Welcome to the LGI Homes Third 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 will turn the call over to Joshua Fattor, Vice President of Investor Relations at LGI Homes. Mr. Fattor, you may begin..

Thank you. Good afternoon and welcome to LGI Homes’ conference call to discuss our third quarter 2020 financial results. Before we begin, I will remind listeners that this call will contain forward-looking statements that include among other things statements regarding LGI Homes’ business strategy, outlook, plans and objectives.

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 statements about forward-looking statements 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, 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 are included in the earnings press release that we issued this morning and in our quarterly report on Form 10-Q for the quarter ended September 30, 2020 that we expect to file with the SEC later today.

And this filing will be accessible on the SEC’s website at www.sec.gov and in the Investors section of the LGI Homes’ website at www.lgihomes.com. 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..

Thank you, Josh. Good afternoon and welcome to everyone participating on our call today. We sincerely hope that you and your families are healthy and doing well. I will open the call today with a few comments on recent demand trends and our performance this quarter. Charles will then provide details on our extraordinary financial results.

And I will conclude with our outlook for the rest of 2020. Finally, we will open the call for your questions. We are extremely pleased with our performance this past quarter.

As we move past the early impacts of the COVID-19 pandemic, we saw unprecedented levels of demand across all our markets, driven by continued low interest rates and undersupply of new and existing homes available for sale and renewed desire for the space, flexibility and the convenience that single-family homes in suburban locations offer.

The housing market is thriving and has proven to be a cornerstone of the nation’s economic recovery. While these dynamics benefit our industry as a whole, we believe LGI is 100% spec entry-level focus model is especially well positioned to meet the needs of today’s buyers.

Given that positive backdrop, it should come as no surprise that this was another quarter for breaking company records. Net orders this quarter were the highest in our history, up 78% over the same period last year.

Orders in July, August and September were all monthly records and August was the single best sales month in our company’s history on both a gross and net sales basis. As a result of the surging demand, our backlog more than doubled year-over-year and was up nearly 70% sequentially.

The consistent strength and demand supports our belief that we have worked through any pent-up demand caused by the shutdowns early on and we are now operating in an environment driven by a secular shift in housing preferences. In the third quarter, we closed a record-breaking 2,091 homes.

In line with the expectations we provided on our last earnings call, home closings in July and August were muted as we ramped up our pace of starts to address the brief construction pause we took in March and April. As evidenced by the order trends just mentioned, the demand in orders were there, but time was needed to replenish our inventory.

During the quarter, we successfully started approximately 3,500 homes compared to just under 2,000 last quarter.

Our ability to ramp up so quickly underscores the strength of our efficient, even flow construction model that enabled us to quickly put new homes on the ground to meet demand and is also a credit to the relationships and loyalty we have built with our trade partners over the last 17 years.

In August, our inventory began to catch up to demand and we have finished the quarter by closing a record 811 homes in September, a 24% increase over the same month last year. Notably, September had the third highest number of closings in our company’s history and was our best performance and a month other than December.

In the third quarter, we averaged 6.4 closings per community per month nationwide.

Sarasota was our top market with an impressive 12.3 closings per community per month, followed by Dallas Fort Worth with 9.9 and Austin, Houston and San Antonio tied to third with 8.8 closings each, Nashville’s Atlanta with 8.1 closings, followed by Portland with 8 closings per community per month.

Congratulations to the teams in these markets for an outstanding performance this quarter. We ended the quarter with 110 active communities, a 6.8% increase over the third quarter of 2019. With that, I will turn the call over to Charles for more details on our financial results..

Thanks, Eric. As highlighted in the press release we sent out this morning, home sales revenues in the third quarter increased 10.6% year-over-year to $534.2 million. This was our second best quarter in company history, surpassed only by our performance in the fourth quarter of 2019.

As Eric highlighted, during the quarter, we closed 2,091 homes, an increase of 4.4% year-over-year and 4.3% sequentially. Home closings included 92 homes sold through our wholesale business this quarter, representing 4.4% of our total closings compared to 127 homes, or 6.3% of our total closings in the same quarter last year.

