S-1 1 d560611ds1.htm FORM S-1 FORM S-1
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As filed with the Securities and Exchange Commission on August 28, 2013

Registration No. 333-            

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

LGI HOMES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

1531

(Primary Standard Industrial

Classification Code Number)

 

46-3088013

(I.R.S. Employer

Identification Number)

 

 

1450 Lake Robbins Drive, Suite 430

The Woodlands, Texas 77380

(281) 362-8998

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Charles Merdian

Chief Financial Officer

LGI Homes, Inc.

1450 Lake Robbins Drive, Suite 430

The Woodlands, Texas 77380

(281) 362-8998

(Name, address, including zip code, and telephone number, including area code, of agent for service)             

 

 

Copies to:

Warren A. Hoffman

Norman R. Miller

Winstead PC

1100 JPMorgan Chase Tower

600 Travis Street

Houston, Texas 77002

 

Timothy S. Taylor

Baker Botts L.L.P.

One Shell Plaza

910 Louisiana Street

Houston, Texas 77002

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

 

 

Title of Each Class of

Securities to be Registered

 

Proposed
Maximum
Aggregate

Offering Price(1)

 

Amount of

Registration Fee(2)

Common Stock, par value $0.01 per share(3)

  $125,000,000.00   $17,050.00

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Calculated pursuant to Rule 457(o) of the Securities Act of 1933, as amended.
(3) Includes shares of common stock which may be purchased by the underwriters pursuant to their option to purchase additional shares of common stock.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, Dated August 28, 2013

PRELIMINARY PROSPECTUS

 

LOGO

             Shares

Common Stock

 

 

This is the initial public offering of our common stock. We are selling             shares of our common stock. We currently expect the initial public offering price to be between $             and $             per share of our common stock.

We have granted the underwriters an option to purchase up to             additional shares of our common stock.

We intend to apply to list the shares of our common stock on the NASDAQ Global Select Market under the symbol “LGIH.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 17.

We are an “emerging growth company” under the federal securities laws and are eligible for reduced reporting requirements. See “Summary—Implications of Being an Emerging Growth Company.”

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $                    $                

Proceeds to us (before expenses)

   $                    $                

 

(1) See ”Underwriting” for a description of all underwriting compensation payable in connection with this offering.

The underwriters expect to deliver the shares to purchasers on or about                     , 2013.

 

 

Joint Book-Running Managers

 

Deutsche Bank Securities   JMP Securities    J.P. Morgan

 

 

Co-Managers

 

Barclays    BofA Merrill Lynch              Builder Advisor Group, LLC

The date of this prospectus is                     , 2013


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Artwork to be provided by amendment


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We are responsible for the information contained in this prospectus. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. We are not and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date, regardless of the time of delivery of this prospectus or of any sale of our common stock.

TABLE OF CONTENTS

 

SUMMARY

     1   

Our Company

     1   

Our Competitive Strengths

     3   

Our Business Strategy

     5   

Market Overview

     6   

The Transactions

     8   

Summary Risk Factors

     10   

Implications of Being an Emerging Growth Company

     11   

Our Offices

     11   

The Offering

     12   

Summary Historical and Pro Forma Financial and Operating Data

  

 

13

  

RISK FACTORS

     17   

Risks Related to Our Business

     17   

Risks Related to Our Organization and Structure

     31   

Risks Related to this Offering and Ownership of our Common Stock

     37   

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

     42   

USE OF PROCEEDS

     44   

CAPITALIZATION

     45   

DIVIDEND POLICY

     46   

DILUTION

     47   

UNAUDITED PRO FORMA FINANCIAL INFORMATION

     49   

SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

     60   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     63   

Overview

     63   

Presentation of Results of Operations and Other Data

     66   

Factors Affecting Our Results of Operations

     66   

Factors Affecting Comparability

     69   

Components of Results of Operations

     70   

Results of Operations

     72   

Liquidity and Capital Resources

     77   

Cash Flows

     79   

Off-Balance Sheet Arrangements

     80   

Contractual Obligations Table

     81   

Critical Accounting Policies

     81   

Recently Adopted Accounting Pronouncements

     84   

Implications of Being an Emerging Growth Company

     84   

Quantitative and Qualitative Disclosures about Market Risk

     85   

Quantitative and Qualitative Disclosures About Interest Rate Risk

     85   

MARKET OPPORTUNITY

     86   

OUR BUSINESS

     137   

Our Competitive Strengths

     139   

Our Business Strategy

     143   

Homebuilding Operations

     145   

Sales and Marketing

     146   

Land Acquisition Policies and Development

     147   

Raw Materials

     149   

Seasonality

     149   

Government Regulation and Environmental Matters

     150   

Competition

     150   

Employees

     151   

Our Property

     151   

Legal Proceedings

     151   

MANAGEMENT

     152   

Directors and Executive Officers

     152   

Biographical Information

     152   

Family Relationships

     155   

Board of Directors

     155   

Role of our Board of Directors in Risk Oversight

     155   

Committees of our Board of Directors

     156   

 

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Compensation Committee Interlocks and Insider Participation

     157   

Code of Business Conduct and Ethics

     157   

Director Compensation

     157   

COMPENSATION OF OUR DIRECTORS AND EXECUTIVE OFFICERS

     158   

Summary Compensation Table

     158   

Employment Agreements

     158   

Outstanding Equity Awards at Fiscal-Year End

     159   

Director Compensation

     160   

2013 Equity Incentive Plan

     160   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     164   

The Formation Transactions

     164   

Management and Warranty Fees from the LGI/GTIS Joint Ventures

     164   

Agreements with Thomas Lipar

     164   

Tax Distributions

     165   

Indemnification Agreements

     165   

Review and Approval of Transactions with Related Persons

     165   

DESCRIPTION OF CAPITAL STOCK

     166   

Common Stock

     166   

Preferred Stock

     166   

Limitation on Liability and Indemnification of Officers and Directors

     166   

Anti-Takeover Effects of Provisions of Our Certificate of Incorporation, Our Bylaws and Delaware Law

     166   

Business Combinations

     167   

Authorized and Unissued Shares

     168   

Listing

     168   

Transfer Agent and Registrar

     168   

SHARES ELIGIBLE FOR FUTURE SALE

     169   

Rule 144

     169   

Rule 701

     169   

2013 Equity Incentive Plan

     170   

PRINCIPAL STOCKHOLDERS

     171   

CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     172   

Taxation of U.S. Holders

     173   

Taxation of Non-U.S. Holders

     174   

UNDERWRITING

     178   

LEGAL MATTERS

     186   

EXPERTS

     186   

WHERE YOU CAN FIND MORE INFORMATION

     186   

INDEX TO FINANCIAL STATEMENTS

     F-1   

Public Homebuilder Peers

References in this prospectus to our “public homebuilder peers” refer to the following domestic homebuilders that file periodic reports with the Securities and Exchange Commission (SEC): AV Homes, Inc., Beazer Homes USA, Inc., D.R. Horton, Inc., Hovnanian Enterprises, Inc., KB Home, Lennar Corporation, M.D.C. Holdings, Inc., M/I Homes, Inc., Meritage Homes Corporation, NVR, Inc., PulteGroup, Inc., The Ryland Group, Inc., Standard Pacific Corp., Taylor Morrison Home Corporation, Toll Brothers, Inc., TRI Pointe Homes, Inc., UCP, Inc., WCI Communities, Inc. and William Lyon Homes.

 

 

 

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Explanatory Note

LGI Homes, Inc. is the newly-formed registrant and issuer of the shares of common stock in this offering.

Concurrently with this offering, LGI Homes, Inc. will acquire all the equity interests of LGI Homes Group, LLC, LGI Homes Corporate, LLC, LGI Homes, Ltd., LGI Homes—Sunrise Meadow, Ltd., LGI Homes—Canyon Crossing, Ltd., LGI Homes—Deer Creek, LLC and their direct and indirect subsidiaries (collectively referred to in this prospectus as our “predecessor” or “LGI Homes Group (Predecessor)”). Concurrently with this offering, LGI Homes, Inc. will also acquire from GTIS Partners, LP, a global real estate investment firm, and its affiliated entities (collectively, “GTIS”), all of GTIS’s equity interests in four unconsolidated joint ventures with LGI Homes Group (Predecessor), namely, LGI-GTIS Holdings, LLC, LGI-GTIS Holdings II, LLC, LGI-GTIS Holdings III, LLC and LGI-GTIS Holdings IV, LLC (collectively, the “LGI/GTIS Joint Ventures”). See “Summary—The Transactions.”

Unless we state otherwise or the context otherwise requires, references in this prospectus to “we,” “us,” “our” or similar terms when used in a historical context refer to LGI Homes Group (Predecessor) and the LGI/GTIS Joint Ventures, as aggregated. When used in the present tense or prospectively, those terms refer to LGI Homes, Inc. and its subsidiaries, including LGI Homes Group (Predecessor) and the LGI/GTIS Joint Ventures as of the closing date of this offering. Unless we state otherwise or the context otherwise requires, the financial, operational and other data in this prospectus are presented on an aggregate basis by adding the historical results/data of our predecessor and the LGI/GTIS Joint Ventures and eliminating the transactions, balances and payments between them. The financial data presented on an aggregate basis are non-GAAP financial measures. For a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure, see ”Summary — Summary Historical and Pro Forma Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations.”

Industry and Market Data

We use market data and industry forecasts and projections throughout this prospectus, particularly in the sections entitled “Summary,” “Market Opportunity” and “Our Business.” We have obtained substantially all of this information from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC (“JBREC”), an independent research provider and consulting firm focused on the housing industry. We have agreed to pay JBREC a fee of $39,000 for that market study, plus an amount charged at an hourly rate for additional information we may require from JBREC from time to time in connection with that market study. Such information is included in this prospectus in reliance on JBREC’s authority as an expert on such matters. Any forecasts prepared by JBREC are based on data (including third-party data), models and experience of various professionals and various assumptions (including the completeness and accuracy of third-party data), all of which are subject to change without notice. See “Experts.” In addition, certain market and industry data has been taken from publicly available industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable but we have not independently verified the data obtained from these sources. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and additional uncertainties regarding the other forward-looking statements in this prospectus.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements contained elsewhere in this prospectus, before investing in our common stock. The information presented in this prospectus assumes (1) an initial public offering price of $         per share of common stock (the mid-point of the price range set forth on the cover page of this prospectus) and (2) unless otherwise indicated, that the underwriters have not exercised their option to purchase additional shares of common stock. You should read “Risk Factors” for information about important risks that you should consider before buying shares of our common stock.

