I’ve added the last two quarters’ data into the lot inventory spreadsheet. Nothing new or dramatic. The growth of closings exceeds the growth of lot inventory, so the years of inventory has decreased, but not to a worrying degree. The rate of increase of lots is fairly steady at 14% to 18% y-o-y, while closings are settling towards 40% y-o-y increase. Closings are decelerating so there is a trend towards stabilizing years of inventory but latest data point is 6.2 years. Looking at the 4 month moving averages of inventory and closings, the years of inventory is decreasing at an 18% annual rate.
Hidden in this data are trends in lot ownership and finished lot percentage. The percentage of lots owned decreased from74% to 64%. The percentage of owned lots that are finished increased from 25% to 29% (both y-o-y). Wring all that out and the inventory of owned, finished lots represents 6 quarters of closings. I don’t have trend data on that number because I haven’t recorded data on owned, finished lots for more than 5 quarters (actually 4 quarters because the annual report does not contain all the data that is in quarterlies—as far as I can determine).
Management reported that they were purchasing a higher percentage of finished lot compared to raw land in the “new territories”. This would make sense if they are trying to accelerate their presence in the new markets. It would reduce their overall profit but decrease time to market. This should have the effect of decreasing years of inventory, but the number of lots in this category is probably small compared to the overall inventory. The impact of this is not a significant factor in the declining years of lot inventory, in my opinion.
My conclusion is that even a forward looking market ought not find anything alarming in this metric–yet.
I’ve added the last two quarters’ data into the lot inventory spreadsheet. Nothing new or dramatic. The growth of closings exceeds the growth of lot inventory, so the years of inventory has decreased, but not to a worrying degree. The rate of increase of lots is fairly steady at 14% to 18% y-o-y, while closings are settling towards 40% y-o-y increase. Closings are decelerating so there is a trend towards stabilizing years of inventory but latest data point is 6.2 years. Looking at the 4 month moving averages of inventory and closings, the years of inventory is decreasing at an 18% annual rate…
Thanks KC, sounds like a lot of work for you, but quite useful. Seems like they have trouble keeping up with demand (finding enough new lots).
Two things. One, red faced, I said 4 month moving average and should have said trailing 4 quarter moving average.
Two, I have not recorded balance sheet improvement/deterioration. They have an increasing number of lots but the cost of that inventory may be increasing faster than mere number of lots. So, is there a balance sheet constraint on land purchases? Is there an availability problem? Is there a shift in business strategy? We know they said that they were buying more already improved land compared to raw land, but I don’t see a marked shift in the numbers.
So for now, still a comfortable (to me) 6.2 years, but declining. What would be a warning sign? All else being equal (how’s that for wiggle room?) I might lighten up at 5 years and be out at 3 years. Maybe. (wiggle, wiggle).
I’ll try to swallow my distaste for reading balance sheets and check the last two annuals and the last quarterly.
KC, They are buying in higher cost areas where they have already said the cost of land is more expensive (but they can sell the houses much higher), so I wouldn’t worry about the cost of lots. the average price of house sales is rising nicely.
Heavy volume and quick up move. Haven’t seen any news. Maybe it’s the IBD “gang” or there’s a leak about a …
It appears they’ve been rated a “1” by Zacks…looks like an article stating this was released Saturday. I’m guessing that’s why the share price spiked this morning.
As far as buying lots that are already developed (typically utilities run to site, if not the lots themselves, possibly roads, curbs, drive entrances, and even gateways or water features) vs. non-developed (lot lines, property markers, designated roads and tot lots, etc. with none of it actually being complete), a person should be asking who developed and who sold.
If it is a land developer that designed the site themselves, is it a developer that LGIH has done work with before? Did LGIH have input as to how the site would be developed? Are they buying developed lots from another builder who is struggling? Are these lots of the size and shape where it is easy to put existing designs on, or do they need to come up with new designs? Is that done on purpose because they wanted to do a new design there or did they purchase the lots simply because those were the only ones available in that general location?
