Welcome to LGI Homes Second Quarter 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. At this time, I will turn the call over to Josh Fattor, Vice President of Investor Relations at LGI Homes.

Thank you. Good afternoon and welcome to LGI Homes' conference call to discuss our results for the second quarter of 2021 and the 6 months ended June 30, 2021. Today's call contains forward-looking statements regarding our business strategy, outlook, plans, objectives and updated guidance for 2021. These statements, which speak only as of today's call and are based on management's expectations, are not guarantees of future performance and are subject to risks and uncertainties. You should review our filings with the SEC, including our risk factors and cautionary statement 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. LGI Homes assumes no obligation to publicly update or revise any forward-looking statements. Reconciliations of any non-GAAP financial measures discussed on today's call to the most comparable measures prepared in accordance with GAAP are included in the press release issued this morning and in our quarterly report on Form 10-Q for the quarter ended June 30, 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 company website. Our hosts today are Eric Lipar, Chairman and Chief Executive Officer; and Charles Merdian, Chief Financial Officer and Treasurer. I'll now turn the call over to Eric.

Thanks, Josh. Good afternoon, and welcome to everyone participating on today's call. I'll start by sharing some highlights of our quarter before handing it to Charles to provide more details on our financial results. We'll conclude with a view on our performance in the third quarter and provide updated full year guidance. We delivered the strongest second quarter performance in our history, exceeding our expectations and setting new company records for revenue, closings, absorptions and virtually all profitability metrics. The housing market remains incredibly strong, driven by dynamics that LGI Homes is uniquely well-positioned to capitalize on. Here are a few highlights of our recent performance. Closings in the second quarter were up 42% over last year to a record 2,856 homes, and our average sales price increased over 15% to more than $277,000. This resulted in revenue increasing 64% to $792 million, a new second quarter record and the second best quarter overall in our history. Our continued success at offsetting cost inflation enabled us to achieve gross margins of 27% and adjusted gross margins of 28.5%, both second quarter records. We achieved our lowest ever SG&A expense ratio that, in turn, helped drive a 460 basis point improvement in our pretax net income percentage to an all-time high of 18.8%. Finally, our net income was over $118 million, representing an increase of over 112%. This was a second quarter record and the second highest net income in our company's history. During the second quarter, we averaged 9.1 closings per community per month, company-wide. This was the second highest absorption rate in our company's history, exceeded only by our fourth quarter 2020 absorption rate of 10 closings per community per month. This quarter, Austin was our top market, with a new company record of 20 closings per community per month. Second was Houston with 13.1, followed by San Antonio with 12.7. Dallas-Fort Worth was fourth, with 12.5 closings per community per month, and Jacksonville closed out the top 5 with 11.9. Our teams continue to manage through supply chain constraints, input cost uncertainty and availability of lots to build out. We have not seen a pullback in demand for homes related to declining interest in homeownership for affordability constraints. However, we remain focused on offering affordable homes that meet the needs of our target market. For the quarter, our net orders were down 10% year-over-year, solely as a result of matching our sales pace with our capacity to deliver homes to our customers. We're releasing new homes for sale later in the construction cycle when there is more visibility into our costs, construction times and expected margins. In many of our communities, our sales professionals are maintaining long wait lists of potential buyers who are sidelined until either a new home is released or a current buyer cancels their contract. Given the robust demand environment and the measures we've taken to support our margins, we expect to see continued negative near-term order growth, particularly in the third quarter as we compare our results to last year's strong comp. I'll share a few more highlights of the quarter before handing the call over to Charles. Since our last earnings call, we made 2 opportunistic acquisitions to support our long-term growth objectives. On May 7, we announced the acquisition of R Home in Minneapolis; and on July 15, we acquired Buffington Homes in Central Texas. Both acquisitions complement our existing footprint and increase our land positions in attractive markets. We're pleased to welcome the employees of R Home and Buffington to our LGI team and know they will play an important role in our continued success. Finally, during National Homeownership Month in June, we closed our 50,000th home. This significant milestone in our history is a result of our ongoing commitment to help renters become homeowners, and a testament to the success of our unique business model which has proven so effective in making the dream of home ownership a reality for thousands of families across the nation. With that, I'll turn the call over to Charles for more details on our financial results.