Average sales prices realized from homes closed during the third quarter was a company record of $255,477, a 5.9% increase over the same period last year and a 6.4% increase sequentially driven primarily by higher price points across our markets, close-outs and transitions to new communities at higher price points, a favorable demand environment that supported price increases ahead of rising input costs and fewer hotel closings.

Gross margin as a percentage of sales this quarter increased 120 basis points year-over-year to 25.3% driven by price increases, lower interest and overhead offset by higher lot costs. This was our highest gross margin since the third quarter of 2018.

Excluding wholesale closings, our gross margin was up 100 basis points year-over-year and 50 basis points sequentially. Given the backdrop of home price increases offset by higher cost associated with recent starts and our expectation that wholesale closings will increase as a percentage of total closings.

We would expect our gross margins in the fourth quarter to be lower sequentially, resulting in our full year margins to be in line with our year-to-date results of 24.5%. Our adjusted gross margin was 27.3% this quarter compared to 26.3% for the same quarter last year, a 100 basis point increase.

Adjusted gross margin excludes $9.2 million of capitalized interest charged to cost of sales during the quarter and $1.4 million related to purchase accounting together representing 200 basis points.

Combined, selling, general and administrative expenses for the third quarter were 10.8% of home sales revenue compared to 10.9% last year and 10.4% in the second quarter of 2020.

Selling expenses for the quarter were $35.5 million or 6.6% of home sales revenues compared to $33.5 million or 6.9% of home sales revenues for the third quarter of 2019, a 30 basis point decrease.

In addition to operating leverage realized from the increase in home sales revenues, our quarterly marketing spend was down 40% year-over-year, driven by strong demand this year that reduced our need to spend on advertising.

Sequentially, selling expenses were up 40 basis points as we increased our marketing spend compared to the second quarter of 2020 and recognized our frontline workers with a one-time cash bonus.

General and administrative expenses totaled $22.3 million, or 4.2% of home sales revenues compared to 4% for the third quarter of 2019, a 20 basis point increase.

The increase in general and administrative expenses as a percentage of home sales revenues is primarily related to the identification and certification of available energy efficient home tax credits, and to a lesser extent, higher personnel cost associated with the increase in active communities during the quarter.

We believe that SG&A will continue to vary quarter-to-quarter based on home sales revenue and uncertainty related to the ongoing impacts of the COVID-19 pandemic. Uncertainties aside, we would expect our full year SG&A as a percentage of revenue to be between 10.3% and 10.8%.for the full year.

EBITDA for the quarter was an impressive $87.2 million and EBITDA margin was 16.3%, a 90 basis point improvement over the same period last year and a 10 basis point improvement sequentially. Pre-tax income for the quarter was $77.8 million, or 14.6% of home sales revenue, an increase of 120 basis points over the third quarter of 2019.

We reported a tax benefit of $11.2 million for the quarter related to the recognition of a $29.4 million credit resulting from federal energy tax credits, $27.1 million of which related to homes closed in prior years and the first half of 2020.

We plan to receive additional tax credits during the fourth quarter and estimate our full year effective tax rate to be between 10% and 12%. Our third quarter reported net income increased 80.4% year-over-year to $89 million or 16.7% of home sales revenue. And our third quarter reported EPS was $3.55 per basic share and $3.52 per diluted share.

Excluding the $27.1 million income tax benefit related to energy tax credits, our adjusted net income was $61.9 million, or 11.6% of home sales revenue, an increase of 140 basis points over the same period last year.

Excluding federal energy tax credits, our third quarter adjusted EPS was $2.47 per basic share and $2.45 per diluted share, an increase of approximately 27% year-over-year and 11% sequentially. Third quarter gross orders were 4,368, net orders for the quarter were 3,544 compared to 1,990 in the third quarter of 2019, an increase of 78%.

The cancellation rate for the third quarter of 2020 was 18.9%. Driven by a strong demand, we finished the third quarter with a backlog of 3,580 homes. This is the highest backlog in our history and represents an increase of 119% year-over-year and 68% sequentially. The value of our backlog on September 30 was a record $933 million.

In line with starting more homes in the quarter, we also ramped up our land acquisition activities. During the third quarter, we added almost 3,000 new lots to our owned inventory and nearly doubled our total number of controlled lots to 24,557.