Our Company

We are one of the nation’s fastest growing homebuilders engaged in the design and construction of entry-level homes in high growth markets in Texas, Arizona, Florida and Georgia. Our business model is based on skillfully building and selling high quality, entry-level homes in attractive locations that include well-designed floor plans with features that appeal to renters. We focus on converting renters of apartments and single-family homes into homeowners by offering superior value at affordable prices in affordable locations and by utilizing a well-established sales and marketing approach, a culture of customer service excellence and a highly efficient construction process. Our strategy has driven our industry-leading build times, inventory turnover and returns on capital. We intend to expand within our existing markets and into new markets where we identify opportunities to build homes that meet our profit and return objectives.

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.

Our management team has been in the residential land development business since the mid-1990s. In 2003, we commenced homebuilding operations targeting the entry-level market. We developed our unique operating model based on our belief that there was a more effective and efficient method of constructing and selling homes. Our proven operating model has been

 

 

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highly successful, resulting in sales rates exceeding those of our public homebuilder peers. After successfully establishing ourselves as homebuilders in the Houston market, we demonstrated that our operating model could flourish in additional markets including Dallas/Fort Worth, San Antonio, Austin and Phoenix. Since 2010, we achieved profitability within six months of our first home closings in each of our new communities in these markets. After conducting extensive due diligence and market studies, we entered the Tampa market in 2012 and the Atlanta and Orlando markets in 2013.

Our success lies within our differentiated strategy as a focused sales and marketing organization targeting the entry-level homebuyer. Our marketing efforts are specifically designed to establish direct communication with local renters in order to educate them on the benefits and affordability of homeownership. At each of our sales offices, we have assembled a team of dedicated sales professionals and an independent onsite loan officer who assist the prospective buyer through the home buying process. Our focus on sales and marketing is a key driver of our high conversion rates, and we believe our unique sales approach has enabled us to differentiate ourselves from our competition. As a result of our operating model and inventory of move-in ready homes, our average closings per active community were 94 in 2012, or nearly eight per month, which far exceeded those of our public homebuilder peers who had average closings per active community of 26 in 2012, or approximately two per month.

Our higher sales volume enables us to employ an even-flow, or continuous, construction methodology to establish an inventory of move-in ready homes, resulting in more favorable relationships with subcontractors who prefer the stability afforded by our approach. We focus on entry-level homes with price points and sizes ranging from approximately $115,000 to $260,000 and 1,200 to 3,000 square feet, respectively. All of our homes are built with a defined set of features that appeal to renters. We simplify our construction and purchasing processes which allows us to optimize the timing of our home starts. Our inventory of move-in ready homes and successful sales methodology have led to generally high closing rates and short escrow periods for customers who are often faced with expiring apartment leases and rising rental costs. As a result, our inventory turnover in 2012 was 2.5x (2.7x for our predecessor), significantly higher than the average of our public homebuilder peers of 1.0x.

We have been an active and opportunistic acquirer of land for residential development in our markets. We acquire finished lots and raw land in affordable locations with proximity to major thoroughfares, retail districts and centers of business, which can be purchased at attractive prices. We test the market and speak with potential homebuyers before proceeding with our land acquisitions. We maintain a large pipeline of desirable land positions and plan to use the proceeds from this offering to fund several land acquisitions to support our continued growth. We increased our active communities from five as of December 31, 2010 to 18 as of June 30, 2013 and expect to reach 24 active communities as of December 31, 2013.

Each of our existing markets is experiencing strong momentum in housing demand drivers, including nationally leading population and employment growth trends, favorable migration patterns, general housing affordability and desirable lifestyle and weather characteristics. Our target markets are characterized by high populations of renters who are facing rising rental costs and are interested in homeownership. Many of our existing markets, including Austin, Houston, Dallas/Fort Worth, Phoenix and San Antonio, ranked among the top 10 markets for fastest population growth in the United States from 2000 to 2010, according to the U.S. Census Bureau.

 

 

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We increased our revenue 70.8% (105.2% for our predecessor) from $56.2 million ($28.9 million for our predecessor) for the six months ended June 30, 2012 to $96.0 million ($59.3 million for our predecessor) for the six months ended June 30, 2013. Similarly, we increased closings 57.3% from 422 homes for the six months ended June 30, 2012 to 664 homes for the six months ended June 30, 2013. For the six months ended June 30, 2013, we generated adjusted gross margins, on a pro forma basis for the Transactions, of 28.4% and adjusted EBITDA margins, on a pro forma basis for the Transactions, of 13.3%. See “—Summary Historical and Pro Forma Financial and Operating Data” for a reconciliation of adjusted gross margins to gross margins and adjusted EBITDA to net income.

Our Competitive Strengths

We believe the following strengths provide us with a significant competitive advantage in implementing our business strategy:

Unique operating model generates “best-in-class” returns on capital

Our unique operating model generates “best-in-class” returns on capital through a profitable and scalable platform that has generated strong operating margins, rates of closings per active community and inventory turnover. We attribute our strong margins and our consistent profitability throughout the downturn primarily to our disciplined land acquisition, operating and management approach. 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% (20.2% for our predecessor), which far exceeds the average compound annual growth rate of 8.3% of our public homebuilder peers over the same period. For the six months ended June 30, 2013, our revenue was $96.0 million ($59.3 million for our predecessor).

Well-established sales and marketing approach focused on a culture of customer service excellence

We believe our expertise in sales and marketing differentiates us from our public homebuilder peers. We have established a successful, unique marketing system that has proven to create a large volume of potential homebuyers. We make extensive use of advertising, including targeted direct-mail brochures, our website, social media, newspaper advertisements and the placement of strategically located signs and billboards, all of which are designed to encourage potential homebuyers to schedule an appointment to visit one of our communities. We reach most of our potential homebuyers through our direct marketing program specifically designed to target renters. Each week, we send an average of 12,000 direct mailings to renters within a 25-mile radius of each of our communities.

We sell homes through our own highly trained sales professionals with less than 10% of our sales since 2010 requiring commissions paid to third party realtors, which enhances our profitability and ensures a superior homebuyer experience. The strength of our sales force is largely driven by our emphasis on recruiting and training. In addition, we provide potential homebuyers with a thorough outline of the steps to homeownership and educate them on the advantages homeownership offers compared to renting.

 

 

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Focus on attractive markets with a favorable growth outlook and strong demand fundamentals

Our focused geographic footprint has positioned us to benefit from the ongoing recovery in the U.S. housing market after the significant downturn from 2006 to 2011. We currently operate in four states, Texas, Arizona, Florida and Georgia, that are benefitting from positive momentum in housing demand drivers, including nationally leading population and employment growth trends, favorable migration patterns, general housing affordability, and desirable lifestyle and weather characteristics. These four states accounted for 29.7% of the 829,658 building permits issued for privately owned homes for the year ended December 31, 2012, and are forecasted to grow at an average annual rate of 3.7% as compared to a national rate of 1.6% between 2010 and 2030, according to the U.S. Census Bureau. However, to the extent housing demand and population growth slows in these states, we may not realize a competitive advantage as a result of the markets in which we focus.

Proven ability to expand into new geographic markets

We continually evaluate expansion opportunities in new geographic markets. Our decision to enter a new market is primarily based on the growing demand for single-family housing, favorable home affordability trends, availability of land in proximity to major metropolitan areas, high volumes of renters, diverse and growing employment bases and attractive sector competitive dynamics. After conducting thorough due diligence and carefully analyzing the demand through an extensive test marketing program, we leveraged our success in Houston and San Antonio and entered the Dallas/Fort Worth market in 2009 and the Phoenix and Austin markets in 2011. In Dallas/Fort Worth, Austin and Phoenix, we rapidly recouped our initial investment and have been consistently profitable. In 2012, we entered the Tampa market and in 2013, we entered the Atlanta and Orlando markets. We believe the in-depth local market knowledge of our experienced management and the local construction and homebuilding experts we hire in each new market has and will continue to enable us to successfully replicate our operating model in new markets. However, if demand for single-family housing slows or if home affordability trends are no longer favorable, we may not find new geographic markets into which to expand.

Superior homeowner experience and service

Our core operating philosophy is centered on making the home buying experience friendly, effective and efficient. By providing personalized service to our potential homebuyers, we facilitate a streamlined home buying process and make the dream of homeownership possible. We believe our focus on providing a superior customer experience leads to a more satisfied homeowner, which in turn enhances the overall attractiveness of our communities, our homes and our reputation with future homebuyers.

Highly experienced and committed management team with a proven track record

With over 50 years of collective real estate experience, our management team is focused on executing our land acquisition, land development, homebuilding, marketing and sales strategy. Upon completion of this offering, our management team will own, on a fully diluted basis, approximately     % of our outstanding common stock.

 

 

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Our Business Strategy

We are one of the nation’s fastest growing homebuilders, utilizing a well-established sales and marketing approach, a culture of customer service excellence, and a highly efficient home construction process. Our business strategy includes:

Accelerate growth within our existing markets

Despite our rapid growth over the past 10 years, we believe there remains a significant opportunity to grow our share of sales in our existing markets. In 2012, our home market of Houston recorded approximately 23,000 new home sales according to Metrostudy, and our market share was less than 2%. Furthermore, our market share was lower in each of our other markets. Given our familiarity with each of our existing markets and the favorable demographic and economic trends that are forecasted in our markets, we expect a significant portion of our near-term growth to come from expansion in these markets.

Aggressively pursue value-oriented land acquisitions

We pursue a flexible land acquisition strategy of purchasing or optioning finished lots, if they can be acquired at attractive prices, or purchasing raw land for residential development. We target affordable land acquisitions with proximity to major thoroughfares, retail districts and centers of business, which allows us to provide our potential homebuyers with superior value at affordable prices in affordable locations, and with access to the key elements of a metropolitan region. By targeting these locations, we acquire land at attractive prices due to favorable competitive dynamics. As of June 30, 2013, we had a strong land position consisting of approximately 10,000 owned or controlled lots.

Selectively expand into new markets

We target markets that are characterized by favorable housing supply and demand dynamics coupled with a large and growing rental market, which generates a large volume of potential first-time homebuyers. We carefully analyze the demand of a market prior to entry through an extensive test marketing program to ensure that we can successfully turn renters into homebuyers. In addition, we evaluate new market expansion opportunities based on our ability to identify and hire local construction and homebuilding experts with detailed knowledge of the local market conditions. We believe our comprehensive new market evaluation process coupled with our unique operating model has and will continue to enable us to profitably expand into new markets.