Thanks, Eric. As highlighted in our press release, revenue in the second quarter increased 64.3% year-over-year to $792 million. This was our second best quarter in company history, surpassed only by our performance in the fourth quarter of 2020. As Eric noted, we closed 2,856 homes, a 42.4% increase year-over-year and an 11.5% increase sequentially. These closings included 430 homes sold through our wholesale business this quarter, representing 15.1% of our total closings compared to 199 homes or 9.9% of our total closings in the same quarter last year. We continue to monitor costs, and we're successful at raising prices to maintain our strong margins. Our average sales price during the second quarter was a record $277,140, a 15.4% increase over the same period last year. Price increases were driven by a favorable demand environment that allowed us to pass through cost pressures as well as increase closings in certain markets and changes in product mix. Gross margin as a percentage of revenue was a second quarter record at 27% compared to 24.5% during the same period last year. This 250 basis point improvement year-over-year exceeded expectations and was driven by our success passing through cost increases, lower capitalized interest expense and continued operating leverage partially offset by higher lot costs. Gross margin, excluding wholesale, was up over 300 basis points year-over-year and 55 basis points sequentially. Given our outperformance year-to-date and continued success managing cost inflation, we are increasing our gross margin guidance to a range of 26% to 28%, representing a 130 basis point increase on both ends of our prior range. Our adjusted gross margin as a percentage of revenue was a second quarter record at 28.5% compared to 26.6% for the same quarter last year, a 190 basis point increase. Adjusted gross margin excludes approximately $10.4 million of capitalized interest charged to cost of sales during the quarter, and $1.4 million related purchase accounting, together representing approximately 150 basis points. Similar to gross margin, we are increasing our annual adjusted gross margin to a range of 27.5% to 29.5%, representing a 100 basis point increase on both ends of our prior range. Combined selling, general and administrative expenses for the second quarter were 8.6% of revenue compared to 10.4% during the same period last year, representing an improvement of 180 basis points year-over-year and 100 basis points sequentially. This was the lowest SG&A expense ratio in our history, further highlighting the continued strength of demand across our markets. Selling expenses for the quarter were $44.8 million or 5.7% of revenue compared to $30 million or 6.2% of revenue for the second quarter of 2020. The 50 basis point improvement was primarily related to operating leverage realized partially offset by higher commissions paid to realtors as a percentage of revenue. General and administrative expenses totaled $23.3 million or 2.9% of revenue compared to 4.2% for the second quarter of 2020. The 130 basis point improvement driven primarily by operating leverage resulting from higher revenue, increased absorptions and a larger percentage of wholesale closings. Given our performance year-to-date, we are lowering our full year SG&A expense guidance by 50 basis points and now expect a range between 9% and 9.5%. EBITDA for the quarter was $159.8 million and EBITDA margin as a percentage of revenue was 20.2%, a 410 basis point increase over the same period last year and a 120 basis point increase sequentially. Our EBITDA margin in the second quarter was a new company record, surpassing our previous high of 20.1% in the fourth quarter of 2020. Pretax net income for the quarter was $149.1 million or 18.8% of revenue, an increase of 460 basis points over the second quarter of 2020 and a 130 basis point improvement sequentially. This was a new company record, surpassing our previous high of 18.6% in the fourth quarter of 2020. For the second quarter, our effective tax rate was 20.8%, and given our performance year-to-date, we now expect our effective tax rate for the full year will range between 20.5% and 21.5%. Our second quarter reported net income increased 112.4% year-over-year to $118.1 million or 14.9% of revenue, and our second quarter earnings were $4.75 per basic share and $4.71 per diluted share. Second quarter gross orders were 2,677, a decrease of 11.3% and net orders were 2,025, a decrease of 10.1% year-over-year. However, underlying demand remains robust and recent declines in our orders are a function of lot availability, pacing of sales and a desire to limit our buyers' time and backlog. Our cancellation rate for the second quarter was 24.4%. We finished the second quarter with a backlog of 4,801 homes, representing an increase of 125.7% year-over-year. The value of our backlog on June 30 was $1.4 billion, an increase of 157.1% year-over-year. During the quarter, we made significant progress acquiring land to support our long-term growth objectives. As of June 30, our land portfolio consisted of 75,910 owned and controlled lots, a 71.3% year-over-year increase and a 12.8% increase sequentially. We added over 6,800 new lots to our owned inventory and finished the quarter with 42,492 owned lots, an increase of 33.7% year-over-year and 10.4% sequentially. 7,859 of our owned lots were finished vacant lots, and 29,885 were either raw land or under development. During the quarter, we started over 3,200 homes and as of June 30, had 4,748 completed homes, information centers or homes in process. Only 360 of these homes were complete compared to 671 completed homes we had at the end of first quarter. This sequential decline further illustrates the strength in demand we are seeing across all our markets. Finally, the total number of lots under our control was 33,418, an increase of 166.9% year-over-year and 16.1% sequentially. Turning to the balance sheet. We ended the quarter with approximately $111.7 million in cash compared to $48.2 million in the first quarter. The increase was attributable to excess proceeds from our new senior notes after giving effect of the temporary pay down of our credit facility. We expect our cash balance to return to a normalized level in the third quarter. During the quarter, we continued to strengthen our balance sheet and lower our cost of debt. On June 28, we successfully completed an offering of $300 million of 4% senior notes due in 2029, and used the proceeds to temporarily repay borrowings on our revolving credit facility. At the end of June, we had approximately $584 million in combined total debt outstanding under the 2026 and 2029 senior notes, and our available borrowing capacity under our revolving credit facility was approximately $715 million. Including cash on hand, we ended the quarter with total liquidity of $826 million. At June 30, our net debt to capitalization ratio was 26.8% compared to 37% at the same time last year. In conjunction with our notes offering, Moody's upgraded our credit rating to Ba2. This is another positive recognition of our outstanding growth, consistent profitability and the improvements we've made to our balance sheet over the last several years. On July 15, we used amounts available on our credit facility to redeem all of our outstanding 2026 senior notes. In the third quarter of this year, we expect to recognize a $10.3 million expense for the early redemption of our 2026 senior notes and to expense $3 million of deferred financing costs and discounts that were previously being amortized in association with the 2026 senior notes. This refinancing successfully pushes out our debt maturity 3 years; resulting in interest savings of over $8.6 million per year; and in combination with the recent amendment of our revolver, will meaningfully lower the interest amortization reflected in our gross profit margins going forward. In the last year, our shareholders' equity has increased by approximately $370 million to nearly $1.3 billion today. Additionally, as a result of our strong operating results and profitability, we delivered an industry-leading return on equity of 40.2% for the trailing 12-month period ending June 30. During the second quarter, we repurchased 335,000 shares of our common stock for $55.8 million. We ended the quarter with 24.6 million shares outstanding and $218.8 million remaining on our existing stock repurchase program. We expect to continue to return capital to our shareholders as a component of our broader capital allocation priorities.

