D. R. Horton Inc. (DHI) is America’s #1 home builder (for the recent past 14 years) that back in March 2014, divided its product mix into three distinct divisions, i.e., luxury division: Emerald Homes; move-up division: DR Horton Homes; and a newly created entry-level division: Express Homes that specifically targeted the entry-level/first-time buyer market, the primary realm of LGI Homes. Although I made a comparison of LGI Homes against 5 of the largest home building companies in a previous 10/13/2015 post here [ http://discussion.fool.com/lgi-homes-vs-competitors-31945328.asp… ], I decided this time around to narrow the focus to an apples-to-apples comparison between LGI Homes and Horton Express Homes, given that I’m a DHI investor.
ENTRY-LEVEL HOME BUYERS MARKET: LGI HOMES vs. HORTON EXPRESS HOMES
Home Closings
Since its inception in March 2014, Horton Express Homes has rapidly grown, zoomed pass and crushed all its competitors, including LGI Homes, in annual home closings, realizing a gigantic 255% gain from 1,869 to 6,643 closings in 2014 and 2015, respectively, versus LGIH’s 44% gain from 2,356 to 3,404 closings in the same years. The following table also shows gigantic YoY triple-digit percentage gains annually and quarterly for Horton Express Homes versus excellent double digit gains by LGIH that are substantially less than those for Horton Express Homes.
HOME LGIH YoY Express YoY
CLOSINGS Change Homes Change
2015 3,404 44% 6,643 255%
Q 12/31/15 946 45% 1,773 122%
Q 09/30/15 934 68% 2,221 330%
Q 06/30/15 853 29% 1,577 414%
Q 03/31/15 671 38% 1,072 332%
2014 2,356 1,869
Q 12/31/14 652 797
Q 09/30/14 557 517
Q 06/30/14 662 307
Q 03/31/14 485 248
Product Mix
While LGIH continues to focus almost entirely on the entry-level/first-time buyer market, D. R. Horton Inc. has made a major substantial shift in its product mix with the creation of Express Homes in 2014. The following table shows that the D. R. Horton Inc product mix of home closings has changed drastically and rapidly from 4% entry-level, 95% move-up and 1% luxury to 22% entry-level, 74% move-up and 3% luxury for quarters ending 3/31/14 and 12/31/15, respectively.
HOME Express % of DR Horton % of Emerald % of TOTAL Total
CLOSINGS Entry-level Total Move-up Total Luxury Total %
2015 6,643 18% 28,993 79% 1,100 3% 36,736 100%
Q 12/31/15 1,773 22% 5,965 74% 322 4% 8,060 100%
Q 09/30/15 2,221 21% 8,038 76% 317 3% 10,576 100%
Q 06/30/15 1,577 16% 7,983 81% 296 3% 9,856 100%
Q 03/31/15 1,072 13% 7,007 85% 165 2% 8,244 100%
2014 1,869 6% 27,959 92% 627 2% 30,455 100%
Q 12/31/14 797 10% 6,937 87% 239 3% 7,973 100%
Q 09/30/14 517 6% 7,923 92% 172 2% 8,612 100%
Q 06/30/14 307 4% 7,215 94% 154 2% 7,676 100%
Q 03/31/14 248 4% 5,884 95% 62 1% 6,194 100%
Concurrent with this drastic shift to entry-level homes in the product mix were substantial increases in revenue generated by Horton Express Homes. As shown in the following table, Horton Express Homes revenue share of the company’s home sales revenues changed significantly and rapidly from 2% to 15% for quarters ending 3/31/14 and 12/31/15, respectively. Horton Express Homes contribution to the company’s total annual home sales revenues substantially increased from 4% in 2014 to 12% in 2015.
