A New IPO, Builder LGI Homes Courts First-Time Buyers


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New to the stock market in November,LGI Homes ( LGIH ) is being regarded by investors and analysts as a housing market play with a unique twist.

The homebuilder, based in the Woodlands, north of Houston, takes a sales-oriented approach to acquiring first-time homebuyers, contacting renters and other prospects with information on how they can afford a home. This helps it stand out from the pack.

LGI stock has surged 57% from its Nov. 7 IPO at $11 a share. It was up about 3% this week by the time the firm released third-quarter results Tuesday night. The stock flagged early Wednesday, then rebounded to close up 0.7% at 17.30.

In its report for the quarter, LGI said home sales revenue rose 58% from a year earlier to $68 million, amid expansion into new markets, and the average home sales price went up 13% to $151,779. JMP Securities analyst Peter Martin had cited expected revenue of $68 million in his Dec. 2 report on the company.

"We closed 448 homes during the quarter, resulting in the best quarter in company history," said LGI CEO Eric Lipar on the earnings conference call. "We ended the quarter with a portfolio of approximately 11,000 lots (finished and raw land) that we own or control."

Moving Cross-Country

LGI started building in Texas in 2003 and has expanded into Florida, Arizona, Georgia and New Mexico. Lipar said on the call that its markets are still seeing "strong momentum in housing demand drivers."

With double or triple-digit year-over-year earnings and revenue growth for several quarters, LGI holds the top Composite Rating in IBD's Building-Residential/Commercial industry group. It's a smaller builder in market cap among 26 names. The largest areLennar ( LEN ), which reported earnings early Wednesday, thenPulte ( PHM ),D.R. Horton ( DHI ) andToll Bros. ( TOL )

The group ranks No. 182 of 197 that IBD tracks. But it jumped 3% Wednesday as stocks broadly lifted on economic confidence brought by the Fed's word that it will start slowly tapering bond purchases.

The Federal Open Market Committee said, though, that its "sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."

LGI's competitors include D.R. Horton, Fulton Homes, Crown Communities, Chesmar, First Texas and Highland Homes.

"The company's strength is its sales model. They really differentiate themselves most by the way they market to the first-time homebuyer," Martin said. "Those marketing strategies have allowed them to achieve record sales metrics."

Hands-On With Homebuyers

LGI direct-mail campaigns target renters and show how they can buy homes with an affordable mortgage. The program has worked very well, resulting in more than triple the industry's average monthly sales per community. At the end of the last quarter, LGI was selling an average of seven homes a month per community, vs. the industry's two.

"The traditional builder has always opened up the model home and provided a couple of salespeople and used traditional methods of marketing," Martin said. "I think the most innovative thing the homebuilding industry has done is gone to social media and some things on the Internet, but it's always advertise and have them come by your model home."

LGI sends out about 12,000 direct mailings each week to renters within 25 miles of LGI's targeted communities. It also uses traditional advertising and social media.

Once potential buyers are interested, LGI's salespeople will book weekend appointments to spend about two hours going over homes and how to buy. As a result of this smooth and efficient process, LGI has been able to achieve a high close rate, writes Martin in his research report. Only about 10% of the closings take place with Realtors.

LGI tries to "have personal contact with that potential customer to learn about what they need, what they can afford, before they even show them the product," he added.

In addition to LGI's targeted marketing, the company has also mastered cost efficiencies in the way it builds and sells its homes. It usually offers no more than five unique home models and incorporates many upgrades that would otherwise be custom work by other builders. This translates to lower labor, design and construction costs, thereby assuring that LGI has industry-leading margins.

It usually focuses on high-growth markets and communities slightly outside of metropolitan areas, yet still close to businesses. This is where land-acquisition savings come in. LGI also selects areas that qualify for various federal and state housing programs, adding appeal for first-time buyers in that demographic. The company has 22 active communities and Martin expects that to double by the end of 2015.

LGI gave an outlook in its third-quarter report saying that it expects to have at least 24 active selling communities at the end of this year and 36 in 2014. It expects to close more than 420 homes in the fourth quarter and 2,000 next year.

LGI's homes are exclusively built on spec, meaning that at any given time in the sales process, several are already built and available. Once LGI sells a home, it immediately starts building another one.

"They really spend a lot of time upfront with the customer, which makes the sales process more efficient," Martin said. "Because they already have homes built and ready ... if that customer qualifies and has ability to get a loan, then they can go look at the product and decide that they can buy."

Efficient construction plus a sound strategy of buying land translates into a strong growth rate and profitable business. LGI commands gross margins of 27% or higher, above the industry average of 20%.

Along with the five states where LGI is active now, Martin anticipates it will venture into Nevada, Colorado and the Carolinas. The recent IPO raised nearly $103 million, giving LGI room for land acquisition and expansion into new states.

"The company has a proven process and development plan," noted Martin. "They just needed the proceeds from the IPO to grow the company and we expect deliveries to double between 2013 and 2015."

LGI has below-industry debt levels, but analysts expect it to slightly increase to partially fuel its strong expansion in the coming years.

Business Cautions

Risks include the typical interest-rate risk, as rising rates could curb buyer demand. Changes in government-sponsored housing programs also could affect affordability.

Martin notes that currently rent prices are high, making it easy to sell homes to renters. If rent prices were to go down, the competitive advantage may not be as apparent.

Labor, material and other costs are always a factor for builders too, plus the overall cyclicality of the industry. However, builders recently came out with very strong confidence numbers for their industry.

LGI's Lipar and his father have been involved in land development since the mid-1990s and with the company since inception.

"Eric Lipar is a very driven individual. He's really the energy behind this sales model and he has grown this business with the help of several other key members," Martin said. "He ended up supplementing that management team over the last 12 to 14 months in anticipation of the growth in the new states."

The team is "pretty well set" to handle the growth ahead, he says.

The consensus view of analysts polled by Thomson Reuters is for revenue of $62 million in the fourth quarter and $225.9 million for the year, then $342.5 million in 2014.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas
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