Thanks, Charles. I'll close with what we're seeing so far in the third quarter and provide an update on our current outlook for the remainder of the year. Q3 is off to a strong start. Subject to our normal review and verification of fundings, we expect to report 930 closings for the month of July, representing a year-over-year increase of more than 50%. Based on the results we shared today and our current outlook for the rest of the year, we're updating our full year guidance. We now anticipate closing between 10,000 and 10,500 homes in 2021 at an average sales price between $285,000 and $295,000. We maintain our prior expectation of closing the year with 112 to 120 active communities. Reiterating the outlook Charles provided in his comments, we expect gross margin in the range of 26% to 28%; adjusted gross margin in the range of 27.5% to 29.5%; and SG&A between 9% and 9.5%. We're extremely pleased with our record-setting accomplishments during the second quarter and expect the momentum we've created will carry into the second half of the year. We remain focused on building, selling and closing homes and are well positioned to deliver on all of our expectations for this year. That concludes our comments on the quarter, and we'll now open the call for questions.

Our first question will be from Deepa Raghavan from Wells Fargo Securities.

Eric, Charles, Josh, the return on equity is quite strong, in fact, the highest among my peers. Can you discuss the factors driving this, particularly those that are sustainable and could help maintain these robust ROE margins? Additionally, could you address any factors that might be temporary?

