Welcome to LGI Homes Third 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. We have allocated an hour for prepared remarks and Q&A. 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 third quarter and the 9 months ended September 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 statement sections for a discussion of the risks, uncertainties and other factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. 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 September 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 will now turn the call over to Eric.

Thanks, Josh. Good afternoon and welcome to our earnings call. I will start by sharing highlights of our third quarter before handing it off to Charles to provide more details on our financial results. Finally, I will close with an update on our performance so far in the fourth quarter and discuss our updated guidance for the full year. First, I’d like to recognize that next week marks our eighth anniversary as a public company. At the time of our IPO, our goal was to grow the company by replicating our business model in new markets across the country. Over the last eight years, we have grown our closings and revenues at annual rates of 29% and 39% respectively, quadrupled our community count, delivered some of the industry’s most attractive and consistent profitability metrics, and have created significant value for our shareholders, demonstrated by the 1,200% appreciation in our stock price. Today, we are the tenth largest builder in the country, with operations in 19 states and 35 markets. Year after year, we have proven that our unique operating model is scalable and successful in every market we’ve entered. Reflecting on these successes, I am most proud that we have maintained our people-focused culture that rewards excellence and makes homeownership attainable for families across the country. I thank all of our employees for their hard work, commitment to our customers, belief in our values, and loyalty to our company. Because of their dedication, we have consistently achieved record-setting results and the third quarter was no exception. During the quarter, we set new company records for revenue, closings and absorptions despite ongoing supply chain challenges and a lower number of active communities. Closings in the third quarter increased nearly 20% over last year to a record 2,499 homes. Combined with higher average sales prices, this drove a 41% increase in our revenue to a third quarter record of $752 million. During the quarter, 9 of our 35 markets delivered double-digit absorptions and we averaged a record 8.1 closings per community per month company-wide. Charlotte was our top market with 15.7 closings per community per month, second was San Antonio with 14.1, followed by Austin with 13.6. Atlanta and Dallas-Fort Worth each achieved 10.8 closings per community per month. We remain focused on our core value of exceptional customer service by honoring the commitments made to our buyers and held fast to our goal of keeping homeownership attainable without sacrificing our margins. Despite recent cost pressures, we delivered gross margin of 26.9% and adjusted gross margin of 28.2%, our best third quarter performance since 2014. Finally, our SG&A expense ratio reached an all-time new low, which helped drive net income to a third quarter record of $101 million. Global supply chain disruptions have extended construction and development cycle times across our markets. I am grateful to our construction and purchasing teams who work closely with suppliers and trade partners to manage these headwinds and limit their impact on our customers. Our 100% spec-focused model is a strong advantage in the current environment. We pre-select the fit and finishes of our homes, enabling us to quickly pivot between suppliers and even substitute alternative SKUs to keep construction moving forward. While these challenges are expected to continue, we believe our people and unique operating model position us to deliver homes at a pace in line with achieving our full year closing guidance. Throughout the quarter, we continued to work through the large backlog we built early in the year and to release new homes for sale once we had visibility on construction times and costs. As we projected on our last call, the slower pacing of sales, combined with last year’s strong order comparison, resulted in a 78% decline in net orders in the third quarter. On a year-to-date basis, the decline was 2.8%. Further declines in order growth are expected as we convert our remaining backlog and continue to compare results to all-time high comparisons in the fourth quarter of last year and the first quarter of 2021. We will continue to manage our sales pace with the goal of bringing the size of our backlog and our customers’ time in it back to normal levels. Demand continues to outpace supply. And in many communities, we continue to sell out of homes as soon as we release them due to existing waitlists. However, we are seeing signs that demand levels are normalizing from the surge that began last year. While price increases are certainly playing a role in moderating demand, we don’t think it’s the primary driver as overall affordability continues to be supported by low interest rates. Instead, we believe that the industry is slowly working through the earlier demand surge and that as these homes deliver, we should return to a normalized demand environment, driven by healthy long-term growth fundamentals. During the quarter, we made significant investments in land and lots to meet that demand in the years to come. Last quarter, we acquired over 14,000 lots and increased our total lot position to nearly 88,000, while maintaining our disciplined underwriting criteria at what we consider to be normalized absorption assumptions, positioning us well for our future growth.

