LGI Homes Inc (LGIH) Q4 2018 Earnings Conference Call Transcript

LGIH earnings call for the period ending December 31, 2018.

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LGI Homes Inc  (NASDAQ:LGIH)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 12:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Hello and welcome to the LGI Homes 2018 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

And now I'd like to introduce your host for today's call, Rachel Eaton, Chief Marketing Officer. You may begin.

Rachel Eaton -- Chief Marketing Officer

Thank you. Welcome to the LGI Homes conference call discussing our results for the fourth quarter and full-year 2018. 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 2019. 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 statement 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, a non-GAAP financial measure, will be discussed on this 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. 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 Annual Report on Form 10-K for the fiscal year ended December 31st, 2018 that we expect to file with the SEC later today. This filing will be accessible on the SEC's website and in the Investors section of our website at 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.

Eric Lipar -- Chairman & Chief Executive Officer

Thank you, Rachel, and welcome to everyone on this call. We appreciate your continued interest in LGI Homes. During today's call, I will share some highlights from 2018, then Charles will follow-up to discuss our financial results in more detail. After he is done, we'll conclude with comments on what we are seeing this quarter and our expectations for 2019 before we open the call for questions. At the start of 2018, we provided guidance announcing our expectations to do the following. First, was to deliver more than 6,000 home closings; second, was to have 85 to 90 active communities by year-end; and finally, to deliver basic earnings per share to our investors in the range of $6 to $7 all while maintaining our gross margin at or near industry leading levels between 24% and 26% and adjusted gross margin between 25.5% and 27.5%.

Today, I am pleased to announce that for 2018, we met or exceeded this guidance in all areas. As a result, this not only marks our fifth full year as a public company, but highlights our fifth consecutive year of delivering strong results to the market reaching or exceeding our guidance in every metric. Our fourth quarter provided an impressive finish to 2018 with a record-breaking 1,852 homes closed highlighted by our best month in LGI history with 884 homes closed in the month of December bringing us to a record-breaking total of 6,512 homes closed for the year. In 2018 we also achieved significant growth in home sales revenue generating $1.5 billion and ending the year with 88 active communities. These strong results enabled us to deliver basic earnings per share of $6.89, increasing basic EPS more than 31% over the prior year.

When we went public in 2013, we had one primary objective which was to fuel our growth by replicating our business model across the country and since then we have done just that. Since our initial public offering, we have grown substantially by expanding our operations from nine markets across four states to experiencing closing in 26 markets across 16 states in just five years. As we have continued to grow, we have maintained the LGI culture demonstrating that our unique operating model is sustainable. We believe our employees are our most vital asset and continue to make the difference. It is through the dedication and outstanding performance of our employees that we are able to leverage our systems and processes to deliver exceptional customer service to all 29,000 homebuyers over the last 15 years and deliver what was another strong year of results for 2018.

So to all of our LGI employees, we appreciate and thank you for your commitment, loyalty, and hard work; which have produced another year of record-setting closings. Before I turn the call over to Charles, I want to share additional highlights from the previous quarter and provide an update on the new market expansion we had during 2018 as well as provide an update on the Wynn Homes acquisition. For the fourth quarter of 2018, we averaged 7.2 closings per community per month. On a closing per community per month basis, all of our regions across the country featured strong absorptions. We closed an average of 9.2 homes in our Central Division, 7.1 homes in the Southeast, 5.8 homes in the West, 5.7 homes in Florida, and 5.0 homes in the Northwest division. For the full-year 2018, we averaged 6.7 closings per community per month Companywide, equaling the prior year average and the highest level we have ever experienced as a public company.

2018 once again demonstrated our ability to maintain or increase our absorption rates as we continued to expand into new markets. Over the last five years, most of our growth has been organic; but key acquisitions like Oakmont and Wynn allowed us to see immediate results. The Wynn acquisition expanded our presence in the Raleigh market while also giving us an entry into the Wilmington market. As a result of this transaction, we acquired approximately 200 homes under construction and 4,000 owned and controlled lots of which 85% were in the Raleigh-Durham market. We are pleased with the results so far, closing 101 homes in 2018, which was in line with our guidance and expectations. Another significant highlight of 2018 was the first home closings in five new states for LGI. With the addition of Alabama, California, Nevada, Oklahoma, and Oregon; we continue to expand our presence nationwide.