Yes. Sure, Deepa. This is Charles. I can start. I think, first of all, operating margins are certainly contributing to that. So gross margin strength plus operating margins are certainly driving profitability in terms of what we're achieving in terms of net income. I think the other factor on what we're seeing is just the ability for our inventory turns to have increased as much as they have since the beginning of 2020. We're now running at roughly about 1.3x in terms of our inventory turns, and that compares to about 1x historically, so about a 30% increase in inventory turn. So in other words, as soon as we're putting the houses on the ground, we're closing them, and that is certainly helping to drive our return on equity.

Got it. I'm not sure if you have any comments on SG&A, I mean you touched on operating margins, is that SG&A being lower? Is that sustainable?

Yes. Our guidance indicates that year-to-date growth is at 9.1%. We are particularly proud of the second quarter's achievement of 8.6%, which was supported by revenue gains and 9.1% absorption this quarter. We anticipate that the second half of the year will see growth in the 9% to 9.5% range for the third and fourth quarters, allowing us to maintain our full-year projections. We also continue to realize savings in our advertising and marketing expenditures due to the current demand environment. It is uncertain how long this trend will last or when natural demand will begin to emerge. Additionally, on the administrative side, the flat or declining number of communities has contributed to lower general and administrative expenses, as we have not been expanding our workforce at the same rate we would if community numbers were increasing.

That's helpful. My follow-up is on your order commentary. Based on the visibility that you have now, Charles and Eric, driven by your community count availability, et cetera. Would you say Q3 is the worst order year or the worst order quarter for the year? Or should Q4 be impacted significantly as well?

Thanks, Deepa. This is Eric. Yes, great question. And orders is one of the challenges we have if one is to say as a challenge. We think it's very positive because our backlog is so strong, we had such a strong first quarter in sales, selling out ahead of ourselves. And now we're just catching up in construction. Because of the cost inflation we were seeing, we decided to make a decision to not price our houses and sell them. And so we were comfortable with the cost and also comfortable with the construction finalization date or the completion date, so we can provide exceptional customer service to our customers and know where they're going to move in. Fortunately, for us, the third quarter closings were basically sold out. The houses that are available to close in the third quarter, almost all of them have contracts already in place. So we are not creating hardly any new orders on a week-to-week basis. We think that's a good thing. But when you start comparing orders in Q3 compared to last year's Q3, it's going to be substantially down. Now in Q4, we don't have as much of a backlog already sold. So we think orders will be better, if you will. But having a very strong backlog creates this dynamic. But again, we look at that as a positive.

And our next question comes from Truman Patterson from Wolfe Research.

Just wanted to follow up on the prior question. No, I think right now, demand is strong enough that really orders going forward will really just be dependent on whatever the builder is willing to release for sale. Some builders are discussing what their quarterly starts capabilities are or just active lot count that can be sold. So I'm just hoping that you can give us an update of how you're positioned in the back part of the year? And also trying to understand maybe the timing mismatch as you're starting to rebuild your spec count?

Yes. Truman, this is Eric. I can begin and Charles can add later. I believe we are in an excellent position. Having a strong backlog is beneficial for us. Our construction teams across the country are effectively delivering homes. We experienced a robust closing quarter, and we are raising our guidance to reflect our confidence in the second half of the year. We are increasing our closing guidance, and we trust our construction team to deliver the necessary homes to meet those targets. The key takeaway regarding orders is that it relates to timing. We had a strong sales quarter in the first quarter. With our sales focus at LGI, we sold homes that were finished, and once those were sold, we moved to homes at various stages like framing and slab, allowing us to plan further ahead. While we were adjusting prices to account for inflation, it often wasn't sufficient. We decided not to price homes that would not be available for several quarters, which led us to withhold certain homes from sale until they were further along in the building process. This approach is specific to the market, where we can accurately assess costs and price homes based on our margins. We are committed to providing exceptional customer service by ensuring that customers know exactly when their homes will be delivered. A crucial aspect for us is that we make decisions based on our core company values. In the first quarter, many of the contracts did not take enough inflation into account, but we have honored these agreements without canceling any contracts despite margin concerns. We are not losing money on homes, although our profits may be less than in the past. We believe this approach is correct, and it reflects our commitment to our customers. Unlike some builders who are canceling contracts and selling to others at higher prices, we are honoring all our customer contracts, and we are proud of that. Furthermore, I want to emphasize that we have not altered our business model. We do not operate as a build-to-order builder or have a design center with options. We remain a speculative builder, offering 4 to 5 preselected floor plans per community. Customers know exactly what they are getting when they purchase a home from us, even if delivery is a couple of quarters away. Our business model remains unchanged, and we are optimistic about how we treat our customers and the strong demand we are experiencing in the market.