Focus on attracting, training and developing our team

We believe that our people are the backbone of our success. We focus on identifying and attracting the best talent and providing them with world-class training and development. We directly invest in our sales professionals by conducting an intensive training program. Our continued commitment to our sales personnel is reflected in the ongoing weekly training sessions held in each of our sales offices coupled with the quarterly regional training events and an annual company-wide conference. We also work closely with our subcontractors and construction managers, training them on the most efficient way to build an LGI home.

 

 

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Utilize Prudent Leverage

We intend to employ debt and equity as part of our ongoing financing strategy, coupled with redeployment of cash flows from our operations, to provide us with the financial flexibility to access capital on the best terms available. In that regard, we intend to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of our homes. As of June 30, 2013, on a pro forma basis for this offering, we would have had $         million in outstanding indebtedness and a net debt-to-net book capitalization of         % (or total debt-to-total book capitalization of         %). As of June 30, 2013, on a pro forma basis for this offering, we maintained $         million of unrestricted cash and approximately $         million of availability under our secured credit agreements.

Market Overview

The U.S. housing market continues to improve from the cyclical low points reached during the 2008-2009 national recession. Between the 2005 market peak and 2011, new single-family housing sales declined 76%, according to data compiled by the U.S. Census Bureau (the “Census Bureau”), and median home prices declined 34%, as measured by the CoreLogic Case-Shiller Index. In 2011, some U.S. markets showed early indications of recovery as a result of an improving macroeconomic backdrop and strong housing affordability. In the twelve months ended June 30, 2013, homebuilding permits increased 16% according to the Census Bureau and the median single-family home price increased 14% year-over-year, according to data compiled by the National Association of Realtors. According to the Census Bureau, growth in new home sales outpaced growth in existing home sales over the same period, increasing 38% as compared to 15% for existing homes. Our target markets include Houston, Dallas/Fort Worth, San Antonio, Austin, Phoenix, Tampa, Orlando and Atlanta.

Texas.    Texas housing fundamentals have shown considerable improvement in recent years, which is typically a precursor for increasing volume of home sales and home price appreciation. Houston was the first large metro area to recover all jobs lost during the recession and JBREC forecasts job growth in Houston averaging 3.3% per year from 2013 through 2015. For the twelve months ended June 30, 2013, existing homes sales in Houston reached 75,282, as compared to 56,807 in 2010 and sales are forecast to continue to grow at an average annual rate of 4.7% through 2015. Job growth in the Dallas and Fort Worth markets for the twelve months ended June 30, 2013, was 3.0% and 4.0%, respectively, significantly exceeding the 1.6% overall job growth in the U.S. During the same period, the Dallas market saw new home sales expand 25.4% and the Fort Worth market saw existing home sales increase 18.8%. In Austin, existing home sales volume increased 20.3% in 2012 while median single-family home prices rose 10.1% due to the area’s job growth outpacing new permit activity, declining inventory and historically high affordability. In the San Antonio market, low inventory levels paired with recovering demand are driving new home prices higher.

Phoenix.    The Phoenix market has recovered significantly with strong job growth fueling housing demand. As of June 30, 2013, the non-seasonally adjusted unemployment rate was 7.2%, down from 7.6% one year prior. In the twelve months ended June 30, 2013, new home sales were up 22.6% from the similar prior year period. Existing home values rose approximately 26% in the twelve months ended June 30, 2013 following five years of declining values, according to the JBREC Burns Home Value Index. Resale inventory has declined rapidly and, as of June 30, 2013, there was only 2.1 months of supply in the Phoenix market.

 

 

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Central Florida.    The Central Florida market continues to recover as the local economy adds jobs and home inventory levels continue to decline driving price appreciation. In Tampa, the non-seasonally adjusted unemployment rate in June, 2013 was 7.2%, down from 8.8% one year prior. In June 2013, existing homes sales were up 74% from the trough of 2008. For the twelve months ended June 30, 2013, new home sales were up 23.4% period-over-period. Orlando is benefitting from its vibrant economy and globally recognized tourism industry. In June 2013, the non-seasonally adjusted unemployment rate was 6.9%, down from 8.7% one year earlier. Throughout the recession, Orlando’s population continued to grow and in 2012 Orlando added 38,500 people (a growth of 1.8%). Existing home sales have been on the rise, growing 117% from the end of 2008 through June 30, 2013. In the twelve months ended June 30, 2013, new home sales increased 33.8% from the similar prior year period.

Atlanta.    As the fundamentals that drive the Atlanta housing market reflect a more stable environment, the Atlanta housing market is on track for improving sales and pricing. Job growth was 2.4%, exceeding the national average of 1.6%, in the twelve months ended June 30, 2013, and home values appreciated 12.9% according to the JBREC Burns Home Value Index. In the same period, sales of new homes were up 23%, job creation was more than triple the number of homebuilding permits issued and resale listings declined to a level equal to 3.8 months supply.

 

 

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The Transactions

LGI Transaction

Concurrently with this offering, we will acquire from Thomas Lipar, one of our founders, Eric Lipar, our Chief Executive Officer and Chairman of the Board and their respective affiliates, the equity interests of our predecessor, in exchange for              shares of our common stock (assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus). In addition, we will issue             shares of common stock to the non-controlling interests in a subsidiary of our predecessor (assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus). As a result, the entities which make up our predecessor will become our wholly-owned subsidiaries. See “Certain Relationships and Related Party Transactions.” We collectively refer to the transactions described in this paragraph as the “LGI Transaction.”

GTIS Transaction

Our predecessor owns a 15% equity interest in and manages the LGI/GTIS Joint Ventures. Concurrently with this offering, we will acquire from GTIS all of the GTIS equity interests in the LGI/GTIS Joint Ventures, in exchange for aggregate consideration of $41.4 million, consisting of a cash payment of $36.9 million and              shares of our common stock (assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus) . We refer to the transactions described in this paragraph as the “GTIS Transaction.”

We will use purchase accounting for the GTIS Transaction. In the pro forma financial information appearing in “Unaudited Pro Forma Financial Information” and elsewhere in this prospectus, we estimate certain adjustments made as a result of this application of purchase accounting, including (i) recording the net tangible assets of the LGI/GTIS Joint Ventures at fair value, (ii) recording goodwill for the excess of the GTIS Transaction purchase price over the identifiable net tangible assets of the LGI/GTIS Joint Ventures, (iii) recording a gain as a result of the re-measurement of our predecessor’s equity interests in the LGI/GTIS Joint Ventures at fair value, and (iv) recording deferred income tax related to the purchase accounting adjustments. Following the closing of this offering, we will own all of the equity interests in the LGI/GTIS Joint Ventures and we will account for them on a consolidated basis rather than by using the equity method.

Formation Transactions and The Transactions

We refer to the LGI Transaction and the GTIS Transaction as the “Formation Transactions.” We refer to the Formation Transactions, the issuance and sale of shares of our common stock in this offering (excluding shares issuable upon any exercise of the underwriters’ option to purchase additional shares of our common stock) and the application of the net proceeds from this offering as described in “Use of Proceeds” as the “Transactions.”

 

 

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Organizational Structure

The following is a simplified diagram of our organizational structure after giving effect to the Formation Transactions and this offering.

 

LOGO

 

 

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Summary Risk Factors

An investment in the shares of our common stock involves risks. You should consider carefully the risks discussed below and described more fully along with other risks under “Risk Factors” in this prospectus before investing in our common stock.

 

   

Continued or additional tightening of mortgage lending standards, mortgage financing requirements and rising interest rates could adversely affect the availability of mortgage loans for potential purchasers of our homes and thereby reduce our sales.

 

   

The Dodd-Frank Act may affect the availability or cost of mortgages, which could adversely affect our results of operations.

 

   

Our long-term growth depends, in part, upon our ability to acquire land parcels suitable for residential homebuilding at reasonable prices.

 

   

Risks associated with our land and lot inventories could adversely affect our business or financial results.

 

   

Labor and raw material shortages and price fluctuations could delay or increase the cost of home construction, which could materially and adversely affect us.

 

   

Any limitation on, or reduction or elimination of, tax benefits associated with homeownership would have an adverse effect upon the demand for homes, which could be material to our business.

 

   

The recent growth in the housing market may not continue at the same rate, and any decline in the growth rate in our markets or for the homebuilding industry may materially and adversely affect our business and financial condition.

 

   

We may incur a variety of costs to engage in future growth or expansion of our operations and the anticipated benefits may never be realized.

 

   

Our geographic concentration could materially and adversely affect us if the homebuilding industry in our current markets should experience a decline.

 

   

Our industry is cyclical and adverse changes in general and local economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.

 

   

Fluctuations in real estate values may require us to write-down the book value of our real estate assets.

 

   

We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets.

 

   

Concentration of ownership of the voting power of our capital stock may prevent other stockholders from influencing corporate decisions and create perceived conflicts of interest.

 

   

There is currently no public market for shares of our common stock, a trading market for our common stock may never develop following this offering and our common stock price may be volatile and could decline substantially following this offering.

 

   

The offering price per share of our common stock offered by this prospectus may not accurately reflect the value of your investment.

 

 

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Implications of Being an Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Thus, we are not required to provide more than two years of audited financial statements, selected financial data and related Management’s Discussion & Analysis of Financial Condition and Results of Operations in this prospectus. For as long as we are an emerging growth company, unlike other public companies, we will not be required to:

 

   

provide an attestation and report from our auditors on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

   

comply with certain new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB;

 

   

comply with certain new audit rules adopted by the PCAOB after April 5, 2012, unless the Securities and Exchange Commission, or the SEC, determines otherwise;

 

   

provide disclosures regarding executive compensation required of larger public companies; and

 

   

obtain stockholder approval of any golden parachute payments not previously approved.

We intend to take advantage of all of these exemptions.

We will cease to be an emerging growth company when any of the following conditions apply:

 

   

we have $1.0 billion or more in annual revenues;

 

   

at least $700 million in market value of our common stock are held by non-affiliates;

 

   

we issue more than $1.0 billion of non-convertible debt over a three-year period; or

 

   

the last day of the fiscal year following the fifth anniversary of our initial public offering has passed.

In addition, an emerging growth company can delay its adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with any new or revised accounting standards on the relevant dates on which non-emerging growth companies must adopt such standards. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Our Offices

Our principal executive offices are located at 1450 Lake Robbins Drive, Suite 430, The Woodlands, Texas 77380, and our telephone number is (281) 362-8998. Our website address is www.lgihomes.com. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not part of this prospectus.