Home Sales Express % of D.R.Horton
Revenues Homes Total Total
(million $) (million $)
2015 1,249.7 12% 10,569.7
Q 12/31/15 351.1 15% 2,340.9
Q 09/30/15 427.3 14% 3,052.1
Q 06/30/15 285.8 10% 2,857.9
Q 03/31/15 185.5 8% 2,318.8
2014 326.9 4% 8,414.6
Q 12/31/14 134.4 6% 2,240.7
Q 09/30/14 96.1 4% 2,403.6
Q 06/30/14 62.7 3% 2,090.3
Q 03/31/14 33.6 2% 1,680.0
Home Sales Revenues: LGIH vs. Horton Express Homes
Here’s an eye opening apples-to-apples comparison of entry-level home sales revenues for LGI Homes and Horton Express Homes. Like the home closing comparisons, Horton Express Homes again overwhelmingly outperformed, zoomed pass and absolutely crushed LGIH in quarterly and annual revenues with YoY triple-digit percentage gains in 2015. Horton Express Homes realized a gigantic 282% gain in annual home sale revenues from $326.9 million to $1.249 billion in 2014 and 2015, respectively, versus LGIH’s 64% gain from $383.3 million to $630.2 million.
Entry-Level LGI Horton
Home Sales HOMES YoY Express Homes YoY
Revenues million $ Change million $ Change
2015 630.2 64% 1,249.7 282%
Q 12/31/15 176.8 63% 351.1 161%
Q 09/30/15 174.0 88% 427.3 345%
Q 06/30/15 158.8 49% 285.8 356%
Q 03/31/15 120.7 59% 185.5 452%
2014 383.3 326.9
Q 12/31/14 108.4 134.4
Q 09/30/14 92.5 96.1
Q 06/30/14 106.4 62.7
Q 03/31/14 75.9 33.6
Average Sales Price (ASP)
The following ASP table shows that quarterly average sales prices for both LGIH and Horton Express Homes continue to rise significantly at an alarming rate, most likely due to geographic locations and increases in project entitlement costs, construction costs, land costs and other factors.
Average Horton
Sales Price LGIH Express Homes
Q 12/31/15 $ 186.8 K $ 199.4 K
Q 09/30/15 $ 186.2 K $ 191.5 K
Q 06/30/15 $ 186.2 K $ 188.4 K
Q 03/31/15 $ 179.8 K $ 179.1 K
Q 12/31/14 $ 166.2 K $ 168.9 K
Q 09/30/14 $ 166.1 K $ 169.3 K
Q 06/30/14 $ 160.7 K $ 157.6 K
Q 03/31/14 $ 156.5 K $ 157.3 K
Over the recent 2-year period, the quarterly ASP for LGIH increased 19% from $156.5 K to $186.8 K for quarters ending 3/31/2014 and 12/31/2015, respectively. Horton Express Homes rose 26% from $157.3 K to $199.4 K. What’s alarming is that the average raise in base pay for Americans rose only 2.9% in 2014 and an estimated 3% in 2015 with inflation currently running at about 2.1%, according to USA Today and other sources. There are other major obstacles facing first-time home buyers that are addressed hereafter under “First-Time Buyers Assessment by the NAR.”
Geographic Locations
When it comes to geographic presence and diversification, D. R. Horton Inc. clearly has a gigantic distinct advantage over LGIH since DHI over its 38 years in the business has penetrated and firmly established its presence in major U.S. domestic markets. As shown in the following table, Horton Express Homes is present in 45 domestic markets, covering 15 states, compared to LGIH in only 19 domestic markets, covering 7 states. Expanding out-of-state has reduced the percentage of total LGIH home closings in Texas from two-thirds (66.8%) in 2014 to just over one half (54.5%).
Horton Express LGIH
Homes
ALABAMA
Birmingham x
Huntsville x
Mobile Baldwin County x
Montgomery x
Tuscaloosa x
ARIZONA
Phoenix x x
Tucson x x
CALIFORNIA
Bakersfield x
S F Bay Area x
Inland Empire x
Sacramento x
Victorville x
COLORADO
Denver x x
Ft Collins/N. Colorado x
Colorado Springs x
FLORIDA
Central Florida x Orlando
East Florida x
North Florida x Jacksonville
Panama City x
Pensacola x
SE Florida x
SW Floida x Fort Meyers
Tampa Sarasotal x x
GEORGIA
Atlanta x x
Middle GA x
Savannah x
MISSISSIPPI
Gulf Coast x
NEVADA
Las Vegas x
NEW MEXICO
Albuquerque x x
NORTH CAROLINA
Charlotte x
Raleigh x
SOUTH CAROLINA
Charleston x
Hilton Head x
Myrtle Beach x
TENNESSEE
Nashville x x
TEXAS
Austin x x
Dallas x x
Fort Worth x x
Houston x x
Killeen/Temple/Waco x
New Braunfels x
San Antonio x x
UTAH
Salt Lake City x
VIRGINIA
Northern VA x
WASHINGTON
King County x Seattle
Pierce County x Tacoma
Snohomish County x Everett
SW Washington x
Thurston County x
STATES 15 7
MARKETS 45 19
First-time Buyers Assessment by the National Association of Realtors (NAR)
Every November since 1981, the NAR releases to its membership the Annual Profile of Home Buyers and Sellers surveys that evaluate the demographics, preferences, motivations, plans and experiences of recent home buyers and sellers.
