LGI Homes Inc

NASDAQ:LGIH

Earnings Call Transcript 2020-Q4

[Operator]

Welcome to the LGI Homes Fourth Quarter 2020 Conference Call. Today's call is being recorded, and a replay will be available on the Company's website later today at www.lgihomes.com. We have allocated an hour for prepared remarks and Q&A. [Operator Instructions]

At this time, I'd like to turn the call over to Joshua Fattor, Vice President of Investor Relations and LGI Homes. Mr. Fattor, you may begin.

[Joshua Fattor, Vice President of Investor Relations]

Thanks. Good afternoon, and welcome to the LGI Homes conference call to discuss our financial results for the fourth quarter and full year 2020.

Before we begin, I'll remind listeners that this call will contain forward-looking statements that include, among other things, statements regarding LGI Homes business strategy, outlook, plans, objectives and guidance for 2021. All such statements reflect management's current expectations, however, these statements do involve assumptions and estimates and are, therefore, subject to risks and uncertainties that could cause management's expectations to prove to be incorrect.

You should review our filings with the SEC, including our risk factors and cautionary statement about forward-looking statements 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. These forward-looking statements are not guarantees of future performance. You should consider these forward-looking statements in light of the related risks and not place undue reliance on these forward-looking statements, which speak only as of the date of this conference call.

Additionally, non-GAAP financial measures will be discussed on this conference call. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in either the earnings press release that we issued this morning and in our report on Form 10-K for the fiscal year ended December 31, 2020, that we expect to file with the SEC later this week. This filing will be accessible on the SEC's website and in the Investors section of our website.

Our hosts for today's call are Eric Lipar, LGI Homes' Chief Executive Officer and Chairman of the Board; and Charles Merdian, Chief Financial Officer and Treasurer. I'll now turn the call over to Eric.

[Eric Lipar, Chief Executive Officer and Chairman]

Thank you, Josh. Good afternoon, and welcome to everyone participating on our call today. I'm pleased to say we delivered another remarkable year of growth and profitability, meeting or exceeding all of our guidance expectations. We closed 1,630 homes in December alone, an increase of 55% at our best month ever. Putting that in perspective, we closed more homes in December than we did in all of 2013, the year of our IPO.

For the quarter, we closed 3,408 homes, an increase of over 35%. Again, for comparison, this was more homes than we closed in all of 2015. Our ability to deliver such extraordinary results is a testament to our systems-based processes and the talent and dedication of our people. As a result of our great quarter, we outperformed our guidance, closing 9,339 homes in 2020, an increase of 21% over 2019 and our seventh consecutive year of double-digit closings growth.

We finished the year with 116 active communities, an increase of over 9% year-over-year and in line with our guidance. During the year, we expanded within our existing markets in addition to establishing new markets in Daytona Beach and Sarasota, Florida; Greenville, South Carolina; and Richmond, Virginia. For the fourth quarter of 2020, we averaged an impressive 10 closings per community per month company-wide, a new quarterly record. Our top five markets were DFW with 15.6 closings per community per month, Phoenix was 14.7%, Austin with 14.1, Sarasota was 13 and Seattle was 12.8.

For the full year, we averaged seven closings per community per month company-wide, a new annual record. Our top five markets this year were DFW with 10.8 closings per community per month, Austin with 9.9, Houston with 9.3, San Antonio with nine and Phoenix with 8.9. We generated home sales revenue of approximately $2.4 billion in 2020, an increase of 29% over 2019, marking our seventh consecutive year of double-digit revenue growth. Most importantly, we drove this growth while increasing our profitability.

Our pretax net income margins were a record 18.6% for the quarter and 15.5% for the year. We more than doubled our net income in the fourth quarter and finished the full year up 81% over 2019, delivering record return on equity of 32.6%. Finally, our significant cash flow generation and prudent management of our balance sheet resulted in a net debt-to-capitalization ratio of just 30.6%.

A few additional highlights, we were recently recognized as one of America's most trusted builders. Since our founding, our mission has been to provide high-quality homes in desirable locations at price points within the financial reach of families dreaming of their first home, and this recognition is a testament to the success of that mission.

We build our homes with the goal of making sustainability affordable for our customers and we made great strides on this goal in 2020. I'm proud to say that 100% of the homes we closed last year included WaterSense fixtures, Energy Star appliances and other energy-saving products designed to improve our homes efficiency. These features ultimately save our customers' money and reduce impacts on our environment.

