LGI Homes Inc (LGIH) 2013 Q3 法說會逐字稿

Good morning and welcome to the LGI Homes third-quarter 2013 earnings conference call. Today's call is being recorded and a replay will be available on the Company's website later today at www.LGIHomes.com. This replay will only be accessible for the next seven days.

We have allocated an hour for prepared remarks and Q&A. (Operator Instructions).

At this time, I will turn the call over to Rachel Eaton, Chief Marketing Officer at LGI Homes. Ms. Eaton, you may begin.

Thank you, Sam. Good morning and welcome to the LGI Homes conference call discussing our results for the third quarter of 2013 and the first nine months of 2013.

Today's conference call will contain forward-looking statements that include, among other things, statements regarding LGI's business strategy, outlook, plans and objectives. All such statements reflect current expectations. However, they do involve assumptions, estimates and other risks and uncertainties that could cause our expectations to prove to be incorrect.

You should review our filings with the SEC, including our risk factors, for a discussion of risks, uncertainties and other factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

These forward-looking statements are not guarantees of future performance. You should consider these forward-looking statements in light of their related risks and you should not place undue reliance on these forward-looking statements, which speak only as of the date of this conference call.

Additionally, certain non-GAAP financial measures will be discussed on this conference call. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP are included in the earnings press release that we issued yesterday evening and in our quarterly report on Form 10-Q for the third quarter of 2013 that will be filed with the SEC within the next few days. This filing will be accessible on the SEC's website or in the Investors section of our website at www.LGIHomes.com.

Joining me today are Eric Lipar, LGI Homes' Chief Executive Officer and Chairman of the Board; and Charles Merdian, the Company's Chief Financial Officer, Secretary and Treasurer.

With that, I will now turn the call over to Eric.

Thank you, Rachel. Good morning, everyone, and thank you for joining us for our first earnings conference call as a public company.

On the call this morning, I will summarize the highlights from the third quarter and the year to date, as well as provide some background on LGI Homes and what makes our Company unique. Then Charles will follow up to discuss our financial results in a little more detail. After he is done, we will review our financial targets and share our expectations for 2014, before we open the call for your questions.

First, some background on LGI Homes. We are one of the nation's fastest-growing homebuilders, engaged in the design and construction of move-in ready homes in high-growth markets of Texas, Arizona, Florida, Georgia and, most recently, New Mexico. Our business model utilizes a well-established sales and marketing approach, a culture of customer service excellence and a highly efficient construction process.

We have historically focused on converting renters to owners by offering homes at affordable prices in affordable locations. This strategy has driven our industry-leading asset turnover and returns on capital.

Since commencing operations in 2003, we have constructed and closed on over 6000 homes. We have been profitable every year despite the housing downturn and have never taken an inventory impairment.

Our core operating philosophy is centered on making the home-buying experience friendly, effective and efficient. By providing personalized service to our potential homebuyers, we facilitate a streamlined homebuying process.

Our success lies within our differentiated strategy as a focused sales and marketing organization. Our marketing efforts have historically been designed to establish direct communication with local renters in order to educate them on the benefits and affordability of homeownership.

At each of our sales offices, we have a team of dedicated sales professionals and an independent on-site loan officer to assist the homebuying process. Our focus on sales and marketing is a key driver of our high conversion rates, and we believe our unique sales approach has enabled us to differentiate ourselves from our competition.

We are very pleased with our 2013 third-quarter results. We closed 448 homes during the quarter, resulting in the best quarter in Company history. As a product of our efficient operating model and inventory of move-in-ready homes, average closings totaled approximately seven homes per community per month, which far exceeded those of our peers.

At the end of the third quarter, our active community count increased to 22, including the opening of our first community in the Orlando market and our third community in the Phoenix market.

During the quarter, home sales revenue increased 58.4% to $68 million and home closings represented a 40% increase in the third quarter year over year. In addition, our average sales price increased 13.1% during the quarter to $151,779, resulting in an adjusted gross margin of 27.4%.

Our higher sales volume enables us to employ an even flow or continuous construction methodology to establish an inventory of move-in-ready homes. This results in more favorable relationships with subcontractors, who prefer the stability afforded by our approach.

We ended the quarter with a portfolio of approximately 11,000 lots that we own or control. This consists of both finished lots and raw land. Each of our markets continues to experience strong momentum in housing demand drivers, including nationally-leading population and employment growth trends, general housing affordability, and desirable lifestyle characteristics.