This expansion, including a tremendous start in California with our first community opening in the Sacramento market in June closing 74 homes for the year averaging more than 10 closings per month and also a tremendous start in the Las Vegas market with our first community closing 24 homes in our first quarter of operations. Lastly, I would like to congratulate our teams in the DFW and Houston markets. DFW and Houston, both reached new heights closing more than 1,000 homes in each of these markets in 2018. This is the first time in Company history that an LGI market has reached this milestone and deserves recognition as a truly notable achievement.

Now for more detailed financial results, I will turn the call over to our Chief Financial Officer, Charles Merdian.

Charles Merdian -- Chief Financial Officer & Treasurer

Thanks, Eric. Home sales revenues for the quarter were $425.2 million based on 1,852 homes closed, which represents a 5% increase over the fourth quarter of 2017. Home sales revenues for the year totaled $1.5 billion, a 19.6% increase over the prior year. Our average sales price was $229,568 for the fourth quarter, a 4.5% year-over-year increase and a 3.4% decrease from the third quarter. During the fourth quarter our Central divisions; which includes Texas, Oklahoma, and Minnesota; closed 865 homes, a 9% increase over the 792 homes closed during the fourth quarter of 2017 at an average sales price of approximately $211,000. The 865 closings represented approximately 47% of overall closings for the quarter. Our Southeast Division closed 445 homes this quarter at an average sales price of approximately $207,000 across 21 communities. Average communities were up four over the prior year quarter primarily due to the Wynn acquisition.

Absorptions increased to 7.1 closings per community per month, up from 5.2 in the fourth quarter of 2017. Also during the fourth quarter, we closed 228 wholesale units, 12.3% of overall closings in 13 of our markets generating $49 million in revenue at an average price of approximately $213,000. In this past year, we closed a total of 466 wholesale units generating $110 million in revenues in our communities compared to 201 units and $41 million in revenue in the prior year. For the quarter, wholesale units impacted our overall gross margins by approximately 120 basis points and for the year by 80 basis points. We believe that our wholesale business is accretive to the overall business as operating margins are similar. Our expectation is that wholesale will be approximately 5% of our overall business in 2019. For the year, we closed 118 homes in our Terrata communities representing less than 2% of our overall closings.

And as mentioned on prior calls, we expect closings from our Terrata communities to be a limited part of our overall business continuing into 2019. Gross margin was 24.4% this quarter, similar to the same quarter last year. Our adjusted gross margin was 26.2% this quarter compared to 25.8% for the fourth quarter of 2017, a 40 basis point increase. And for the year, gross margin was 25.3% compared to 25.5% for the full year of 2017 and adjusted gross margin was 27% compared to 26.9% last year. Adjusted gross margin excludes for the fourth quarter approximately $7.2 million of capitalized interest charged to cost of sales during the quarter representing 170 basis points and we expect this will remain in this range for the upcoming year. Additionally, approximately $560,000 of purchase accounting adjustments related to the Wynn acquisition is excluded for the quarter.

Combined selling, general, and administrative expenses for the fourth quarter were 11.3% of revenues and 12% for the full year similar to 2017. And as a percentage of revenues, we believe that for the full-year 2019, we will continue to achieve operating leverage in our existing markets offset by initial operating costs in new markets. Overall, we expect SG&A as a percentage of revenue to be similar in 2019 compared to both 2018 and 2017. SG&A will vary quarter-to-quarter based on home sales revenue and we typically expect the first quarter to have the highest SG&A ratio as our first quarter generally results in the lowest closings on a per community basis during the year. Selling expenses were $29.3 million or 6.9% of home sales revenue compared to $28.6 million or 7.1% of home sales revenue for the fourth quarter of '17, a 20 basis point improvement.

