LGI Homes Inc (LGIH) 2017 Q2 法說會逐字稿

Welcome to the LGI Homes Second Quarter 2017 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 Rachel Eaton, Chief Marketing Officer at LGI Homes. Mrs. Eaton, you may begin.

Thank you. Welcome to the LGI Homes conference call discussing our results for the second quarter of 2017 and the 6 months ended June 30, 2017.

Today's conference call will contain forward-looking statements that include, among other things, statements regarding LGI's business strategy, outlook, plans, objectives and guidance for 2017. All such statements reflect current expectations. However, they do involve assumptions, estimates and other risks and uncertainties that could cause our expectations to prove to be incorrect. You should review our filings with the SEC, including our Risk Factors and Cautionary Statement about Forward-looking Statements 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, adjusted gross margin and non-GAAP financial measure will be discussed on this conference call. The presentation of this information is not intended to be considered an isolation or as a substitute for the financial information presented in accordance with GAAP. A reconciliation of adjusted gross margin to gross margin, the most comparable measure prepared in accordance with GAAP, is included in the earnings press release that we issued this morning and in our quarterly report on Form 10-Q for the quarter ended June 30, 2017, that we expect to file with the SEC later today. This filing will be accessible on the SEC's website and in the Investor Relations section of our website at www.lgihomes.com.

Joining me today are Eric Lipar, LGI Homes' Chief Executive Officer; and Charles Merdian, the company's Chief Financial Officer.

With that, I will now turn the call over to Eric.

Thank you, Rachel, and welcome to everyone on this call. We appreciate your continued interest in LGI Homes. During today's call, I will summarize the highlights and results from our record-breaking second quarter and year-to-date 2017. Then Charles will follow up to discuss our financial results in more detail. After he is done, we will conclude with comments on what we are seeing for the third quarter and our expectations for the remainder of 2017 before we open the call for questions.

First, we'd like to thank all of our employees for their hard work, dedication and loyalty to LGI. Because of your outstanding performance, we are proud to announce that we delivered a very impressive quarter highlighted by record-setting closings, record-setting revenues, record-setting average sales price, record-setting community count, record-setting net income and record-setting earnings per share.

For the quarter, we closed 1,511 homes, generating over $324 million in home sales revenue, which represents a 45.6% increase over the second quarter of 2016.

Breaking it down, let's first look at highlights from our Texas operations. Comprised of results from Houston, San Antonio, Dallas/Fort Worth and Austin, our Texas operations generated 679 closings, representing approximately 45% of our total closings for the quarter. These 679 closings represent a 16% year-over-year increase in closings for Texas. In addition, the absorption rate in Texas was the strongest across all divisions, averaging 9.2 closings per community per month.

Our concentration outside of Texas increased during the second quarter, making up 55% of our closings compared to 48% of our closings in the second quarter of last year. The Southeast Division represented 18% of our home closings, the Southwest Division represented 17%, the Florida Division represented 16% and the Northwest Division represented 4%. As we have discussed on previous calls, we anticipate our percentage of closings outside of Texas will continue to increase.

Highlighted in the second quarter was an increase in closings in our Northwest Division. This quarter, we closed 64 homes in this division compared to 11 homes closed in the second quarter of last year, which is a 481% year-over-year increase.

Company-wide absorption for the second quarter averaged 7.1 closings per community per month, an increase from the second quarter of last year with 6.8 closings per community per month.

Our top 5 markets for the quarter were: Houston leading the way with 9.8 closings per community per month; Dallas/Fort Worth with 9.7; San Antonio with 9.1; Fort Myers with 8.7; and Charlotte with 8.2 closings per community per month.

For the past 7 years, LGI Homes has been and continues to focus on growth and expansion of our footprint. We ended the second quarter with 71 active selling communities, which is an increase of 15 over the 56 active selling communities that we had at the end of the second quarter last year. These 15 communities spread throughout the nation with 2 in Houston, Orlando, Nashville and Seattle, and 1 each in Austin, Phoenix, Denver, Jacksonville, Atlanta, Raleigh and Portland.