 

 

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The Offering

 

Common stock offered by us

             shares

 

Common stock to be outstanding immediately following this offering

             shares(1)

 

Underwriters’ option

We have granted the underwriters an option to purchase up to              additional shares of our common stock.

 

Use of Proceeds

We expect to receive net proceeds from this offering of approximately $         million (assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We expect to use $36.9 million of the net proceeds from this offering to make a payment to GTIS as the cash portion of the purchase price to acquire all of the joint venture interests of GTIS in the LGI/GTIS Joint Ventures which we do not own, and we expect to use the remainder of the net proceeds for working capital and for general corporate purposes, including the acquisition of land, development of lots and construction of homes.

 

Dividend policy

We currently intend to retain our future earnings, if any, to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any of our financing arrangements and such other factors as our board of directors deems relevant. See “Dividend Policy.”

 

Proposed NASDAQ symbol

We intend to apply to list our common stock on the NASDAQ Global Select Market under the symbol “LGIH.”

 

Risk factors

Investing in our common stock involves a high degree of risk. For a discussion of factors you should consider in making an investment, see “Risk Factors.”

 

(1) Based on              shares outstanding as of                     , 2013 and:
   

includes              shares issued in connection with the LGI Transaction (assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus);

   

includes                  shares issued in connection with the GTIS Transaction (assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus);

   

excludes restricted stock units to be granted to executive officers and directors upon the consummation of this offering under our Equity Incentive Plan (see “Compensation of Our Directors and Executive Officers—2013 Equity Incentive Plan”); and

   

excludes an additional              shares of common stock authorized to be issued under our Equity Incentive Plan (see “Compensation of Our Directors and Executive Officers — 2013 Equity Incentive Plan”).

 

 

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Summary Historical and Pro Forma Financial and Operating Data

The following table presents our summary historical and pro forma financial and operating data as of the dates and for the periods indicated.

The summary historical balance sheet and statement of operations information presented as of December 31, 2012 and 2011 and for the years ended December 31, 2012 and 2011 are derived from the audited historical combined financial statements of our predecessor, LGI Homes Group (Predecessor), that are included elsewhere in this prospectus. The summary historical balance sheet and statement of operations information presented as of June 30, 2013 and for the six months ended June 30, 2013 and 2012 are derived from the unaudited historical combined financial statements of LGI Homes Group (Predecessor) that are included elsewhere in this prospectus. The historical combined financial statements of our predecessor account for investments in the LGI/GTIS Joint Ventures using the equity method. The following table should be read together with, and is qualified in its entirety by reference to, the historical combined financial statements of LGI Homes Group (Predecessor) and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Capitalization,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The summary pro forma financial information presented as of June 30, 2013 and for the six months ended June 30, 2013 and the year ended December 31, 2012 gives effect to the Formation Transactions, the issuance and sale of shares of our common stock in this offering and the use of proceeds thereof as described under “Use of Proceeds” and is derived from the unaudited and audited combined financial statements of LGI Homes Group (Predecessor) and the unaudited and audited financial statements of the LGI/GTIS Joint Ventures, included elsewhere in this prospectus. See “—The Transactions” for a description of the Formation Transactions. The summary pro forma financial information should be read together with our unaudited pro forma financial statements included elsewhere in this prospectus and “Unaudited Pro Forma Financial Information.”

 

    Pro Forma
Six

Months
Ended
June  30,
    Six Months Ended June 30,     Pro Forma
Year Ended
December 31,
    Year Ended
December 31,
 
             2013                      2013                       2012              2012     2012     2011  

Statement of Operations Data:

    (in thousands)   

Home sales

  $ 95,969      $ 57,998      $ 27,861      $ 143,378      $ 73,820      $ 49,270   

Management and warranty fees

           1,302        992               2,401        1,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 95,969      $ 59,300      $ 28,853      $ 143,378      $ 76,221      $ 50,456   

Cost of sales

    69,465        42,142        20,273        104,229        54,531        36,700   

Selling expenses

    9,164        5,493        2,863        13,370        7,269        4,884   

General and administrative

    5,791        5,026        2,451        6,934        6,096        5,125   

Income from unconsolidated joint ventures

           (944     (586            (1,526     (715
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 11,549      $ 7,583      $ 3,852      $ 18,745      $ 9,851      $ 4,462   

Interest expense

    (6     (6     (25     (1     (1     (28

Other income, net

    84        22        24        215        173        204   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income taxes

  $ 11,627      $ 7,599      $ 3,851      $ 18,959      $ 10,023      $ 4,637   

Income taxes

    4,069        136        65        6,598        155        125   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 7,558      $ 7,463      $ 3,786      $ 12,361      $ 9,868      $ 4,512   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Income) loss attributable to non-controlling interests

           146        (68     (163     (163     (1,162
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to owners

  $ 7,558      $ 7,609      $ 3,718      $ 12,198      $ 9,705      $ 3,350   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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    Pro Forma
Six
Months
Ended

June 30,
    Six Months Ended June 30,     Pro Forma
Year Ended
December 31,
    Year Ended
December 31,
 
    2013              2013                       2012              2012     2012     2011  
    (dollars in thousands)  

Other Financial and Operating Data:

           

Active communities during period(1)

    18        11        6        11        7        5   

Home closings

    664        397        204        1,062        536        376   

Average sales price of homes closed

  $ 145      $ 146      $ 137      $ 135      $ 138      $ 131   

Gross margin(2)

  $ 26,504      $ 15,856      $ 7,588      $ 39,149      $ 19,289        12,570   

Gross margin %(3)

    27.6     27.3     27.2     27.3     26.1     25.5

Adjusted gross margin(4)

  $ 27,279      $ 16,631      $ 7,981      $ 39,958      $ 20,098      $ 13,831   

Adjusted gross margin %(3)(4)

    28.4     28.7     28.6     27.9     27.2     28.1

Adjusted EBITDA(5)

  $ 12,760      $ 8,489      $ 4,322      $ 20,340      $ 10,845      $ 5,803   

Adjusted EBITDA margin %(3)(5)

    13.3     14.6     15.5     14.2     14.7     11.8

Balance Sheet Data (as of end of period):

           

Cash and cash equivalents

  $        $ 15,205          $ 7,069      $ 5,106   

Real estate inventory

  $ 90,160      $ 49,191          $ 28,489      $ 12,526   

Total assets

  $        $ 79,803          $ 45,556      $ 23,513   

Notes payable

  $ 23,065      $ 23,065          $ 14,969      $ 6,415   

Total liabilities

  $ 37,598      $ 32,526          $ 20,345      $ 8,878   

Total equity

  $        $ 47,278          $ 25,211      $ 14,635   

 

(1) With respect to the six months ended June 30, 2013 and 2012, defined as the sum of the number of communities in which we were closing homes as of the first day of the year and the last day of each quarter during the first half of the year divided by three. With respect to the year ended December 31, 2012 and 2011, defined as the sum of the number of communities in which we were closing homes as of the first day of the year and the last day of each quarter during the year divided by five.
(2) Gross margin is home sales revenue less cost of sales.
(3) Calculated as a percentage of home sales revenue.
(4) Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest included in the cost of sales. Our management believes this information is meaningful, because it isolates the impact that capitalized interest has on gross margin. However, because adjusted gross margin information excludes capitalized interest, which has real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance.

The following table reconciles adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable:

 

    Pro Forma
Six

Months
Ended
June 30,
    Six Months Ended June 30,     Pro Forma
Year Ended
December 31,
    Year Ended
December 31,
 
    2013             2013                     2012             2012     2012     2011  
    (dollars in thousands)  

Home sales

  $ 95,969      $ 57,998      $ 27,861      $ 143,378      $ 73,820      $ 49,270   

Cost of sales

    69,465        42,142        20,273        104,229        54,531        36,700   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  $ 26,504      $ 15,856      $ 7,588      $ 39,149      $ 19,289        12,570   

Capitalized interest charged to cost of sales

    775        775        393        809        809        1,261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted gross margin

  $ 27,279      $ 16,631      $ 7,981      $ 39,958      $ 20,098      $ 13,831   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin %(a)

    27.6     27.3     27.2     27.3     26.1     25.5

Adjusted gross
margin %(a)

    28.4     28.7     28.6     27.9     27.2     28.1

 

  (a) Calculated as a percentage of home sales revenue.

 

 

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(5) Adjusted EBITDA is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales and (v) other income, net and excluding adjustments resulting from the application of purchase accounting in connection with the GTIS Transaction. Our management believes that the presentation of adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. Adjusted EBITDA provides an indicator of general economic performance that is not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and items considered to be unusual or non-recurring. Accordingly, our management believes that this measurement is useful for comparing general operating performance from period to period. Other companies may define adjusted EBITDA differently and, as a result, our measure of adjusted EBITDA may not be directly comparable to adjusted EBITDA of other companies. Although we use adjusted EBITDA as a financial measure to assess the performance of our business, the use of adjusted EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. Adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or nonrecurring items. Our adjusted EBITDA is limited as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

it does not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments, including for the purchase of land;

 

   

it does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements or improvements;

 

   

it is not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;

 

   

it does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and

 

   

other companies in our industry may calculate it differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, our adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. We compensate for these limitations by using our adjusted EBITDA along with other comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. These GAAP measurements include operating income, net income and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments and other non-recurring charges, which are not reflected in our adjusted EBITDA.

Adjusted EBITDA is not intended as an alternative to net income as an indicator of our operating performance, as an alternative to any other measure of performance in conformity with GAAP or as an alternative to cash flows as a measure of liquidity. You should therefore not place undue reliance on our adjusted EBITDA calculated using this measure. Our GAAP-based measures can be found in our consolidated financial statements and related notes included elsewhere in this prospectus.

