going to be pretty consistent around the country. We have been buying a lot of land. A lot of that is raw land. Almost all of it is raw land that has to get through the development timeline with engineering and plot approvals, and that's different across the United States. Most of its delayed and taking longer than it ever has. So geographically, I think it's going to be pretty widespread. Not as much growth in a per community basis in Texas just because this is where we have our largest concentration of communities in our established markets. But a lot of growth in the southeast, Florida, no really new markets. We are going to Salt Lake City, but we don't project that to be in the community count until 2023.

29:11 Okay. Thanks. And then in terms of the cadence of community openings, is that likely to be relatively, as you look at it now, relatively even across the year? Or is there a front-end or a back-end load? Thanks.

29:25 Yes. We believe it's going to be back-end loaded. It will be spread throughout. We think 90 is probably our lowest point, maybe moves one or two in the month of February, then from March on, it's ramping up. But we do believe it's going to be more back-end weighted.

29:38 Okay. Thanks a lot.

29:40 You are welcome.

29:43 Thank you. Our next question comes from Jay McCanless.

29:49 Thanks. Sorry about that. So following on what Carl was asking, I guess, a little more ambitious target than I expected from you guys for the community count for this year. I mean, have you seen an improvement in some of the municipal issues? Or is it just you're getting through the self-development process a little faster? Maybe just talk us because that's going from 90 to potentially 115's pretty big move through the year?

30:19 Yes. No, I think it's as expected Jay. I think what it seems like it's larger than it is because of the 90 because we closed out so many communities at the end of the year in December. So our end of the community count – end of the-year community count was 101 and then 101 going to 110 to 120, 10% to 20% community count increase is what we expect. And like last year, that's what we expect. We missed it last year because closings and absorptions were higher. We ended up closing a lot of communities faster than expected. But the ramping up of new communities is as challenging as it ever has been, and that -- we have not seen any relief in that regard.

31:02 Okay. And then I guess on the wholesale targets, any specific reason why you're thinking you might sell less this year, especially with what we've seen in the press with the large amount of demand that's out there and numerous institutions trying to get into the single-family for-rent business?

31:25 Yes, yes. A couple of things I'd point to, Jay. First of all, you're entirely correct, there's still very strong demand from the single-family rental industry to buy homes from LGI. They're just starting off the year. We don't have a strong pipeline and we're limited on inventory, and the retail business is very strong. So we could sell as many as we did last year. But I think that would be under the case that the retail business is not as strong, and we have not seen that yet.

31:56 Okay. Great. Thanks for taking my questions.

31:58 You’re welcome.

31:59 Thank you. Our next question comes from Alex Barron with Housing Research Center.

32:07 Yeah. Thanks, guys. I wanted to start to see if you could provide the number of homes you guys started in the quarter versus last year?

32:19 Yes. Sure, Alex. This is Charles. Just over 1,600 starts in the fourth quarter of this year. That compares to almost 2,100 in the fourth quarter of '21.

32:31 1,500, okay.

32:33 Yes, 1,600.

32:35 1,600, okay, I'm sorry. The other question I wanted to ask is, I know traditionally, you guys used to sell homes that were more, I would say, closer to being finished. And I think last year with the changes in the supply chain, I guess, that changed. So are you guys, at this point, basically going back or aiming to go back to pretty much selling completed houses? Or what -- how are you guys thinking about that?

33:02 Yes, this is Eric. I can take that. Our business model didn't change. We're still a 100% spec builder, where we preselect the fit and finishes ahead of sales. What happened at the start of the pandemic is we got way ahead of ourselves and was sold our houses -- sold a house in permitting stage and before we went to permitting, and we didn't build in enough inflation target. So to protect our margin and make sure we can also deliver a house to a customer on the date we agreed to deliver that house. 33:35 We have went, so it's about middle of last year, we have just decided not to put a house up for sale until that house has started. Because once the house has started, essentially, we know and are comfortable that our team will deliver that house on time, and we're also comfortable that we understand all the costs involved so we can price it accordingly. So we're just taking out some of the margin and timing risk. It's the only thing that we have changed. Otherwise, the business model is exactly the same.