In addition to growth through community count, we are seeing a lot of success with what we are calling our wholesale business. Over the last 12 to 18 months, we have seen increased interest from the single-family rental business to purchase homes from LGI. Our team has been working with these investment groups on identifying mutually beneficial communities where it make sense for us to deliver homes based on available inventory and our land positions. Through these wholesale agreements, we closed 7 homes in the first quarter of 2017 and 65 homes in the second quarter of 2017. The 65 homes closed this quarter were spread across 14 communities in 5 different states. These common closings come at lower gross margin, but similar net margins because of the savings we realize on SG&A expense. Although this quarter our wholesale business made up a small percentage of our 1,511 closings, we are excited about the future opportunities that may come as a result of these relationships.

During the second quarter, we continue to execute our strategy of marketing directly to renters living within close proximity to our communities. Our advertising produced over 100,000 inquiries in the second quarter, strengthening our belief that there remains a strong demand from the first-time homebuyer segment.

In addition, our markets continue to have strong housing demand drivers, including nationally leading population and employment growth trends, general housing affordability and desirable lifestyle characteristics.

With that, I'd like to turn the call over to Charles Merdian, our Chief Financial Officer, for a more in-depth review of our financial results.

Thanks, Eric. Home sales revenue for the quarter was $324.2 million based on 1,511 homes closed, which represents a 45.6% increase over the second quarter of 2016. Sales prices realized from homes closed during the second quarter range from the $170,000s to over $600,000 and averaged $214,545, an 8.7% year-over-year increase. In the second quarter, our approximate average sales prices by division were $206,000 in Texas; $255,000 in the Southwest; $187,000 in the Southeast; $200,000 in Florida; and $323,000 in Northwest.

Gross margin as a percentage of sales was 26.6% this quarter compared to 26.5% for the same quarter last year. Our adjusted gross margin was 28% this quarter compared to 27.8% for the second quarter of 2016, a 20 basis point increase. Included in this quarter's results was a onetime reimbursement associated with the community development. Excluding this onetime cost, our adjusted gross margin would have been 27.2%. Year-to-date gross margin was 26.7% compared to 26.1% last year. And adjusted gross margin was 28% compared to 27.3% for the same period in 2016. Adjusted gross margin excludes approximately $4.3 million of capitalized interest charged to cost of sales during the quarter, representing 134 basis points and consistent with previous quarters.

Combined selling, general and administrative expenses for the second quarter were 11.7% of home sales revenues compared to 12.7% in the prior year. We believe that SG&A will vary quarter to quarter based on home sales revenue. And for the full year, we expect SG&A as a percentage of revenue to be 20 to 50 basis points lower compared to our 2016 full year results.

Selling expenses for the quarter were $24.2 million or 7.5% of home sales revenue compared to $17.9 million or 8% of home sales revenue for the second quarter of 2016, a 50 basis point decrease. The decrease in selling expenses as a percentage of home sales revenue is due to operating leverage realized related to advertising costs. General and administrative expenses were 4.2% of home sales revenue compared to 4.7% for the second quarter of 2016, a 50 basis point decrease. The decrease in general and administrative expenses as a percentage of home sales revenue reflects operating leverage realized from the higher number of homes closed.

Pretax income for the quarter was $48.6 million or 15% of home sales revenue, an increase of 90 basis points over the same quarter in 2016. As a result of a recently adopted accounting standard, our year-to-date effective tax rate of 32.8% is lower than the statutory rate due, in part, to the tax benefit of deductions in excess of compensation cost or windfalls for share-based payments. We would expect our effective tax rate for the back half of the year to range between 33.5% and 34.5%.

We generated net income in the quarter of $32.2 million or 9.9% of home sales revenue, which represents earnings per share of $1.49 per basic share and $1.39 per diluted share. Weighted shares outstanding for calculating diluted earnings per share are impacted by our outstanding convertible notes. In the second quarter 2017, our average stock price was $33.50, exceeding the conversion price. And therefore, the convertible notes were determined to be dilutive. This resulted in an approximate 1.4 million share increase to the weighted average shares outstanding for the diluted EPS calculation for the quarter.

Part of our mission is to deliver an excellent return to our investors. Since our IPO in November of 2013, we have generated over $200 million in earnings and have reinvested it to grow the business and delivered returns on average equity in the mid-20s.

As noted in our earnings release, this quarter, we saw robust orders. Second quarter gross orders were 2,551 and net orders were 1,969. Ending backlog for the second quarter was 1,545 homes compared to 887 last year, and the cancellation rate for the second quarter of 2017 was 22.8%.

