It was not a question of whether Eric Lipar and his adrenalized youthful brain trust at Houston-based LGI Homes would make a big play to take the fast-growing firm public; it was when. Initial public offerings are all timing, and about being able to clean up good for Wall Street, whose torrents of investable resources need little so much as a good narrative.
LGI has it. It has the three ingredients essential to making a good story for Wall Street during a year market-making investors have crossed the threshold of belief that housing has turned from bad to good, and that the asymmetries that lead to big profits favor those who can supply new homes and communities to meet a rising demand. Here are the three essential hallmarks of a firm with the best odds of becoming belle of the IPO ball in 2013:
1. Seasoned talent – a pedigree of both operational excellence and comfort with private equity and debt market dynamics
2. Real estate – 10,000 or so lots, about seven years’ supply, free of legacy encumbrances, and strong, on-the-ground relationships with people and organizations who have access to more pipelines of finished and unfinished home building lots
3. Money – A private equity sponsor in GTIS, whose management has taken time and focus over the past couple of years to understand the nuances of local market recoveries and get out ahead of other distressed lot buyers.
What is more, LGI has a story. It can tell people, particularly the short-attention-span decision chains among institutional investors why--in 250 words or less--this stunning rise from nothing in 2003 to home building juggernaut in 2013 should make for big upside, with minimal downside should things not work out as planned.
Here's the LGI rap from its S-1 filing with the Securities and Exchange Commission:
Since commencing operations in 2003, we have constructed and sold over 5,000 homes, have been profitable every year despite the housing downturn, and have never taken an inventory impairment. According to Builder magazine, we were the only homebuilder among the 200 largest U.S. homebuilders to report closings and revenue growth from 2006 to 2008 when the housing market experienced a significant decline. We increased our revenue from $55.3 million ($50.5 million for our predecessor) in 2010 to $143.4 million ($76.2 million for our predecessor) in 2012, representing a compound annual growth rate of 61.0% (22.9% for our predecessor). We increased our closings from 439 homes in 2010 to 1,062 homes in 2012. Among our public homebuilder peers, we had the highest revenue and closings growth between 2010 and 2012. Further, in 2012, we ranked first among our homebuilder peers in return on assets, asset turnover and closings per active community. We generated attractive returns on capital for 2012 with a 37.7% earnings before taxes to average total capitalization ratio, a level far exceeding the average of our public homebuilder peers of 3.5%. We have a proven and highly effective operating model and a strong land position of approximately 10,000 owned or controlled lots as of June 30, 2013, representing more than seven years of land supply based on our home closings for the twelve months ended June 30, 2013. We believe we are well-positioned to continue our profitable growth within existing and new markets and to capitalize on the U.S. housing recovery.
If that's not impressive, you don't impress easy. Which is generally not the case these days for yield-thirsty investors who are jittery over volatility in emerging markets, and merely need a bit of assurance on the impact of Federal Reserve tapering plans to renew their conviction that housing is poised for a sustainable upcycle in the months and years ahead.
The few things still in question for LGI--from the standpoint of risk-averse investors--are 1. will the model LGI has currently detailed continue to work as home building's multiple giants, peers among both the public and local and regional power players, crowd back into the land, labor, and materials acquisition game all at once? In other words, is the pricing of its costs for resources from the past three or four years replicable? 2. As much as it counts that LGI executive brass has experience with private equity at a big time level, what's conspicuous in its absence is prior experience in the public equity markets game ... this may or may not be material to the outcome of the LGI IPO, but it is a factor that has helped other builders this past year. 3. LGI's position as an entry-level builder has proven to be practically bullet-proof through the worst of the downturn, but that still doesn't mean questions won't arise as to the impact of rising interest rates on the demand pool LGI pulls from. Getting people to choose homeownership vs. renting has been a compelling play for LGI, and the numbers have worked out nicely on a monthly payments basis for the past several years as the stars aligned around low, low home prices, low interest rates, and mortgage interest deduction incentives.
At least some of those motivations are changing on a monthly payments level, so the replicability of the LGI model, as sure a bet as it's been through the toughest of times, has to get looked at anew as rates and prices tick upward.
Despite these questions, the sheer power of focus and purpose Eric Lipar has brought to his mission to make LGI a home building power player stands as an example of a unique kind of business executive, the likes of which we see no evidence of in any other business community.
Over the next several days, in this space we'll take a close look at what started the 2013 initial public offering parade among home builders, namely the January 31, 2013, TRI Pointe Homes deal that set in motion the biggest story of the year for new residential construction.
Learn more about markets featured in this article: Houston, TX.