 

 

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The following table reconciles adjusted EBITDA to net income, which is the GAAP financial measure that our management believes to be most directly comparable:

 

    Pro
Forma
Six
Months
Ended

June 30,
    Six Months Ended June 30,     Pro Forma
Year Ended
December 31,
    Year Ended
December 31,
 
     2013             2013                     2012             2012     2012     2011  
    (dollars in thousands)  

Net income

  $ 7,558      $ 7,463      $ 3,786      $ 12,361      $ 9,868      $ 4,512   

Interest expense

    6        6        25        1        1        28   

Income taxes

    4,069        136        65        6,598        155        126   

Depreciation and Amortization

    303        131        77        518        185        80   

Capitalized interest charged to cost of sales

    775        775        393        809        809        1,261   

Other income, net

    (84     (22     (24     (215     (173     (204

Purchase accounting adjustment(a)

    133                      268                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 12,760      $ 8,489      $ 4,322      $ 20,340      $ 10,845      $ 5,803   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA
margin %(b)

    13.3%        14.6     15.5     14.2     14.7     11.8

 

  (a) This adjustment results from the application of purchase accounting in connection with the acquisition of all of the equity interests of GTIS in the GTIS Transaction and represents amortization of the fair value of a marketing-related intangible asset. See “Unaudited Pro Forma Financial Information.”
  (b) Calculated as a percentage of home sales revenue.

 

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk and should be considered highly speculative. Before making an investment decision, you should carefully consider the specific risk factors set forth below, which we believe address the material risks concerning our business and an investment in our common stock, together with the other information included elsewhere in this prospectus. If any of the risks discussed in this prospectus occur, our business, prospects, liquidity, financial condition and results of operations could be materially impaired, in which case the trading price of our common stock could decline significantly and you could lose all or part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Concerning Forward-Looking Statements.”

Risks Related to Our Business

Continued or additional tightening of mortgage lending standards and mortgage financing requirements and rising interest rates could adversely affect the availability of mortgage loans for potential purchasers of our homes and thereby reduce our sales.

Almost all purchasers of our homes finance their acquisition through lenders that provide mortgage financing. If mortgage interest rates increase, and, as a result, the ability of prospective homebuyers to finance home purchases is adversely affected, our operating results may be significantly negatively impacted. Our homebuilding activities are dependent upon the availability of mortgage financing to homebuyers. The availability of mortgage financing remains constrained, due in part to lower mortgage valuations on properties, various regulatory changes and lower risk appetite by lenders. Lenders currently require increased levels of financial documentation, larger down payments and more restrictive income to debt ratios. First-time homebuyers are generally more affected by the availability of mortgage financing than other potential homebuyers. These homebuyers are a key source of demand for our new homes. A limited availability of home mortgage financing may adversely affect the volume and sales price of our home sales.

Due to the recent volatility and uncertainty in the credit markets and in the mortgage lending and mortgage finance industries, the federal government has taken on a significant role in supporting mortgage lending through its conservatorship of Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), both of which purchase or insure mortgage loans and mortgage loan-backed securities, and its insurance of mortgage loans through or in connection with the Federal Housing Administration (“FHA”), the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). FHA and USDA backing of mortgage loans has been particularly important to the mortgage finance industry and to our business. If either the FHA or USDA raised their down payment requirements, our business could be materially affected. The USDA rural development program provides for zero down payment and 100% financing for homebuyers in qualifying areas. As of June 30, 2013, the USDA program is available in all our markets and is available to 65% of our active communities. If the USDA program was discontinued or if funding was decreased, then our business could be adversely affected. In addition, if the USDA changed its determination of areas that are eligible to qualify for the program, it could have an adverse effect on our business.

The availability and affordability of mortgage loans, including interest rates for such loans, could also be adversely affected by a scaling back or termination of the federal government’s

 

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mortgage loan-related programs or policies. Because Fannie Mae-, Freddie Mac-, FHA-, USDA- and VA-backed mortgage loans have been an important factor in marketing and selling many of our homes, any limitations or restrictions in the availability of, or higher consumer costs for, such government-backed financing could reduce our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected. The elimination or curtailment of state bonds utilized by us could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.

The Dodd-Frank Act may affect the availability or cost of mortgages, which could adversely affect our results of operations.

Further tightening of mortgage lending standards and practices and/or reduced credit availability for mortgages may also result from the implementation of regulations under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Among other things, the Dodd-Frank Act established several requirements (including risk retention obligations) relating to the origination, securitizing and servicing of, and consumer disclosures for, mortgage loans. These include, among others, minimum standards for mortgages and lender practices in making mortgages, limitations on certain fees and incentive arrangements, retention of credit risk and remedies for borrowers in foreclosure proceedings. These requirements, as and when implemented, are expected to reduce the availability of loans to borrowers and/or increase the costs to borrowers to obtain such loans. Any such reduction could result in a decline of our home sales, which could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.

Our long-term growth depends in part upon our ability to acquire land parcels suitable for residential homebuilding at reasonable prices.

Our long-term growth depends in large part on the price at which we are able to obtain suitable land parcels for the development of our homes. Our ability to acquire land parcels for new single-family homes may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning, regulations that limit housing density, the ability to obtain building permits, environmental requirements and other market conditions and regulatory requirements. If suitable lots or land become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could be increased substantially, which could adversely impact us. As competition for suitable land increases, the cost of undeveloped lots and the cost of developing owned land could rise and the availability of suitable land at acceptable prices may decline, which could adversely impact us. The availability of suitable land assets could also affect the success of our land acquisition strategy, which may impact our ability to increase the number of our active communities, grow our revenue and margins, and achieve or maintain profitability. Additionally, developing undeveloped land is capital intensive and time consuming and we may develop land based upon forecasts and assumptions that prove to be inaccurate, resulting in projects that are not economically viable.

Risks associated with our land and lot inventories could adversely affect our business or financial results.

Risks inherent in controlling, purchasing, holding and developing land for new home construction are substantial. The risks inherent in purchasing and developing land parcels increase as consumer demand for housing decreases. As a result, we may buy and develop land parcels on which homes cannot be profitably built and sold. In certain circumstances, a grant of

 

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entitlements or development agreement with respect to a particular parcel of land may include restrictions on the transfer of such entitlements to a buyer of such land, which would negatively impact the price of such entitled land by restricting our ability to sell it for its full entitled value. In addition, inventory carrying costs can be significant and can result in reduced margins or losses in a poorly performing community or market. Developing land and constructing homes takes a significant amount of time and requires a substantial cash investment. In Texas, land development has started to become a bigger part of our operations and we expect to expand our development activities in our other markets as well. The time and investment required for development may adversely impact our business. We have substantial real estate inventories which regularly remain on our balance sheet for significant periods of time, during which time we are exposed to the risk of adverse market developments, prior to their sale. Our business model is based on building homes before a sales contract is executed and a customer deposit is received. Because interest and other expenses are capitalized during construction but expensed after completion, we recognize interest and maintenance expense on unsold completed homes inventory. As of June 30, 2013, we had 213 completed homes in inventory and 380 homes in progress in inventory. In the event there is a downturn in housing sales in our markets, our inventory of completed homes could increase, leading to additional financing costs and lower margins, which could have a material adverse effect on our financial results and operations. In the event of significant changes in economic or market conditions, we may have to sell homes at significantly lower margins or at a loss, if we are able to sell them at all. Additionally, deteriorating market conditions could cause us to record significant inventory impairment charges. The recording of a significant inventory impairment could negatively affect our reported earnings per share and negatively impact the market perception of our business.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties for reasonable prices in response to changing economic, financial and investment conditions may be limited and we may be forced to hold non-income producing properties for extended periods of time.

Real estate investments are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in response to changing economic, financial and investment conditions is limited and we may be forced to hold non-income producing assets for an extended period of time. We cannot predict whether we will be able to sell any property for the price or on the terms that we set or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

Labor and raw material shortages and price fluctuations could delay or increase the cost of home construction, which could materially and adversely affect us.

The residential construction industry experiences serious labor and raw material shortages from time to time, including shortages in qualified tradespeople, and supplies of insulation, drywall, cement, steel and lumber. These labor and raw material shortages can be more severe during periods of strong demand for housing or during periods following natural disasters that have a significant impact on existing residential and commercial structures. Our markets have recently begun to exhibit a reduced level of skilled labor relative to increased homebuilding demand in these markets. Labor and raw material shortages and any resulting price increases could cause delays in and increase our costs of home construction, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

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Our business and results of operations are dependent on the availability and skill of subcontractors.

We engage subcontractors to perform the construction of our homes, and in many cases, to select and obtain the raw materials. Accordingly, the timing and quality of our construction depend on the availability and skill of our subcontractors. While we anticipate being able to obtain sufficient materials and reliable subcontractors and believe that our relationships with subcontractors are good, we do not have long-term contractual commitments with any subcontractors, and we can provide no assurance that skilled subcontractors will continue to be available at reasonable rates and in our markets. The inability to contract with skilled subcontractors at reasonable rates on a timely basis could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

Despite our quality control efforts, we may discover that our subcontractors have engaged in improper construction practices or have installed defective materials in our homes. When we discover these issues, we generally utilize our subcontractors to repair the homes in accordance with our new home warranty and as required by law. The adverse costs of satisfying our warranty and other legal obligations in these instances may be significant and we may be unable to recover the costs of warranty-related repairs from subcontractors, suppliers and insurers, which could have a material impact on our business, prospects, liquidity, financial condition and results of operations.

Any limitation on, or reduction or elimination of, tax benefits associated with homeownership would have an adverse effect upon the demand for homes, which could be material to our business.

Changes in federal income tax laws may affect demand for new homes. Current tax laws generally permit significant expenses associated with homeownership, primarily mortgage interest expense and real estate taxes, to be deducted for the purpose of calculating an individual’s federal and, in many cases, state taxable income. Various proposals have been publicly discussed to limit mortgage interest deductions and to limit the exclusion of gain from the sale of a principal residence. For instance, under the American Taxpayer Relief Act of 2012, which was signed into law in January 2013, the federal government enacted higher income tax rates and limits on the value of tax deductions for certain high-income individuals and households. If the federal government or a state government changes or further changes its income tax laws, as some lawmakers have proposed, by eliminating, limiting or substantially reducing these income tax benefits without offsetting provisions, the after-tax cost of owning a new home would increase for many of our potential homebuyers. Enactment of any such proposal may have an adverse effect on the homebuilding industry in general, as the loss or reduction of homeowner tax deductions could decrease the demand for new homes.

The recent growth in the housing market may not continue at the same rate, and any decline in the growth rate in our served housing markets or for the homebuilding industry may materially and adversely affect our business and financial condition.