We ended the second quarter with a portfolio of approximately 32,700 owned and controlled lots. And as we mentioned on our prior quarter call, our objective is to build a sufficient number of move-in ready homes to meet our expected closings. At the end of June, we had approximately 3,000 homes complete or in progress compared to 1,600 homes at December of 2016, increasing our net dollars invested in production by approximately $125 million year-to-date.

In May of this year, we increased our revolving credit facility to $600 million with a $50 million accordion with our second amended and restated credit agreement. At June 30, we had $370 million outstanding under the facility, and our borrowing capacity was approximately $154 million. In addition, we have $85 million in convertible notes outstanding. Our gross debt to capitalization was approximately 52%, and net debt to capitalization was 51%.

At this point, I would like to turn it back over to Eric.

Thanks, Charles. In summary, we had an outstanding quarter and a great first half of the year. Let me provide some guidance and thoughts on what we are seeing, thus far, in the third quarter and looking ahead into the remainder of the year.

The third quarter is off to a great start with 591 closings in July, up 93% from the 306 closings in July of last year. To put this in perspective, in July of 2010, the not-so-distant past, we closed 18 homes. The 591 closings this year came from 76 active selling communities, resulting in a very solid absorption pace, averaging just over 7.8 closings per community per month. Based on the strength of our July closings and the continued demand we are seeing from customers wanting to go from a rental situation to home ownership, we are increasing our closing guidance for 2017 from more than 4,700 homes closed to more than 5,000 homes closed.

Our community count expanded from 71 at the end of June to 76 at the end of July. These additional communities are located in the Houston, Dallas/Fort Worth, Charlotte and Nashville markets. We are still expecting our community count at year-end to be between 75 and 80 communities.

We are also continuing our nationwide expansion. We are opening our first community in both the Minneapolis market and the Winston-Salem market for sales in September, and expect to have our first closings in the fourth quarter of 2017. The expansion into the Minneapolis market will create our new Midwest Division.

We have closed on our first property in the Oklahoma City market. We expect to be open for sales in the second quarter of 2018 with closings during the second half of 2018. The Oklahoma City market will be managed by our leadership team out of Dallas/Fort Worth and be added to our Texas Division to form our new Central Division. Our first project in the state of California has been approved by our Acquisitions Committee. We are scheduled to close on this property in the Sacramento market in the next 60 days with construction starting around the first of 2018. We are expecting to have closings in this market in the second half of 2018.

As Charles mentioned, our average sales price in the second quarter was nearly flat to the first quarter. We see this continuing in the third and fourth quarters, resulting in our average sales price for the year remaining within our previous guidance of $210,000 to $220,000.

We expect gross margin for the full year to remain within our historical range of 25% to 27%, and adjusted gross margin to be within our historical range of 26.5% to 28.5%. Given our increased closing guidance, similar average sales prices, gross margins, SG&A and taxes within our expected ranges, we are raising our full year basic earnings per share guidance from $4 to $4.50 per share to $4.25 to $4.75 per share.

Now we'll be happy to take your questions.

(Operator Instructions) Our first question comes from the line of Nishu Sood of Deutsche Bank.

So let's start out with just taking a look at what has changed here. I mean, the performance has been fantastic the last couple of months. And earlier this year, there were some concerns about slowdown in demand and slowdown on absorption pace. And I think July, I was looking back at the numbers, is, I think there's only one month in your 5-year history of public numbers that's higher from an absorption pace. So just a real fantastic performance. You had mentioned some issues, Eric, related to just some delays in getting inventories on the ground. So as we take a look back, like what has improved so dramatically to lead us to what you laid out today?

Sure, Nishu. This is Eric. I'll start and Charles can add to it. First of all, it was a great quarter and the demand, it's still there. We had a great sales quarter. But I really look back and looking at the first quarter results, we had a strong sales quarter. And I think we are pretty clear that the primary reason closings were down in the first quarter was really because of inventory. We closed out some top-performing communities. We needed to get some more houses started. We needed get some development sections on the ground. And we were optimistic that the closings were going to still be there, and that's why we reiterated our guidance at 4,700 closings, even though we were down year-over-year. But you are correct, as we had a positive outlook on demand and sales, and I think that is continued and even strengthened. And I think the market we are in right now and where we have positioned ourselves is supply is very low out there. Demand is as good as it's ever been for our business. As far as customers that are currently in rental situations wanting to get into home ownership, we've got the added benefit that rates have stayed low, so the affordability is there and the monthly payment is there. And we've got some positive things happening in mortgage availability. I think credit standards, we're seeing some gradual loosening. So when you have high demand, low supply, easier relative financing and low interest rates, that's a very good environment for LGI to put up really good numbers.