Moving on to year-to-date comparisons, we have closed 1112 homes as of September 30, 2013, resulting in a 49.9% increase in home closings compared to the same period in 2012. We are pleased to announce that these 1112 closings reached a new high for LGI Homes, exceeding our previous record set last year of 1062 homes closed.

Other highlights for the nine-month period ending September 30, 2013 are that home sales revenue increased 65.3% to $164 million compared to the same period of 2012. In addition, our average home price increased 10.3% to $147,452, with an adjusted gross margin of 27.9%.

With that, I would like to turn the call over to Charles for a more in-depth review of our financial results.

Thanks, Eric. I appreciate the opportunity to share our financial highlights from the third quarter and year to date through September 30. It has been an exciting year.

On November 13, the Company closed its IPO, issuing 10,350,000 shares of common stock, which generated net proceeds of $102.7 million, net of commissions, fees and expenses. Concurrent with the IPO, we acquired all of our joint venture partners' equity interests in the LGI/GTIS Joint Ventures in exchange for $41.4 million, consisting of approximately $36.9 million in cash and $4.5 million in common stock. The transaction will be accounted for using purchase accounting, and we are in the process of determining the purchase price allocation.

After the close of the IPO, the Company has 20.8 million shares outstanding.

It is important to note that the numbers presented in the earnings release highlight the results of both our predecessor and the LGI/GTIS Joint Ventures. On a go-forward basis, we will be reporting our operations on a consolidated basis.

The increase in home sales revenue for the third quarter of 2013 of 58.4% as compared to the third quarter of 2012 consists of an increase of 62.1% to $37 million for the Company's predecessor and an increase of 54.1% to $31 million for the LGI/GTIS Joint Ventures. This increase was due to an increase in the number of active selling communities, number of homes closed and average selling price per home. As Eric mentioned earlier, we have 22 total communities as of September 2013, up from 12 at September 2012.

The increase in average home sales price during the third quarter of 2013 of 13.1% as compared to the third quarter of 2012 consists of a 12.1% increase in the Company's predecessor's average home sales price to $154,313 and a 14.1% increase in the average home sales price for the LGI/GTIS Joint Ventures to $148,855. This increase was primarily due to a shift in product mix and the pass-through of increased construction costs to the homebuyer.

In the third quarter of 2012, sales prices for homes closed ranged from $113,000 to $185,000. In the third quarter of 2013, sales prices for homes closed ranged from $124,000 to $235,000.

Adjusted gross margin of 27.4% for the quarter ended September 30, 2013 decreased 50 basis points from 27.9% for the third quarter of 2012, reflecting the net impact of increased construction costs and higher developed lot costs, offset by higher average home sales prices.

For the three months ended September 30, our predecessor generated $5.2 million in net income, which includes $2 million in income from the unconsolidated LGI/GTIS Joint Ventures. The Joint Ventures themselves generated net income of $4.7 million.

The year-over-year increase in home sales revenue for the nine months ended September 30, 2013 of 65.3% consists of an increase of 87.4% to $95 million in predecessor home sales revenue and an increase of 42.2% to $68.9 million in the LGI/GTIS Joint Ventures. The 2013 results reflect an increase in the number of active communities and our expansion into new markets.

The year-over-year increase in average home sales price during the nine months ended September 30, 2013 of 10.3% consists of an 8.9% increase in our predecessor's home sales price to $149,188 and an 11.4% increase in the average home sales price for the LGI/GTIS Joint Ventures to $145,123.

For the nine months ended September 30, 2013, our adjusted gross margins of 27.9% decreased 50 basis points from the 28.4% for the nine months ended September 2012, again reflecting the net impact of the increased construction costs and higher developed lot costs, offset by higher average sales prices.

For the year to date, our predecessor generated $12.6 million in net income, which includes $2.9 million in income from the unconsolidated LGI/GTIS Joint Ventures, and the Joint Ventures themselves generated net income of $9.5 million.

As of September 30, we owned or controlled 9342 lots through our predecessor and 1610 lots through the LGI/GTIS Joint Ventures, for a total of approximately 11,000 lots.

Since September 30, we have closed in excess of $37 million in acquisitions, representing approximately 2100 lots.

We are also currently in the process of amending our credit facility with our lender, Texas Capital Bank, to increase our available line from $37 million to $50 million.

And at this point, I would like to turn it back over to Eric to discuss our outlook for the remainder of the year and 2014.

