A s apartment rents keep rising,LGI Homes (
) 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
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
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
"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"
"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 (
) andLennar (
) -- which also build for entry-level buyers, among others -- but
it is one of the fastest growing in terms of percentage gains in
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
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
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
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,"
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
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
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