LGI Homes, Inc. quarterly report, Q3 FY2013

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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2013, for LGI Homes, Inc. The filing is unique as it presents the financial statements of the newly formed public registrant (LGI Homes, Inc.), which had no operations or material assets as of the period end, alongside the combined historical financial statements of its predecessor entities (LGI Homes Group). The registrant was organized in July 2013 solely to facilitate an Initial Public Offering (IPO) completed on November 13, 2013. The company operates as a residential homebuilder in Texas, Arizona, Florida, and Georgia, with operations commencing in New Mexico subsequent to the reporting period.

Key Financial Metrics (Predecessor Entities)

The following metrics reflect the operations of the LGI Homes Group (Predecessor) for the periods ended September 30, 2013:

  • Revenue: Total revenues were $38.0 million for the three months ended September 30, 2013, and $97.3 million for the nine months ended September 30, 2013. Home sales revenue comprised approximately 97.4% of total revenue for the quarter.
  • Profitability: Net income attributable to owners was $5.6 million for the three months and $13.2 million for the nine months ended September 30, 2013. Operating income was $5.3 million (quarter) and $12.9 million (nine months).
  • Margins: Gross margin remained constant at 26.9% for the three months ended September 30, 2013, compared to the same period in 2012. For the nine-month period, gross margin was 27.2%.
  • Cash Flow: Net cash used in operating activities was $24.3 million for the nine months ended September 30, 2013, primarily due to increased inventory purchases. Net cash provided by financing activities was $27.9 million for the same period.
  • Liquidity: Cash and cash equivalents totaled $9.4 million as of September 30, 2013.
  • Debt: Total notes payable were $27.4 million as of September 30, 2013, consisting of secured revolving credit facilities with a borrowing base of $29.5 million.

Material Changes Versus Prior Period

Comparing the nine months ended September 30, 2013, to the same period in 2012:

  • Revenue Growth: Home sales revenue increased 87.4% to $95.0 million, driven by a 72.2% increase in home closings (637 homes vs. 370 homes) and a 8.8% increase in average selling price ($149,188 vs. $137,057).
  • Expense Increases: Cost of sales rose 87.2% to $69.2 million. Selling expenses increased 92.8% to $9.1 million, and General and Administrative (G&A) expenses increased 113.3% to $9.1 million. The G&A increase included approximately $1.9 million in professional fees related to the IPO and reorganization.
  • Joint Venture Income: Income from unconsolidated joint ventures (LGI/GTIS) increased 162.7% to $2.9 million, largely due to the achievement of priority return tiers in the joint venture agreements.
  • Inventory Expansion: Real estate inventory more than doubled to $66.8 million from $28.5 million, reflecting significant land acquisition and development activity.

Guidance, Outlook, and Subsequent Events

Subsequent Events (Post-September 30, 2013):

  • IPO Completion: On November 13, 2013, LGI Homes, Inc. completed its IPO, selling 10,350,000 shares at $11.00 per share. Net proceeds were $102.7 million.
  • Reorganization: Concurrent with the IPO, the company acquired all equity interests of the predecessor entities and acquired GTIS Partners' interests in four joint ventures (the "GTIS Transaction") for $41.4 million (cash and stock).
  • Debt Facility Amendment: The company agreed to amend its revolving credit facility to increase available balances to $50.0 million, subject to criteria.
  • Expansion: The company commenced homebuilding operations in New Mexico and closed acquisitions of land and finished lots totaling approximately $37.6 million using IPO proceeds.

Risks and Contingencies:

  • The company is subject to standard homebuilding risks, including interest rate volatility, land availability, and construction costs.
  • As an "emerging growth company," the registrant has opted out of extended transition periods for new accounting standards.
  • Outstanding surety bonds and letters of credit totaled $0.3 million as of September 30, 2013.

Investor Verification Checklist

  • Verify the final purchase price allocation and fair value adjustments for the GTIS Transaction, as the filing notes this was in process at the time of filing.
  • Confirm the utilization of the $102.7 million IPO net proceeds, specifically the $36.9 million cash payment to GTIS and the remaining allocation to land acquisition and working capital.
  • Monitor the company's ability to maintain compliance with debt covenants (net worth, liquidity, leverage ratios) under the amended $50.0 million credit facility.
  • Track the absorption rates and margins in new markets (New Mexico, Atlanta, Orlando) where operations commenced or expanded post-period.
  • Review the impact of the transition from equity-method accounting to full consolidation for the LGI/GTIS Joint Ventures on future financial statements.