Thanks, Eric. Our revenue in the third quarter increased 40.7% year-over-year to a record $752 million. We closed 2,499 homes, a 19.5% increase year-over-year. These closings included 433 homes sold through our wholesale business, representing 17.3% of our total closings compared to 92 homes or 4.4% of our total closings in the same quarter last year. Our average sales price increased 17.7% over the same period last year and 8.5% sequentially to a record $300,764. Price increases were driven by a favorable demand environment that allowed us to pass through costs, increased closings in certain markets with higher price points, particularly in the Northwest, and partially offset by a higher percentage of wholesale closings. Gross margin as a percentage of revenue this quarter was 26.9% compared to 25.3% during the same period last year. This 160 basis point improvement resulted from our success passing through cost increases, lower capitalized interest expense, and continued operating leverage, partially offset by higher lot costs and a larger percentage of wholesale closings. Excluding wholesale, gross margin was up over 260 basis points year-over-year. And given our performance to date, we’re tightening our gross margin guidance by 50 basis points to a range of 26.5% to 27.5%. Our adjusted gross margin as a percentage of revenue this quarter was 28.2% compared to 27.3% for the same quarter last year, a 90 basis point improvement. Adjusted gross margin excludes approximately $8.6 million of capitalized interest charged to cost of sales during the quarter and $1 million related to purchase accounting, together representing 130 basis points. Similar to gross margin, we are tightening our adjusted gross margin guidance by 50 basis points to a range of 28% to 29%. Combined selling, general and administrative expenses for the third quarter were 8.6% of revenue compared to 10.8% during the same period last year, representing an improvement of 220 basis points year-over-year. 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 $39.9 million or 5.3% of revenue compared to $35.5 million or 6.6% of revenue for the third quarter of 2020. The 130 basis point improvement was primarily related to operating leverage realized from the increase in revenue. General and administrative expenses totaled $24.5 million or 3.3% of revenue compared to 4.2% for the same quarter last year. The 90 basis point improvement was primarily driven by operating leverage resulting from higher revenue, increased absorptions, and a larger percentage of wholesale closings. As a result of our performance to date, we are maintaining our SG&A expense guidance in the range of 9% to 9.5%. EBITDA for the quarter was $135.9 million or 18.1% of revenue, a 180 basis point improvement over the same period last year. Adjusted EBITDA for the quarter was $147.8 million or 19.7% of revenue, a 320 basis point improvement over the same period last year. Adjusted EBITDA excludes approximately $13.3 million related to the redemption premium, debt issuance costs and discount previously capitalized associated with our 2026 senior notes and $1 million related to purchase accounting, together representing approximately 160 basis points. Pretax net income for the quarter was $127 million or 16.9% of revenue, a 230 basis point improvement over the third quarter of 2020. Our effective tax rate in the third quarter was 20.8%. The year-over-year increase in our effective tax rate was due to the retroactive federal energy-efficient homes tax credit we recognized in the third quarter of last year. And given our performance to date, we are tightening our effective tax rate guidance for the full year by 50 basis points to range between 20% and 21%. Our third quarter reported net income increased 13% year-over-year to $100.6 million or 13.4% of revenue, and our third quarter earnings were $4.10 per basic share and $4.05 per diluted share. Excluding charges related to debt extinguishment, net income in the third quarter would have been $111.1 million and earnings would have been $4.53 per basic share and $4.48 per diluted share. Third quarter gross orders were 1,389, a decrease of 68.2%, and net orders were 790, a decrease of 77.7% year-over-year. Reiterating Eric’s earlier comments, the recent decline in our orders is a function of sales pacing, a desire to limit our buyers’ time and backlog, and a record third quarter comparison last year. Our cancellation rate for the third quarter was 43.1%, and this was expected as we released fewer new homes for sale to compensate for cancellations that occurred in our backlog and we would expect this trend to continue as we pace our sales and work through our backlog. We finished the third quarter with a backlog of 3,090 homes, representing a decrease of 13.7% year-over-year. The value of our backlog on September 30 was approximately $1 billion, an increase of 2.9% year-over-year. We continue to make significant progress acquiring land to support our long-term growth objectives and finished the quarter with our strongest land position ever. As of September 30, our land portfolio consisted of 87,512 owned and controlled lots, a 53% year-over-year increase and a 15.3% increase sequentially. We added almost 4,200 new lots to our owned inventory and ended the quarter with 44,174 owned lots, an increase of 35.4% year-over-year and 4% sequentially. 7,342 of our owned lots were finished vacant lots and 32,250 were either raw land or land under development. During the quarter, we started over 2,300 homes. And as of September 30, we had 4,582 completed homes, information centers or homes in process. Excluding our information centers, only 456 of these homes were complete, a decline of 55.8% compared to the 1,031 completed homes at the end of the third quarter last year. Finally, we had 43,338 controlled lots at quarter end, an increase of 76.5% year-over-year and 29.7% sequentially. Turning to the balance sheet, we ended the quarter with approximately $47 million in cash compared to $112 million last quarter. Our higher cash balance last quarter was attributable to excess proceeds from the issuance of our new 2029 senior notes after giving effect to the temporary pay down of our revolving credit facility. During the quarter, we used amounts available on our credit facility to redeem all of our outstanding 2026 senior notes. And as a result, we recognized a $10.3 million early redemption expense and expensed $3 million of deferred financing costs and discounts that were previously being amortized in association with the notes. The completion of this refinancing successfully extends our debt maturity by 3 years to 2029 and saves $8.6 million per year in interest expense. At the end of September, we had approximately $666 million in combined total debt outstanding under our revolving credit facility and our 2029 senior notes. Our available borrowing capacity under our credit facility was approximately $460 million. Including cash on hand, we ended the quarter with total liquidity of $506.3 million. Our net debt to capitalization ratio was 31.7% compared to 36.1% at the same time last year. In last year, our shareholders’ equity increased by over $323 million to more than $1.3 billion. Additionally, as a result of our strong operating results and profitability, we delivered a return on equity of 38.7% for the 12-month period ended September 30. During the third quarter, we repurchased 358,817 shares of our common stock for $56.1 million. And since 2018, we have repurchased nearly 1.7 million shares of our common stock. As of September 30, there were 24.3 million shares outstanding and $162.7 million remaining on our existing stock repurchase program. We expect to continue the systematic and opportunistic share reductions as a component of our broader capital allocation priorities.