In November 2014, the NAR reported the following:
• Despite an improving job market and low interest rates, the share of first-time buyers fell to its lowest point in nearly three decades and is preventing a healthier housing market from reaching its full potential.
• Young adults endure many obstacles on their way to homeownership, i.e., rising rents and repaying student loan debt make saving for a downpayment more difficult (especially young adults experiencng limited job prospects and flat wage growth since joining the workforce); those finally able to buy encounter low inventory levels in their price range, competition from investors, high credit conditions and high mortgage insurance premiums.
A year later In November 2015, the NAR reported:
• The share of first–time buyers declined for the third consecutive year and remained at its lowest point in nearly three decades as the overall strengthening pace of home sales over the past year was driven more by repeat buyers with dual incomes.
• The share of first–time buyers declined to 32 percent (33 percent a year ago), which is the second–lowest share since the survey’s inception (1981) and the lowest since 1987 (30 percent). Historically, the long–term average shows that nearly 40 percent of primary purchases are from first–time home buyers.
Most interesting, the NAR chief economist related the following:
• The housing recovery’s missing link continues to be the absence of first–time buyers.
• Although there are reasons why more first-time buyers should be reaching the market (e.g, persistently low mortgage rates, healthy job prospects for those college-educated and renting that has become more unaffordable in many areas), unfortunately, there exist just as many high hurdles that slow down first-time buyers, i.e., increasing rents and home prices impede their ability to save for a down payment, there’s scarce inventory for new and existing homes in their price range, and it was still very difficult for some to secure a mortgage.
• The survey also indicated that all forms of debt delayed saving for a home down payment for a median of 3 years; among the 25% of respondents who indicated that saving was the most difficult task, a 58% majority revealed student loans delayed saving.
After suffering and surviving the 2008 housing market crash and financial crisis, most homebuilders now exercise a lot more caution and have learned not to overreach and not to over build. Given the above NAR survey info and reasons, IMO homebuilders like D. R. Horton Inc and LGI Homes recognized a profitable opportunity (the shortage and limited supply of affordable housing for entry-level/first-time home buyers), conducted their requisite market analyses and reaped the benefits of targeting and building in specific local marketplaces; after all, it’s still location, location, location. One of my growing concerns, however, is that the aforementioned alarming increases in the average sales prices for entry-level homes is becoming another huge hurdle for first-time buyers whose share is currently on a downward trend - something requiring vigilance by homebuilder investors.
CORPORATE COMPARISONS: LGI HOMES (LGIH) vs. D. R. HORTON INC (DHI)
LGIH DHI
Market Cap 481.42M 10.38B
Employees 489 6,325
52-wk high 36.07 33.10
Mar 9, 2016 24.06 28.06
52-wk low 13.01 22.97
P/E (ttm) 11.70 13.63
FWD P/E 7.74 10.75
P/B (mrq) 1.98 1.69
P/S (ttm) 0.78 0.94
EV/EBITDA (ttm) 9.00 10.19
Capital Resources, Management & Liquidity
Here’s D. R. Horton Inc’s statement on capital resources and liquidity:
We have historically funded our homebuilding and financial services operations with cash flows from operating activities, borrowings under bank credit facilities and the issuance of new debt securities. Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to homebuilding market conditions. During the last two years, we have increased our investments in homes, finished lots, land and land development to expand our operations and grow our profitability. We intend to maintain adequate liquidity and balance sheet strength, and we regularly evaluate opportunities to access the capital markets.