I realize many of these questions may not really matter. However, there is a lot to be gleaned from whom they bought the developed lots from, why the seller sold (obvious if a land developer), if prior business was done with the seller, or even if this is common or uncommon for LGIH to buy developed property vs. non-developed.
It is highly possible they bought from a developer and bought pre-developed for time to market issues, but I don’t know. Just asking a few questions.
Saul,
While the number of lots increased 17.2% over the last two quarters, the value of the inventory increased only 14.8%. At first glance, this would indicate that the cost of lots is decreasing, not increasing—overall.
The situation is more complicated than that, of course. The value of the inventory increases as raw land is converted to lots and houses are built. When houses are sold, a pro rata value is added to cost of the house and that value is deducted from inventory value. A lot of moving parts. All LGIH communities are not equal in value. Maybe they have “absorbed” a high rate of expensive houses on larger lots with more community amenities and replaced with raw land in other regions. Or not.
Our sharp eyed readers will wonder why the number of lots increased by 17.2% over six months while I state that the annual increase in the number of lots is 18.7%. That annual increase is the trailing 4Q moving average compared to the year earlier trailing 4Q moving average. I used the moving averages because in the southwest and Florida geographies the quarter-to-quarter number of lots fluctuated wildly as, I assume, large parcels of land were purchased (or options obtained thereon) and in the next quarter the greater portion was disposed of, it being in excess of the planned community(ies). This made quarter over quarter comparisons meaningless as far as trends are concerned.
I have one more post coming. I went through balance sheets and cash flow statements and concluded that the growth of lot inventory is limited by financial considerations rather than lot availability or operational changes. That assessment could stand some critique by those with more experience, as it would have significance in projecting the longer term growth rate of LGIH. I am quite lacking in competence in reading the tea leaves of balance sheets and cash flow.
Well, after a day of annual report reading, I have a lot more information and very little more understanding. I will leave you with this information:
LGIH borrowing covenants: A leverage ratio of not greater than 67.5%, liquidity of at least $40.0 million.
LGIH liquidity is around $40 million.
LGIH assets are pretty much cash plus inventory. “Other assets” don’t change much.
I suppose you could leverage the net income to calculate how much LGIH could increase inventory value.
More fact:
LGIH either had to, or chose to, issue $85 million of convertible notes in 2014. They used $16.6 million to purchase 1 million shares (looks good now, doesn’t it?). The remainder was used mostly to purchase inventory.
In 2015, LGIH sold $9.6 million shares at the market.
My conclusion remains that LGIH has financial constraints on increasing inventory, and therefore the number of lots. Above some rate, growth is accompanied by shareholder dilution. At one point I thought that limitation was about 24% but now I have grave doubts.
Oh, by the way, those notes convert to shares at $21.52, May 15, 2019 (or maybe sooner under certain conditions). That is 3,950,732 shares.
You might glean more insight also keeping track of the number of separate housing developments that LGI is involved with, perhaps in combination with the dollar values you are tracking.
KC thanks for your postings on LGIH and its industry. They are very enlightening on the US property development sector for me never having lived there.
Ant
First, LGIH is comfortably under the .675 leverage limit so they have room to add inventory above reinvesting profit.
But, assume they invested 100% of profits in inventory. The additional debt divided by profit plus additional debt cannot exceed 0.675. Do the math and they can invest profit times 3.076.
Take that amount and divide by inventory and that is the percent increase in inventory that can be financed from operations.
This will vary from quarter to quarter. The latest quarter profit was $20.6 million, allowing $63.6 million on inventory increase. Ending inventory was $609.9 million. Increase would be 10.9% for the quarter. Year ago quarter would have allowed 8.1%. Taking FY2015 as a whole, the $52.2 million profit could be leveraged to $162.5 increase in inventory. Ending inventory was $531.2 million. Increase could be 30.6% (that is 6.9% per quarter compounded).
Obviously, they have to invest in other things than inventory but inventory dominates the cash usage and balance sheet.
One could compare increases in lot closings and increase of lot inventory and see if the decrease in “quarters of lot inventory” corresponds to the 30% “financial limit” on inventory growth. A task for another day.
Final. Honest.
KC, who has trimmed LGIH on this two-day price increase.