LGIH

Investment Analysis Clubs Saul’s Investing Discussions
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How long is the runway? LGIH has entered nine new markets in the 3 years since the IPO. I would guess, based on the historical absorption rate and the Q2 and Q3 2013 closings…., that they were in 5 markets before the IPO. So, that would mean they are in 14 markets now and looking for Minneapolis and Las Vegas in 2017. They think they will be in “most” of the top 50 markets “one day”. Given that the number 50th market is not as attractive as #15, the next tripling of their market presence would give less growth than the nine new markets entered to date. My feeling is that they are still on the lower part of the ’S’ curve, still a few years of good growth. Two years? Three years? Subject to the general housing market and economy.

My forward looking metric, quarters of inventory, increased but still in the normal range. Current is 28.4 quarters up from 24.9 quarters and not caused by a sales slowdown. I was surprised by where the increase of lot inventory occurred, or rather where it did not. Inventory decreased in southwest, Florida and southeast. Northwest increased from 892 to 1008. There was a 20% decrease in southwest, 15% decrease in Florida and 5% decrease in southeast. But, Texas lot inventory increased 23%, up to 17,034 which represents 57% of the LGIH lot inventory, up from 49%. Well, Texas provided 53% of the closings in 3rd quarter so maybe the increase in lot inventory ought not be surprising. The southeast sector bears watching. Inventory dropped from 19 quarters to 16 quarters.

Another thing to watch will be upcoming comparables. The first two months of Q4 were strong but December 2015 was their best ever month and will be tough year-over-year comparable for 2016. Then, January and February are slow months. So, could be an over reaction and buying opportunity by March?

LGIH is a core position for me. I can understand the business. No “fashion” issues. No one is going to disrupt by building a better igloo. Not subject to trade wars, other than an accompanying recession risk. Demographics for new households looks good. Downside is the business cycle generally.

KC, very long LGIH

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Another thing to watch will be upcoming comparables. The first two months of Q4 were strong but December 2015 was their best ever month and will be tough year-over-year comparable for 2016. Then, January and February are slow months. So, could be an over reaction and buying opportunity by March?

KC perhaps you recall that they addressed seasonality during the last CC.
They sell more in the summer and then deliver the houses in the fall and early winter.
There should be no surprises to any of the larger shareholders or analysts paying attention.

We get past all the December interest rate increase talk and I think we may see the share price appreciate.

I’m with you, holding shares and long May call options.

JT

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I was surprised by where the increase of lot inventory occurred, or rather where it did not. Inventory decreased in southwest, Florida and southeast. Northwest increased from 892 to 1008. … But, Texas lot inventory increased 23%, up to … 57% of the LGIH lot inventory, up from 49%. Well, Texas provided 53% of the closings in 3rd quarter so maybe the increase in lot inventory ought not be surprising. The southeast sector bears watching…

Hi KC,
Let me speculate on this a little, but remember that this is just my speculation.

  1. The Northwest is new and recently opened, so probably they had to build up inventory there. Our Northwest division now has two active communities. We closed 20 homes in the quarter with an average sales price of over $325,000. This is a very strong start given that we first opened for sales in Seattle in March and closed our first homes in June.

  2. They had to add in Texas because they are selling at such a high rate there. Based on absorption, our top three markets were all in Texas. Dallas Fort Worth was 9.9 closings per community per month, Houston was 8.6, and Austin was 8.1. As our leading division, Texas generated 553 closings, which was approximately 53% of our total. Closings were up about 13% in Texas from a year ago with one less active community. In my opinion that’s an incredible rate of sales!

  3. So that left Florida, the Southeast, and the Southwest. They also had very good results: The Florida division and the Southwest division both experienced strong growth during the quarter. The Florida division was up 23% the Southwest division was up 18% in closings from a year ago. But maybe they had to choose where they put their money, maybe these were already stocked with as many lots as they needed, etc,… but all in all, it’s hard to worry about results like that.

Saul, also very long LGIH

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Another thing to watch will be upcoming comparables. The first two months of Q4 were strong but December 2015 was their best ever month and will be tough year-over-year comparable for 2016. Then, January and February are slow months. So, could be an over reaction and buying opportunity by March?

