Explanatory Note
Unless otherwise indicated or the context requires, “LGI,” the “Company,” “we,” “our” and “us” refer collectively to LGI Homes, Inc. and its subsidiaries. On November 13, 2013, we completed an initial public offering (the “IPO”) of 10,350,000 shares of our common stock. As a result of the reorganization transactions in connection with the IPO, for accounting purposes, our historical results included herein present the combined assets, liabilities and results of operations of LGI Homes, Inc. since the date of its formation and LGI Homes Group, LLC, LGI Homes Corporate, LLC, LGI Homes II, LLC, LGI Homes-Sunrise Meadow, LLC, LGI Homes-Canyon Crossing, LLC, LGI Homes-Deer Creek, LLC and their direct and indirect subsidiaries (collectively, our “Predecessor”) prior to the IPO. Subsequently, the assets, liabilities and results of operations present the consolidated results of the Company.
Prior to the completion of the IPO, our Predecessor owned a 15% equity interest in and managed the day-to-day operations of four joint venture entities (the “LGI/GTIS Joint Ventures”). Concurrent with the IPO, LGI Homes, Inc. acquired all of the equity interests in the LGI/GTIS Joint Ventures that it did not own immediately prior to the IPO (the "GTIS Acquisitions"). Our financial statements present our Predecessor’s historical interest in the LGI/GTIS Joint Ventures using the equity method and our Predecessor’s share of the LGI/GTIS Joint Ventures’ net earnings are included in income from unconsolidated joint ventures. Effective November 13, 2013, we own all of the equity interests in the LGI/GTIS Joint Ventures and we account for them on a consolidated basis after such date.
ITEM 1. BUSINESS
General
We are one of the nation’s fastest growing public residential homebuilders in terms of percentage increase of home closings. We are engaged in the design and construction of homes in Texas, Arizona, Florida, Georgia and New Mexico. On November 13, 2013, we completed an IPO of 10,350,000 shares of our common stock, which provided us with net proceeds of $102.6 million. Our management team has been in the residential land development business since the mid-1990s. In 2003, we commenced homebuilding operations targeting the entry-level market. Since commencing operations in 2003, we have constructed and closed over 6,200 homes and for the year ended December 31, 2013, on a pro forma basis, we had 1,617 home closings, compared to 1,062 home closings in 2012.
The following is a summary of our history:
2003 - LGI Homes began operations building homes in the Houston, Texas market
2006 - We entered the San Antonio, Texas market
2009 - We entered the Dallas/Ft. Worth, Texas market
2010 - We formed our first LGI/GTIS Joint Venture
2011 - We entered the Phoenix, Arizona market and formed our Southwest Division
2011 - We expanded our Texas Division by entering into the Austin, Texas market
2012 - An LGI/GTIS Joint Venture entered the Tampa, Florida market and we formed our Florida Division
January 2013 - We expanded our Florida Division by entering into the Orlando, Florida market
April 2013 - We entered the Atlanta, Georgia market and formed our Southeast Division
July 2013 - LGI Homes, Inc. was formed
August 2013 - We expanded our Southwest Division by entering the Tucson, Arizona market
November 2013 - We completed our IPO and certain reorganization transactions in connection with our IPO and we acquired our joint venture partners’ interests in the LGI/GTIS Joint Ventures
December 2013 - We expanded our Southwest Division by entering the Albuquerque, New Mexico market
LGI Homes, Inc. is a Delaware corporation incorporated on July 9, 2013. Our principal executive offices are located at 1450 Lake Robbins Drive, Suite 430, The Woodlands, Texas 77380, and our telephone number is (281) 362-8998. Information on or linked to our website is not incorporated by reference into this Annual Report on Form 10-K unless expressly noted.
Business Opportunities
We believe there continues to be a significant opportunity to grow our share of sales in our existing markets. Given our familiarity with each of our existing markets and the favorable demographic and economic trends that are forecasted in our markets, we expect to continue to see growth in these markets.
We also believe that we will grow our business by increasing the number of price points in our existing markets. We are seeing opportunities to develop properties with multiple price points and product lines in the same communities.
We intend to expand into new markets where we identify opportunities to build homes and develop communities that meet our profit and return objectives. We have started due diligence on the Charlotte, North Carolina and Denver, Colorado markets and will consider entry into these markets as we find the right leadership and development situations. In addition, we will continue to analyze other potential markets as we continue our efforts to expand into new geographical markets.