During the fourth quarter, we launched a redesigned website. Utilizing modern design, this new site enhances our online presence to meet the rapidly evolving digital expectations of our customers and allows us to focus on delivering an industry-leading user experience throughout every stage of our buyer's journey. Finally, we closed our 45,000th home in December, a significant landmark for our company and for the families that have entrusted us to fulfill their goal of homeownership.

Now, I'll turn the call over to Charles for more detail on our record financial results.

[Charles Merdian, Chief Financial Officer and Treasurer]

Thanks, Eric. As highlighted in the press release this morning, home sales revenue for the fourth quarter increased 48.2% year-over-year to $897.4 million. This was the single best quarter in our company's history. Home sales revenues for the year totaled nearly $2.4 billion, a 28.8% increase over 2019. As Eric noted, during the quarter, we closed a record 3,408 homes, an increase of 35.5% year-over-year and 63% sequentially.

Home closings included 360 homes sold through our wholesale business this quarter, representing 10.6% of our total closings compared to 344 homes or 13.7% of our total closings in the same quarter last year. For the full year, we closed a record 9,339 homes, an increase of 21.4% year-over-year. Home closings included 850 homes sold through our wholesale business this year, representing 9.1% of our total closings and generating $176.6 million in revenue. We currently expect that our wholesale business will represent 10% to 15% of our total closings in 2021.

Average sales prices realized from homes closed during the quarter was a record $263,321, a 9.3% increase over the same period last year and a 3.1% increase sequentially. For the full year, our average sales price was $253,553, an increase of 6.1% compared to full year 2019. Higher average sales prices were primarily driven by a favorable demand environment that supported price increases ahead of rising input costs in all of our markets, higher price points in certain markets and closeouts and transitions to new communities at higher price points.

Last quarter, we delivered our highest gross margin since the fourth quarter of 2016. Gross margin as a percentage of sales in the fourth quarter was 27.1% and compared to 23.5% in the fourth quarter of 2019 and 25.3% in the third quarter of 2020. This represented an increase of 360 basis points year-over-year and 180 basis points sequentially. Our gross margin improvement was primarily driven by lower overhead, resulting from operating leverage, lower capitalized interest and our ability to successfully raise prices.

In the fourth quarter of 2020, we delivered our highest adjusted gross margin since the fourth quarter of 2014. Adjusted gross margin in the fourth quarter was 28.8% compared to 25.5% in the fourth quarter of 2019 and 27.3% in the third quarter of 2020. This represented an increase of 330 basis points year-over-year and 150 basis points sequentially. Adjusted gross margin excludes $13.6 million of capitalized interest charged to cost of sales during the quarter and $1.6 million related to purchase accounting, together representing 170 basis points.

For the full year, gross margin was 25.5% compared to 23.7% for the full year 2019, an increase of 180 basis points. Adjusted gross margin this year was 27.4% compared to 25.8% for full year 2019, an increase of 160 basis points. Adjusted gross margin excludes $40.4 million of capitalized interest charged to cost of sales during the year and $4.9 million related to purchase accounting, together representing 190 basis points.

Combined selling, general and administrative expenses for the fourth quarter were 8.7% of revenues compared to 9.6% in the fourth quarter of 2019 and 10.8% sequentially. For the full year, our combined selling, general and administrative expenses were 10.1% compared to 11.4% in the prior year, a 130 basis point improvement and the lowest rate we have reported as a public company.

Selling expenses for the quarter were $50.2 million or 5.6% of home sales revenue, compared to $37.4 million or 6.2% of home sales revenue for the fourth quarter of 2019, a 60 basis point improvement. Selling expenses were down 100 basis points sequentially and, as a percentage of revenues, were the lowest level we have reported as a public company. In addition to operating leverage realized from the increase in home sales revenue, our quarterly advertising spend was lower year-over-year as a result of strong demand tailwinds.

For the full year, our selling expenses were $148.4 million or 6.3% of home sales revenue, compared to $131.6 million or 7.2% of home sales revenue in 2019, a 90 basis point improvement. General and administrative expenses totaled $27.6 million, or 3.1% of home sales revenue in the fourth quarter compared to 3.4% of home sales revenue last year, a 30 basis point improvement that was driven primarily by operating leverage resulting from increased revenues.