34:06 Got it. And in terms of that the business model, I know to [Technical Difficulty] is to emphasize selling a lot of homes to first-time buyers, marketing to renters, rental communities, mailers, that kind of stuff. Is that still the case or has the mix of the buyers changed as the ASP has gone up?

34:31 It's still the case. We're still selling to first-time homebuyers. It's just a little more expensive. And everybody's price point is up and needed to be up because of inflation and supply chain. But the customers are still the same. We're selling more investors than we ever have so that is slightly different. And obviously, the wholesale business and selling to the big institutional investors didn't even exist four or five years ago. So that is new. But our traditional business is still selling to first-time homebuyers. That is there, our Terrata brand, which is our luxury brand, it is going to be approximately 5% of our business this year, but the other 95% will be focused on that first-time homebuyer.

35:13 Got it. And if I could ask one, last one. I'm not sure if I missed it, but did you guys provide any estimate or guidance for first quarter deliveries? Should we just roughly take the January number, or do you expect a significant ramp-up from that as each month goes by?

35:30 We didn't give first quarter guidance. We can tell you that we expect February closings to be between 500 and 600 will be total closings for February, so right in line with January on a per community basis and based on historicals, right online – in line with our annual guidance.

35:50 Okay. Thanks and best of luck.

35:52 All right. Thanks, Alex.

35:54 Thank you. Our next question comes from Mike Rehaut with JPMorgan.

36:01 Thanks. Good afternoon, everyone. A couple of questions on the guidance. First, on the gross margins, you're looking for a full year range that the low end of the range is basically at or slightly above what you did in the fourth quarter, and the midpoint being roughly plus or minus 100 basis points above what you did for full year '21. So just trying to understand what the assumptions are behind that, if you're seeing -- if there's any assumption for better costs. I believe you said in your prepared remarks that you weren't necessarily baking that in. Just trying to get a sense of that move in gross margin. And also, if that's something that would build throughout the year and we would end, at the end of the year, at a higher level than the full year average.

37:09 Yes. Great question, Mike. This is Charles, I can start. Well certainly, for 2021, we were very pleased with record-breaking gross margin results in terms of how we came in for the full year. And I think we're still thinking about it like we always have, which is constantly monitoring costs. We do think that costs are going to continue to rise and raise prices accordingly to balance out rising costs with average sales prices. Eric had mentioned maybe there might be a shift with affordability down to lower floor plans and kind of, so we take that into account, the geographic mix. And then the closeout and transition between communities is certainly a factor that comes into play as we get into relatively more turnover from a community count standpoint, where there's community transition within the markets. That certainly is a factor that we're taking into account when we're thinking about our 2022 gross margins.

38:21 So just so I understand. I appreciate that, Charles. But kind of parsing through that answer, is it fair to say that it's more just mix and cost basis of the land that's coming through in '22? Is that -- if you had to kind of boil it down, is that what you'd say would be the primary driver? And again, any comments in terms of cadence throughout the year would be helpful.

38:51 Yes, sure. No, I think it's more of just our philosophy of pricing to margin. I think that's how we're thinking about it. I think certainly, all of those factors come into play because a good portion of our closings in 2022 are going to come from communities that didn't exist in 2021, so that turnover is certainly a component. I think on the cadence, I think we're expecting relative consistency across the quarters. We tend to have slightly better margins in the higher absorption quarters. This year, in terms of 2021 was a little different in the sense of – from absorptions being strong throughout the year. So as absorptions are lower in the quarter, I think you can expect slightly lower gross margins. But we think it's going to be generally consistent across the quarters.

39:48 Okay. That's helpful. Also on ASP guidance, $315,000 to $330,000, is that kind of also assuming kind of a normal or sort of a steady improvement throughout the year? Or if there were to be further price increases as are warranted by cost inflation, you might see upside, let's say to the higher end of that range?