Thanks, Charles. Our strong performance has continued into the fourth quarter. Subject to review and verification of fundings, we expect to send out a press release tomorrow, formally announcing that in line with our expectations, we closed approximately 725 homes in October. Moving to our updated full year guidance, we now expect to end the year with fewer communities than we guided to last quarter. Elevated absorptions have caused communities to close out earlier than planned, and supply shortages have extended development timelines. As a result, we now expect to end the year with 100 to 105 active communities. We continue to model flat to slightly up community count in 2022 with the expectation of a considerable increase in our communities thereafter. Despite a lower community count expectation this year, our closing guidance is unchanged, thanks to the phenomenal work our construction and purchasing teams are doing every day to manage the supply chain challenges. Year-to-date closings through October indicate that we remain on pace to deliver between 10,000 and 10,500 homes this year. Similarly, our average sales price guidance of $285,000 to $295,000 for the full year is unchanged. As Charles noted, we are tightening our gross margin guidance to a range of 26.5% to 27.5% and our adjusted gross margin to a range of 28% to 29%. The third quarter marked our fourth consecutive quarter of single-digit SG&A expense as we benefit from higher closings and average sales prices. Given our performance to date, we are maintaining our SG&A guidance in a range between 9% and 9.5% and now expect an effective full year tax rate between 20% and 21%. I’ll say again how pleased we are with our results. For the last 8 years, we’ve repeatedly set records, and last quarter was no exception with new third quarter highs in closings, absorptions and revenue. Despite industry-wide challenges, we have maintained our strategy of going deeper in our existing markets and expanding to select new markets as we pursue the goal of doubling our community count. Based on our impressive results to date, our strong balance sheet and attractive land pipeline, we believe we’re extremely well positioned to deliver on all of our expectations this year and for many years to come. We will now open the call for questions.

Thank you. Our first question comes from Jay McCanless with Wedbush. You may proceed with your question.

Hi, good afternoon. Thanks for taking my questions. The first one, Eric, could you please repeat what you said about community growth for ‘22?

Yes. The community count for ‘22, Jay, we said flat to slightly up. Last quarter we said similar, but since we revised down, now we’re saying flat to slightly up in ‘22 and then a considerable increase in community count in ‘23.