For the full year, our general and administrative expenses were approximately $90 million or 3.8% of home sales revenue compared to 4.2% of home sales revenue in 2019, a 40 basis point improvement primarily driven by operating leverage and, to a lesser extent, cost savings resulting from reduced travel and other pandemic-related savings. These savings were partially offset by costs related to the identification and certification of available federal energy-efficient home tax credits.

We believe that SG&A will continue to vary quarter-to-quarter based on home sales revenue, and we would expect our full year 2021 SG&A as a percentage of revenue to range between 10.3% and 10.8%. EBITDA for the quarter was an impressive $180.4 million, an increase of 87.2% over the fourth quarter of 2019. EBITDA margin was 20.1%, a 420 basis point improvement over the same period last year and a 380 basis point improvement sequentially. Full year EBITDA was a record $408.9 million, an increase of 52.8% over 2019. And EBITDA margin was 17.3% for the full year, a 270 basis point improvement year-over-year.

Pretax income for the quarter was $166.5 million, or 18.6% of home sales revenue, an increase of 460 basis points over the same period in 2019 and the highest quarterly pretax net income dollars and margin in our history. For the full year, we generated pretax net income of $367.8 million or 15.5% of home sales revenue, an increase of 290 basis points over the prior year. This was the highest annual pretax net income result and margin in our company's history.

Federal energy-efficient home tax credits recognized during the year totaled $41.2 million, of which $29.7 million related to homes closed in prior tax years. In December of 2020, this tax credit was extended through 2021. And based on our current outlook and information available to us at this time, we estimate our full year effective tax rate will range between 21.5% and 22.5%.

Our fourth quarter reported net income more than doubled year-over-year, increasing 110.3% to $136.4 million or 15.2% of home sales revenue, resulting in earnings per share of $5.45 per basic share and $5.34 per diluted share. Excluding the $4.2 million income tax benefit related to the retroactive energy tax credits, our adjusted net income in the fourth quarter increased 103.8% to $132.2 million or 14.7% of home sales revenue, an increase of 400 basis points over 2019.

And our fourth quarter adjusted EPS was $5.28 per basic share and $5.18 per diluted share, an increase of approximately 105.6% year-over-year. Our full year reported net income increased 81.3% year-over-year to $323.9 million or 13.7% of home sales revenues, resulting in full year earnings per share of $12.89 per basic share and $12.76 per diluted share.

Excluding the $29.7 million income tax benefit related to the retroactive energy tax credits, our adjusted net income increased 64.7% to $294.2 million or 12.4% of home sales revenue, an increase of 270 basis points over 2019. And our full year adjusted EPS was $11.70 per basic share and $11.59 per diluted share, an increase of approximately 65.1% year-over-year.

Fourth quarter gross orders were 3,692, net orders were 2,792, an increase of 32.1%. Cancellation rate for the fourth quarter was 24.4%. For the full year, net orders increased 33.4% to 11,070 and the cancellation rate was 21.6%. Driven by continued strong demand during the quarter, we began 2021 with a backlog of 2,964 homes, a 140.4% increase year-over-year. And the value of our backlog at December 31 was $775.5 million, a 167% increase over 2019.

Investment in attractive land positions to support our long-term growth remains our top capital allocation priority. As of December 31, our land portfolio consisted of 61,504 owned and controlled lots, a 28% year-over-year increase. 35,268 or 57.3% of our lots at year-end were owned.

And of our owned lots, 9,274 were finished vacant lots and 22,132 were either raw or under development. We ended the year with 3,862 completed homes, information centers or homes in process. And during the fourth quarter, we added over 6,000 new lots to our owned inventory and increased our total number of controlled lots 6.8% sequentially to 26,236. 78% of our controlled lots were undeveloped compared to 46% at the end of 2019.

I'll conclude with an update on our balance sheet, which has never been stronger. We ended the quarter with $35.9 million in cash, $1.6 billion of real estate inventory and total assets in excess of $1.8 billion. As of December 31, we had $546.6 million in total debt outstanding under our senior notes and revolving credit facility, and our available borrowing capacity was $392.5 million, resulting in $428 million of total liquidity.