Got it. No, that's helpful. And then -- so if we think about the success you had in the second quarter and obviously extending into July, there's kind of 2 takes on it -- potential takes on it. One might be that there was some catch-up from some of the inventory issues in the first quarter. And an alternate take might be that now, the demand trends that we saw in the second quarter are truly reflective of what the market is giving us. Now your order trend says that it's the latter. What are your thoughts there? I mean, it's just a -- such a high level of performance. So just kind of thinking about how sustainable it might be.

Yes. I think it's both, Nishu. I mean, I think the high -- the catch-up on the inventory really is what made us confident to get to the 4,700. And then there definitely is increased performance on the sales side. And that's why we thought -- we didn't really have any choice but to raise guidance to more than 5,000 because the numbers at 4,700 just don't make any sense anymore. I can tell you, the demand has continued in August -- the month of August. We expect to close more than 500 homes. We closed 383 last month. So we'll be looking at a really strong year-over-year count as well. So we see that trend continuing more than 4 -- 5,000 houses. We're very confident in that number now. But with the inventory constraints, there is still the finite number of homes that we can close this year. We have some communities that we caught up on inventory. And now we're going to be closed out again before the end of the year gets here. And we're going to be waiting for that next section to come on board. So there's always going to be month-through-month and quarter-to-quarter volatility, but we're very comfortable with the 5,000-plus number this year.

Got it. And then I had a question on SG&A. Charles, you mentioned that SG&A is volatile from quarter to quarter, but then when you were describing the factors that drove the strong performance, it has a -- it was a very nice performance in SG&A. When you described the factors, you basically mentioned, I think, operating leverage. Operating leverage sounds like it might be sustainable. So how do I reconcile that? Were there some one-off factors that drove the impressive SG&A performance in 2Q that might reverse in the back half of the year?

Sure. Good question. So I think really, it's driven more so from -- we have some back half of the year expenses coming, new market expansions. Eric had mentioned the Midwest and California. So that's going to contribute more in terms of adding additional overhead in the back half of the year than it did in the second quarter. We also have our implementation of our finalization of all of our Sarbanes-Oxley requirements, and that is going to weigh heavier on the back half of the year, as well. So I think we'll see year-over-year favorable comparisons in both the third and fourth quarter. But our expectation would not necessarily be that the third and fourth quarter would be as favorable as the second quarter was.

Got it. And that might be driven -- you had a pretty big jump -- a nice jump in community count to 76. So that -- is that the link there that, that will probably drive some incremental startup cost and so hence, it would be higher in the second half?

Yes. I think it's more so driven on the community counts that we haven't yet reported on more so than the ones that are in the 76. So as we get into the fourth quarter and then into 2018, we're establishing the overhead that we need for the 2018 community counts and markets that we anticipate to go into, which is really affecting us probably more so in the third and fourth quarter this year that you see that lag.

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

First question, just wanted to delve into the remaining, I guess, 5 months -- 5, 6 months of the year -- or 4, 5 months of the year with you saying that you expect August to be over 100 -- 500 closings. It seems that you could easily be in the 5,000 to 6,000 range -- I'm sorry, solidly above 5,000. Obviously, your guidance says at least 5,000, but if August is above 500, the math would show that just to hit 5,000, you need to only do about 300 in a quarter for the last few months. So just wanted to make sure that -- I mean, I don't think there's anything necessarily to think or expect that you wouldn't be doing at least 400 per month. And given the stronger sales pace with a similar amount of year-end communities, just wanted -- was curious about how that affects the opening cadence. And is there any risk to maybe selling out of communities faster than expected?

Yes. Your math's pretty close, Mike. If we close more than 500 this month, we're going to have to do just over 400. That is exactly 500 to hit the 5,000 number, so 400 to 500 a month for the last few months. Last year, though, September, October and November were less than August. And then we had a really strong December. So there is some inventory constraints built into these projections. But when we say more than 5,000, you can assume that is going to be greater than that number. But you're right on, there's a big difference between 400 and 500 closings a month. And we're comfortable in that range. But we're seeing increased demand. It's just a question of getting the houses built in inventory. And then September is looking good. But we sell houses pretty quickly and really focus on completed houses. So it's really a little bit early to talk about demand that's really going to impact, especially, November and December closings.