Thanks, Charles. Since we only have a few days left in the current quarter, let me provide some guidance and thoughts on what we are seeing this quarter and looking ahead into 2014.

In the current quarter, we are continuing to see strong demand. Interest rates are up slightly; however, we have not seen a slowdown in sales as a result. The government shutdown in October had a minimal impact on our business. It did result in some closings being delayed and ultimately pushed to November from October, but overall, we do not see it as a negative to our business.

With the addition of two new communities in the Atlanta market, we expect to end the year with at least 24 active communities. Our budget for the fourth quarter was 420 closings, and we expect to end the year strong and beat that number.

This month, we closed on our first property in the Albuquerque market. We are excited to enter New Mexico as our fifth state of operation. We have started construction in New Mexico and expect to have our first home closings in the second quarter of 2014.

As we move forward, we continue to raise prices to keep pace with increased costs. The primary cost driver that will result in higher prices is selling out of finished lot communities and moving into communities where we are doing our own development. Our management team has been in the residential land development business since the mid-1990s. As a land developer, our management excelled at identifying and developing attractive communities and selling finished lots to custom homebuilders and individuals.

It is through this rich history that we are confident in our ability to successfully develop, market and sell in communities we develop ourselves.

Currently, we are only developing land in the Texas markets. In addition, we will continue to pursue finished lot opportunities that meet our margin requirements.

We will continue to expand our product mix in certain communities, extending our price point to the mid to high $200,000s. We also expect to have some higher-price-point product as a result of buying more raw land where it makes sense to have multiple product lines in the same community.

Looking forward to 2014, we believe we will have 36 active selling communities at the end of the year and close 2200 homes during the year. We anticipate the increase in communities will be spread across all of our current divisions.

Going forward, we plan on announcing closings and number of active communities on a monthly basis.

Now, Charles and I will be happy to take any questions that you may have.

(Operator Instructions). Nishu Sood, Deutsche Bank.

Thanks. This is Rob Hansen on for Nishu. I just wanted to ask about your entrance into New Mexico. I think that is pretty new, and we didn't hear about that at all during the kind of IPO process. So how did that opportunity evolve? And are these finished lots that you are buying? And how much -- is there development work that you need to do? I just wanted to get some color on that.

Sure. Yes, Rob, we talked about it in the IPO process. Albuquerque was highlighted on the map on the S-1 as far as a new community. We are very confident in our leadership in the Southwest division, run by Chris Kelly out of Phoenix. So Albuquerque we thought was a natural extension out of the Phoenix division. And we were able to find just over 80 finished lots, so we will not be doing any development in Albuquerque for now. We were able to buy finished lots in Albuquerque, and we were excited that they meet our margin requirements and we will run that out of the Phoenix division.

Okay, and then you mentioned you would have some higher-price-point product in some of your communities. I guess kind of where in the country is this going to be? And then are you going to have a different sales strategy for this higher-price-point product?

No, great question, Rob. I believe LGI's advantage is in our sales and marketing approach generally, and the fact that we have a sales process, the fact that we take customers through our process results in them having a great experience. And our background in the '90s and my background for the last 20 years is really in development and selling to higher-priced homes and selling higher-priced lots to people looking to build custom homes.

So we believe that our sales and marketing approach will work across all price points. Certainly the entry level is going to continue to be our focus. But like I said in the statements, we are seeing opportunities to get into more expensive homes. The natural inflation of land and costs will lead our price points higher.

We will continue to focus on the move-in ready homes. We don't envision being a builder that is going to have design centers or anything like that. But we believe that we can be successful in the $200,000, $300,000, $400,000 markets and compete head-to-head with other builders.

Also like I mentioned, we are looking at these land opportunities that are a few hundred acres. And we don't generally think it is a good idea to put 1000 homes in one community at a $140,000 or $150,000 price point. So we would structure that acquisition in the development have different product types and product lines. And that would lead to higher price points in some of our more master-planned communities that we will be developing.

Got it. That makes sense. One quick last one was what is the quarter-end backlog?

Sure. The quarter-end backlog was 178 homes at the end of the third quarter. Obviously, we don't focus on that number because our inventory turns are so high and we are focused on selling move-in-ready homes. So when a customer buys a home from us, our average closing time is approximately 30 to 45 days.

Got it. All right.

So even though our backlog is 178, we plan on -- like I said on the call, we plan on closing more than 420 homes in the fourth quarter.

All right. I appreciate it, guys. Thanks.

Thanks, Rob.

Michael Rehaut, JPMorgan.