In total, at September 30, our land portfolio consisted of 57,185 owned and controlled lots, a 17.2% year-over-year increase and a 29.1% increase sequentially. 32,628 or 57.1% of those lots were owned and of our owned lots, 7,622 were finished vacant lots and 19,814 were either raw or under development.

And finally, we ended the quarter with 5,192 completed homes, information centers or homes in process, a 12.2% increase over the same period last year and an increase of 43.9% sequentially. Our balance sheet remains strong even as we have ramped up our starts and land acquisitions activities.

We ended the quarter with approximately $46 million in cash, $1.5 billion of real estate inventory and total assets of $1.8 billion. At the end of September, we had $628 million in total debt outstanding under our senior notes and revolving credit facility and our available borrowing capacity under the facility was $307 million.

As a result of our strong operating results and the resulting cash flows, we ended the quarter with over $1 billion in total book equity and a net debt to capitalization ratio of 36.1%, down approximately 90 basis points sequentially and significantly lower than the 47.9% we reported at this time last year.

This was our lowest net debt to capitalization ratio since June of 2014. We ended the quarter with 25.1 million shares outstanding and $17.2 million remaining on our existing stock repurchase program.

On October 30, 2020, our Board of Directors approved an additional $300 million in our stock repurchase program, increasing the total authorization under the program to $317.2 million available to purchase shares of our common stock. I will now turn the call back over to Eric..

Thanks, Charles. Let me provide some thoughts on what we are seeing thus far in the fourth quarter and share our outlook for the full year. We continue to see strong demand for our homes and October was another record month for closings.

Subject to our normal review and verification of fundings, tomorrow after market close, we expect to formally reporter between 815 and 820 closings for the month of October, which would result in a year-over-year increase of approximately 14% over a strong comp of 715 closings in October of 2019, which prior to this year was our best October on record.

With that backdrop, our share outlook for the rest of the year, we expect to have 115 to 120 active selling communities at year end and we are updating our guidance to reflect our expectation to close between 8,400 and 9,000 homes for the full year, with our wholesale business expected to make up 7% to 10% of our total closings.

In addition, we expect an average sales price for the year of between $245,000 and $255,000. As Charles mentioned, we expect full year gross margin in the range of 24% and 25%. Similar to our year-to-date results through September and expect full year adjusted gross margin between 26% and 27%.

I will conclude by saying how proud I am of the team here at LGI and everything we have accomplished this quarter. Despite the challenges of the last 8 months, our dedication to providing high-quality affordable homes for our customers has positioned us for success this year and for years to come. We will now open the call for questions..

Thank you. [Operator Instructions] Our first question is from Truman Patterson with Wells Fargo. Please go ahead..

Hey, good morning or early afternoon, everyone. So, nice results. I wanted to touch on your order growth, 78% in 3Q, how has that trended throughout the quarter or at least in October? Have you seen any falloff at all? And I am asking this because there has been a lot of concern around affordability.

I am hoping if you all could dig in, have you done any sensitivity around pricing or rates, how much pricing your buyer can absorb? And part of the October question is, I imagine you all have pushed pricing fairly aggressively over the past 3 or 4 months, have you seen a large negative impact on demand elasticity from that pricing?.

Hey, thanks, Truman. Great question and good morning. This is Eric. And I can start – and I will start with the October remain strong after 70% – 78% order growth in Q3, gross orders in October are up approximately 20%.

So, we clarify that as a very strong October, especially taking into consideration our backlog is so strong, nearly doubled over last year and almost $1 billion in our pipeline.

So, we really even October did need to spend the necessary marketing dollars, because pretty much everything is already sold for the fourth quarter, which is a great position to be in.

And yes, you saw through our average sales price increasing to $255 for the third quarter that we have increased prices really under the traditional LGI model of just offsetting costs, but costs have been up, if I knew about the lumber cost increases and we raised prices to offset that costs and that relates in consistent gross margins for us.

So, demand environment is really strong, haven’t seen a drop off at all and it’s really positive..

Okay, okay.