Although the housing markets in the geographic areas in which we operate are currently stronger than they have been in recent years, we cannot predict whether and to what extent this will continue, particularly if interest rates for mortgage loans continue to rise. Other factors which might impact growth in the homebuilding industry include uncertainty in domestic and international financial, credit and consumer lending markets amid slow growth or recessionary conditions in various regions around the world; tight lending standards and practices for mortgage loans that

 

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limit consumers’ ability to qualify for mortgage financing to purchase a home, including increased minimum credit score requirements, credit risk/mortgage loan insurance premiums and/or other fees and required down payment amounts, more conservative appraisals, higher loan-to-value ratios and extensive buyer income and asset documentation requirements, or Federal Reserve policy changes. Given these factors, we can provide no assurance that present housing market trends will continue, whether overall or in our markets.

If there is limited economic growth or declines in employment and consumer income and/or continued tight mortgage lending standards and practices in the geographic areas in which we operate or if interest rates for mortgage loans continue to rise, there could likely be a corresponding adverse effect on our business, prospects, liquidity, financial condition and results of operations, including, but not limited to, the number of homes we sell, our average selling prices, the amount of revenues or profits we generate, and the effect may be material.

If we are unable to develop our communities successfully or within expected time-frames, our results of operations could be adversely affected.

Before a community generates any revenue, time and material expenditures are required to acquire land, obtain development approvals and construct significant portions of project infrastructure, amenities and sales facilities. It can take several years from the time we acquire control of an undeveloped property to the time we make our first home sale on the site. Delays in the development of communities expose us to the risk of changes in market conditions for homes. A decline in our ability to develop and market one of our new undeveloped communities successfully and to generate positive cash flow from these operations in a timely manner could have a material adverse effect on our business and results of operations and on our ability to service our debt and to meet our working capital requirements.

We may be unable to obtain suitable bonding for the development of our housing projects.

We are often required to provide bonds to governmental authorities and others to ensure the completion of our projects. As a result of market conditions, surety providers have been reluctant to issue new bonds and some providers are requesting credit enhancements (such as cash deposits or letters of credit) in order to maintain existing bonds or to issue new bonds. If we are unable to obtain required bonds in the future for our projects, or if we are required to provide credit enhancements with respect to our current or future bonds, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected.

We may incur a variety of costs to engage in future growth or expansion of our operations and the anticipated benefits may never be realized.

We intend to grow our operations in existing markets, and we may expand into new markets. We may be unable to achieve the anticipated benefits of any such growth or expansion, the anticipated benefits may take longer to realize than expected or we may incur greater costs than expected in attempting to achieve the anticipated benefits. In such cases, we will need to employ additional personnel at all levels and consult with personnel that are knowledgeable of such markets. There can be no assurance that we will be able to employ or retain the necessary personnel, that we will be able to successfully implement a disciplined management process and culture with local management, or that our expansion operations will be successful. This could disrupt our ongoing operations and divert management resources that would otherwise focus on developing our existing business. Accordingly, any such expansion

 

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could expose us to significant risks, beyond those associated with operating our existing business, and may adversely affect our business, prospects, liquidity, financial condition and results of operations.

The homebuilding industry is highly competitive and, if our competitors are more successful or offer better value to our customers, our business could decline.

We operate in a very competitive environment which is characterized by competition from a number of other homebuilders and land developers in each market in which we operate. Additionally, there are relatively low barriers to entry into our business. We compete with large national and regional homebuilding companies, many of which have greater financial and operational resources than us, and with smaller local homebuilders and land developers, some of which may have lower administrative costs than us. We may be at a competitive disadvantage with regard to certain of our large national and regional homebuilding competitors whose operations are more geographically diversified than ours, as these competitors may be better able to withstand any future regional downturn in the housing market. Furthermore, we generally have a lower market share in each of our markets as compared to many of our competitors. Many of our competitors may also have longer operating histories and longstanding relationships with subcontractors and suppliers in the markets in which we operate. This may give our competitors an advantage in marketing their products, securing materials and labor at lower prices and allowing their homes to be delivered to customers more quickly and at more favorable prices. We compete for, among other things, homebuyers, desirable land parcels, financing, raw materials and skilled management and labor resources. Our competitors may independently develop land and construct homes that are substantially similar to our products.

Increased competition could hurt our business, as it could prevent us from acquiring attractive land parcels on which to build homes or make such acquisitions more expensive, hinder our market share expansion and cause us to increase our selling incentives and reduce our prices. An oversupply of homes available for sale or discounting of home prices could adversely affect pricing for homes in the markets in which we operate. Oversupply and price discounting have periodically adversely affected certain markets, and it is possible that our markets will be adversely affected by these factors in the future.

We also compete with the resale, or “previously owned,” home market as well as shadow inventory. According to JBREC, while the number of homes entering the foreclosure process is declining, the overall volume is still quite high relative to historical levels. Approximately 10.8% of all mortgages are delinquent or in foreclosure as of the second quarter of 2013–nearly twice the pre-2008 level. The shadow inventory is still substantial. This supply is likely to be sold or liquidated over the next several years. JBREC believes that banks will dispose of many of these distressed loans through either short sales or foreclosures and will do so at a moderate rate so as to limit the downward pressure on home prices resulting from the liquidation. These banks may change their philosophy and decide to dispose of these distressed loans at a more rapid pace. As of June 30, 2013, as estimated by JBREC, less than 8% of the total housing units in the United States have some sort of distress; the remaining 92% do not.

If we are unable to compete effectively in our markets, our business could decline disproportionately to our competitors, and our results of operations and financial condition could be adversely affected. We can provide no assurance that we will be able to continue to compete successfully in any of our markets. Our inability to continue to compete successfully in any of our markets could have a material adverse effect on our business, prospects, liquidity, financial condition or results of operations.

 

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New and existing laws and regulations or other governmental actions, including with respect to zoning and entitlement, may increase our expenses, limit the number of homes that we can build or delay completion of our projects.

We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning, development, building design, construction and similar matters which impose restrictive zoning and density requirements, the result of which is to limit the number of homes that can be built within the boundaries of a particular area. We may encounter issues with entitlement or encounter zoning changes that impact our operations. Projects that are not entitled may be subjected to periodic delays, changes in use, less intensive development or elimination of development in certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or zoning changes. Such moratoriums generally relate to insufficient water supplies, sewage facilities, delays in utility hook-ups, or inadequate road capacity within specific market areas or subdivisions. Local governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. Projects for which we have received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety and welfare issues, which can further delay these projects or prevent their development. As a result, home sales could decline and costs could increase, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

We are subject to environmental laws and regulations, which may increase our costs, result in liabilities, limit the areas in which we can build homes and delay completion of our projects.

We are subject to a variety of local, state, federal and other laws, statutes, ordinances, rules and regulations concerning the environment, hazardous materials, the discharge of pollutants and human health and safety. The particular environmental requirements which apply to any given site vary according to multiple factors, including the site’s location, its environmental conditions, the current and former uses of the site, the presence or absence of endangered plants or animals or sensitive habitats, and conditions at nearby properties. We may not identify all of these concerns during any pre-acquisition or pre-development review of project sites. Environmental requirements and conditions may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or in areas contaminated by others before we commence development. We are also subject to third-party challenges, such as by environmental groups or neighborhood associations, under environmental laws and regulations to the permits and other approvals for our projects and operations. Sometimes regulators from different governmental agencies do not concur on development, remedial standards or property use restrictions for a project, and the resulting delays or additional costs can be material for a given project.

From time to time, the United States Environmental Protection Agency and similar federal, state or local agencies review land developers’ and homebuilders’ compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws, including those applicable to control of storm water discharges during construction, or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs and result in project delays. We expect that increasingly stringent requirements will be imposed on land developers and homebuilders in the future. We cannot assure you that environmental, health and safety

 

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laws will not change or become more stringent in the future in a manner that could have a material adverse effect on our business. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials such as lumber, and on other building materials, such as paint.

Ownership, leasing or occupation of land and the use of hazardous materials carries potential environmental risks and liabilities.

We are subject to a variety of local, state and federal statutes, rules and regulations concerning land use and the protection of health and the environment, including those governing discharge of pollutants to soil, water and air, including asbestos, the handling of hazardous materials and the cleanup of contaminated sites. We may be liable for the costs of removal, investigation or remediation of man-made or natural hazardous or toxic substances located on, under or in a property currently or formerly owned, leased or occupied by us, whether or not we caused or knew of the pollution.

The particular impact and requirements of environmental laws that apply to any given community vary greatly according to the community site, the site’s environmental conditions and the present and former uses of the site. We expect that increasingly stringent requirements may be imposed on land developers and homebuilders in the future. Environmental laws may result in delays, cause us to implement time consuming and expensive compliance programs and prohibit or severely restrict development in certain environmentally sensitive regions or areas, such as wetlands. Concerns could arise due to post-acquisition changes in laws or agency policies, or the interpretation thereof.

Furthermore, we could incur substantial costs, including cleanup costs, fines, penalties and other sanctions and damages from third-party claims for property damage or personal injury, as a result of our failure to comply with, or liabilities under, applicable environmental laws and regulations. In addition, we are subject to third-party challenges, such as by environmental groups or neighborhood associations, under environmental laws and regulations to the permits and other approvals required for our projects and operations. These matters could adversely affect our business, prospects, liquidity, financial condition and results of operations.

As a homebuilding and land development business with a wide variety of historic ownership, development, homebuilding and construction activities, we could be liable for future claims for damages as a result of the past or present use of hazardous materials, including building materials or fixtures known or suspected to be hazardous or to contain hazardous materials or due to use of building materials or fixtures which are associated with elevated mold. Any such claims may adversely affect our business, prospects, financial condition and results of operations. Insurance coverage for such claims may be limited or nonexistent.

Difficulties with appraisal valuations in relation to the proposed sales price of our homes could force us to reduce the price of our homes for sale.

Each of our home sales is accompanied by an appraisal of the home value before closing. These appraisals are professional judgments of the market value of the property and are based on a variety of market factors. If our internal valuations of the market and pricing do not line up with the appraisal valuations and appraisals are not at or near the agreed upon sales price, we may be forced to reduce the sales price of the home to complete the sale. These appraisal issues could have a material adverse effect on our business and results of operations.

 

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Because of the seasonal nature of our business, our quarterly operating results fluctuate.

As discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Seasonality,” we have historically experienced, and in the future expect to continue to experience, variability in our results on a quarterly basis. We close more homes in our second, third and fourth quarters. Thus, our revenue may fluctuate on a quarterly basis and we may have higher capital requirements in our second, third and fourth quarters. Accordingly, there is a risk that we will invest significant amounts of capital in the acquisition and development of land and construction of homes that we do not sell at anticipated pricing levels or within anticipated time frames. If, due to market conditions, construction delays or other causes, we do not complete home sales at anticipated pricing levels or within anticipated time frames, our business, prospects, liquidity, financial condition and results of operations would be adversely affected. We expect this seasonal pattern to continue over the long term but we can make no assurances as to the degree to which our historical seasonal patterns will occur in the future.