General and administrative expenses were 4.4% of home sales revenue compared to 3.8% of home sales revenue for the fourth quarter of '17, a 60 basis point increase primarily due to expenses related to the Wynn acquisition and additional overhead related to our geographic expansion. Pretax income for the quarter was $56.2 million or 13.2% of home sales revenue, a decrease of 40 basis points over the same quarter in '17. For the year, we generated $199.1 million in pre-tax net income or 13.2% of home sales revenue. Our effective tax rate for the fourth quarter was slightly higher than the previous quarter at approximately 24.1%. We believe our annual effective tax rate for 2019 will range between 23% and 24%. We generated net income of $42.7 million or 10% of home sales revenue for the fourth quarter of '18, which represents earnings per share of $1.89 per basic share and $1.72 per diluted share.

For the year, we generated net income of $155.3 million or $6.89 basic earnings per share and $6.24 diluted earnings per share. Weighted shares outstanding for calculating diluted earnings are impacted by our outstanding convertible notes. In the first -- In the fourth quarter of 2018, our average stock price was $42.23, exceeding the conversion price and therefore the convertible notes were determined to be dilutive. This resulted in an approximate 1.6 million share increase to the weighted average shares outstanding for the diluted EPS calculation for the quarter. Our convertible notes will mature in November this year and therefore our 2019 basic EPS will be impacted by the conversion. Our intent is to settle the principal in cash and the premium in stock and once the conversion occurs, we would expect that diluted EPS will only be impacted by stock compensation. Fourth quarter gross orders were 1,756 and net orders were 1,264.

Ending backlog for the year was 624 homes and the cancellation rate for the fourth quarter was 28% and for the year, our cancellation rate was 24.2%. We ended the fourth quarter with a portfolio of approximately 51,400 owned and controlled lots. And as of December 31st, approximately 28,600 or roughly 56% were owned. And of this amount, roughly 8,300 were finished vacant lots, 17,400 were either raw or under development, 1,940 were completed homes including our information centers, and 990 were homes in process. At December 31st, we had approximately $46.6 million in cash, $1.2 billion of real estate inventory, and total assets of $1.4 billion. At year-end, we had approximately $664 million outstanding under our revolving credit facility senior notes and convertible notes and net debt to capitalization was 48.1%. In November of 2018, we initiated a $50 million share repurchase program and during the quarter we purchased 39,000 shares at an average price of $38.58 per share for a total of $1.5 million. We ended the year with $22.7 million shares outstanding.

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

Eric Lipar -- Chairman & Chief Executive Officer

Thanks, Charles. In summary, we had another impressive quarter and a phenomenal 2018. Let me provide some guidance and thoughts on what we are seeing for the upcoming year. The first quarter of 2019 is off to a solid start with 269 closings in January and we expect closings in February 2019 to be similar to last year's February results, which totaled 368 closings. Based on our solid performance to-date and assuming a continuation of today's housing market conditions for the remainder of this year, we offer the following guidance. As we previously announced in our January 4th press release, we expect to close between 6,900 and 7,800 homes in 2019. We believe throughout 2019, we will continue to grow our community count primarily by going deeper in our existing markets and end the year between 105 and 115 active selling communities.

In addition to closings and community count guidance for 2019, we believe our average sales price for the year will continue to increase ending 2019 with an overall average sales price between $235,000 and $245,000. Guidance for gross margin will be in the range of 23.5% and 25.5%. We expect adjusted gross margin, which excludes the effects of interest and purchase accounting, will continue to be strong ending the year between 25.5% and 27.5%. This is the same adjusted gross margin that we guided to last year, which reflects our optimistic view of 2019. This also reflects our belief in the strength of our model and the ability to produce consistent margins. Given our home closing guidance along with an increase in average sales price, consistent gross margins, and conversion of convertible notes; we believe our basic earnings per share for the full-year 2019 will be in the range of $7 and $8 per share.

In summary, we are very pleased with our results for the fourth quarter and the full year of 2018. We believe we are poised to take advantage of continued growth opportunities in existing and new markets and that we are well-positioned to continue to grow our revenues, community count, and earnings allowing LGI Homes to achieve our long-term goals, and objectives of market-leading returns for our shareholders and continuing toward our goal of becoming a Top 5 builder.

Now we'll be happy to take your questions.


Related Articles

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Jay McCanless with Wedbush. Your line is open.