And then your starts during the quarter pretty much matched your backlog at I think 3,500 units or so, this is another investor concern, but have you seen lengthening of your construction cycle or lengthening your ability from pulling the permit to actually starting the home? And I am really thinking bigger picture with the 78% order growth, are you able to deliver those homes in an acceptable timeframe based on labor materials, local muni constraints, is there anything that’s really getting in the way there?.

Yes, Truman, this is Charles. Good morning and another great question. We have not seen any significant delays. I think earlier on in the quarter and late last quarter that we may have seen some challenges in terms of getting permits and getting starts rolling.

But as Eric mentioned, 3,500 starts for the quarter more than we are averaging over 1,000 starts right now on a monthly basis. So we are not expecting any delays in our traditional construction delivery times. I think an advantage that we have and have had is that we are – we have been a high volume builder as part of our normal program.

So, I think our trade partners are available and labor is available. So, we have not had any issues ramping up productions we are very comfortable with making sure that we can deliver the units to meet our guidance..

Okay, okay, that’s really helpful. And then one final one for me, the land market is always competitive, but you all have started to reaccelerate your purchases and you are usually pretty cautious regarding your gross margin and you usually pull back if you are seeing land pressure heat up.

So, I guess the question really is would you consider the land market overheated in any areas that you operate or is it kind of business as usual and you are not necessarily seeing a whole lot of land inflation currently, land cost inflation?.

Yes, Truman, this is Eric. I describe it as more business as usual for the LGI business. And after 50,000 owned and controlled at the end of Q1, we dropped down to 44,000 and really pushed a lot of our acquisitions spend to make sure we were certain on what’s happening with the pandemic.

And then this quarter we are reporting 57,185, so, a big increase in owned and controlled with a lot of those were the same deals that came back that we got back under contract.

And also, what we are looking at is really raw land pieces, we are really comfortable with developments, we are comfortable with the larger sizes, we like to capture that, developer profit as well, which leads to our industry leading gross margins.

So, the raw land piece is a little bit further out that are a few hundred acres that leads to communities of 500 homes or larger. We are very comfortable doing those, especially in Texas and we put a number of those under contract.

I think it is overheated and any developer or any finished lots to become for sale, because a lot of builders are looking for finished lots supply to add to their 21 pipeline. We are probably not going to win that bid, but that’s okay, we will let someone else go that route and we will focus on land development, which isn’t as competitive..

Okay. Thanks, guys. Good luck on the upcoming quarter..

Thank you..

Thanks..

Thank you. Our next question comes from Michael Rehaut with JPMorgan. Please go ahead..

Hi, thanks. Good afternoon, everyone. First question, I just wanted to delve into the community count a little bit, understandably taking off prior high-end of the range that was out there before. I guess now, I guess 115 to 120 by the end of the year, which would still be a nice move from where you currently are.

How should we see about ‘21? I know, you are not at the point to figure out formal guidance, but just directionally in the past, obviously you have kind of targeted anywhere from 10% to 20% type of community count growth, at this point you are on what you offer is a bigger footprint.

So just any thoughts directionally on community count from a growth standpoint over the next year or two would be very helpful?.

Sure, Mike. This is Eric.

And yes, December 19, we ended the year at 106 active communities, you are correct in taking off the high-end of our community count guidance for 2020, that’s really a very positive message to the market, if you will, as all of our investors, because it’s the results of closing out communities faster than anticipated and because of COVID and about a quarter delay in development some of the new communities are getting delayed by a quarter.

So we will end the year off this year 115 to 120. And I think you are correct and we are not ready to give specific guidance as far as percentage increase or numbers for ‘21 yet, but directionally, we do expect ‘21 community counts at the end of the year to be higher than the end of the year ‘20 community counts, so we expand on growing next year..

Okay. I appreciate that. I guess secondly, I’d love your thoughts around credit availability currently, correct me if I am wrong, but I recall you saying even last quarter that credit availability had kind of bounced back maybe often some temporary pauses early on in the pandemic, but it bounced back maybe to pre-COVID levels.

So if I am recalling that right or neither case, how do you see credit today to continue to improve or is it more of the stable and any types of changes that you might want to highlight?.

Sure, Mike. Yes, I described the credit market certainly stable and I have the same response as last quarter.