As a result of our strong operating results, we ended the quarter with over $1.1 billion in total book equity, a 34.8% increase year-over-year and a net debt to capitalization ratio of 30.6%, down 550 basis points sequentially and significantly lower than the 43.6% we reported at this time last year. This was our lowest net debt to capitalization ratio since June of 2014, reflecting our successful commitment to conservatively manage our balance sheet, utilize free cash flow to fund our operations and decrease leverage. Our current expectation is to maintain our leverage in the range of 30% to 40%.

As a result of these and other achievements over the year, we recently received a one notch upgrade by Moody's to Ba3. During the fourth quarter, we repurchased 151,965 shares of our common stock at an average price of $110.20 per share, bringing the total number of shares repurchased over the course of 2020 to 718,993 at an average price of $66.84 a share. As of December 31, 2020, we had $300.4 million remaining under our share repurchase program, and we ended the year with 25 million shares outstanding.

At this point, I'd like to turn the call back over to Eric.

[Eric Lipar, Chief Executive Officer and Chairman]

Thanks, Charles. Our first quarter is off to a strong start, and our markets continue to benefit from unprecedented demand for new homes. As we reported earlier this month, we closed 650 homes in January, an increase of roughly 50% over a strong comp of 434 closings last January.

With that background, we're providing the following guidance for 2021. We expect to close between 9,200 and 9,800 homes, and we expect to have 112 to 120 active selling communities at year-end. During 2021, we will be expanding within our existing geographic footprint and in new markets, such as suburban Baltimore, Maryland and Norfolk, Virginia. Our average sales price is expected to be in the range of $260,000 to $270,000. We expect gross margin will be between 24% and 26%, and adjusted gross margin between 26% and 28%.

I'll provide some color on the land market and our available inventory for sale this year, which will influence our expected closings this year. Since demand picked up back in May, the market has experienced a significant shortage of finished lots available for sale. Where there are finished lots to buy, the prices for those deals are reflective of the supply demand imbalance in the current market. And in such cases, LGI will not be the winning bid. We are focused on maintaining our profitability rather than growing at any cost.

We continue to underwrite our land to the same high standards we always have, targeting both return and margin minimums of 25%. The deals we've been pursuing over the last nine months are largely self-development opportunities that are expected to deliver lots 18 to 24 months after we close. In 2021, we plan to maintain our industry-leading returns and margins, conservatively manage our balance sheet and prudently build our land supply with a view to expand our community count and continue on our path to becoming a top five builder.

I will close by noting how pleased we are with our incredible results during what was a year of uncertainty. Despite the challenges, we delivered our most successful and profitable year, achieving double-digit closing and revenue growth and record-breaking profitability. I want to personally thank our employees, you made these accomplishments possible. Because of your dedication, passion and professionalism, we have significant momentum going into 2021 and are well positioned to achieve all of our long-term goals as we continue to make our customers' dreams of homeownership a reality.

Now we'll be happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Aaron Hecht from JMP Securities. Your question please.

[Aaron Hecht, JMP Securities]

Nice quarter and thanks for taking my question. Obviously, Texas has had a really tough weather situation and energy situation. You guys have pretty significant exposure there. Any impact, on an annual basis, from this weather in your view, is this something you can overcome? Any detail there would be helpful.

[Eric Lipar, Chief Executive Officer and Chairman]

Yes, Aaron. This is Eric. I could start. Yes, no impact because of the weather on LGI. Thank goodness, all of our employees are safe, our customers in the field that are living in LGI homes. So far, we've heard of minimal damage to those homes, and everyone seems to be doing pretty well, all things considered.

The other thing that we're extremely proud of here at LGI is our payroll was met this last week with all the employees getting paid. The team really stepped up and made sure all of our trades got paid on schedule last week. So accounts payable, getting into the office, make sure everybody got paid.

So they would have the dollars available, take care of their workers and their families. So the team has done a remarkable job no delays in our schedule, no delays in forecasting any hit to closings or anything like that. So, all is good here at LGI in Texas.

[Aaron Hecht, JMP Securities]

It's great to hear. It sounded like a tough situation. In terms of the land market, you noted how hypercompetitive it is right now. Is that going to result in any changes to geographic mix in the future that may not have occurred, if you had a more normal land market? Has there been any markets where you just aren't really participating because you think it's gotten out in front of itself? And which ones do you think might be a little bit more attractive?

[Eric Lipar, Chief Executive Officer and Chairman]

Yes. It's a good question, Aaron. I don't think we look at it as much as geographically, just like we talked about in the prepared remarks, more of the finished lot opportunities are really getting priced up. Not seeing a lot of finished lot opportunities from developers or deals that are going to result in additional community count or closings in 2021.