Yes, I completely agree that incorporating pricing contingencies can potentially harm our long-term reputation. I understand your point. You mentioned this in your previous response, but I want to explore further regarding your increased gross margin guidance. Looking at the midpoint, it suggests a fairly stable gross margin for the remainder of the year. While you maintained a broad range of about 200 basis points for the full-year guidance, considering your backlog, you likely have a good sense of the margin profile for the latter half of the year. Could you clarify what factors might lead you to the lower or upper end of this guidance?

Yes, Truman, great question. I can start. We do have a very strong backlog. We've got the prices to the customer locked in. But one of the things that's still open on the gross margin, very positive to us the fact that we raised gross margin, but a lot of the houses that are going to deliver this year aren't started yet. They'll be started in August, September in some cases, even October. So those costs are a little bit unknown. They seem to be trending in the right direction over the last 30 to 60 days. So that's a positive. If that trend continues over the next 60 to 90 days, that would probably indicate we may be at the higher side of our gross margin. But I don't think anyone is really comfortable saying there may be more cost pressures over the next couple of months or supply chain shortages. That would be one aspect of that. And then also the mix component of different parts of the country have different gross margins comparables, very similar gross margin nationwide, but it will matter where those closings come from in the back half of the year.

Good luck on the coming quarter.

And our next question comes from Michael Rehaut from JPMorgan.

This is Maggie on for Mike. First question on kind of how to think about closing pace through the balance of the year. I think last quarter, you had made a comment that it would be kind of reasonable to expect something similar to 1Q. Obviously, Q2 pivots higher and your closings range for the rest of the year, combined with the community count outlook kind of implies a step back down. So wondering if you could give some color about how we should be thinking about the closings pace?

Yes. This is Eric and Charles can add to it. I think the closing pace, we're very comfortable with our guidance. No question, 9.1% closings per community per month in the second quarter is very strong absorption pace, highest second quarter in history, especially with the average sales prices of where we're at. So we're forecasting absorptions going down in the second half of the year. That's just the math of it. But we don't look at that as slowing or a negative, that's just getting back to more historical absorptions or really still elevated but just not as strong as the 9.1% closings per month that we experienced in the second quarter. Just because we just don't like to forecast and guide to the best quarter in company history. That's a high bar. We want to be shocked if we don't produce great numbers in the third and fourth quarter, but that's not how we give guidance.

Yes. The other thing I'd add, Maggie, this is Charles, would be that we have a number of high-performing communities that are closing out, and those are coming up. So in terms of forecasting as we transition the replacement or potentially have a gap between those communities, we certainly think that's a factor in the back half of the year as we transition from one community to the next.

Got it. For my second question, looking ahead to 2022, I understand it's still early to provide official guidance. However, could you share your thoughts on your potential to increase closings next year, especially considering the expected order declines in the short term? I recall you mentioning a stable community count outlook for the year in the past.

Yes, it's a great question, Maggie. You're correct. We're not giving guidance on closings for '22. We have said in the past, we expect community count to be similar. And that would still be our expectation today. Community count is interesting because even our guidance this year, 112 to 120, the stronger closings are in the back half of the year, the lower the community count is going to be. So no one's really hoping for weaker community count or weaker closings, just have higher community count. So if you operate from the standpoint of communities are going to be similar end of year next year compared to end of year this year, then it's really what's the absorption that everyone's going to expect. This year is likely to end up on an annual basis with our guidance we're giving. It's going to be the strongest absorption in our history. That's just a mathematical fact. So when investors and all of you are thinking about what closing is going to be next year, it's really a question of what everyone believes absorption is going to do. We'll get back to everyone on our guidance for next year. But obviously, if absorptions are as strong as they are now, it will be a similar number. If absorptions go down to go back to historical averages and for us at 6 to 7 a month, then closings will be down last year, and that's just next year. That's just a math equation. So we'll get back to everyone on absorptions, but we feel like it's going to be a strong absorption pace either way. But 9.1% as a comp and where we're going to end up this year is going to be an unbelievable year from an absorption standpoint.