The mortgage market feels exactly the same as they did pre-COVID and outside of the really a 45 to 60-day period, where there was a lot of uncertainty around March or April, I would describe it as back to normal, very consistent, very much available, obviously, lower interest rates helps all of us in homebuilding and leads to an affordable payment.

And although interest rates are probably about up 25 basis points higher than a month ago still seeing strong demand. So, no changes in the mortgage company, it’s very consistent. All the mortgage companies are busy. They are busy with refinances. So we have seen our underwriting times elongate by a few days, but other than that real positive..

Quickly just I will put one more in there, one more question.

Price increases in the cadence there, how would you characterize your cadence of price increases over the last 3 months and do you see that kind of continuing at a steady rate or given how we have heard about different builders maybe experiencing little bit of a flex up in pricing should that kind of moderate maybe as you deal with any types of just trying to make sure that the affordability equation remains reasonable?.

Yes, pricing for us is really a cost plus model that we use. So, we have been in an environment last 3 or 4 months where we have really seen a lot of cost inflation, probably more than we have in our history of pricing. So we have had to be more aggressive on our price increases.

We have raised prices over the quarter in 100% of our communities, because costs are up in 100% of our communities. Now lumber seems to be coming off to some extent, but still elevated, and we will see how the next three to six months ago, if costs are flat, then our pricing increases will be more muted.

And as we buy more deals and they come online, we will be able to offer more affordable, price, if you would, if costs continue to rise, then we will have to raise our prices to match those costs to keep our gross margins consistent..

Thank you..

You are welcome..

Thank you. Our next question comes from Carl Reichardt with BTIG. Please go ahead. .

Hey, thanks, everybody. Eric I wanted to ask about obviously part of what made you successful for a long time is a pretty unique approach to sales. I think one of our worries when COVID hit was how do you continue to train folks, your reliance on in person sales could be muted.

Can you kind of talk about how that’s evolved? And now that we are sort of in a strange, semi stabilized world with COVID? In terms of are you able to find people are you able to train them the way you want or your stores largely open? Are you selling the way you were pre COVID? I would just like to get a sense of how it’s impacted your system because it’s so unique?.

Yes, thanks Carl. Great question. And what we are dealing with the COVID situation and first of all, just to point out that the team is doing a fantastic job. And in all of our frontline workers, we gave the onetime bonus two last quarters, certainly well deserved.

And everybody’s just doing about a fantastic job wearing masks social distancing customers arriving in separate cars. So we certainly are taking all the precautions necessary to keep everyone safe and healthy.

That means that our sales process is exactly the same, customers are still calling the demand for homeownership is as strong as ever, we strongly believe in that, direct to the consumer approach and walking the customers through face to face our process, first time homebuyers have had a ton of questions.

And we really like the hand holding process, if you will, and make sure their questions answered walking through, because we have stack inventory, walking them through the house, you get to see exactly what they are going to be buying. It’s working great.

Recruiting wise, I think recruiting is really good spot right now, we have not had a lot of turnover. We are recruiting talented people and because of the unfortunate layoffs in other industries, there is a lot of top talent available. And we are seeing that come through our system. We have had to minimize our travel.

And we have relied more on the field to do training, and the personnel in the field is doing a fantastic job so now outside of keeping everybody safe and healthy. Carl, the team is doing a great job and we are operating with the same system we always have..

Thanks, Eric. That is a nice comprehensive overview. And then I wanted to ask you also just a bit about the balance sheet and as you are obviously cash is quite a bit this year and you have aggressively ramped the lot count this quarter, as you are sort of looking forward.

What is your comfort on your gross debt to cap Charles and where would you think you would ideally like to run the business over the course of the next two to three years? Thanks..

Yes, great question Carl. So we are comfortable with gross debt to cap in the 40s. I think our balance sheet management is really driven by our real estate inventory and, that can tend to be lumpy as we buy deals. Eric had mentioned most of what we are currently looking at and have under controlled are raw land deals.

So we will continue to monitor our real estate needs from an inventory standpoint and then manage the balance sheet in the 40s..

Okay, great. I am sorry I want to ask one quick one too.