We will continue to pursue a flexible land acquisition strategy of purchasing or optioning finished lots, if they can be acquired at attractive prices, or purchasing raw land for residential development. We generally target land acquisitions that are further away from urban centers than many other suburban communities but have access to major thoroughfares, retail districts and centers of business. These areas that are further away from town usually result in better value for the homeowner either in a less expensive price point or in larger lot sizes. Our analysis of the development opportunities that meet our profit and return objectives consider many different types of possible investment. These opportunities may involve the sale of home sites as a part of the product mix. We expect that our home closings in communities with higher price points or that include the sales of home sites will be less than 10% of our annual home closings.
We intend to target markets that are characterized by favorable housing supply and demand dynamics. Our typical market has at least 900,000 residents and at least 40,000 renters within a 25-mile radius of our targeted land acquisitions. We carefully analyze the demand of a market prior to entry through an extensive test marketing program. Once we have confirmed the existence of strong homeownership demand, we employ a series of financial and budgetary controls before committing resources for land acquisitions. These measures include requirements with respect to anticipated gross margins, cash flows and internal rates of return as well as an evaluation of overall return on investment. In addition, we evaluate new market expansion opportunities based on our ability to identify and hire local construction and homebuilding experts with detailed knowledge of the local market conditions. These experts provide knowledge of the local market, such as governmental processing, land development and land available for acquisitions, as well as relationships with local landowners, brokers and subcontractors.
Unique Operating Model
We developed our unique operating model based on our belief that there is a more effective and efficient method of constructing and selling homes. We are focused on maintaining an appropriate supply of move-in ready homes to fuel our dynamic sales force, maximizing our return on capital through efficient build-times, our even-flow or continuous construction methodology, and steady inventory turnover. We believe that the key competitive advantages of our operational business model include our sales and marketing expertise; recruiting, selection, training and development of our people; our disciplined land acquisition process; and our quality assurance and quality control procedures.
Our unique operating model has been refined over the last 20 years through the experience of our management team. We believe our operating model will be effective with respect to homes across all price points, including in our new markets and in communities in which we are the developer, and with respect to sales of home sites. We believe that the business model can be adapted as needed, for the requirements of the individual communities.
Sales and Marketing
We utilize a well-defined sales and marketing approach to identify leads for our communities and to educate potential buyers on the process and benefits of homeownership. For many of our communities, our marketing efforts are focused on converting renters of apartments and single-family homes into homeowners. With respect to our communities with higher price points or that include the sales of home sites, our sales and marketing approach with be tailored to the potential purchasers of such homes and home sites and may include more involvement by real estate agents and brokers.
We use extensive print and digital advertising to attract potential homebuyers. We reach beyond traditional real estate advertising by employing sophisticated marketing techniques such as direct mail, display and classified ads, social media and interactive online media as well as directional signage and billboards to attract and drive potential homebuyers to our sales centers across our markets. By testing the market before land acquisition and entering a new market, our marketing team is able to assess the level of interest in the location and amenities, determine the cost of rent in the area, and assess the size of the market opportunity. The amount of information that we are able to ascertain about potential buyers, including renters, allows us to better identify the opportunity to sell move-in ready homes.
Our print advertising is extensive and effective in placing potential homebuyers in front of our highly trained sales professionals. In response to market conditions, our advertising generally includes the core message of value and dream fulfillment. We have found direct mail to be very effective in reaching our target market. To connect personally with potential buyers, we send an average of 12,000 direct mailings a week per community to selected areas within a 25-mile radius of our active communities (currently approximately 300,000 direct mail pieces per week). These mailings are designed to reach those in the market for a new home as well as those who might not presently be looking. Our advertisements focus on monthly payment, affordability, value, and the opportunity for renters to become homeowners. We invite people to fulfill their dream of homeownership and to join a growing group of satisfied LGI homeowners.
Across all price points, our marketing strategy calls for a balanced approach of corporate support and local expertise to attract potential homebuyers in a focused, efficient and cost-effective manner. Our proprietary customer relationship management system, developed fully in-house, provides management with the tools to continually monitor and measure the performance levels of every sales professional in each particular phase of the sales process. Generating reports weekly and on demand, the ease of operation encourages use. We assess the cost effectiveness of a particular advertising campaign and the strengths and weaknesses of every member of our sales team.
Our marketing efforts are generally designed to encourage the prospective homebuyer to call our sales offices to schedule an appointment and our primary objective is to establish direct communication between the prospective homebuyer and the salesperson. Our professional salespeople are well-trained to determine specific needs and wants and to provide the potential homebuyer with all information required to make a buying decision.
Each of our sales offices is open approximately 12 hours per day, 361 days per year and is staffed by three to five sales professionals and is supported by an independent on-site loan officer. Our commission-based sales professionals provide potential homebuyers with a comprehensive and thorough understanding of the steps required to achieve homeownership. Throughout the sales process, our sales professionals learn about the current housing situation of the potential homebuyers and seek to understand their individual needs while also educating them on the value we provide through superior quality and affordable prices.