And our next question comes from Jay McCanless from Wedbush.

The first one I had, just looking at the order absorption pace that you had in the second quarter, it looks like roughly 6.4 per month. If we took that forward to the third quarter, where do you think that's going to end up for an order percentage being down like 40% to 50%? Is that where things are tracking right now?

Yes. I think at least that much, Jay, just because we have nothing to sell. Orders would be a lot stronger if we release more inventory, but it's probably going to be even a greater percentage than 40% to 50%. Now it depends on what happens for the rest of August and September, but it's going to be substantially down just because we have nothing to sell, and we're doing that on purpose. So I just want to make sure I reiterate we're talking a lot about orders, but the demand we're seeing, as soon as we release homes for sale that we're comfortable with the cost and delivery date, they sell immediately. As soon as a customer cancels primarily related to financing, there's another customer coming off our waiting list and putting that house under contract. But when we have a cancellation to replace it with a customer that's likely to be at a much higher average sales price, that does not create a net order. It's just a wash in order standpoint. So real strong demand environment don't get us wrong. It's just the math of the orders is going to be substantially down in the third quarter.

The second question is about your cancellation rate for the second quarter, which decreased by about 90 basis points year-on-year. Is this change primarily due to the cans you're receiving now, or is it mainly related to mortgage letters falling through? It doesn't seem to indicate that people no longer want the house. Can you elaborate on this a bit more?

Yes. I think it's all mortgage related as it is, most times. I mean our customers under contract, the customers that bought or placed an order, if you will, in the first quarter. They've got a lot of built-in equity in their houses, prices went up in really every community nationwide. So everyone would like to close, sometimes life gets in the way and things affect the mortgage business that they're not able to, but it's almost exclusively mortgage related.

Okay, that's good to hear. I have one more question. It seems like you have enough homes in backlog to meet your closing guidance for the year. You still have strong pricing as well. I'm curious why you didn't raise the low end of your gross margin guidance, especially since you achieved a 27% gross margin in the first half of the year.

I believe the issue stems from uncertainty regarding costs and some mix factors. As we mentioned earlier, we want to ensure we have a sufficient buffer for potential cost increases for our upcoming starts in August, September, and October. The wholesale segment affects our gross margins, accounting for 15% of our closings in the second quarter. We remain on target for that to represent 10% to 15% of our business in the third and fourth quarters, which will influence our margins and whether we fall at the higher or middle end of our range. This will certainly contribute to our return on equity and operating margins amid very strong demand. While we are seeing activity in the wholesale business, it will factor into our considerations when we issue our guidance.

Our next question comes from Alex Barrón from Housing Research Center.

Yes, great performance this quarter. I wanted to inquire about your build time, which has typically been around 60 to 62 days. How is that currently affected by the supply chain constraints?

Yes. Great question, Alex. This is Charles. I mean it is definitely extending out. I mean we are seeing delays in terms of the supply chain, in terms of ordering, lead times are increasing. We're managing around that. Our construction teams are doing a great job of working through those challenges, if you will, it's market specific. So depending on the market, for example, one market and maybe brick, another market may be something like windows or garage doors or some of the things that we've been working through. But lead times are definitely impacting construction delivery dates by several weeks. We're building it into the schedule and then just managing the schedule around it.

Okay. I mean I know also, historically, you guys have always kind of built and I guess, closed a lot of houses before you even find buyers. And I guess now the market kind of flipped, where demand was so strong that you guys are now even selling, like you said, at foundation stage. So my guess is that you're trying to rebuild the pipeline of spec inventory. So can you talk about what your starts look like, what your plan is for starts in the back half of the year? How you guys are thinking about it going forward? What your ability is to start specs to replenish that inventory?

