Niche Builder LGI Homes Targets Renters For Starters

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A s apartment rents keep rising,LGI Homes ( LGIH ) derives more marketing power to turn renters into homeowners. With six straight months of 5% or greater annualized rent growth through July, the national apartment market "could be in its hottest long-term streak since the Great Recession," said market researcher Axiometrics.

July's annual rent growth rate of 5.2% was the highest in four years, Axiometrics notes.

LGI, which is based in the Woodlands, Texas, targets renters for its low-priced, entry-level homes in Texas and seven other states in the Southwest and Southeast.

It sends direct mail to renters in apartment complexes near its new-home communities, explaining how they can afford to own an LGI Home for the same amount or less than their monthly rents.

Instead of advertising the price of a home, LGI often touts homes' monthly payments of $700 to $1,000 a month.

The average price of an LGI home increased 15.8% in the second quarter vs. a year earlier, still a relatively affordable $186,197.

"A big part of their strategy is building a very simple home cost effectively so they can charge a low price for it," said John Burns, CEO of John Burns Real Estate Consulting, a housing-market research firm. "They have standard floor plans they build over and over."

Qualifying Folks With Less

Interested buyers are steered to sales offices in LGI communities, where numbers are crunched to determine if they qualify for a low down payment loan -- typically a 3.5% product from the Federal Housing Administration (FHA).

Or for those who qualify, LGI offers "no money down" financing.

"If they qualify (for financing), LGI will literally walk them out to a finished home they can purchase," said Burns, who compares LGI's marketing strategy to a time-share company's. "Most of these people don't even think they can become homeowners because they don't have a lot of savings."

LGI may be one of the smallest of the publicly traded homebuilders among giants such asD.R. Horton ( DHI ) andLennar ( LEN ) -- which also build for entry-level buyers, among others -- but it is one of the fastest growing in terms of percentage gains in home closings.

In the six months ended June 30, it closed on 1,524 homes, up 32.9% from a year ago. The summer months were even stronger. In July, closings jumped 78.7%. In August they climbed just shy of 75%.

The company expects to close 3,000 to 3,300 homes in 2015, up from a previous forecast of 2,800 to 3,200 homes. It closed 2,356 homes in 2014, up 45.7%.

LGI set a new quarterly record for home closings in Q2 -- up 29% from a year ago to 853 homes. Revenue jumped 49% to $158.8 million. Earnings climbed 53% to 66 cents per share.

Moreover, management raised earnings guidance for the full year to $2.15-$2.50 per share from $1.85-$2.25 previously. At the mid-point, it would represent growth of 75% over 2014.

"We consistently saw strong and steady traffic, with some of our information centers experiencing standing room only on the weekends," CEO Eric Lipar said in the post-Q2 conference call. (Company executives were unavailable to comment for this article.)

More than 54,000 potential customers inquired about a home, averaging 100 leads per community per week, he added.

Shares Soar Since IPO

LGI started building homes in Texas in 2003. Since it went public in November 2013, shares have appreciated about 154%. They soared 23% on Aug. 5, the day LGI reported Q2 results and raised guidance.

At quarter's end, LGI boasted 45 active communities in eight states, up from 14 communities a year earlier. Besides Texas, LGI is building in Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina and South Carolina.

"They are in areas that are among the fastest-growing economies in the country," Burns said.

They are also in areas where LGI can build homes relatively cheaply compared to other regions of the country, where land is tighter and more costly. "You're not going to find them in California or Massachusetts, for example," Burns said.

LGI says customers continue to flock to its communities in Houston, despite oil-related pressures on the economy there. Four of its top-five selling communities were in Houston. But they are not in the pricey areas, such as the energy corridor on the west side, where many oil executives live, Burns says.

LGI projects in Denver and Charlotte, N.C., new in the last year, were two of the firm's top performers outside of Texas.

LGI plans to sell homes soon in Seattle, which has seen a surge of young tech workers. "But it will be in the distant areas of Seattle, not near downtown (where) the land is too expensive," Burns said.

LGI also plans to expand into Nashville, Jacksonville, Fla.; Raleigh-Durham and Colorado Springs.

"The model is very replicable," Burns said.

Lots Of Lots: 22,200

LGI ended the quarter with roughly 22,200 owned and controlled lots, an inventory it says represents three to five years of supply. In early July it acquired 400 lots in Denver from Jack Fisher Homes.

But since LGI is reliant on low interest rates to keep monthly payments for its target buyers affordable, how would rising interest rates impact its business? Burns says the answer is simple: "If rates go up, they've said they will build smaller homes."

Analysts expect LGI's revenue and earnings growth to slow next year but remain in double digits.

In a research note on LGI after its Q2 report, J.P. Morgan analyst Michael Rehaut pointed to the company's "above average and near industry leading" growth in closings and orders, and gave the stock an overweight rating.

He noted the company's attractive land position, expansion into new markets, strong gross margins and "unique marketing and sales approach."

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
Referenced Symbols: LGIH , DHI , LEN

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