Are you expecting this particular quarter for your closings have historically been a little more last month loaded December loaded? Does that pattern going to look roughly the same this coming quarter as it has in past quarters or you would be more spread evenly through the month?.

Yes, I would just say December is going to be really strong month for us. Yes, and November is going to be higher than October and December is going to be higher than November, so pretty traditional flow this quarter..

Okay, Thanks a lot, both..

You are welcome..

Thank you. Our next question comes from Suzanne [indiscernible]. Please go ahead..

Thank you. Good afternoon, everyone..

Good afternoon..

Eric my first question is, in your commentary, you suggested that we have realized a lot of the pent up demand that, we kind of saw from the start of the pandemic over the course of this quarter.

And I am trying to triangulate that the fact that we have met that pent-up demand with the fact that you are continuing to see some really strong orders coming through? I mean, I think you mentioned October, up about 14% or so year-over-year, how do we think about those two comments in kind of contrast and what do you think that, that really means as we look to ‘21 and the potential for growth?.

Yes, it’s great question, Susan. And yes, I think our comment was really focused around making sure if I understood the demand is still strong, I think there was some opinions that for the first couple of months post-COVID, there is a lot of really pull-forward demand.

I think we are just really emphasizing even through the month of October and even through last weekend, we are still seeing strong demand and we are still seeing the amount of dollars we are spending on marketing compared to how many leads we got coming in, the efficiencies we are getting is still very strong.

And also letting everybody know, we think this is going to continue, a secular shift in 2021, the concept of the COVID and getting out of tight, dense living situations and getting into your own home with the yard and more space and working from home, those type of trends are certainly going to be with us at least for the next few years is how we feel.

So, we are very optimistic about homeownership demand trends for both the short and long-term..

Okay, that’s helpful. And then my final question is, we have kind of seen that there has been some relative differences in some of the geographies based on local economies and some of the factors there.

Can you talk to what you have seen maybe across some of your markets in this quarter and especially how some of those markets that maybe lagged a bit how they have trended over the last couple of months?.

Yes, we have seen consistent strong demand. One of the numbers that I could point to is every region in the country, everywhere had least 5 closings per month for the quarter. Every area, average sales price was up over last year, last quarter. So, it’s pretty consistent demand nationwide.

Of course, some markets are always doing better than others, but we emphasize on the call Sarasota, market in Florida, most people are familiar with only 1 community in Sarasota about 37 closings last quarter shows the strength of that market, also highlighting the size of Texas markets that have historically always been strong, Atlanta and Portland had north of 8 closings per community, Phoenix, Seattle and Albuquerque, were all north of 7, so pretty widespread and consistent strength of our top 10 markets and revenue last quarter – or excuse me, our top 10 communities in revenue, those top 10 communities came from 5 different states and 7 different markets, so widespread success and demand across the country..

Okay, thank you and good luck..

Thank you..

Thank you. Our next question comes from Jay McCanless with Wedbush. Please go ahead..

Hey, good afternoon. Thanks for taking my questions. Great quarter..

Thank you..

So the first question I had, Eric, you said that the demand in the traffic haven’t slowed down, you are still seeing what seems to be very strong demand.

I guess, have you seen any change in who your average buyer is or have you seen maybe the age of that average buyer coming down as the millennials and the Zs are starting to really aggressively go towards homeownership?.

We haven’t, Jay. Our average age of our buyers has been between 38 to 42 really every quarter.

That was consistent again in the third quarter and we are still seeing strong demand, October up approximately 20%, was a credit strong 78% up for the quarter, but 20% year-over-year strength in the middle of a pandemic with everything going on, we think is just fantastic domain..

Yes, absolutely. The second question I had just thinking about the 7,600 VDLs you said you had and then you are starting at 1,000 homes a month approximately.

I mean, is that historically given the VDL number out before, but is that roughly 6 or 7 month supply, what you all historically had or you all trying to build in a little extra right now?.

Yes, Jay, this is Charles. So, 7,600, we typically give that every quarter in terms of the VDLs. It has trended down a little bit in terms of our expectation in the sense that we have typically managed our inventory with one year supply of VDLs is what we are really looking to have kind of in the queue. So, we also had 18,000 in log and raw.

