LGIH: Snowball's chance in Hell

What does it take for LGIH to meet the 4,700 closings. I added a couple of columns to my “LGIH Absorption” spreadsheet. Simply entered the estimated number of communities for the next nine months to reach 72 by 12/17. Then multiplied by the absorption rate for the corresponding months of 2016. Added the 761 closings-to-date. Answer: 4,754.

Consider two facts. 1) Absorption rates have been consistently falling since the first data from 2013. 2) January and February absorption rates were -16% and -24% year-over-year. March rate where “sales were strong” was down 19% year-over-year.

Now, in fairness, the data could easily (more properly?) be characterized as “flat” the last threeyears: 6.1, 6.0, 6.0 compared to the last four years with -4% annually. Choose your starting point carefully to “prove” your thesis.

What to look for in April closings: 421 to 428. That’s what my model shows. If they miss that when they report next, consider them a snowball in Houston in May.

But this is relevant to the 4,700 closings target. What would that mean for the revenue? Let’s take a “worst case” that the monthly closing rates continue to be -19% for the rest of the year. Add another column to the spreadsheet and the result is 3,865 closings versus 4,163 for 2016. Temper that with a “not worst case” increase in average selling price of +10% and the result is a revenue increase of 2%. That is sort of looking at worst case through rose colored glasses, I admit.

KC

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KC,
How many of these pending sales are reliant on developments in AZ?

The reason I’m asking is that the AZ real estate markets season is very seasonal. The summer months are dead. Fall is ok.

LGIH properties are a little more protected from the seasonality I think because they are more for younger working class locals, as opposed to retired snowbirds. I’m certainly not positive about that, but at their price points, it’s a guess.

I know rents in Phoenix have skyrocketed to an average of 40% of monthly income, which is very unsustainable, and most likely what’s driving milenials to become home owners over renting.

Chris

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The summer months are dead. Fall is ok.

       Q1   Q2    Q3    Q4   YEAR    YoY
----  ---  ----  ----  ----  ----  -------
2013                    505
2014  485   662   557   652  2356
2015  671   853   934   946  3404  +44.48%
2016  844  1128  1052  1139  4163  +22.30%
2017  761  1313  1313  1313  4700  +12.90%

From the historical numbers Othalan posted (company wide, not just AZ), I wouldn’t really call summer “dead”. Regardless, the next couple months sales and Q2 results will really tell the story here, unfortunately we can’t rush it, we’ll all just have to wait and see.

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How many of these pending sales are reliant on developments in AZ?

Chris,

Pretty much answered by others, but just to confirm,

LGIH doesn’t breakdown contracts signed (sales) by region. I will say that there was an imbalance of inventory among the regions. The average weeks of sales in backlog at year end (various states of completion) was 20 weeks. Southwest had 28 weeks, Southeast 26 weeks, Florida 20 weeks, Texas just 13 weeks. The Northwest which was just opening up, had 98 weeks but I think that would be 14 to 16 homes per community and with any kind of absorption rate that “weeks of inventory” should normalize.

Management acknowledged execution problem of not having enough Texas inventory, but did they overbuild Southwest and Southeast? Colorado is in Southwest region and there were new markets opened there, too, right? Might be a factor.

KC