James C McCanless -- Wedbush Securities Inc. -- Analyst

Hey. Good afternoon, everyone. So my first question, you said February is looking roughly 368 closings. If I assume an 88 community count there, that puts you guys at roughly 6.3 homes per community, which is down again about 13%, 14%. And what -- right now is it a question of price, is it the weather that's holding you guys back? What's driving some of these negative comps that we're seeing on the per community basis?

Eric Lipar -- Chairman & Chief Executive Officer

Yes, Jay. This is Eric. I can start with not the weather holding us back for sure. And on your math, we expect the community count not to be as high as 88. It was 83 last month, maybe add a community or two in February and I think that's in line with our guidance. The last few years we've averaged 6.7 closings per community per month and that's the highest it's been as a public company and really strong absorption paces. And I think what we saw in the fourth quarter was good solid sales equivalent to the year before, but not quite as strong on a per community basis. So, it feels like our closing range is more six to seven closings a month annualized and that feels about where we are in January and February so similar results. And then as we add communities throughout the year and really drive that community count growth this year, we're confident we will end up between 6,900 and 7,800 closings.

James C McCanless -- Wedbush Securities Inc. -- Analyst

And then on the gross margin, good job there. When you think about how many homes you guys turn in a quarter, do you believe that you guys are seeing maybe some of the savings from lumber a little bit faster than some of your competitors and is that what drove the gross margin or was it more volume in 4Q versus just getting some savings on the construction cost?

Charles Merdian -- Chief Financial Officer & Treasurer

Hey Jay. This is Charles. I'll start and then Eric can add. So I think there's some impact that in quarters where we do have higher absorptions, we do see some benefit and certainly our cycle time is typically shorter and -- but we have visibility into our pricing about as quick as anybody that we would see because we're building on a spec basis as well. What that allows us to do is help forecast out where our sales prices need to be, which is what we focus on in terms of how we're managing expected gross margins.

James C McCanless -- Wedbush Securities Inc. -- Analyst

And then the last question I had, are you guys seeing the land sellers start to take prices down a little bit and/or are you seeing some competitive -- and not just in 4Q, but even January, February; are you guys seeing some competitive discounting from some of the other builders out there and how are you guys responding to that?

Eric Lipar -- Chairman & Chief Executive Officer

Yes. Jay, it's a good question. First of all from the acquisition standpoint, I would say we haven't seen a lot of discounting yet, maybe some easiness on terms. But certainly also being focused on the entry level, there's a lot of builders focused on the entry level segment right now. So, we don't think the markets soft enough to have a huge discount from the land sellers yet. But certainly in a softer market if that's anyone's projection, then that will be one of the benefits that we would have being at LGI. And what's the second part of your question?

James C McCanless -- Wedbush Securities Inc. -- Analyst

Just, what are you seeing from your competitors? Are you seeing more people cutting price to try and drive some volume and how is that impacting you guys?

Eric Lipar -- Chairman & Chief Executive Officer

Yes. I think it potentially could impact us on appraisals. If the other builders that are in the proximity of our communities certainly cut price, it can impact it through the appraisals and mortgage business. We don't really focus on what the other builders, but certainly we've been hearing of that potential in a slower market and that's really down to a market or a community-by-community basis that may have some impact. But other than that, we haven't seen a lot of that.

James C McCanless -- Wedbush Securities Inc. -- Analyst

All right, great. Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Nishu Sood with Deutsche Bank. Your line is open.

Nishu Sood -- Deutsche Bank AG -- Analyst

Thank you. First question on the gross margins, the wholesale business had an 80 basis point drag I think on gross margins in 2018. What are we thinking about for 2019? I can imagine that as that outlet becomes more attractive on a relative basis in 2019. Should we think about something like the 120 basis point drag that you had in 4Q or perhaps even something higher? Just trying to understand the drivers of the gross margins.

Charles Merdian -- Chief Financial Officer & Treasurer

Sure, This is Charles. So as we've -- since we've introduced wholesale, the percentage of wholesale business this quarter for example being roughly 12% of the business had 120 basis point impact and for the year it was roughly right around 7% to 8% of the overall business, which had an 80 basis point impact. So, I think we put it out there that we think wholesale is going to be around 5% so that would be a 50 basis point impact in kind of the general range of what we would expect.