Great. And then on the cancellation rate, 43% versus, I think it was 19% last year. Is part of this rate driven? Or is part of this you guys canceling out some people who you think might not qualify once the home is ready? Maybe some more color around that.

Yes. It’s really neither of those, Jay. It’s really just the orders. It’s just the math equation. Since we didn’t have our main orders going through this quarter, we limited that inventory to sell. The cancellation percentage was just a lot bigger number. But no, we’re honoring all the contracts. The customers we sold in the first quarter that are coming through, even though we didn’t build enough in a lot of cases, upholding our core values and integrity. And if we told the customer we’re going to sell them the house, we’re going to deliver that house to them at that price. So, the cancellation rate is really just attributable to the lack of orders, and that’s attributable to not having a lot of inventory to sell and make sure we’re providing good service to our customers.

Okay, great. Thanks for taking my question.

You are welcome. Thank you.

Your next question comes from Carl Reichardt with BTIG. You may proceed with your question.

Thanks, everybody. I wanted to ask about the lot supply at 88,000. And I think, Charles, you said 7,300 or so finished vacant. If you look at that 88,000 you’ve got under control, can you tell us what percentage of that is associated with currently open communities? And then what percentage is associated with, say, what you’d expect to bring to market in ‘22 and ‘23 and beyond?

Yes. Thanks, Carl. Yes, it’s a great question. We don’t have necessarily that level of detail handy, but what we can say, right, above the 88,000, about half of them are controlled. And consistent with what we’ve been talking about in the last couple of quarters, the vast majority of those controlled lots are raw land deals. So piggybacking off of Eric’s comment about ‘23 and 2024. So, we’re just not seeing a lot of finished lot deals in our pipeline. And so we’re focused on buying raw land, putting that into our development pipeline and getting those ready to deliver as communities in 2023 or 2024.

Okay. So that makes sense. Is it still you’re going to do the vast majority self-developed, not finished lot option contracts, and that’s been your way you’ve operated for a while? Okay. Thanks.

Correct.

And then you made a comment about pricing and normalization. I’m curious if – given the number of closings you had to the wholesale channel, if you’re seeing similar levels of price resistance from that customer?

This is Eric, Carl. Great question. Yes, I’d say described the wholesale business is extremely strong right now. There is a lot of capital going into that space and demand is extremely robust. We have very little inventory to sell the investors. So we’ve been very pleased with the percentage this year. We’re going to end up, it’s going to be probably 15% of our closings after coming off 17% last quarter, and we’re at 14.5% year-to-date. So I would describe the wholesale business as demand still being very strong, even at today’s pricing.

From a price resistance standpoint, you don’t sense you’re seeing a similar dynamic to what you’re seeing in the consumer channel?

Not as much, no. That is correct.

Okay, great. Thanks a lot. Appreciate it.

Thank you.

Thank you. Our next question comes from Truman Patterson of Wolfe Research. You may proceed with your question.

Hey, good afternoon, everyone. Thanks for taking my questions. First, you all are clearly doing a lot of development work. We’ve been hearing of continued delays or shortages on the municipal and horizontal development side. Last quarter, I believe you all mentioned that the time that you buy a raw piece of land to convert it into closings was kind of 24 to 36 months. I was just hoping you could give an update there and what’s happened over the past 3, 6 months?

Yes. Truman, this is Eric. I can start. Yes, I’m not sure if it’s changed much in the last quarter. But certainly that timeline is not getting any quicker. It depends on the market. It depends on how much engineering has been done on the specific tract. But 24 to 30 months is certainly a good average for the time it’s taken to buy a piece of raw land and turning that into sales, construction, and closings. So, I think we’re not going to impact, any raw land deal we buy won’t have an impact on ‘22 or ‘23 closings. It’s now 2024 and 2025 impact.

Okay. And then just a housekeeping question on the 22 community count that you expect to be flattish to slightly up. Is that based on your more traditional kind of 6.5 to 7 per month absorption pace? Or does that assume an elevated, we will call it, 8 per month that we’re seeing in ‘21?

No. That would be forecasting more 6.5 to 7, more normalized ‘18, ‘19 and ‘20 absorption pace, which is still very strong, but nothing like this year.

