LGI CEO Eric Lipar has a plan. It's to grow into a top 5 five national public builder. He knows exactly what it's going to take for he and his team of big builder outliers to get there. No one apparently reminded him that the company he started up on the eve of the Great Recession 15 or so years ago with a couple of friends-and-family project-financed land deals around Houston would be an unlikely prospect to morph into an elite leader among Builder 100 enterprises, competing head to head with the likes of Lennar, D.R. Horton, Pulte, and NVR.
But morph they did, and in its latest earnings call last week, LGI's ferocious rate of growth--and Eric Lipar's plan--got a spotlight analysts and investors have become used to, powered by an average of 7.8 home closings per community per month in almost 80 active communities, sparking a 36% quantum step change in unit volume year-on-year for the 2nd quarter, and generating upwards of 100,000 new inquiries in response to LGI's compelling message to renters that they can, and would do better to own, and an outlook for a community count bounding leap from the current 79 stores, to 95 or even 100 in 2019.
Including California, where it's practically written in stone that home builders can't build affordably.
2018's growth--including its just-announced acquisition of Raleigh, N.C.-based Wynn Homes, expected to add 100 some closings and $25 million in incremental gains to this year's second half--very likely will propel LGI into the Builder 100's exclusive top 10 club, with a footprint in 15 states and 30 markets. Lipar and the team at LGI have no intention of stopping there.
In remarks to investors and analysts during last week's earnings call, a Seeking Alpha transcript notes Lipar's remarks :
"We have got the plan in place; really, it's just a question of how long it's going to take to get there, and what we talk about with our leadership team is [that] it's up to us. If we keep producing results like we have been producing over the past five years, then we are going to be right on track, and keep running and we will get there quicker... We think [that to be a] top five builder, we're realistic, and we're shooting for 240 communities nationwide."
Which is why adding the California (as well as Oregon and Alabama) market during the this past quarter of this year has been an important part of the LGI juggernaut strategy, and why Lipar and his team collaborated with a longtime, trusted partner--Tony Avila and the Encore Housing Opportunity Fund he's a co-founder and principal in--to establish an organically-seeded presence in the torrid Northern California Bay Area market. And, to do it the LGI way.
Which is to say, with immediate, shock-and-awe momentum, coming right out of the gate, news of which should come as a source of comfort to those whose faith in a still, as-yet, unmet universe of buyer demand may be a little shaky right now. And right out of the gate, LGI opened its new community--Liberty--in the East Bay area town of Rio Vista (62 miles northeast of San Francisco), with four floor plans, prices averaging in the $370,000s, a good $100,000 less than other new home construction in the area, with a splash.
The LGI project grand opened on June 16, and became the stuff of company legend, even for an organization accustomed to high-velocity traction. Its first Liberty closing clocked in before the month of June was out, and by the end of July, eight new closings were on the books, a monthly sales absorption pace the LGI team expects to keep up under the sales leadership of recently relocated Dallas-Fort Worth area sales VP Jeannine Roach.
"We knew we've been wanting to get into the California marketplace, but we were not going to do it by incurring development risk on a land investment," says Lipar. "This deal with Encore solved for that risk, and allowed us to come in with our system on a lot take-down basis, and get up and running very fast, selling and delivering homes and clocking in the revenue in 2018, which was the plan. When we opened Liberty for sale officially on the weekend of June 16, we sold more houses, took more deposits, and wrote more contracts for homes than we had ever done before. It was the most successful grand opening the LGI team had ever had, and it proved out our analysis that demand for our communities and price-point in the area is strong. "
Indeed, LGI's benchmark demand level--50,000 or more renter households within a 30-mile radius of the site--holds true for the Rio Vista site, and that potential universe has leapt at the opportunity for new homeownership at estimated monthly principal and interest payments of as low as $1,900 a month for a three-bedroom one-level home to less than $2,500 per month for a four-bedroom two-level model.
The Liberty at Rio Vista opening mojo was not lost on LGI's Encore partner Tony Avila, who actually joined the sales team's ranks, putting on a hat as an LGI sales associate, and working personally with three families through the buying process. Avila crushed it, notching three sales, shepherding the families as they scored on mortgages, with VA, FHA, and USDA finance backing, respectively.
They say that even as technology, data, and artificial intelligence each make inroads into what has been a progress-resistant business, home building and development are a people business, and in LGI's case, the LIberty project's initial success would never have been possible were it not for Lipar's tried-and-true relationship with Encore's Avila, dating back to the late-aughts, when Avila brokered LGI's first major private equity investment deal with GTIS Partners.
This time round, Avila's Encore Housing Opportunity Fund was doing due diligence on what was to become the Liberty project with Shea Homes, which wanted to move what had been a sunk deal off its books, and LGI played a key role in triggering the sale.
Shea had taken on the tract--mapped in the early 2000s as 885 building lots, 663 of which were developed, with infrastructure, water, sewer, etc. as higher-end 50-, 60-, and 70-front foot lots, programmed for McMansion-style, 5,500 square foot homes with projected selling prices in the $700,000s, consistent with nearby Brentwood pricing 15 years ago or so.
That plan didn't work out at all well for Shea once the housing meltdown kicked in, and after spending as much as $5 million on 13 model homes in the 2005-2006 time warp, the property languished, literally going to the birds. After holding on to land that time had forgotten for more than 10 years, Shea looked for an exit on the deal.
"It was a ghost town for over a decade," says Avila, who noted that the 13 Shea models needed to be torn down and removed in around 2012, while the property sat. Even the site's 663 fully-developed single-family lots were going to need considerable repair investment on the water systems, the sewer laterals, the sidewalks, and driveways, Avila noted, after so long a period of neglect.
As Avila's due diligence process proceeded, he dialed in Lipar and discussed a deal that would assure Avila of a confirmed customer for lots--at 25 a month--providing LGI's market research analysis supported its operations in the area. LGI was one of the few--if not the only one--builders capable of taking a land position almost nobody else would touch, and transform it into an inventory-turn machine, capable of generating seven to nine home closings a month.
"We looked at the data in the market, and we knew that with our modeling, we'd be able to reach 50,000 currently-renting households within that 30-mile ring," says Lipar. "The take-down schedule, and the shared upside on lot sales works for both LGI and Encore, and it cuts out our development risk entirely."
Lipar credits operational and executional success in good part to a market-proven, stand-up VP of Construction, Jeff Catalano, whom LGI was able to lure over from Meritage Homes, bringing with him local knowledge and relationships with trades, etc.
Avila notes that while 663 lots of the tract were already laid out, another 192 from the original land plan were mapped and zoned, but not developed. This allowed the Encore team to go back to local planning officials and work out an increased density for what will be a "third-phase" of the property, converting 192 very big lots into 311 sites for a combination of 45-front-foot single family product, and a "duet" attached product for the future.
At least one builder--who seems to have developed operational, selling, and financial processes to crack the code of relative affordability for entry-level buyers of all ages--is making noises like it will sign up for those sites as well.