And just getting to the back half of that question. I know it's a little loaded, but in terms of managing the community count again, I mean, if you're raising your closings guidance, but typically, if -- it's a zero-sum game, unless you can -- you'd think all else equal, maybe you're lowering the community count guidance. So it seems like you're able to, at minimum, replenish the communities that there's any selling out faster? And just kind of curious about your ability to continue to grow and feed the beast into next year, maintaining -- I don't know what the goals are for next year, but I would assume it might be at least 15% type of community growth goal? Just to address any of that.

Sure, yes. And importantly, to better understand the community count, when we went up from 71 to 76 communities in July, that really is the first month those new communities are having closings. So they don't have -- the 5 additional communities won't have a big impact on 2017, but they will be operational for the full year in 2018. So that's really where our growth is going to come from in 2018, as these communities we've been adding in the back half of the year. And also we mentioned areas like Oklahoma City, areas like Minneapolis, areas like California, and we'll get additional community count growth in those markets because right now, there is no communities in that count from Minneapolis, Oklahoma City, California. We are focused on getting something going in the Las Vegas market and a couple other ancillary markets. So most of our community count growth is going to come from our new markets that we're entering.

Right, right. Wanted to shift gears to the wholesale business that you referenced earlier in the call. And with 65 homes sold to the single-family rental companies, it's about 4% of your closings for the quarter. Just wanted to kind of take your pulse on how that kind of fits into your strategy and your broader messaging where, typically, you're selling to renters themselves with the argument all around home ownership. At the same time, their -- you're kind of allowing a rental element into your communities. So I'm kind of curious on how that kind of fits with your broader message to your core customer base, and also if you have any ability to manage, I assume not, but those homes, as they just become rental vehicles, if you have any back-end control on the management of those units?

Okay. Great question, Mike. First of all, on the controls, just so that was last when you mentioned, I mean, all of our communities that we're selling homes to the -- on a wholesale basis all have deed restrictions. So they would be held to the same standard as far as maintenance as our existing customers would. So we don't anticipate any problems with that issue any more than we deal with now. And also the concentration of these 65 homes, we talked about were spread across 14 communities in 5 states. So the wholesale companies that we've been doing business with really don't want a big concentration of their homes in a -- in one community. They like to have them spread out. So we don't anticipate that, that's going to be an issue. They're already in -- all of our communities, we've been selling homes to what we call mom-and-pop investors, 1 or 2, here and there for a long time. And there's rentals in our communities nationwide and having customers paying rent or renting house in our communities, we think, has no negative impact at all. In fact, we know it doesn't. In fact, some of these closings are in our -- in a couple of our top-performing communities, where we've been selling houses in there in the wholesale business. And the sales pace is as strong or stronger. So we think it's very, very accretive to the company to take advantage in some of our communities where we have longer lot positions. So a little less on the gross margin, we make up for it on SG&A leverage, similar pretax net income metrics, but then you take it to the next level and it's a very accretive from a return on equity and those metrics and earnings per share because we are shortening the life of any community that we are putting the wholesale investors in.

Okay. Well, I guess, just last question on this and perhaps, I'll get back in the queue. But just finishing up this line of thought. Because you mentioned that you already have, in the past, sold to mom-and-pop investors, so there's always been an element of -- I assume a relatively small one, but already been an element of rental within your communities. So I was just curious if you have any sense, perhaps, in your more established markets, like Texas, for example. What percent of your home -- once the community is built out, what percent of a community's units are rentals? And just secondly, where you think this wholesale business for your own means, what that might represent in a year or 2 from a percent of closings and if you have like a cap that you would put a ceiling on it?

Yes. I think historically, rentals in our communities have been a pretty low percentage. And I think that will continue to be there as a low percentage. The wholesale business this year, we expect to end the year between 150 and 200 closings. So out of more than 5,000, obviously, a pretty small percentage, 3% to 4%, very similar to this quarter as well. And we think it's going to remain a small percentage of the LGI Homes business. The biggest challenge we have in doing business on a wholesale business, there's a lot of demand there. The biggest challenge we have is we do not have a lot of finished lot supply or available inventory to sell them because the demand is so good on LGI Home side. So it's a win-win situation because we obviously want to sell any houses that's not accretive to our shareholders, but we have the opportunity in certain cases, where we have the inventory to make a deal that's good for everyone. So we're excited about it. It's going to be a small part of our overall business, but certainly beneficial to everyone.