Yes, hi. Good morning, everyone. Congrats on the results.

Thank you.

First question just on 2014 guidance. I was just hoping you could put that into context in terms of sales per month. This most recent quarter, you did a little bit over seven sales per month per community, and you have been running at a plus or minus seven type number for most of this year. And you already said that you expect likely to beat -- you expect to beat the 420 closings for 4Q.

So is there any reason -- if you are expecting, I think you said in your press release, similar market backdrop, underwriting standards et cetera, it would seem that the 2200 would imply a lower sales pace. Is that just being conservative or do you have other concerns or is there any type of mix shift, geographic or product, that would drive to a slower pace? Or is it just kind of a cushion or conservatism that you are building in?

Mike, this is Eric. I would say it is generally conservatism. Our model for 2014 is built on an average of six closings per month per community and ramp up in those areas. So we are comfortable with the 2200 number next year. We think six is a conservative number, but also certainly we are going to have new people as we expand, new managers. Getting into more development, there is risk of dealing with counties and planning delays, et cetera, that every builder faces. So we think six is a good, solid, conservative number to use in our forecast.

Okay, I appreciate that. And just thinking about 4Q, you did a little over seven sales per month in 3Q, and you have most of 4Q wrapped up at this point. Is it reasonable to expect that that sales pace would continue into the last quarter of the year?

Yes, that is reasonable.

Okay, great. And just one other question, bigger picture. You mentioned the master-plan communities and kind of potentially moving up into different price points over time. I guess it is really over time is my question.

As you think about the mix, these new purchases potentially affecting your mix of price point, would this be more of a 2015 type of event, or would you see this kind of flow into your numbers perhaps in the back half of 2014?

I think it's almost exclusively 2015 and beyond, Michael. In our existing communities and in 2014, getting the price points into the mid-$200,000s, and probably a few closings in the high $200,000s. But very slow and gradual to the higher price points. Certainly a very small percentage of those 2200 homes next year would be above $250,000. So slow and gradual would be how I worked it, and it would be mostly on land deals now that wouldn't be delivering closings until 2015 and 2016.

Okay. And just last one and I will get back in queue. Just so I understand this. If you could just repeat -- one or two deals that you are working on, and it is more -- would you characterize it as more opportunistic that you like this large piece of land and you felt you can work a broader range of product? Because up until now, your product focus has been pretty consistent in the mid-$100,000s and in that first-time-buyer, that entry-level product.

So would you characterize this as more opportunistic relative to the land that you were able to find and secure, or more of a strategic intentional shift over time towards a higher price point?

I would classify it as both. An example would be our Luckey Ranch community in San Antonio, which is a very high-performing community. We have over 1000 lots in that community that we own or control, and right now our price point is more traditional, our price point of $140,000 to $190,000.

But we don't envision as a team putting over 1000 houses in there at the $140,000 to $190,000 price point. Some of that is going to be just price appreciation because cost of development is going to go up. But we think it is natural to have a second or third type of product in there selling at the same time for the customers that are willing to pay the higher prices and want some additional upgrades and features in their homes. So we will have smaller sections as a complement to our focus on entry-level in that community, as an example.

Great, thank you.

You are welcome.

Mike Roxland, Bank of America Merrill Lynch.

Hi, everybody. Good morning. Thanks for all the details. Just a couple quick questions. Following up on some of the previous lines of questions in terms of the overall product mix, obviously, this higher-end product, something that you are looking to target longer-term, and obviously comprises a small part of the overall mix today.

Is there a certain percentage of the overall portfolio that you are targeting to be this higher-end product, whether it be 2016, 2017, 2018? Is it going to be 20%, 25%? Is there a particular target that you are aiming to achieve?

Yes, Michael. Our core is still going to be to focus on the first-time homebuyer entry level. Even in that market, we anticipate our average sales price increasing because of costs and getting into more development.

But I would be very comfortable saying less than 10% of our business in the future we plan on having at the move-up product or higher price points, if you will. But we do see it as accretive to adding to our entry-level mix and continuing to grow the Company.

Got it. Thanks for that. In the press release, you also highlighted -- and I think, Eric, you mentioned this as well in your comments -- about the higher construction costs and then really the developed lot cost. Is there any way to quantify what those were in aggregate? And did the increased price that you achieved in the quarter fully offset those higher costs?