So, getting those units delivered, Eric, had mentioned, we have really taken a quarter pause, there for COVID. So, that’s having some impact plus the increase in demand is churning through some of that inventory as well. So we will continue to evaluate it and rebuild it as we continue to develop new sections and put new lots on the ground..

Is there any – sorry, I will sneak one more in? Is there any municipal issues there, whether it’s you are permitting, planning, environmental, etcetera, are you seeing any issues as you will try to rebuild that across the canal?.

No, we are not, I mean, nothing of significance in any of our communities across the country..

Okay, great. Thanks for taking my questions..

Yes, you are welcome..

Thank you so much. [Operator Instructions] Our next question is from Alex Barron with Housing Research Center. Please go ahead..

Yes. Hey, guys. Thanks and great job on the quarter..

Thank you..

I wanted to ask regarding two different issues, one with the energy tax credits and the other was on the share buyback.

So, on the energy tax credits, is this the first time that you both get such a credit and can you explain what has changed in the construction of your homes and whether that implied to tax rates going forward? And then on the share buybacks, so it’s a pretty sizable authorization from just hoping you can expand on your thoughts on – how you plan to use it? Is that going to be systematic? What are your thoughts around doing the share buyback going forward?.

Yes, sure, Alex. This is Charles. On the 45, so we did book about $3.5 million in the second quarter and that was the first time that we had started the process to evaluate our homes and whether they would qualify for the credit.

So, we focused early on since it was announced in December of ‘19, we spent the first half of the year really just gathering the information we needed to evaluate whether we would qualify or not. We focused on the West originally, just places like California, where we felt like we should easily be able to clear the hurdle.

And what we didn’t estimate or factor in is some of the success that we would see in places like Texas and some of the other markets. Overall, we had about 80% of our homes qualified, so we are picking up for all the years prior to 2020. We are picking up roughly about 20,000 units that overall in our estimate related to the years prior to 2020.

So we went into it not really knowing what to expect, because we hadn’t really evaluated it before, so, obviously very pleased with the fact that we had phenomenal success in terms of getting them to qualify. On the share buyback comment, I think we are just really looking at it more versus opportunistic.

I mean, I think for the last several quarters we have really talked about how we are financing our growth and certainly getting to a size and scale to Carl’s comment earlier about how we are expecting managed balance sheet kind of things that gross debt to cap in the 40s is the right number for us long-term in terms of how we see it from a strategic long-term capital strategy.

So, just manage the inventory and it’s opportunistic. If we have some excess cash flow available and there are potential disconnects in the market, then we will see that as an opportunity to deploy some of that capital..

Okay, great.

And if I could ask one more on the gross margin guidance, I think you gave a range of 26 to 27, so given everything going on, what would cause it to come in on the lower end of the range, you would think to me that you guys have momentum? So I am just trying to understand, what – is it lumber related or what could be that could cause it to come in on the lower end of the range?.

Yes, sure. I mean, really, I think for the fourth quarter, obviously with three quarters in the books, if you will and coming in at roughly 26.5 year-to-date, really, the only two components we have going on in the fourth quarter is one is we expect wholesale to be a larger percentage. So, just from a gross margin standpoint, that could be a tailwind.

For example, if we move from 4%, just over 4% this quarter to say up to 10% in the fourth quarter that could have a 50 to 60 basis point impact to our margins, all things equal.

The other factor we have going on is that from the retail side, we started a lot of houses this quarter as we mentioned, some of those homes were sold prior to starting construction. So there is some movement going on in terms of the timing of the delivery versus the sale of the homes.

So, we would expect retail overall to be slightly down as well just until that catches back up into next year, so maybe 80 to 100 basis points sequentially down would put some brackets around it and that would mean that we would be weighted average very close to what we have achieved year-to-date, so we should be pretty close to that midpoint..

Okay, great. That’s very helpful and good luck for the rest of the year. Thanks..

Thank you..

Thank you. And so I am not showing any further questions in the queue. You may proceed with final comments..

Thanks everyone for participating on today’s call and for your continued interest in LGI Homes. Have a great day. Thank you..

Ladies and gentlemen, thank you for participating in today’s conference call..