Our next question comes from the line of Stephen East of Wells Fargo.

This is Paul on for Stephen. I guess, first, Eric, on the first quarter conference call, you've mentioned you were expecting 450 closings for May, June and July. What drove the variance to that projection? Are we seeing some pull forward that might show up in the second half of the year?

Yes. I don't necessarily think we're going to see a pull forward. I think what drove that, is one, there is some conservatism built in those numbers, we want to make sure that we hit our numbers. We haven't hit our numbers a few times when we're given month-to-month closing guidance. So we want to make sure we're hitting that numbers. In the back half of that, I mean, there's no question, demand is strong. So we did not forecast being over 600 in June and 590 in July. Those are 2 very strong months. And our teams in the field, our construction teams, particularly, did a really good job of getting the houses built and catching up on some of that inventory that resulted in us having the ability to close those extra houses. So a combination of everything. But I don't think we necessarily pulled forward demand, other than just to reiterate the point is there is a finite number of homes that are being close every month and every quarter. And the more homes you close in any given month doesn't necessarily take away, but sometimes it does because we have to work on getting the new sections on the ground and getting more houses built.

Okay. And then switching over to gross margin. Curious, you raised your closing guidance, but you left your gross margin guide the same. So what would be impacting that? And then your gross margin was down sequentially, which, I believe, is the first time that's happened in the second quarter since you became public. So were there any onetime items this quarter that hit the gross margin?

Yes. Paul, this is Charles. I'll start and Eric can add. You know we had mentioned we had the reimbursement of cost coming in. That was about an 80 basis points impact. So if you took that down on an adjusted gross margin, we would have -- that would have taken this down to 27.2%, so clear by that point. On the wholesale business, Eric had mentioned that margins are a little lower. We saw that as about a 40 basis point impact this quarter, so to offsetting the reimbursement. So I think the wholesale business sits at roughly the 4% to 5% of our business, but maybe at a 6% to 8% lower ASP is going to equate to roughly about 40 basis points, 30 basis points to 50 basis points on a quarter-to-quarter basis, lower than what we would normally have seen just taking into account the regular LGI Homes business. I mean, we are seeing pressures on both labor and materials. We talked about that last quarter. We expected that to come into play. As we have increased our production, that's one of the factors that we have had to manage through, which is making sure that we have enough trades, the trade base, expanding the trade base that sometimes, that comes at a cost because the next guy behind the first one maybe a little bit more expensive, but we feel like that is definitely paid off in terms of building our inventory balances back up. That certainly comes into play. And then also the traditional new market entries, transitions on a year-over-year basis, we have a lot of movement, even though the market, community count maybe similar in most of our markets. The make-up of the individual communities vary from quarter to quarter and year to year. So as we close out of communities and move into new ones, the margin profile maybe slightly different in both directions, sometimes favorable, sometimes unfavorable. So that's certainly a constant in our business that affects the gross margin on a quarter-by-quarter basis.

Okay. And then your lot count was up in the mid-teens here today. Should we think of that as a good proxy for 2018 community count growth?

I mean, I think we'll certainly add commentary on 2018 at some point later. But I think some of it was -- we had a relatively light quarter in terms of acquisitions. I mean, certainly, our volume increasing has helped us from an acquisition standpoint in terms of looking at what opportunities are available because we base our expectations based on current performance. So I think it's a little bit more that maybe the second quarter was a little bit lower in terms of putting deals under contract than maybe it normally would. So it's little bit more of a jump -- I think a little bit more of a dramatic jump that may have otherwise seen historically.

Our next question comes from the line of Jay McCanless of Wedbush.

The question that I had is when I look at the 77% increase in backlog, and congrats on that, it's a great statistic. I'm just wondering if there is a meaningful difference in the cycle times -- or the projected cycle times for the backlog this year versus last year because the number -- the gross number for backlog looks so big? It feels like you guys are being maybe too conservative on the guidance. Could you talk me through that?

Jay, this is Eric. I don't consider it any longer cycle time this quarter. So I would say, no with that. So hopefully, we are being conservative. It was a great quarter for sales. Backlog remains strong. And we're optimistic about the second half.