Okay. And then final one for me, you all have returned to the 100% spec strategy. Could you just discuss what sort of spec build you were able to drive during the quarter? I believe in the prepared remarks you said 456 completed specs. I’m trying to just balance this going forward because your third quarter absorptions based on orders were in the 2.5 per month range?

Yes, Truman, this is Charles. I mean we started just over 2,300 homes in the third quarter. And I think we’ve always been 100% spec. It’s just the demand has been strong. And the backlog has been so strong from the early part of the year. But 2,300 starts for the quarter and only 456 completed at the end of the quarter is about half of what we had at the end of September last year.

Yes. Sorry, let me clarify versus pre-sale earlier in the year, switching to selling a little bit later. Okay. Thank you all for your time. I appreciate it.

Thanks, Truman.

Thank you. Our next question comes from Michael Rehaut with JPMorgan. You may proceed with your question.

Hi. This is Maggie on for Mike. First question, just on the price increases. I believe you said they were still being used to moderate demand, but they had moderated a bit. So I was wondering if you could give us an idea of the level of price increase that you saw during the quarter and how you’re thinking about the potential for future increases over the next quarter or two quarters?

Yes, Maggie, this is Eric. I can start. Great question. Having our ASP over $300,000 for a quarter is driven by demand, but also driven by costs that have been elevated over the last quarter or two. So, we have had to increase our prices substantially because all the costs are up, whether it’s lumber or now all of the costs of construction, whether its fees, on the development side, obviously, land is increasing and all the development costs are increasing as well. So, we have seen some moderation in costs on the construction side. Lumber has come down, but other costs have increased. So, we are projecting ASP to be very similar in Q4. That’s why our guidance remained unchanged. But I think the higher cost environment is going to be here for a while.

Got it. Thank you. And then second, just on the wholesale part of the business. I believe you said that you are expecting it to end up at about 15% of closings this year. As you look forward over the next couple of years, could you talk about kind of how you think of the wholesale business as a part of your overall business? And kind of if you have any target or where you think that might go?

Yes. We are not ready to give guidance for 2022 on the wholesale business yet. We are working through our pipeline of getting our contracts closed for year 2021. We will start looking over the next quarter or two quarters available inventory for 2022. We are confident the demand will be there. We think it’s been a very accretive part of our business this year, as evidenced by – we thought it was going to be 10% to 15%. We are going to end up at the high end of the range, just I think amplifying the demand that’s in place. So, we will go back to everybody on ‘22 or ‘23, but we think the demand will be there for it to be still a good part of our business and very accretive to our shareholders.

Got it. Thank you.

Thank you. Our next question comes from Stephen Kim with Evercore. You may proceed with your question.

Hey. Thanks guys. This is actually Brian on for Steve. So, orders were down significantly on a year-over-year basis, but the number of orders themselves was well below the level of starts you just mentioned you did during the quarter. We have been doing some analysis on how oversold the builders broadly have gotten during the past few quarters. And it looks to us as though you guys were significantly oversold, say, back in 1Q ‘21. But in these past two quarters, you have slowed your orders and in doing so, almost completely reversed that condition. So, I guess my question is, are you now positioned to – positioned well to lift sales restrictions in the near future and possibly return to a more normal level of sales absorptions next quarter?

Yes. It’s a great question, Brian. This is Eric. Yes. And I think another way to look at it is we have got 7,900 closings, 7,916 through Q3. We have got just over 3,000 homes in the backlog, and the vast majority of those are scheduled to close in Q4. So, we don’t have a lot of available inventory to sell still. We are just now starting to sell January and February deliveries, because we are operating in an environment where we are not going to put a house for sale unless we know the costs because we have been dealing with such an inflationary environment. And we don’t know the cost until we start construction of the house for certain. And then also providing exceptional customer service to our customers, we want to make sure we are confident in the closing dates, and that also doesn’t happen until the house has started construction. So, the houses we are starting in November that are going to deliver in January, February, March of next year, we are just starting to put those on the price list. So, our orders for Q4, we believe are going to be down a similar percentage to Q3, in that 70% to 80%, because we have nothing to sell. And then the first quarter should get back to normalized order environment. Now, it’s a very tough comparison because the first quarter of last year was orders were the best in homebuilding history practically for all of us builders. So, it’s really, really strong. But first quarter, we will get back to normalized inventory and orders for us.