Sure. Yes, we had roughly about 3,200 starts in the second quarter. Our finished completed inventory was down to about 360 units at the end of the second quarter. So we've never seen a number that low in our history, to your point about really selling in advance, also goes back to the inventory turn comment we made in terms of how we've been able to deliver a strong return on equity. But we've got 4,300 houses that are in some stage of construction. And I think we're releasing what we feel like is a comfortable number on a community-by-community basis. So in some markets, like Texas, for example, we can release more units at one time than we would maybe, say, in another market. So I think it comes down to lot availability. We had just under 8,000 finished lots. And given our closing pace, that would be less than we normally would like. We'd like to have 1 year's worth of supply of vacant finished lots. So we're a little under on that. We've got 11,000 units that are currently under development of our nearly 30,000 that we have in raw and under development, 11,000 of those are actively being developed. So I think the idea is that depending on the community by community specific, if we've got lots available to start, and the demand is there based on what we're seeing in terms of contracts, then we're starting as many as we can in that community and just continue to manage it that way.

Got it. And then just to focus in on the delivery side a little bit. So you guys just kind of gave us an estimate for July. So am I to imply based on the order trends and on this that it's more likely than third quarter deliveries will end up being higher than fourth quarter? In other words, they will be similar to the dip you're seeing in orders now that will follow through in fourth quarter? Is that reasonable?

Yes. I mean, it could be, Alex. I mean I think we're not getting that much specifics on community count. But certainly, the third quarter is off to a great start with closings, with 930 in July.

Got it. And if I could ask just one last one. What is your sense about the margin on these new homes that you're starting and selling compared to the homes in backlog? Is it better than what you've delivered so far?

Overall, it should be better. I think that's reflective in our gross margin. There's a lot of case-by-case because of markets, but our backlog does have a lot of houses that were sold in the first quarter. Recent sales do have better gross margin than the backlog. That is generally a true statement.

And our next question is a follow-up from Truman Patterson from Wolfe Research.

Just a couple of follow-ups here. First one on affordability. You all historically focused on affordability and kind of driving the lowest monthly mortgage payment. And oftentimes, we think of it as a spread versus a rental payment. In the areas and renters that you're targeting, how does that spread look like today versus maybe a year or 2 ago? I'm trying to understand how much rental payments in your areas are kind of keeping up with home price appreciation.

Yes. I think Truman, how we look at it is it's always been more expensive to buy a home from LGI than to rent, but you're usually not comparing apples-to-apples. Traditionally, our numbers always showed that to rent an apartment that's usually 1 or 2 bedrooms where most of our buyers come from, and to go into 1 of our LGI homes, including taxes and insurance, owner association dues, it's $500 to $600 more a month. One of the things that we're looking at is our average sales price is up, I believe, about 15% year-over-year. And that's a few hundred dollars or $100 a month probably in payment. So that's what we're closely monitoring, affordability is important. Obviously, all of us have seen the benefits of rates staying real low. So even though the average sales price is higher, it hasn't had that big of an impact on monthly payment. And I do think we're hearing from the field and seeing our buyers are more qualified than ever. For the first time in our history last quarter, our partner, loanDepot, and the mortgage business reported our average credit score was 708. And that was the first time that our average credit score was north of 700, and our debt-to-income ratios are lower than they were a year ago. So those are both positive signs as far as the buyers and their ability to take on the additional pricing, if you will, and still feel good about it.

Okay. And then just a follow-up on 2022 kind of community count and potential there. Look, I appreciate you're not forecasting demand or anything like that, and it depends on what absorptions are. But if we just play kind of a hypothetical and say that absorptions remain elevated and could even possibly expand based on demand. I'm just trying to understand what sort of internal capabilities you all have from a starts metric per community or just overall, I believe, you started about 3,000 starts in each of the past couple of quarters. Is that a comfortable pace for you all? Trying to balance this with you all have 11,000 lots that are actively being developed? Just trying to understand what potential upside there might be.

Yes, there is potential to increase the number of starts in each community. In places like Austin, Texas, and Houston and San Antonio, we are seeing monthly absorption rates of 12, 13, or even 20, which reflects the outstanding performance of our construction and leadership teams. Many builders cannot start, build, and close at these rates. However, the total number of homes available typically remains the same. For instance, if a community has 100 lots, whether we're building at a pace of 8 or 12 per month, the overall closings will align over time, just happening at a different speed. At a rate of 12 homes a month, we would sell out in 12 months; at 8 homes a month, it would take a year to sell out. Therefore, while we can increase starts, we also need to ensure we can sustain this pace, and there are timing challenges both for us and the industry, especially since our absorption rates are 30% to 50% higher than they have been in recent years. Our development plans and forecasts were not designed to accommodate this level of absorption, which means we are somewhat behind on launching new sections or acquiring new projects. We've primarily been purchasing land to develop ourselves, and converting raw land into home closings typically takes 24 to 36 months.