Since I could not find a concise LGI Homes statement, I pulled the following from their 2015 10K filing:
We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets. We expect to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of our homes. Our existing indebtedness is recourse to us and we anticipate that future indebtedness will likewise be recourse. (snip) Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, if any, the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service. As a means of sustaining our long-term financial health and limiting our exposure to unforeseen dislocations in the debt and financing markets, we currently expect to remain conservatively capitalized. However, our certificate of incorporation does not contain a limitation on the amount of indebtedness we may incur and our board of directors may change our target debt levels at any time without the approval of our stockholders.
(snip)
If we do not have sufficient funds to repay our indebtedness at maturity, it may be necessary to refinance the indebtedness through additional debt or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancings, increases in interest expense could adversely affect our cash flows and results of operations. If we are unable to refinance our indebtedness on acceptable terms, we may be forced to dispose of our assets on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our assets that may be pledged to secure our obligations to foreclosure. Unsecured debt agreements may contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other indebtedness in some circumstances. Defaults under the Credit Facility and our other debt agreements, if any, could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Now consider the following:
• Concerning capital resources, the big homebuilders like D. R. Horton have a major advantage over small builders like LGI Homes due to their ability to access the capital markets and raise funds very inexpensively. The smaller builders find themselves nearly shut out of the capital markets. Also, large institutional investors have been re-investing in the large homebuilders, while small builders cannot take advantage of opportunities due to tight credit conditions.
• Based on recently released FY 2015 financials ending 12/31/2015, the LGIH Total Debt to Equity ratio increased from 118.4% in 2014 to a red flag high 124.5% in 2015 compared to a 61.6% Debt to Equity ratio for DHI, based on financials from its latest quarter ending 12/31/2015. In January 2016, DHI paid $170 million of senior notes.
• A non-GAAP measure of a company’s leverage is the company’s Debt-to-Capitalization Ratio, i.e., the ratio of its total debt (short-term and long-term) to its combined total debt and total equity. D. R. Horton Inc currently has an excellent low debt-to-total-capitalization ratio of 38%, which is well below (a) the peer average in the mid-50s and (b) the LGI Homes ratio of 55%. This ratio is important because, in the event of an economic turndown, a company with a high ratio may have a difficult time making the interest payments on its debt.
• At present, DHI has a positive $600 million free cash flow vs. LGIH’s negative $90 million.
• Both LGIH and DHI have excellent current ratios.
• While LGIH pays zero dividends, DHI pays an annual dividend of $0.32 with an annual yield of 1.14%.
Given the above, DHI appears to have a much stronger capital structure and management in place than LGIH. I highly recommend and suggest examining on your own the most recent quarterly and annual SEC filings for further details and explanations.
Free Cash Flow LGIH DHI
(million $)
2015 -90 644
2014 -174 -762
2013 -55 -1,287
2012 -5 -327
2011 9 -1
LGIH DHI
Cash (mrq) 37.5M 1.268
Total Debt 308.1M 3.73B
Debt/Equity 124.6% 61.6%
Current ratio 7.09 6.93
Debt/Capitalization 55.5% 38.1%
FY 2016 EXPECTATIONS/GUIDANCE FOR D. R. HORTON INC.
The following FY 2016 expectations of D. R. Horton Inc appear very positive and achievable:
• Consolidated pre-tax margin in the range of 10.5% to 11.0%
• Consolidated revenues of $12.0 billion to $12.5 billion
• Closings between 39,500 homes and 41,500 homes
• Home sales gross margin in the high 19s to 20%
• Homebuilding SG&A expense in the range of 9.2% to 9.4% of homebuilding revenues
• Financial Services operating margin between 30% and 33%
• Income tax rate between 35% and 36%
• Diluted share count of approximately 375 million shares
• Cash flow from operations in the range of $300 million to $500 million
CONCLUSIONS
For now, small-cap LGI Homes is basically a one-dimensional company, focused almost entirely on the entry-level buyer market. It would be imprudent to assume that other public and private homebuilders (e.g., Lennar, PulteGroup, CalAtlantic Group and KBH) are unaware of the rapid profitable success of Horton Express Homes and what’s going on in this specific market; my current due diligence on these companies indicates otherwise and that they have already jumped into the fray.
For now, since my portfolio has room for only one homebuilder, my full analysis validates sticking with my investment in DR Horton Inc, America’s #1 homebuilder. As always conduct your own due diligence and decision-making.
Regards,
Ray