Okay. Got it. Thanks, Eric. That’s really helpful color there. And then my second one, changing gears here, is on the topic of supply chain disruptions. We have heard tales from some of the other builders, sending workers across state borders to pick up paint or shipping siding from one job site to another. And I guess I am wondering if your third quarter reported margins and/or your projections for fourth quarter include any negative impact from the supply chain disruptions? And if so, are you guys able to quantify that impact?

Yes. I think the biggest impact on supply chain is just the construction timeline. And our construction timeline is running on average about 30 days longer than it was kind of pre-pandemic or pre this year. So, I think that’s the biggest disruption more than cost. Certainly, costs are elevated, but under the example that you’re using, I don’t think we are doing a lot of that in the field as far as getting different supplies from out of market or across state lines. And then our gross margin, we describe, is right on track for the third quarter and fourth quarter in our annual guidance, having adjusted gross margin in the 28%, so it is very strong and stronger than historical and right where we want to be.

And I guess one more. Apologies if this was already brought up, but – and this is probably peak lumber costs that you are working through here in 3Q primarily, right?

Correct. Yes. Our peak lumber cost was three months or four months ago for start. So, it’s coming through from closings. September, October right now is when it’s going to come through our financials.

Okay. Awesome. Thanks a lot guys. I will pass it on.

You’re welcome. Thank you.

Thank you. Our next question comes from Ken Zener with KeyBanc. You may proceed with your question.

Hello everybody.

Good afternoon.

I am just checking on my mic. I might have missed it, but did you guys lay out the actual inventory units? I think it was 47, 48 last quarter?

We did 4,582 total units. We had 456 completed, about 4,000 in WIP. So, our WIP number is about the same as it was last year with the completed units being down.

Yes. The reason I ask is, I mean essentially close, right, inventory, that’s where you are starting. So, the number that you highlighted for starts. What is – as you guys talk about normalization, I think you are saying inventory should normalize first quarter, second quarter. Just conceptually, what – are you guys actually targeting just a certain rate there because, and you guys are focused on closing, not the orders, obviously, those are just outputs. But what are the governors that you are seeing? I mean, if you look back to ‘16, I mean, obviously, you have grown a lot, so you are in a lot of regions. There are a lot of different factors undermining trend analysis, but you guys were doing six in ‘16, nine in ‘17, back to seven in ‘18. You did eight in ‘18. I mean is there actually a natural cadence that you are targeting there when you think about your communities, or is it better talked about Texas where you have been, you have extraordinary pace because the communities are larger. In the Northwest, where you cited strong gross margins, it’s – they are a little smaller, so it’s a little different. Can you kind of just walk us through what you think the variances are there that are causing that thought about your normalization next year?

Sure. No, it’s a great question, Ken. And I think our philosophy on inventory management is the same, which is we like to see around four months to six months inventory at any one point in time. So, at a build pace of 10,000 a year, you would expect to see somewhere around 5,000 units. So, we are coming in at 4,600 roughly total is close to where we want to be. The difference, I think and what we are highlighting is, is that the shift is into just a little heavy in WIP. So, we are delivering the houses and closing with the customers very quickly, which is very good for inventory turnover and cash flow. So, we are being very efficient. So, I think normalization, what you would see is maybe the total units don’t necessarily change by much, but it’s more of a shift to 60-40 WIP to complete or more of a 50-50 type of arrangement rather than the vast majority just being in WIP.

Right. Yes, because your closing guidance is just half of what you have under construction, right? I mean, it’s not bad at all. Last question, for your inventory of $1.9 billion, do you have that broken out for WIP and land, or is that something that just comes out in the Q?

It comes out in the footnote in the 10-Q?

Yes. Do you happen to have kind of a directional breakout right now right here?

I do. I have got that for you. So, in land, land under development and finished lots, was about $1.2 billion. We had $580 million in homes in progress and about $88 million in completed homes with the balance being in information centers.

Great. Thank you very much.

Thank you. Our next question comes from Deepa Raghavan with Wells Fargo Securities. You may proceed with your question.

Hi. Good afternoon everyone. Two quick questions for me. One, can you talk through your gross margin expectations into 2022? Would that be similar, or should we expect better picture as you just mentioned you peaked lumber this quarter, next quarter, which means your lumber starts to benefit next year, but then we have these backlog closing cadence and supply chain delays that may or may not hurt. How do we think about margins into 2022?