And our next question comes from a follow-up from Alex Barrón from Housing Research Center.

I know historically, you guys have sent a lot of mailers and stuff like that to people. So I'm guessing a lot of your historical buyers have been renters, but we've been hearing that there's also a lot of influx of out-of-state people coming into places like Texas and Florida from California and New York. So I'm curious if you guys are also seeing that pickup in those types of buyers? Or are you still generally seeing the same profile of buyers you've seen historically?

It's a good question, Alex. We don't have very comprehensive data on that, but we are definitely noticing an influx of out-of-state buyers. Many of these individuals are still renters relocating from high-cost or more restricted markets like California and New York to Texas, where job growth is strong. We're also seeing them move to many of the areas where we operate, such as the Carolinas and Florida. Phoenix and Las Vegas are also strong markets for us. Additionally, we've noted an increase in investor activity, not only from our wholesale side but also from non-investors acquiring one, two, or three homes at a time. This trend is definitely elevated right now. Overall demand in the market is currently as strong as we have ever experienced. All these factors play a role in that. Looking ahead to 2022, 2023, or 2024, we expect the market to normalize, returning to conditions seen in 2017, 2018, and 2019. We're focusing our efforts on reaching renters through social media and direct mail, but with our current backlog sold and a limited number of homes for sale, our marketing spend is minimal, which is positively impacting our SG&A numbers, as Charles mentioned.

Okay. And then on this issue about what stage to sell the homes generally speaking, what's your thought process at this point, given supply chain, given the time it takes to build the homes, where are you guys optimally pricing the houses at this point? I'm guessing it's no longer a foundation, but just curious if you can comment on that.

Yes. We're putting houses on the price list for our sales team to sell when we're comfortable that we understand all the costs, and we're comfortable with the schedule when that house is going to be complete. And that's a little bit different than every market. But essentially, a lot of times it is when the slab gets done or when the frame drops, and you're into construction at some point, where you're comfortable that you're going to have the appliances, you're going to have the windows, you're going to have the brick, and we can provide a date to a customer that both of us can feel good about that we can deliver.

And our next, we have a follow-up question from Deepa Raghavan from Wells Fargo Securities.

Eric, it seems there are mixed messages here. While your underlying numbers are strong, it seems you're tempering expectations moving forward. I'm curious if you're anticipating a normalized absorption pace of around 6 to 7, or if you think a pace of 7 to 8 is still a possibility based on your internal forecasts.

It depends on what category we're discussing, Deepa. Our optimism is currently quite high, following a monthly closing rate of 9.1%, gross margins of 28.5%, a pretax margin of 18.8%, and a return on equity of 40%. This is the best quarter in LGI's history, and the team is very excited about it. While we are not providing guidance for 2022, it's reasonable for those in the homebuilding industry with 25 years of experience like us to consider what 2022, 2023, and 2024 might look like. From 2014 to 2020, we averaged 6 to 7 closings per month, and this year we've seen that increase to 8 to 9. Similarly, with average sales prices and gross margins, we will forecast based on our land acquisition strategies and how we assess deals, taking into account historical absorption rates and margins rather than expecting the best quarter in LGI's history to continue for the next three years.

Okay. The 11,000 lots being developed, you also mentioned that's less than 1 year's worth of supply. Did I hear that right? I mean you're only closing like 10,500 this year?

Yes, it was just under 8,000 finished vacant lots that were under the year supply, with 11,000 under active development.

And how much of this 11,000 active development can be released next year?

Yes. They're in various stages. Some of them are nearing completion. Some of them are just getting started. So to Eric's point, it takes a couple of years over on a project-by-project basis to deliver lots. So they'll stage in throughout the next 24 months.

I am showing no further questions. I would now like to turn the call back over to Eric Lipar for closing remarks.

Thank you for participating on today's call and your continued interest in LGI Homes. Everyone, have a great day. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.