Most of what we're focused on are the larger land positions, obviously, an entry-level type locations, a little bit further out. But we're comfortable doing our own development. We're comfortable with the larger land positions, 200 to 500 homes in a community plus. A lot of builders really are focused on being asset-light right now, and want to buy those finished lots.

So, I'm not seeing a lot of crazy inflation in the land prices where we're looking. But certainly, it's more of a timing issue where we talk about 18 to 24 months from the time we close on these pieces, really to turn them into sales and closings. I think the hottest markets, as everybody probably suspects and what we talked about, just leading the way in our closings for the fourth quarter of the year, are all the Texas markets, markets like Phoenix, markets like Seattle, Charlotte, really leading the way.

[Operator]

Thank you. Our next question comes from the line of Carl Reichardt from BTIG. Your question please.

[Carl Reichardt, BTIG]

Thanks, good morning or good afternoon. It's nice to talk about it's not been hot in Houston I guess. Charles, could you talk a little bit about the puts and takes to the margin guide for '21 in the 20.5 in 20 -- 24 to 26 is the guide. What's kind of your expectations for cost increases, land labor materials? And how much pricing or operating leverage are you also assuming in that guide for next year?

[Charles Merdian, Chief Financial Officer and Treasurer]

Yes, sure. Great question, Carl. So yes, when we thought about gross margin for 2021, we then took a look at what's currently happening and what we're currently seeing. Obviously, lumber being the most significant cost pressure that we're seeing and certainly haven't seen lumber at some of the prices that we're seeing today in at least my career. We haven't seen them this high.

So there's rising costs in general is a risk for us. So our overall thought for gross margin guidance was looking at what we achieved in 2020, kind of putting a little bit of a factor for rising costs. We also have a significant amount of closeouts and transitions happening this year, which typically will add a little bit of uncertainty to our gross margin expectations as we move from one community to another.

And then the other factor, we guided to a higher percentage of wholesale closings this year for 10% to 15%, coming off of 9.1% for 2020. So that was certainly a factor as well. And then if you look at our five-year average, Carl, our adjusted gross margin average for the last five years since 2016 is at 27%. So, right there, kind of in the midpoint of where our 2021 guidance is.

[Carl Reichardt, BTIG]

That's very helpful. And then a bigger picture question. On the website, which wouldn't necessarily be a topic we discussed in the conference calls, but given the sales process, which you've operated for a long period of time and alteration to sending customers to the website is a bit of a change, at least in my view. Can you talk just a little bit about how that rollout has gone in terms of driving traffic or interest? And how it fits with the sales process you've been using so successfully for so long?

[Eric Lipar, Chief Executive Officer and Chairman]

Carl. This is Eric. I can take that one. I would look at it is not as a change to our process. Certainly, we're excited about our new website. The team did a great job putting it together, certainly an enhanced experience for the customer more information on the website. I think in this day and age, obviously, a lot of our customers are coming to us through digital channels, are spending more time looking at the website before they contact us.

But no change in our process, still believe in directly marketing to that consumer. Still want them to pick up the phone and call our sales reps and set an appointment and still have that one-on-one interaction. So the website is just a tool to generate more leads and make sure the customer has a better experience.

[Operator]

Thank you. Our next question comes from the line of Nischal Sood from UBS. Your question please.

[Nishchal Sood]

So first question I wanted to ask was around, just kind of the cash flow generation. The very, very strong demand this year and then obviously, the land market conditions that you mentioned, Eric, led to your first year of kind of positive cash flow, brought your debt-to-cap down to 31%. And obviously, I think this is the highest year of share buybacks you've had as well since you've gone public. Are we setting up for another year with a similar dynamic where we could see kind of higher than normal share buybacks, given that you're already at the lower end of your target debt to cap?

[Charles Merdian, Chief Financial Officer and Treasurer]

Yes, great question, Nishu. This is Charles. So yes, as far as the success this year, it was really driven by the accelerated volume. Meaning our inventory turns from a direct construction standpoint really picked up in the back half of the year as we ramped up production post summer, if you will, when we saw the demand was really picking up. And we were really able to efficiently build and close our vertical construction.