Adverse weather and geological conditions may increase costs, cause project delays and reduce consumer demand for housing, all of which could materially and adversely affect us.

As a homebuilder and land developer, we are subject to the risks associated with numerous weather-related and geologic events. These weather-related and geologic events include but are not limited to hurricanes, tornados, droughts, floods, brushfires, wildfires, landslides, soil subsidence and earthquakes and other natural disasters. The occurrence of any of these events could damage our land parcels and projects, cause delays in completion of our projects, reduce consumer demand for housing, and cause shortages and price increases in labor or raw materials, any of which could affect our sales and profitability. In addition to directly damaging our land or projects, many of these natural events could damage roads and highways providing access to those assets or affect the desirability of our land or projects, thereby adversely affecting our ability to market homes or sell land in those areas and possibly increasing the costs of homebuilding completion.

There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with hurricanes, landslides, earthquakes and other weather-related and geologic events may not be insurable and other losses, such as those arising from terrorism, may not be economically insurable. A sizeable uninsured loss could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.

Our geographic concentration could materially and adversely affect us if the homebuilding industry in our current markets should experience a decline.

Our business strategy is focused on the acquisition of suitable land and the design, construction and sale of single-family homes in residential subdivisions, including planned communities, in Texas, Arizona, Florida and Georgia. Because our operations are currently concentrated in these areas, a prolonged economic downturn in the future in one or more of these areas, particularly within Texas, could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations, and a disproportionately greater impact on us than other homebuilders with more diversified operations.

Moreover, certain insurance companies doing business in Florida and Texas have restricted, curtailed or suspended the issuance of homeowners’ insurance policies on single-family homes. This has both reduced the availability of hurricane and other types of natural disaster insurance in Florida and Texas, in general, and increased the cost of such insurance to prospective purchasers of homes in Florida and Texas. Mortgage financing for a new home is conditioned,

 

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among other things, on the availability of adequate homeowners’ insurance. There can be no assurance that homeowners’ insurance will be available or affordable to prospective purchasers of our homes offered for sale in the Florida and Texas markets. Long-term restrictions on, or unavailability of, homeowners’ insurance in the Florida and Texas markets could have an adverse effect on the homebuilding industry in that market in general, and on our business within that market in particular. Additionally, the availability of permits for new homes in new and existing developments has been adversely affected by the significantly limited capacity of the schools, roads, and other infrastructure in that market.

If adverse conditions in these markets develop in the future, it could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. Furthermore, if buyer demand for new homes in these markets decreases, home prices could decline, which would have a material adverse effect on our business.

Difficulty in obtaining sufficient capital could result in an inability to acquire land for our developments or increased costs and delays in the completion of development projects.

The homebuilding and land development industry is capital-intensive and requires significant up-front expenditures to acquire land parcels and begin development. In addition, if housing markets are not favorable or permitting or development takes longer than anticipated, we may be required to hold our investments in land for extended periods of time. If internally generated funds are not sufficient, we may seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financings and/or securities offerings. The availability of borrowed funds, especially for land acquisition and construction financing, may be greatly reduced nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. The credit and capital markets have recently experienced significant volatility. If we are required to seek additional financing to fund our operations, continued volatility in these markets may restrict our flexibility to access such financing. If we are not successful in obtaining sufficient funding for our planned capital and other expenditures, we may be unable to acquire additional land for development and/or to develop new housing. Additionally, if we cannot obtain additional financing to fund the purchase of land under our purchase or option contracts, we may incur contractual penalties and fees. Any difficulty in obtaining sufficient capital for planned development expenditures could also cause project delays and any such delay could result in cost increases. Any one or more of the foregoing events could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

Our industry is cyclical and adverse changes in general and local economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.

Our business can be substantially affected by adverse changes in general economic or business conditions that are outside of our control, including changes in short-term and long-term interest rates; employment levels and job and personal income growth; housing demand from population growth, household formation and other demographic changes, among other factors; availability and pricing of mortgage financing for homebuyers; consumer confidence generally and the confidence of potential homebuyers in particular; financial system and credit market stability; private party and government mortgage loan programs (including changes in FHA, USDA, VA, Fannie Mae and Freddie Mac conforming mortgage loan limits, credit risk/mortgage loan insurance premiums and/or other fees, down payment requirements and underwriting standards), and federal and state regulation, oversight and legal action regarding lending, appraisal, foreclosure and short sale practices; federal and state personal income tax

 

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rates and provisions, including provisions for the deduction of mortgage loan interest payments, real estate taxes and other expenses; supply of and prices for available new or resale homes (including lender-owned homes) and other housing alternatives, such as apartments, single-family rentals and other rental housing; homebuyer interest in our current or new product designs and new home community locations, and general consumer interest in purchasing a home compared to choosing other housing alternatives; and real estate taxes. Adverse changes in these conditions may affect our business nationally or may be more prevalent or concentrated in particular submarkets in which we operate. Inclement weather, natural disasters (such as earthquakes, hurricanes, tornadoes, floods, droughts and fires), and other environmental conditions can delay the delivery of our homes and/or increase our costs. Civil unrest or acts of terrorism can also have a negative effect on our business.

The potential difficulties described above can cause demand and prices for our homes to fall or cause us to take longer and incur more costs to develop the land and build our homes. We may not be able to recover these increased costs by raising prices because of market conditions. The potential difficulties could also lead some homebuyers to cancel or refuse to honor their home purchase contracts altogether.

Inflation could adversely affect our business and financial results.

Inflation could adversely affect our business and financial results by increasing the costs of land, raw materials and labor needed to operate our business. If our markets have an oversupply of homes relative to demand, we may be unable to offset any such increases in costs with corresponding higher sales prices for our homes. Inflation may also accompany higher interests rates, which could adversely impact potential customers’ ability to obtain financing on favorable terms, thereby further decreasing demand. If we are unable to raise the prices of our homes to offset the increasing costs of our operations, our margins could decrease. Furthermore, if we need to lower the price of our homes to meet demand, the value of our land inventory may decrease. Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient funds to operate our business.

Interest rate changes may adversely affect us.

We currently do not hedge against interest rate fluctuations. We may obtain in the future one or more forms of interest rate protection in the form of swap agreements, interest rate cap contracts or similar agreements to hedge against the possible negative effects of interest rate fluctuations. However, we cannot assure you that any hedging will adequately relieve the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations thereunder. In addition, we may be subject to risks of default by hedging counterparties. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or more of our assets at times which may not permit us to receive an attractive return on our assets in order to meet our debt service obligations.

We are subject to warranty and liability claims arising in the ordinary course of business that can be significant.

As a homebuilder, we are subject to construction defect, product liability and home warranty claims, including moisture intrusion and related claims, arising in the ordinary course of business. We maintain, and require our subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance and generally seek to require our subcontractors to indemnify us for liabilities arising from their

 

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work. While these insurance policies, subject to deductibles and other coverage limits, and indemnities protect us against a portion of our risk of loss from claims related to our homebuilding activities, we cannot provide assurance that these insurance policies and indemnities will be adequate to address all our home warranty, product liability and construction defect claims in the future, or that any potential inadequacies will not have an adverse effect on our financial statements. Additionally, the coverage offered by and the availability of general liability insurance for construction defects are currently limited and costly. We cannot provide assurance that coverage will not be further restricted, increasing our risks and financial exposure to claims, and/or become more costly.

We may suffer uninsured losses or suffer material losses in excess of insurance limits.

We could suffer physical damage to property and liabilities resulting in losses that may not be fully recoverable by insurance. Insurance against certain types of risks, such as terrorism, earthquakes or floods or personal injury claims, may be unavailable, available in amounts that are less than the full market value or replacement cost of investment or underlying assets or subject to a large deductible. In addition, there can be no assurance certain types of risks which are currently insurable will continue to be insurable on an economically feasible basis. Should an uninsured loss or a loss in excess of insured limits occur or be subject to deductibles, we could sustain financial loss or lose capital invested in the affected property as well as anticipated future income from that property. Furthermore, we could be liable to repair damage or meet liabilities caused by risks that are uninsured or subject to deductibles. We may be liable for any debt or other financial obligations related to affected property. Material losses or liabilities in excess of insurance proceeds may occur in the future.

If the market value of our land inventory decreases, our results of operations could be adversely affected by impairments and write-downs.

The market value of our land and housing inventories depends on market conditions. We acquire land for expansion into new markets and for replacement of land inventory and expansion within our current markets. There is an inherent risk that the value of the land owned by us may decline after purchase. The valuation of property is inherently subjective and based on the individual characteristics of each property. We may have acquired options on or bought and developed land at a cost we will not be able to recover fully or on which we cannot build and sell homes profitably. In addition, our deposits for lots controlled under purchase, option or similar contracts may be put at risk.

Factors such as changes in regulatory requirements and applicable laws (including in relation to building regulations, taxation and planning), political conditions, the condition of financial markets, both local and national economic conditions, the financial condition of customers, potentially adverse tax consequences, and interest and inflation rate fluctuations subject valuations to uncertainty. Moreover, our valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality.

If housing demand fails to meet our expectations when we acquired our inventory, our profitability may be adversely affected and we may not be able to recover our costs when we build and sell houses. We regularly review the value of our land holdings and continue to review our holdings on a periodic basis. Further material write-downs and impairments in the value of our inventory may be required, and we may in the future sell land or homes at a loss, which could adversely affect our results of operations and financial condition.

 

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Fluctuations in real estate values may require us to write-down the book value of our real estate assets.

The homebuilding and land development industries are subject to significant variability and fluctuations in real estate values. As a result, we may be required to write-down the book value of our real estate assets in accordance with U.S. GAAP, and some of those write-downs could be material. Any material write-downs of assets could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

Acts of war or terrorism may seriously harm our business.

Acts of war, any outbreak or escalation of hostilities between the United States and any foreign power or acts of terrorism may cause disruption to the U.S. economy, or the local economies of the markets in which we operate, cause shortages of building materials, increase costs associated with obtaining building materials, result in building code changes that could increase costs of construction, affect job growth and consumer confidence, or cause economic changes that we cannot anticipate, all of which could reduce demand for our homes and adversely impact our business, prospects, liquidity, financial condition and results of operations.

A major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage.