Hi KC and JT,
They gave a crystal clear explanation of this here (below). It seems that the “sales” transactions are actually initiated several weeks before the “closings”, so there are always fewer closings in Jan and Feb because of all the holidays between Thanksgiving and New Years.
Best,
Saul

We believe we will close about the same number of homes in November as in October. We closed just 249 last November which is going to make for a very easy comp this month. December, which was the best month we ever had at 433, is going to be tougher comp. January and February closings will be substantially lower compared to the others because closings in Jan and Feb are based on sales that were made between November 15 and Jan 15, which includes Thanksgiving, Xmas, and New Years holidays. So historically December is very strong for us and then January and February are weaker as far as closings go.

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Agreed that the conference call warned and explained. But that doesn’t mean that some robo algorithms won’t punch sell, sell, sell. Or some bear post on SA comes out blasting low December sales and q over q declines. Just thinking one move ahead :slight_smile:

KC

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Agreed that the conference call warned and explained. But that doesn’t mean that some robo algorithms won’t punch sell, sell, sell.

Good point. Robo-algorithms don’t listen to conference calls or understand the company. But we do, which should give us an advantage.
Saul

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I too am long LGIH. I also sold slightly in the money December puts. I’ll take the shares if they’re put to me, or I’ll roll them forward (I know Saul does not trade options, I didn’t either until I sold almost all my holdings in a hasty over-reaction to the election results. This board is not about options so I won’t dwell on it. Just trying to be clear about my position).

I also spent quite a bit of time perusing the “Seattle” communities on the LGIH web site. LGIH has three communities in the Pacific NW where I live.

First of all, if you work and socialize in Seattle, none of the communities will be very appealing. They are all about and hour’s drive south of Seattle/Bellevue/Issaquah in moderate traffic. If you spend most of your time in this area, or north of this belt (especially if you work here) you’d be setting yourself up for a very painful commute (Seattle metro has the 2nd worst traffic in the US). On the other hand, if you’re centered in the Tacoma/Olympia area, these communities might be appealing.

Why do I think this is important? LGIH is attempting to change the age-old edict that the three most important things about real estate are location, location and location. They apparently believe (and I think I agree) that for a variety of reasons the three most important things are price, then location and amenities (tied for 2nd).

It’s interesting to see what LGIH puts on their website. It’s even more interesting to take note of what’s absent. They do not list prices. You have to call for pricing info. Instead they provide the monthly payment starting price (undoubtedly, for the smallest home). They show a tiny floor plan, but they don’t provide square footage. They include a fridge (most builders in this area do not). They landscape the front yard and fence the back. They advertise an “open floor plan” and that it is. Either some of those ceiling spans are quite small, or they’re using outsize gluelams to support the superstructure. Walls are expensive, it’s cheaper to eliminate them and the attendant costs of framing them in, sheet-rock, finishing, baseboard, etc. They advertise “energy efficient” homes, in fact, all the communities here subscribe to pretty much the same building codes which enforce energy efficiency. No harm in advertising it, but it’s like saying water is wet. All new homes (in this area anyway) are energy efficient. They don’t show a plat of the community or mention how many homes are slated for construction. However, a quick review on Zillow.com shows a Bing aerial photo of the development, total square footage of each model, and price by plat location.

It’s clear the homes are finished and ready to move in, with the exception of furniture. But the new owner needn’t buy a fridge, spend money on landscaping (at least not right away, but that backyard will be mud for 7 - 8 months), or anything else. All the homes have 2-car garages, adequate bath to bedroom accommodations and nice appointments (upgrade appliances and cabinetry, granite counters, etc). They also have more models than I would have guessed. Builders save money by building the same house over and over. LGIH provides quite a variety of models within a community and across different communities. These communities will not replicate the old FHA 538 plans where every house, side-by-side was the same cement block, 940 square foot box.

I could go on, but I’ll only mention in closing that I am confident LGIH will maintain a presence in this region for years. There are regional mass transit plans being implemented which should relieve a lot of the traffic. There is a lot of undeveloped land outside of the metro areas to the East and North (not much to the West due to Puget Sound, although people who commute to Seattle and don’t mind having their lives controlled by ferry schedules live on Bainbridge Island - mostly pricey - or the Olympic Peninsula).

I am very comfortable with my investment with LGIH.

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Great information, brittle rock. Thank you for your post.

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Thank you for the post

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So that left Florida, the Southeast, and the Southwest.

I have heard in several places that Charlotte is really getting hot, so their presence there should pick up.

Las Vegas scares me, there were so many cookie-cutter homes built out in the infinite desert during the boom. They were “all” bought by investors (many big) during the bust. They have been sitting on them collecting rent and I have heard they are starting to sell them off. This can last a long time. That said, I don’t think it will hurt them too much and their research and locations have been pretty good so far.