And at the same time, when we took a pause early in the pandemic, from an acquisitions and development standpoint, that kind of delay if you will, kind of benefited our cash flow because that pushed out a quarter's worth of acquisitions. So ending the year with really net inventory up $70 million compared to our net change between '18 to '19 and '17 to '18 of roughly $250 million to $300 million increase in inventory is really what helped accelerate the ability to bring our leverage down this year.

And then transitioning into share repurchases. So certainly, we feel, from a capital standpoint, that our first priority is to invest in projects and continue to grow the Company. Eric had mentioned buying more raw land deals. We're investing more in raw land than finished lots. We mentioned in the prepared remarks that 78% of our controlled lots are now raw compared to 46% last year. So, we'll -- first priority will be to continue to invest in inventory and have the available inventory to grow community count and then maintaining 30% to 40% leverage. So that's a goal of ours from a capital allocation standpoint.

And then from there, we have options, really. So our options are either to explore M&A opportunities if they become available. And if there's nothing left and no other opportunities, then we have the opportunity to participate in share repurchases. So, we think it's a part of our capital strategy going forward and certainly look to be opportunistic in terms of execution.

[Nishchal Sood]

Got you. Got you. Great. That's very helpful. And then you mentioned that 10% or 15% of your closings might come from the single-family rent operators. Clearly, a lot of activity in that arena, and I think in particular, a lot of those folks seem to be focusing on the outlying areas where you folks traditionally operate. How has that affected the competition for -- how has that affected the land market side of things? And perhaps those folks are the ones driving up the finished lot prices. Is it also having an effect on the kind of development deals that you folks have been switching your emphasis to?

[Eric Lipar, Chief Executive Officer and Chairman]

Yes. Yes, a real positive, Nishu, from the wholesale side. You're correct. We are definitely seeing strong demand from the single-family REIT side. Their appetite to buy our LGI homes and entry-level locations in the entry-level markets is strong as it ever has been, so that's real positive.

We don't look at it as direct competition going back to our earlier point. Certainly, the single-family rental operators, some of them have their own construction companies. They're looking to buy finished lots. They're looking forward to turn those into rental units pretty quickly.

So I think, again, it's probably having a factor at any finished lot opportunity or some of the smaller opportunities that are out there. But the bigger land positions that we're really focused on, I don't think it's having an impact. But from the retail side and the wholesale side, demand is as good as we've ever seen it.

One thing that we'll mention is our gross and net orders in January, were both up over 100%, both on the retail and wholesale side. And our gross orders are up approximately 50% so far for the first three weeks in February. So we're seeing strong demand, wholesale and retail.

[Operator]

Our next question comes from the line of Ken Zener from KeyBanc. Your question please.

[Ken Zener, KeyBanc]

So let's just -- if we could start with -- you talked about closeouts, which affected your '21 community count growth versus what you thought, I guess, in November, thereabouts. Can you talk about -- give us some -- quantify what percent of your communities close out this year versus like '19, just to get a sense of that magnitude that led to the lower community count?

[Eric Lipar, Chief Executive Officer and Chairman]

Yes. I don't think we have that information in front of us, Ken. I mean, it's a lot of transition going on, and it's really just a timing factor. Sales and closings are so robust. And obviously, everybody can see from the fourth quarter numbers. The communities are just closing out quicker. And it's a little bit of a counterintuitive notion.

But if we want to close as many homes, our community count actually would have been higher to end the year because we'd add more communities still actively selling. And same thing with this year on our community count guidance of 112 to 120. The more closings that we have this year is probably going to result -- or will result in a lower community count. And if we're closer to the lower end of our guidance on closing, it's probably going to result in a higher community count.

So a little counterintuitive, but all good challenges to have, but really just timing issues when it comes to communities.

[Ken Zener, KeyBanc]

Right. No good deed goes unpunished. I wonder if the SG&A trend that you kind of laid out that range, how would you compare that 10.3, I think, to 10.9. Could you kind of put that in context of the volatility we saw or the swings we saw 1Q to 4Q in '20? And if we're going to see that entry year cadence swing as high? Or could you explain that a little bit, if you could?

[Charles Merdian, Chief Financial Officer and Treasurer]

Sure, Ken. Yes, this is Charles. So yes, so I think last year, being as unique it was, given the circumstances in terms of how the cadence kind of went throughout the year, I think what we're thinking -- if you take 2019 and 2020, SG&A percentage 2019 was 11.4%, 2020 at 10.1%, the average of those two years at 10.8%. So, I think our philosophy is, is that as we continue to grow, we think there are still some potential for operating leverage from SG&A.