Are there any markets where you're having more difficulty than some other markets in terms of getting homes completed and out there, I mean, municipal -- municipality issues, things of that nature?

Not necessarily. The markets are a little bit different based on build time, primarily based on whether we're going to put a basement in and then different inspections. And there are longer build times, but nothing unusual compared to historical. As we have expanded outside of Texas, there is a greater percentage of our closings coming from outside of Texas now. And generally speaking, our build time is longer outside of Texas. So overall, I think it has increased. But nothing out of the ordinary going on.

Our next question comes from the line of Carl Reichardt of BTIG, LLC.

I wanted to ask just about the gross margin again. Just looking at the bridge, you guys, in the press release, called out a positive from pricing, of course. I'm assuming that's ex mix. And then it implies, obviously, a negative from construction cost. Charles, can you quantify the basis point impact from pricing and construction cost to get that bridge from the 27.8% last year to the 27.2% adjusted this year?

So on adjusted from 27.8% to 27.2%, so I'd mentioned the wholesale business having about a 40 basis point impact. I think land as a percentage of revenues was similar. So I would say that's been relatively constant. So the delta or the difference would be primarily related to house cost accelerating at a faster rate than we were able to push pricing.

Okay. And -- but -- did you have sort of a sense of the basis point impact of that? So lands out -- so pricing was a positive, but costs were a negative. So just -- I'm just trying to get a sense of what the impact would have been just on a numeric basis.

Sure. Yes, I'd say somewhere in the 40 basis points to 50 basis point range.

Negative. Okay. And then Eric, if we think about the first quarter, you and I talked a few times about the issues getting lots horizontal and houses vertical. What do you think you'll do differently heading into Q1 of '18 to ensure that inventories are ready to go? What changes have you made to ensure that you'll be ready this time around?

Yes, great question. A couple of things we've been talking about with our management teams is we have to make sure we're starting up houses in the fourth quarter and just don't focus on completely focusing out the end of the year. Make sure we focus on building out the inventory to have a strong first quarter, as well. From the development side, we'd been working with our teams and really looking at the lead times and really looking at how long it takes to get a section on the ground and are we building enough contingency into these forecasts. It is not getting any easier in dealing with cities and plots and utility providers and getting these developments on the ground ready to go. So I think we can build in some more contingencies on that. And then just really looking at our continued strong sales and make sure we are forecasting aggressively enough because sales are very strong and we'll be monitoring that as well to make sure we have enough inventory to keep up with these accelerated absorption paces.

Okay. That's great. And then I have one last question. Just for me, the California expansion surprised me a little bit in Sacramento. What made you choose Sacramento as a market? And my assumption is you'll continue to try to add stores there if the first one goes well. What drove you to that market as opposed to the tailored myriad markets in California you might have looked at?

Yes. It was this specific deal, Carl, certainly, LGI focused on the first-time home buyer, is not going to go to coastal California. And we knew we'd get to California eventually because our plan is get to every market of size eventually. And this particular opportunity fit right into our model of how we are going to get to California, meaning it was finished last. We're not going to take a development risk. It was then an entry-level market and an entry-level location for affordability purposes. And also it's on a option takedown contract, so we are taking down finished lots on a quarterly basis, so taking out development risk. So the specific deal is really what got us started in California. And correct, we plan on adding community counts once we get started.

Our next question comes from the line of Alex Barron of Housing Research Center.

Just curious, similar question, so maybe asked another way. So your orders are up 64% this quarter. And given that you guys generally expect homes in advance, I guess, it really sounds like you're being pretty conservative if the building time hasn't really changed, I guess, for third quarter. Maybe there isn't a question, but just more like a statement. But anyway, given that you do expect build and you've seen an acceleration in demand, what is it that you guys are looking at to make sure you don't get too -- on the one hand, you don't want to fall behind on building inventory. On the other hand, how do you monitor that you don't fill too much in case demand does kind of pull back a bit?