40:17 Yes. That's correct, Mike. I think it just really depends on what's happening. The rate discussion plays into that because our price range is per community. There's usually about a $60,000 difference between the smallest plan, the largest plan and what plan the individual fix has a bearing on our average sales price. Also, there's a geographic mix component. If we exceed our expectations in our more expensive markets, that's going to have an influence on ASP compared to some of the lower price point markets. So we think we put out a realistic range, not as large a percentage increase this year as last year. I think that's consistent with some of the forecasts we see in the market as well.

41:01 Okay. One last one if I could, just on community count. Your comments around '23 showing greater growth or accelerated growth, '23 and '24. I believe last quarter, you maybe talked about '23 also showing growth but to be much more back half weighted that maybe the first half of '23 might be similar to the end of '22. Just wanted to know if that's still kind of how you're thinking about things. And when we think about growth maybe starting in the back half of '23 into '24, given the lot count growth that you've had over the past year, up, let's say, on average, 50% year-over-year, should we be thinking something in kind of a 20%-plus growth type of dynamic, once you get through maybe a flattish first half into the second half? Is that the right way to think about it?

42:04 Yes. That's what we think is going to happen, Mike. We've spent a lot of money on land. We've got a lot of communities. Our teams in the field are doing a great job. We're being selective with our underwriting criteria. Our projection this year is for community count to be up 10% to 20% over year-end. In 2023, we'd expect that number to be larger so you use that in, and I would have to agree with that is, community count up more than 20% in 2023 is our expectation.

42:37 Great. Thanks a lot.

42:40 You bet.

42:41 Thank you. Our next question comes from Truman Patterson with Wolfe Research.

42:49 Hey, good afternoon, everyone. Thanks for taking my questions. Just wanted to ask a little bit more explicitly, but you all had 90 communities ending in January. You expect it to ramp to 115 by the end of the year. So just a two-part question. Can you help us think through what level of starts you're expecting in the first quarter, which will – might be able to extrapolate for potential orders, if demand remains healthy? And then with communities kind of ramping through the year and being back half weighted, is it safe to assume that your closings are also pretty back half weighted in '22?

43:36 Yes, Truman, I can start with starts, but I think we're in line to start roughly a similar number of houses in what we closed, maybe slightly more. We kind of ended or we ended the year around 3,700 units in inventory. That was similar to where we ended 2020 and slightly down from the third quarter. So, I think our pace in the first quarter is probably similar to what we closed and then ramping up, to your point, assuming that the back half then starts to pick up a little bit.

44:11 Okay, okay. And then now that your mortgage JV has matured, any expectations for earnings in '22?

44:22 Yes. As Eric mentioned, we've got 12 states licensed. We're hopeful that we're going to get all of our states licensed by the end of the first quarter. We'll continue to work through our existing backlog, which is currently not – the majority not in the joint venture. So pacing out the year, we might be looking at roughly around $1 billion in loan volume, somewhere in that 40 to 50 basis points range for the year [Indiscernible].

44:59 Okay. Okay. Thanks. And final one for me. You all mentioned supply chain constraints and materials were really tight in '21. We have now had the Omicron flare, which looks to be dissipating. Just trying to check to see if there's been any near-term or recent improvement on the materials availability side of things. I'm thinking roof trusses, paint, windows, garage doors, you name it.

45:30 We have not seen that, Truman. I mean, our teams are doing a great job in the field, having record-breaking closings last year. And our guidance this year at 9,000 to 10,000, we expect there still to be challenges but our teams will manage through that the best that we can. And also on the development side, getting these new communities online, we have not seen relief in the supply chain challenges in that regard either.

45:55 All right. Thank you.

45:58 You are welcome.

45:59 Thank you. And at this time, I'm showing no further questions. I'd like to hand the conference back over to Mr. Eric Lipar for closing comments.

46:07 Thank you. Before we close, I wanted to take a moment and welcome our two new Board members, Shailee Parikh and Maria Sharpe. Shailee and Maria bring a wealth of experience and expertise to our Board and their valuable insights will contribute to our continued success and long-term growth. Thanks to everyone today for participating on the call and for your interest in LGI Homes. We look forward to sharing our achievements throughout the year.

46:33 Ladies and gentlemen, thank you for your participation. You may now disconnect. Everyone, have a wonderful day.