A couple of things we highlighted throughout the year, travel, meals and entertainment, some of those discretionary expenses were significantly down this year due to the pandemic. We also, given the strong demand environment, were able to be very efficient in our advertising this year. So our assumption for '21 assumes that both of those factors that we would expect to see -- more travel, more training events throughout the year, plus the need to spend more on advertising and marketing, particularly in the back half of the year.

And then the final thing for this year is that we have a number of open positions that we're actively recruiting for, primarily in our acquisitions and development department, so looking for folks across the country. So that's going to factor in. So typically, our first quarter, we're usually talking on this call to make sure everybody understands that the first quarter SG&A percentages are typically higher.

We may not see that this year, just given the fact that we're coming into the first quarter with such a strong backlog. And that our pace, as Eric mentioned, 50% up for January, certainly is going to adjust it. So we're really thinking of it more in line of the full year guidance rather than just a quarter-by-quarter guidance.

[Operator]

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

[Michael Rehaut, JPMorgan]

Glad to hear everyone's safe down there in Texas with the weather challenges, so good news there. I appreciate it. A few questions here, if I could. First, on the gross margins, kind of understanding taking into account some of the factors you mentioned in terms of the 50 bp decline if you're looking at the midpoints after interest amortization. But when you look at your fourth quarter, obviously at 27.1 or maybe 27.3 if you exclude the purchase accounting after interest, how should we think about getting towards that 25 flat midpoint? If you're talking about rising lumber costs, which I would presume would be a big factor in the overall full year, is that something that you expect to hit more immediately? Or should we see some type of decline throughout the year in gross margin coming off of the 27? And could that even result in the end of the year being below that 25, even midpoint that you're at this point, modeling?

[Charles Merdian, Chief Financial Officer and Treasurer]

Yes, sure, Mike. This is Charles. So yes, I think the absorptions coming in, in the fourth quarter at 10 and then the full year coming in at seven, our highest absorptions, so I think that has a factor in terms of how we allocate our overhead and how it then comes through in the closings, so very efficient. To Eric's point, I mean, our field operations, our construction managers did an amazing job this year, particularly ramping up production later in the summer when we saw the demand came through. And our philosophy for years has been high volume. And so, we were able to take advantage of that by increasing production in a way to meet the demand, particularly for the closings in the fourth quarter.

So, we saw that at the end of the year, the back half of the year. We came in gross margins above where our guidance on our last call, we had published. So I think part of that was its just things were really good. It's a really strong fourth quarter. We're kind of acknowledging that. And to repeat it, necessarily, may not be -- there's a little conservatism in there, I guess, if you will, to say that, hey, such a strong quarter and to expect to repeat what we were able to do may not be the smart goal. So that is certainly a factor.

The closeout and transition comes into play. Typically, when a community closes out, it's achieving its highest gross margins in the life cycle of the community. And then typically, as we go into a new community, those are generally a starting point where it's lower in the life cycle of that community as well. So when there's more volatility and transition between communities, that tends to give us the expectation that gross margins may be slightly lower.

And I think the other piece is that the pricing environment was really strong this year as well, with interest rates being low. We were able to successfully raise prices, which allowed us to maintain margins, which our outlook at the end of last year was not as favorable that we were able to keep up with that. And I think that's a factor coming into 2021, is that it's going to be lumpy, if you will. It's that we may not be able to get all of the cost increases initially, but then maybe get it later over time or we may just have to absorb it a little bit.

And that's why we give the range for that. And then the last piece was wholesale. Obviously, wholesale we sell at a discount, but still achieve a similar operating margin. So if you're looking just at gross margin, that certainly should be factored in for 2021.

[Michael Rehaut, JPMorgan]

Okay. No, I appreciate that. I know there's a lot of moving pieces. And maybe I will follow-up later this afternoon when we're scheduled to talk. Just a couple of others here. Is it possible for you to give us a sense of sometimes you're able to give the current month, what you're thinking of in terms of closings and perhaps even March?

[Eric Lipar, Chief Executive Officer and Chairman]

Yes. Mike. I think last February, we closed 606. We're expecting it to be positive year-over-year. Still a couple of days early to give retail -- really detailed on February closings, but we expect it to be up year-over-year, and too early in March.