Yes, yes. Okay. Good question, Alex. This is Eric. First of all, being conservative, you're correct. And we want to be conservative. We don't look at that as a negative aspect at all. We want to make sure we're hitting our numbers every quarter. We talk to that about the Board of Directors and then also on our yearly guidance. And we'll have another chance to update that when we get back together after the third quarter. And how we make sure of getting out in front of ourselves is primarily looking at it every week based on the sales coming in, looking at lease, looking at demand in our current offices, making sure our closings are coming through. And as closings increase, we start more. So we -- you have to commit a few months in advance. But because our cycle time is pretty quick and our construction times, we can ramp up pretty quickly if you have the lots and tone it down or dial back pretty quickly as well. The other thing that we can do is really pull the permits in advance and get ready. So if the demand is there and we need to, we can get aggressive. But we can obviously just hold on the permits for 30 or 60 days, if needed, if we see any slowdowns at all.

Okay. And it was definitely interesting to see all the new markets you guys were planning to be in next year. I'm assuming you'll continue to look at new potential markets beyond the ones you listed.

Yes, that is correct. Our expectation with our leadership in the field is we are going to grow as fast as we can handle. And as we continue to have success opening up of new markets, we continue -- we will continue to open up new markets past that.

And along those lines, have you guys consider issuing like a bond offering or you don't think you need it that at this time?

Sure. This is Charles. So we are constantly monitoring our capital needs. It's certainly something that we consider from time to time. We're very excited about the success that we had on our -- increasing our credit agreement. And so having, as I mentioned, about $154 million of availability at the end of the quarter is certainly a positive for us. But accessing the high-yield market, all the other alternatives that are available to us, we certainly monitor on a quarter-to-quarter basis, but feel very good with where we're at today.

Okay. And lastly, these warehouse deals that you guys did on a few communities, have you guys been contemplating or in conversations to do entire communities because we heard that some of these rental companies wanted to potentially build entire communities? So wondering if that's something you guys have been contemplating?

We have -- we're willing to build anything on a wholesale business that makes sense for our investors. We don't have any or a lot of entire communities to really build out, so that hasn't been the focus in our relationships with the wholesales investors yet. But we're certainly open to that in the future.

(Operator Instructions) Our next question comes from the line of Michael Martin of Michael J. Martin & Associates.

You mentioned a little while ago you're growing as fast as you can. What kind of strains has, you know, the growth put on your ability to attract, train and get the right people? Is there -- what's the limits there?

Yes. Great question, Michael. And that something we're focused on, part of our culture, constant, never-ending improvement. Training is a big part of it. And that's one of the challenges, going forward, with all of our growth, as we've got a lot of new employees. We're up just over 700 employees now. We've got a lot of new markets, a lot of new managers and a lot of new Vice Presidents. But the systems we have in place, we believe, mitigate that risk. A lot of work, a lot of training to be done, but we have systems in place to mitigate that risk. Our President and Chief Operating Officer, Mike Snider, has done a phenomenal job this year. He is committed to travel to every single market and spend a week in the market, which is 13 different markets this year, really, really getting out in the field with the managers. We're still committed to flying every salesperson and manager that we hire nationwide to our corporate office for a structured training. We've been doing it very quarter since 2003. We still do it, so everybody still here has exactly the same message. And we'll all continue operating on exactly the same process that we always have.

Great. But has there been any material change in your turnover in the last year?

No. Turnover is running same as historical averages. We're always going to have some turnover. And the people that leave, we wish them the best. But we're going to focus on the remaining 700 that are still here and train them up on our processes.

And we have a follow-up from the line of Michael Rehaut of JPMorgan.

Just a quick one. Just going back on the wholesale business, you mentioned that it was across 14 communities in 5 states.

Correct.

And I was just curious, the number of companies that you sold to for those 65, I assume it wasn't 14 different single-family rental companies for those 14 different communities. I was curious if you have a sense of the number of those outfits that you're currently dealing with. And how many of them are kind of operating on a cross-state or multistate basis with you?

Yes. It's less than 5 companies. Yes, we did put it in the K earlier this year were disclosed. We did sign a bulk sales agreement to deliver 56 -- excuse me, 156 homes through 2017 and the first quarter of 2018. And of, of those 156, we closed 62 in the first 6 months. So that's been the majority of it. But we're working with a few different companies and we have interest in a few more. But we found it's really better to only focus on a few of the companies because there's a lot of demand out there from that space to get into new homes.

And I'm showing no further questions in the queue at this time, sir. I'd like to turn the call back to Eric Lipar, CEO, for closing remarks.

All right. Thanks, everyone. We appreciate everybody participating on today's call and for your continued interest in LGI Homes. Have a great afternoon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect, and have a wonderful day.