Eric Lipar bet two of his beliefs to be valid and true. One: How many young adults, given a chance at the American dream, are going to say, “No?”
Second: To effect his contrarian operations model when the moment called for it, he needed to move beyond the traditional banking relationships and private equity that had served his company, The Woodlands, Texas–based builder LGI Homes, since its start in 2002.
“The opportunities to grow through private equity were getting more limited because we were getting out of the recession,” says Lipar, the CEO of LGI. “With a limited supply of finished, distressed lots [that draw private equity], we were starting to get into traditional deals, which is more challenging with private equity.”
But Lipar wasn’t expecting to launch his initial public offering (IPO) in November.
As the downturn’s grip eased and demand started materializing in the markets in 2012, he began to target 2014 or 2015 as the moment to take his company public. But then, in January 2013, Irvine, Calif.–based TRI Pointe Homes jumped into the public sphere.
“That really showed us that the markets were open,” Lipar recalls. “We didn’t really kick-start the IPO process until TRI Pointe Homes went out. We thought there was a window to get out.”
Things moved a little slower for LGI, who needed to complete an Ernst and Young audit and negotiate exits with its joint venture partner, New York–based GTIS Partners. Lipar targeted an October IPO date, but there was another holdup: The government shutdown forced him to push his public debut from October to November. “We took a little longer than other companies, but it all worked out,” he says.
Within seven days of the offering, LGI had $100 million wired to its bank account. And the public markets investment should turbo-fuel LGI, which will go from closing 439 homes in 2010 and 627 homes in 2011, to a projected 2,200 homes in 2014.
The real growth will be powered by an aggressive sales and marketing operation that aims to pull renters out of their apartments (or single-family rentals) and into LGI homes. So far this pitch has worked in Texas (Dallas, Houston, San Antonio, and Austin), in addition to Phoenix and Tampa, Fla. Going forward, Lipar expects the IPO to give him the platform to take his operations to Orlando, Fla., Tucson, Ariz., and Albuquerque, N.M.
Early to Market
Other builders saw the IPO window open as well. Five of them hit the public markets by July 2013. “Most of these builders were backed by institutional money that was looking for a way to monetize the investment,” says Stephen East, a partner and senior managing director at the New York–based ISI Group, an investment research firm.
But that didn’t mean things were easy on the public markets. Of the five builders who did IPOs in 2013, only one—Bonita Springs, Fla.–based WCI Communities—traded above its offering price, according to The Wall Street Journal. The paper’s headline on Nov. 7 called the LGI debut mediocre as it came in at $11—below its anticipated range of $13 to $15 (despite its stock increasing 17 percent on the first day of trading). But East still thinks 2013 was a good time for builders to hit the public markets. “For those that are trying to grow through the IPO process, it is still early in the cycle, thus the access to capital provides the path to growth through the cycle,” he says.
So far, the decision to go public seems to have worked out well for LGI. By the end of March, the company’s stock was flirting with the $18 mark. Tony Avila, co-founder and managing principal at San Francisco–based Encore Housing Opportunity Fund—a real estate fund manager that invests in residential real estate (including LGI)—is bullish on the firm’s future.
“They were the smallest market cap of all public builders, but yet they were still valued in the top quartile, based on multiple of book value,” Avila says of LGI. “Today, they trade in the top two. It was clearly the right strategy.”
Courting the Entry-Level home Buyer
On the surface, LGI’s target audience of entry-level home buyers seems counterintuitive. Instead of going out to buy their first homes, many people (including a large number of Gen Yers) have doubled up or gone to rentals, as the homeownership rate fell from 69.2 percent in the fourth quarter of 2004 to 65.2 percent in the fourth quarter of 2013. But it is exactly this customer who has been hit especially hard by the recession that LGI is courting, even if financing remains a challenge for them.
“A lot of people didn’t qualify like they used to so they need to stay in apartments,” Lipar says. “Looking out over the next three to five years, whoever has a better run, whether it’s multifamily or single-family detached, will really depend on how difficult financing is for the consumer.”
Rather than conceding that the rental industry owns a growing segment of the population, especially millennials, LGI actively courts multifamily and single-family renters who can qualify. Essentially, it’s letting them know they have options. “We do not believe that we’re becoming a renter society,” Lipar says. “We believe there is a need and a desire for homeownership.”
Lipar has been putting his money where his mouth is with an aggressive advertising campaign that targets renters within a 15- to 20-mile radius of its communities. The company sends out about 12,000 direct mail pieces per week per community, every week. An individual apartment unit receives a new advertisement every five or six weeks. The goal? To get renters into the sales office.
Once customers visit an LGI office, they’ll see at least three to five salespeople. “They are better at selling a house than anyone out there,” Avila says. “It’s not a high-pressure sales pitch. It’s just articulately explaining the American dream for someone who wants the American dream.”
An LGI salesperson spends 45 minutes educating them about the home buying process, monthly payments, home ownership, the company’s history, and community basics, such as the location of the closest hospital, fire departments, and schools. “We really educate them before they even look at a house,” Lipar says. “We methodically take them through the house. They already have a lot of questions answered about the community and company so we can focus on the floor plan.”
Even if the customer isn’t ready to buy at that time, Lipar doesn’t consider them a loss. “There is a lot of follow up with customers as they pay off debt or save up money for a down payment,” Lipar says. “Each salesperson works on having a good pipeline of people who can buy in three months, six months, or a year down the road.”
With the IPO behind it, LGI plans to add more people throughout the chain, whether it’s salespeople, construction superintendents, or anyone else who can help build or sell a house. “Now that we’re public, we’ve taken care of the capital needs,” Lipar says. “So for us the focus is now on the people. The people will determine how successful we are in the future.”