[Michael Rehaut, JPMorgan]

Okay. Also, share repurchase, I just wanted to hit on that. I believe you said you bought back about 150,000 shares during the quarter. And at the end of the year, your -- I believe it was your basic shares, were at 25 million even. But in any case, just wanted your thoughts on share repurchase in 2021, particularly if you expect to maintain, more or less, the current leverage profile that you're at today, notwithstanding land purchases based on your modeling. Just curious if you're expecting any incremental share repurchase, given your expectations around operating cash flow.

[Charles Merdian, Chief Financial Officer and Treasurer]

Yes, Mike, you're absolutely right, is that the first capital allocation going to inventory. So as this year kind of plays out, it's going to depend a little bit in terms of how those acquisitions come in development spend throughout the year. You mentioned maintaining leverage at 30% to 40%. So that's certainly a key component of our strategy.

And really based on that is, then, that gives us the flexibility to participate or not, depending on our available free cash flow. So I think we look at it as a permanent part of our long-term capital strategy. So we think we will be active in share repurchases over time. But no specific guidance in terms of actual share count for '21 at this point.

[Michael Rehaut, JPMorgan]

Okay. One last one, if I could, just on community count. You mentioned during your remarks around trying to invest in -- continue to invest in development opportunities that have a little bit of a longer time line in terms of coming online. And so that's part of what's going on with the share count, with the community count outlook for 2021. Any kind of early directional guidance you can give on 2022, I think would be really helpful.

It would sound like you'd expect a some type of a stronger growth trajectory to resume in '22 based on the type of land you're purchasing and kind of this lag effect. Love to get any kind of sense of -- historically, I think you've tried to shoot for community count growth in the -- anywhere from 10% to 20%. Obviously, you're working off of a much larger base today. So any kind of directional guidance you could give at this point for '22 would be helpful?

[Eric Lipar, Chief Executive Officer and Chairman]

Yes, Mike, I could touch on that. Not giving guidance for '22, but I think it also goes back to the same story as 2020 and what happens in 2021 and how strong sales are, and then just that lead time and buying land. So we just approved six new deals and acquisitions committee here in the month of February, and one is going to open in '22 and five are going to open in 2023. So any deal that we're closing on and underwriting right now is really impacting '23 community count.

But over the last six months, and Charles mentioned in his prepared remarks, owned and controlled lots, overall, were up 28%. So the deals we've been buying over the last six months really going to be impacted community count. I would just model that's more heavily weighted in the back half of '22 and then accelerating into 2023.

[Operator]

Our final question for today comes from the line of Jay McCanless from Wedbush. Your question please.

[James McCanless]

Actually, that was going to be my first question, Eric, with the 78% raw lots this year versus the 40-some percent number you have at the end of '19, is that that's how we should read that, that it's going to be a flex higher community count in the back half of '22 and into '23?

[Eric Lipar, Chief Executive Officer and Chairman]

Yes. Yes, that would be a good assumption, using 24 months for all land turning into finished lots and closings.

[James McCanless]

Okay. And then with the small move higher we've seen in mortgage rates just based on the 250 average price you guys had this year, it looks like the average monthly payment for your buyer has probably gone up by about $50 or $60 off of the lows. Is there any way to quantify what percentage of your average consumers that's knocked out of the box and has rates and not being able to qualify, become more of a challenge since the beginning of the year?

[Eric Lipar, Chief Executive Officer and Chairman]

Yes, not at all, Jay. Not so far. I mean, mortgage rates are still at historic lows. And even though the 10-year has increased here, we haven't seen that pull-through mortgage rates yet. It's really hard to talk about any headwinds in rates yet because our sales are so strong, like I talked about orders being up 50% year-over-year so far in February.

So, just a really strong dynamic sales environment, obviously, when it comes to our guidance and what we're forecasting, we're a little bit more conservative because if rates do go up, and we do expect them to creep up throughout the year, that will be a headwind to sales, but we still think it's going to be very positive sales environment through the end of the year.

[Operator]

Thank you. This does conclude the question-and-answer session. I'd like to hand the program back to management for any further remarks.

[Eric Lipar, Chief Executive Officer and Chairman]

Thanks, Jonathan, and thanks to everyone for participating on the call today and your interest in LGI Homes. We look forward to sharing our achievements of 2021 throughout the year.

Thank you.

[Operator]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.