Nishu Sood -- Deutsche Bank AG -- Analyst

Got it. Why would wholesale be a smaller part of the business in '19 versus '18? Is it just that you had some communities or phases that were more appropriate for wholesale in 2018 and have sold out? I would think given the market volatility, wholesale would continue to be an attractive outlet.

Eric Lipar -- Chairman & Chief Executive Officer

Yes, it is Nishu. I mean certainly the demand from the wholesale buyers will be there. Last year it was between 7% and 8%, we said 5% but certainly it wouldn't surprise us if it was a similar number to last year. And I also think something that is relevant to this question is we're starting to see more interest from the companies buying from us to do more larger sections, do more communities, and certainly we can be a player in that; but that just gives us a longer lead time. So, more of a focus on 2020 closings and beyond and we are talking to some of the bigger opportunities that we're looking at.

Nishu Sood -- Deutsche Bank AG -- Analyst

Got it. And my other question was about marketing, -- marketing spend. In the past when there has been volatility in the market, you've had the option given your model -- your sales driven model of increasing your marketing expense to keep up volume. Your marketing as a percentage of sales was actually down year-over-year. So, I just wondering how are you able to achieve that? Is the increase in marketing spend still yet to come or is it just more efficient these days with the Internet and then perhaps we won't see as much of an increase?

Eric Lipar -- Chairman & Chief Executive Officer

I think it's a combination of both. I think our marketing team has done a great job. We're more efficient than we've ever been, certainly growing community count and getting some national scale helps in that. In fact we had more leads last week than we had in the history of the Company. We went over 9,000 leads for the first time. So, that gives you an idea of how strong the demand is. Now certainly we have more communities than we've ever had, but just a data point and a great job by our marketing team driving leads to our communities and our salespeople. And then also, Nishu, that's one of the things we talked about on the call. If the interest rates continue to go up or we needed to spend more money on marketing, that's one of the triggers that we could pull to keep our absorption paces up, but that just hasn't been the case right now. We're seeing really efficient use of our marketing dollars. Last year in 2018, we generated over 360,000 leads. So we haven't had to increase that marketing spend yet, but it's certainly something we can do and would do if we saw demand starting to drop off.

Nishu Sood -- Deutsche Bank AG -- Analyst

Okay. Thank you.

Eric Lipar -- Chairman & Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question comes from the line of Michael Rehaut with JP Morgan. Your line is open.

Michael Jason Rehaut -- JP Morgan -- Analyst

Thanks. Good afternoon, everyone. The first question I had was on gross margins and obviously you've done a great job over the years of managing that to well above industry average levels. Just wanted to get a sense though as you look at from 2016 you were almost 28%, little bit of slippage in 20 -- over the past year or so. Just trying to get a sense of what in your mind was the bigger driver of that slippage and kind of what frames your thought process around maybe the midpoint being slightly less than 2018, certainly nowhere near the level of contraction relative to your peers. But what have kind of been the big pluses and minuses, puts and takes that have been driving that gross margin over the last couple of years, I'm talking about on an adjusted basis, and how you see those pluses and minuses, the puts and takes this upcoming year?

Charles Merdian -- Chief Financial Officer & Treasurer

Right, yes. Good question. So in 2016, you're right we were at 27.8% adjusted gross margin. In 2017 is when we introduced wholesale so that was certainly a function in 2017 where we introduced wholesale, which had an impact on overall gross margins but a similar operating margin. So I would say from '16 to '17, you had the introduction of wholesale. We also continue to expand outside our Central divisions and Texas primarily tends to still be our strongest market in terms of how we can generate gross margins. All of our regions are very similar in gross margins, but Texas generally tends to be the strongest which means as we expand geographically, we have a slight dilutive effect overall that would have come into play as well. And then in '17, particularly we spent some time on some of our quarterly calls just talking about the rapid rise of inputs, both labor and materials, during '17 and our ramp up in production were two factors in '17. And then for 2018, we were just able to kind of stay consistent and come in at 27% based on just managing the cost and managing sales prices in order to meet our target.

