This homebuilder stock is poised to pull out of a recession

When people think of real estate stocks, many turn their attention to real estate investment trusts (REITs). While you can certainly do well with REITs and the regular dividends they offer, other types of real estate companies are also crushing it now, despite the looming threat of a recession.

Builder LGI houses (LGIH -0.22%) is one of those companies whose business is doing well despite all the obstacles. Although it is among the smallest publicly traded players in the residential construction space, this mid-cap company has spent the last 20 years making careful and precise decisions that have enabled it to weather the real estate crash of 2008. and to prepare to do the same with the turbulent real estate market of 2022.

Focus on an underserved segment of the market

Although LGI Homes builds homes in major metropolitan areas, it does not build the type that many of its peers seem to focus on today. Instead, LGI Homes is looking for opportunities on the fringes of the market. In doing so, he has managed to carve out a significant niche for first-time home buyers and those looking to move into age-restricted communities.

The average price of an LGI Home as of August 2 was $356,719, compared to the median sale price of an existing home in June of $416,000. This price advantage is no accident; it is part of the company’s strategy.

Since new homes are often more energy efficient than those that have been retrofitted with modern energy-saving technology, buyers may be able to budget their money more easily when choosing a newly built property. Buyers also know that they are unlikely to face large repair bills immediately with a new home. These two factors are continually driving new home sales despite the varying behaviors of the broader real estate market.

Although LGI Homes only plans to close 7,500 to 8,300 homes in 2022, this is consistent with pre-pandemic sales. In 2019, it closed 7,690 homes, at an average price of $239,032.

According to Census Bureau data, there was a notable increase in new home sales nationwide between mid-2020 and early 2022, which was certainly outside the norm. LGI’s projected overshoot of 2019 figures despite recession threats, house prices well above 2019 levels and interest rates continuing to climb point to stable and continued activity regardless of the general climate.

Even with cancellations, interest and profits remain high

There has been a noticeable increase in real estate contract cancellations lately, and builders and sellers have felt the impact. LGI Homes certainly has: The contract cancellation rate for its homes reached 20.8% in the first half of 2022, compared to just 14.8% in the first half of 2021.

Even so, its second-quarter net income rose 4.4% year-over-year, largely because its average selling price per home rose 28.7%. This increased LGI Homes’ gross margin to 32% from 27% the previous year. Management also plans to grow from 92 communities with homes for sale at the end of the second quarter to between 100 and 110 communities by the end of 2022, bringing it back on par with pre-pandemic community building.

Specialization helped smooth out financial difficulties

Even though homebuilding is a highly cyclical industry, it says a lot about LGI Homes that it consistently beat earnings forecasts throughout the last year – in some cases, significantly. In the third quarter of 2021, its contract termination rate and national mortgage interest rates were much lower than they were in the second quarter of 2022, but despite this, its income remained more or less stable. The tendency of executives to continue to cautiously assess company performance is an indicator that, regardless of the general environment, financial self-awareness is strong.

The current revenue trend is largely due to the strong demand for cheaper homes, which LGI Homes is more than happy to supply. Focusing on this particular niche has also allowed LGI Homes to grow exponentially since its inception in 2003. Since its IPO in 2013, it has grown from a market capitalization of $369.38 million to $3.69 billions of dollars.

There are already hints of this future growth in his finances, especially when looking at the real estate inventory during these same two periods. Between December 31, 2021 and June 30, 2022, LGI Homes real estate inventory grew from $2.085 billion to $2.633 billion. As a home builder, the only product you have to sell is real estate, so more should equal more revenue over time.

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