Yes, Deepa, this is Eric. I can start. We are not ready to give ‘22 guidance for margins yet. But that being said, if you look at our historical gross margins and how we buy deals, we do a lot of development. So, when we underwrite a piece of property we are buying, we underwrite that to an adjusted gross margin of 25% to 28%. And historically that is what we have produced. The wholesale business brings that down slightly. And this year, I described as a very strong gross margin range, and including wholesale, we are likely to end the year above our historical averages. Next year, more consistency in gross margin. I mean we expect adjusted gross margin to be between 25% and 28% for the future because that’s how we buy deals, and that’s our expectation, and we have been very good about producing those types of results. So, similar to historical results for gross margins, that’s what we always expect.

Okay. That’s fair. Can you talk through your lot sizes? I mean, not lot sizes, sorry, the amount of lots per community and if that’s been increasing or staying the same? I mean your lots have obviously increased a lot, but it looks like none of these are filtering even into 2022, you are calling for everything to benefit 2023 and beyond. So just curious, is it the same number of lots per community on average?

Yes. I think directionally, it’s probably higher just because the blend of finished lot developments or finished lots, take down development, buying from a developer compared to lots that we self-develop. The percentage is increasing towards more and more self-development. And those tend to be larger. I don’t have those and I don’t think Charles has the exact numbers in front of us. But directionally, they are larger land positions.

Alright. I will pass it on. Thanks very much. Good luck.

Thank you.

Thank you. Our next question comes from Alex Barron with Housing Research Center. You may proceed with your question.

Thanks, gentlemen, and good afternoon. I was hoping you could give us the starts number for year-to-date and also for last year’s quarter, just to get a sense of how this quarter compares to 2,300?

Just flipping here Alex, to see if I had it handy, which I do not, unfortunately. Go ahead and ask – I will see if can get back to you here.

Okay. Great. Yes, the other question is, I was wondering if you guys feel like there has been any change in the mix of buyers that you guys are seeing? Obviously, there is a lot of talk with people coming in from other states. There has been baby boomers who all of a sudden are buying houses. Are you guys seeing the change – any change in the mix of your buyers versus what you traditionally saw? That’s question one. The other question is, as you guys are doing these land development deals for 2023, do you expect that the prices are going to be similar or the size of the homes are going to be similar to what you are doing now, or are you going to seek to do something to make the homes more affordable price point wise by 2023?

Okay. Good questions, Alex. This is Eric. I can start. Well, Charles is looking up those numbers. First of all, our buyers, I would point to a couple of things. One is we have got our highest average sales price in history. Rates have basically been the same for the last year or 2 years. So, that means our monthly payments are higher. So, the quality of our buyers is measured by the amount of money they are making and their credit is the best it’s ever been. Our average credit score last quarter was 711 of our buyers. Historically, that’s been a number that has been between 650 and 680. So, we are seeing average credit scores and the quality income and credit wise from our buyers is increasing. I think that’s a direct proportion to the average sales price increasing. And we are seeing more investor activity, not only on the wholesale side, but the bond market investors coming to the community and purchasing our houses, that’s more elevated than it has been in the past. As far as the development goes, affordability is always important to LGI. So, we are continuously on these larger land plans looking for density, more lots per acre is important to us as density. And then really just for the assumptions going forward, on affordability, house cost is really going to drive it. The deals we are buying from a land standpoint, not a surprise day one. Land is more expensive than it was 2 years ago. Currently, it’s more expensive to develop land than it was 2 years ago or even last year. So, it really depends on where house costs. We believe, maybe not off its peak from three months or four months ago, but we believe labor, materials, fees, doing business in the city is going to continue to get more expensive just because that’s how it’s been historically since we have been operating as a public company.

Alex, I have got those numbers for you here. We have started at roughly about 8,500 total for the year with 3,200 starts in the second quarter this year.

Thanks so much.

Yes. You bet.

Thank you. At this time, I am not showing any further questions.

Alright. Thanks everybody for participating on today’s call, for your continued interest in LGI Homes. Have a great day.

Thank you. This concludes LGI Homes’ third quarter 2021 conference call. Have a great day.