Michael Jason Rehaut -- JP Morgan -- Analyst

And then as you see 2019 kind of in that similar type of range midpoint being 26.5%, what do you kind of see as the headwinds year-over-year and tailwinds if any?

Eric Lipar -- Chairman & Chief Executive Officer

Yes. This is Eric. I think when we've given our midpoint of the guidance and it's really only 50 basis points higher, I think the headwinds to gross margin this year would be probably seeing what our competitors are doing and then there is also a mix component of that. We did tend to do a lot of development in Texas like Charles talked about so our gross margins are better in Texas than overall. Our growth this year and additive to community count is primarily going to be outside of Texas so just law of large numbers, if you will, will bring that average down. And then there's the mix component, we price our lots differently if we're buying finished lots compared to developing ourselves to make sure we capture that developer margin as well. So, it's going to vary a little by 50 basis points to 100 basis points just on the communities and whether we're developing are not. So we put a range on it, it's probably a little bit conservative on our range, but we're comfortable we're going to be in that range.

Michael Jason Rehaut -- JP Morgan -- Analyst

Okay. So just so I understand, the midpoint of the range being a little less than 2018, the primary drivers of that you would say would be a little bit of the pricing backdrop being maybe slightly more competitive as well as the geographic mix?

Eric Lipar -- Chairman & Chief Executive Officer

Correct.

Michael Jason Rehaut -- JP Morgan -- Analyst

Okay, great. Thanks very much.

Eric Lipar -- Chairman & Chief Executive Officer

You bet.

Charles Merdian -- Chief Financial Officer & Treasurer

You're welcome.

Operator

And our next question comes from the line of Stephen East with Wells Fargo. Your line in open.

Stephen F. East -- Wells Fargo Wells Fargo Securities -- Analyst

Thank you. Good morning, guys.

Eric Lipar -- Chairman & Chief Executive Officer

Good morning.

Stephen F. East -- Wells Fargo Wells Fargo Securities -- Analyst

Eric, when you look at the tax refunds that are coming back slower and/or smaller, I guess I'm wondering do you all see tax refunds drive your business in the spring? And if you typically do, are you seeing any change in what happened, what's happening so far? And then if you look at interest rates, they moved up into the fall and now they've eased. Did you see those rates affect negatively then and starting to affect positively now as you move through the spring?

Eric Lipar -- Chairman & Chief Executive Officer

Yes. Great question, Stephen. On the tax refunds getting back, I'm not sure if we have a good data point to gauge that other than there seems to be really strong demand in the field. So, certainly hasn't been slower. So, I think that's -- that's a positive in this time of the year, customers getting their tax refunds back to use for down payment, pay off that. I guess that's a positive for us. And I think what we saw in the fourth quarter when interest rates spiked, we saw -- still saw strong demand of lease coming in, but I think people because of that monthly payment increase started selecting smaller plans and that was one of the things that we all thought might happen and one of the components that drove our average sales price down in the fourth quarter compared to the third quarter. So, that's one of the things that we believe we noticed. It's not very clear in the data exactly that people were picking smaller plans, but that's what it suggests to us and probably not a coincidence that when interest rates went up in the quarter, our average sales price went down and that would be something that we would think could continue to happen if interest rates went up in 2019.

Stephen F. East -- Wells Fargo Wells Fargo Securities -- Analyst

Got you, OK. And then historically you've talked a lot about preservation of margin so in essence more price over pace. As you've had a little bit of a slower dynamic and you've got more competitors out there as you look at '19, does your thought process change anywhere you maybe leaning a bit more toward pace than maybe you would have in the past?

Eric Lipar -- Chairman & Chief Executive Officer

No. I think we're going to stay consistent with our business model. We'd like to have both price versus pace. So we plan on leading the industry again in pace on a closings per community basis and being north of that 6.0 closings per month and not reduce prices. We're not a fan of reducing prices on a community. Generally speaking, we think 2019 costs will continue to go up so we'll have to raise prices gradually throughout our community to keep our gross margins consistent. But we won't be reducing prices to generate more pace like some of the other builders are talking about.