Yes, this is Charles. Yes, so the increased construction costs we are seeing somewhere in the 2% to 4% range. Our developed lot cost as a percentage of home price in the 13% to 14% range. But you can tell -- as you can tell from the results of the gross margins, that we were able to pass most of that through as we increased prices throughout the year in our various communities to maintain our margins. And that is where our focus is, on maintaining the margins.

And do you see that -- has that trend persisted into 4Q as well, so construction costs have remained at that range?

Yes, we are seeing that as -- each month as we release new bids -- releases for construction.

Got you. And so for construction and lot costs basically that has persisted?

That's right.

Okay, got it. Last question -- certainly appreciate all the color here. Can you give us a sense of the type of margin then that you are looking at in 4Q, especially if those costs do remain elevated, and also given the fact that you are going to have the basis step-up from your JV partner buyout?

Yes, this is Eric, Michael. I appreciate the question. As far as our adjusted margin, not including the step-up, we are looking for our margins to be consistent. And I'll let Charles address the step-up (technical difficulty).

Sure. So we don't have a feel just as yet, as our analysis on the acquisition of the GTIS Joint Ventures is based on the November 13 date; so we don't have the results of our fair value estimates as of yet. So I can't really speak to what we feel like the adjustment is going to be.

But we will be disclosing it in our adjusted gross margins, so that we will be able to reconcile back to reported gross margins to adjusted gross margins, taking into account the effect of the purchase accounting adjustments.

Got it. Thanks very much.

You bet.

(Operator Instructions). Alex Barron, Housing Research Center.

Great job, guys. I wanted to ask you -- I'm not sure if I missed it or if you haven't mentioned it. Can you give us the orders both for this quarter and a year ago, broken out also between what was consolidated and JV?

Yes, this is Charles. So for the third quarter of 2013, we had total net orders of 429 units, and that is a combination of both our predecessor and our LGI/GTIS Joint Ventures.

For the third quarter of 2012, it was 338. But again, as Eric mentioned before, it's due to our quick turnover time, quick turn time for closings. We are not as focused on it as you may see some of the other builders talk about.

Okay. And the backlog of 178, that is as if the whole thing was consolidated, right?

That's correct.

Okay. And in terms of the sales pace that you guys have achieved historically, and I guess what you are still projecting, of six-plus sales per community per month, I guess what do you think is the difference between what you guys are doing versus other builders? Because other builders seem to struggle to get through three sales per community per month, so your expectations seem to be almost twice what most guys are getting.

Yes, that's correct, and we are comfortable with those numbers that we can achieve that in the future. The big difference between us and other builders is our whole sales and marketing approach. So, for example, we have at least three salespeople in every single office that we have open. A traditional builder would have more like one or two salespeople per office.

We spend a lot more money on advertising and to market to renters to drive the leads to our community. And we believe that we have a very strong sales process, and resulting in a great experience for the homebuyers. From the time they call, we have a very structured process through the time that we hand them their keys to their new home, to take them through a process. We have move-in ready homes. Most builders don't have that. So we are different in a lot of different ways, and that is how we drive that higher absorption pace.

Okay, great. And in terms of the G&A that you guys reported this quarter, the $4 million, is there some one-time IPO-related expenses in there? Or is that like a new -- should we think of that as kind of a new run rate, or how should we think about SG&A for next year?

Sure, the $4 million is the G&A for just the predecessor, and it does include some IPO-related expenses related to restructuring and accounting-related items. We switched auditors and did two years of audits this year. That number was about $1.1 million in the total of the $4 million.

Okay. And I guess going forward, how should we think about this rate now that you have consolidated both entities? Do you have some kind of number for next quarter or something that we can work with?

Yes, we are not giving guidance on G&A at this time, but as we work through our pro forma, we will have some more information.

Okay. And if I could ask one last one. In terms of your pricing strategy, are you guys more inclined to push for higher margins or just to maintain the sales pace and therefore not raise prices too much?

We are more inclined to be consistent in our price ranges, and we price to margin. Our communities tend to be larger than some other builders. Our average community size would be in the 150- to 200-home size. And we consistently price the margin and we never discount.

So other than the occasional appraisal challenges over the years, since 2003, we have never discounted a house. So we believe when you go into a community that you should gradually raise prices along the way, and we see that continuing in the future.

Okay, great. Thanks.

You are welcome.

Thank you. At this time, I am not showing any further questions. I would like to turn the call back to Eric Lipar for any further remarks.

Thank you, Sam. I want to thank everyone for joining us on our first earnings call as a public company. A special thanks to all of our employees that have made this journey possible. Have a great holiday and we will talk to everyone next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.