Stephen F. East -- Wells Fargo Wells Fargo Securities -- Analyst

Got you, OK. If I can sneak in one more. You did your first national promo in the fourth quarter, thoughts on how, when, and whether this -- you'd do it in 2019?

Eric Lipar -- Chairman & Chief Executive Officer

Yes, I think it went great. The feedback that we got, we drove a lot of extra leads to the field. Didn't spend a ton of money like we talked about earlier on the call and just at our size and scale now, we have the ability to do promotions like that to really let the renters out there in the United States know that we have available inventory and it's a good time to own. And I think that message is going to continue into 2019 and I'm sure we'll have some national events and really have a focus on sales and marketing as we always do.

Stephen F. East -- Wells Fargo Wells Fargo Securities -- Analyst

All right. Thank you.

Eric Lipar -- Chairman & Chief Executive Officer

You're welcome.

Operator

Our next question comes from the line of Carl Reichardt with BTIG. Your line is open.

Carl Edwin Reichardt -- BTIG -- Analyst

Thanks. Hi, guys. Just wrapping up on a couple of these other questions. So when you look at the slowdown in sales per community over the last few months, is that more a function of traffic or conversion of traffic as you guys look at it?

Eric Lipar -- Chairman & Chief Executive Officer

Yes. It's -- again it's hard to say it's about slowdown. So, we think it's pretty good. It's certainly slower than our historical averages and record-breaking -- record-breaking months that we've had in the past, but the leads are strong. So, it's more of a function of conversion. I mean one of the things that we're dealing with as a company certainly is affordability as everyone has and as our average sales prices continue to rise. It's up $70,000 approximately over five years ago. Affordability is something that we have to be mindful of and not as may customers qualify as they did five years. Now our absorptions last year did not get impacted by that because I think of all the other positive things in the economy. So I think our range of closing guidance for the year is kind of that historical average of 6.0 on the low end of our range and at the high end of our range, it's more like the last couple of years and I think we'll fall somewhere in between.

Carl Edwin Reichardt -- BTIG -- Analyst

Okay. Thanks, Eric. And then as you expanded your number of markets your -- and there is I suppose an argument could be made while as you move to new places, you'll need new floor plans right and to meet those individual markets. Are you finding you're able to export the floor plans that have been so successful for you in end markets like Texas over time and move them because I would think if you could get some positive leverage on these plans that sell well, that ought to be helpful to gross margin more quickly as you move into new markets?

Eric Lipar -- Chairman & Chief Executive Officer

Yes and no. So not exactly the floor plans necessarily, Carl, but we have seen in our new markets that our traditional 1,400 square foot to 1,600 square foot three bedroom, two bath, two car garage that's laid out similarly is really the most popular plan and always has been and always will be. So I think when we go to a new market, we do a good job of not overthinking the architecture and just build a nice quality home and that 1,300 square foot to 1,600 square foot is always our best seller on a 45-foot or 50-foot lot and just get into that market quickly and get into sales and closings.

Carl Edwin Reichardt -- BTIG -- Analyst

Okay, great. Thanks, Eric. Thanks, guys.

Eric Lipar -- Chairman & Chief Executive Officer

You're welcome.

Operator

At this time, I'd like to turn the call back over to Eric Lipar for closing remarks.

Eric Lipar -- Chairman & Chief Executive Officer

Thank you, everyone, for participating on the call and your interest in LGI Homes. We look forward to sharing our achievements for 2019 throughout the year. Have a great day. Thanks, everybody.

Operator

Ladies and gentlemen, that concludes today's call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.

Duration: 40 minutes

Call participants:

Rachel Eaton -- Chief Marketing Officer

Eric Lipar -- Chairman & Chief Executive Officer

Charles Merdian -- Chief Financial Officer & Treasurer

James C McCanless -- Wedbush Securities Inc. -- Analyst

Nishu Sood -- Deutsche Bank AG -- Analyst

Michael Jason Rehaut -- JP Morgan -- Analyst

Stephen F. East -- Wells Fargo Wells Fargo Securities -- Analyst

Carl Edwin Reichardt -- BTIG -- Analyst

More LGIH analysis

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