Building sites are inherently dangerous, and operating in the homebuilding and land development industry poses certain inherent health and safety risks. Due to health and safety regulatory requirements and the number of projects we work on, health and safety performance is critical to the success of all areas of our business.

Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements or litigation, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation and our relationships with relevant regulatory agencies, governmental authorities and local communities, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

We may become subject to litigation, which could materially and adversely affect us.

In the future, we may become subject to litigation, including claims relating to our operations, securities offerings and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and officers.

 

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Poor relations with the residents of our communities could negatively impact sales, which could cause our revenue or results of operations to decline.

Residents of communities we develop rely on us to resolve issues or disputes that may arise in connection with the operation or development of their communities. Efforts made by us to resolve these issues or disputes could be deemed unsatisfactory by the affected residents and subsequent actions by these residents could adversely affect our sales or our reputation. In addition, we could be required to make material expenditures related to the settlement of such issues or disputes or to modify our community development plans, which could adversely affect our results of operations.

The estimates, forecasts and projections relating to our markets prepared by JBREC are based upon numerous assumptions and have not been independently verified by us.

This prospectus contains estimates, forecasts and projections relating to our markets that were prepared for us for use in connection with this offering by JBREC, an independent research provider and consulting firm focused on the housing industry. See “Market Opportunity.” The estimates, forecasts and projections relate to, among other things, employment, demographics, household income, home sales prices and affordability. These estimates, forecasts and projections are based on data (including third-party data), significant assumptions, proprietary methodologies and the experience and judgment of JBREC and we have not independently verified this information.

The forecasts and projections are forward-looking statements and involve risks and uncertainties that may cause actual results to be materially different from the projections. JBREC has made these forecasts and projections based on studying the historical and current performance of the residential housing market and applying JBREC’s qualitative knowledge about the residential housing market. The future is difficult to predict, particularly given that the economy and housing markets can be cyclical, subject to changing consumer and market psychology, and governmental policies related to mortgage regulations and interest rates. There will usually be differences between projected and actual outcomes, because events and circumstances frequently do not occur as expected, and the differences may be material. Accordingly, the forecasts and projections included in this prospectus might not occur or might occur to a different extent or at a different time. For the foregoing reasons, JBREC cannot provide any assurance that the estimates, forecasts and projections contained in this prospectus are accurate, actual outcomes may vary significantly from those contained or implied by the forecasts and projections, and you should not place undue reliance on these estimates, forecasts and projections. We have not independently verified these estimates, forecasts and projections. Except as required by law, we are not obligated to, and do not intend to, update the statements in this prospectus to conform to actual outcomes or changes in our or JBREC’s expectations.

An information systems interruption or breach in security could adversely affect us.

We rely on accounting, financial and operational management information systems to conduct our operations. Any disruption in these systems could adversely affect our ability to conduct our business. Furthermore, any security breach of information systems or data could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.

 

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Termination of the employment agreement with our Chief Executive Officer could be costly and prevent a change in control of our company.

The employment agreement with our Chief Executive Officer, Eric Lipar, provides that if his employment with us terminates under certain circumstances, we may be required to pay him a significant amount of severance compensation, thereby making it costly to terminate his employment. Furthermore, these provisions could delay or prevent a transaction or a change in control of our company that might involve a premium paid for shares of our common stock or otherwise be in the best interests of our stockholders, which could adversely affect the market price of our common stock.

Risks Related to Our Organization and Structure

We depend on key management personnel and other experienced employees.

Our success depends to a significant degree upon the contributions of certain key management personnel including, but not limited to, Eric Lipar, our Chief Executive Officer and Chairman of our board. Although we have entered into an employment agreement with Mr. Lipar, there is no guarantee that Mr. Lipar will remain employed by us. If any of our key management personnel were to cease employment with us, our operating results could suffer. Our ability to retain our key management personnel or to attract suitable replacements should any members of our management team leave is dependent on the competitive nature of the employment market. The loss of services from key management personnel or a limitation in their availability could materially and adversely impact our business, prospects, liquidity, financial condition and results of operations. Further, such a loss could be negatively perceived in the capital markets. We have not obtained key man life insurance that would provide us with proceeds in the event of death or disability of any of our key management personnel.

Experienced employees in the homebuilding, land acquisition and construction industries are fundamental to our ability to generate, obtain and manage opportunities. In particular, local knowledge and relationships are critical to our ability to source attractive land acquisition opportunities. Experienced employees working in the homebuilding and construction industries are highly sought after. Failure to attract and retain such personnel or to ensure that their experience and knowledge is not lost when they leave the business through retirement, redundancy or otherwise may adversely affect the standards of our service and may have an adverse impact on our business, prospects, liquidity, financial condition and results of operations. The loss of any of our key personnel could adversely impact our business, prospects, financial condition and results of operations.

We may change our operational policies, investment guidelines and our business and growth strategies without stockholder consent, which may subject us to different and more significant risks in the future.

Our board of directors will determine our operational policies, investment guidelines and our business and growth strategies. Our board of directors may make changes to, or approve transactions that deviate from, those policies, guidelines and strategies without a vote of, or notice to, our stockholders. This could result in us conducting operational matters, making investments or pursuing different business or growth strategies than those contemplated in this prospectus. Under any of these circumstances, we may expose ourselves to different and more significant risks in the future, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

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We are a holding company, and we are accordingly dependent upon distributions from our subsidiaries to pay dividends, if any, taxes and other expenses.

We are a holding company and will have no material assets other than our ownership of membership interests or limited partnership interests in our subsidiaries. We have no independent means of generating revenue. We intend to cause our subsidiaries to make distributions to their members or partners in an amount sufficient to cover all applicable taxes payable and dividends, if any, declared by us. Future financing arrangements may contain negative covenants, limiting the ability of our subsidiaries to declare or pay dividends or make distributions. To the extent that we need funds, and our subsidiaries are restricted from making such dividends or distributions under applicable law or regulations, or otherwise unable to provide such funds, for example, due to restrictions in future financing arrangements that limit the ability of our operating subsidiaries to distribute funds, our liquidity and financial condition could be materially harmed.

The obligations associated with being a public company will require significant resources and management attention.

As a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, including the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC and requirements of the NASDAQ Global Select Market, with which we were not required to comply as a private company. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting.

Section 404 of the Sarbanes-Oxley Act requires our management and independent auditors to report annually on the effectiveness of our internal control over financial reporting. However, we are an “emerging growth company,” as defined in the JOBS Act, and, so for as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404.

Once we are no longer an emerging growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent auditors on the effectiveness of our internal control over financial reporting.

These reporting and other obligations will place significant demands on our management, administrative, operational and accounting resources and will cause us to incur significant expenses. We may need to upgrade our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, create or outsource an internal audit function, and hire additional accounting and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

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We are an “emerging growth company,” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, a requirement to present only two years of audited financial statements, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, reduced disclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies and no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements. We have elected to adopt these reduced disclosure requirements. We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary of the completion of this offering, although a variety of circumstances could cause us to lose that status earlier. We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised financial accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have determined to opt out of such extended transition period and, as a result, we will comply with new or revised financial accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised financial accounting standards is irrevocable.

If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which could materially and adversely affect us.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot be certain that we will be successful in implementing or maintaining adequate internal control over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weakness or significant deficiency and management may not be able to remediate any such material weakness or significant deficiency in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our reported financial information, all of which could materially and adversely affect us.

 

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Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.

Accounting rules and interpretations for certain aspects of our operations are highly complex and involve significant assumptions and judgment. These complexities could lead to a delay in the preparation and dissemination of our financial statements. Furthermore, changes in accounting rules and interpretations or in our accounting assumptions and/or judgments, such as asset impairments, could significantly impact our financial statements. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Any of these circumstances could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

Any joint venture investments that we make could be adversely affected by our lack of sole decision making authority, our reliance on the financial condition of our joint venture partners and disputes between us and our joint venture partners.

We may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a land acquisition and/or a development. In this event, we would not be in a position to exercise sole decision-making authority regarding the acquisition and/or development, and our investment may be illiquid due to our lack of control. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that our joint venture partners might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions or block or delay necessary decisions. Our joint venture partners may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the our joint venture partners would have full control over the land acquisition or development. Disputes between us and our joint venture partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. In addition, we may in certain circumstances be liable for the actions of our joint venture partners.

We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets.

We expect to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of our homes. Our existing indebtedness is recourse to us and we anticipate that future indebtedness will likewise be recourse. As of June 30, 2013, we had $40 million of revolving credit facilities to finance our construction and development activities. As of June 30, 2013, we had outstanding borrowings of $22.5 million under our credit facilities and we could borrow an additional $1.7 million under our credit facilities without breaching any of the facilities’ financial covenants. As of June 30, 2013, borrowings under our credit facilities bore interest at a weighted average rate of 4.03% per annum; interest is payable monthly. Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, if any, the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service. As a means of sustaining our long-term financial health and limiting our exposure to unforeseen dislocations in the debt and financing markets, we currently expect to remain conservatively capitalized. However, our certificate of incorporation does not

 

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contain a limitation on the amount of indebtedness we may incur and our board of directors may change our target debt levels at any time without the approval of our stockholders.

Incurring substantial indebtedness could subject us to many risks that, if realized, would adversely affect us, including the risk that:

 

   

our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt which is likely to result in acceleration of such indebtedness;

 

   

our indebtedness may increase our vulnerability to adverse economic and industry conditions with no assurance that our profitability will increase with higher financing cost;

 

   

we may be required to dedicate a portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for operations and capital expenditures, future investment opportunities or other purposes; and

 

   

the terms of any refinancing may not be as favorable as the terms of the indebtedness being refinanced.

If we do not have sufficient funds to repay our indebtedness at maturity, it may be necessary to refinance the indebtedness through additional debt or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancings, increases in interest expense could adversely affect our cash flows and results of operations. If we are unable to refinance our indebtedness on acceptable terms, we may be forced to dispose of our assets on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our assets that may be pledged to secure our obligations to foreclosure. Unsecured debt agreements may contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other indebtedness in some circumstances. Defaults under our credit facilities and our other debt agreements, if any, could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

Access to financing sources may not be available on favorable terms, or at all, especially in light of current market conditions, which could adversely affect our ability to maximize our returns.

Our access to additional third-party sources of financing will depend, in part, on:

 

   

general market conditions;

 

   

the market’s perception of our growth potential;

 

   

with respect to acquisition and/or development financing, the market’s perception of the value of the land parcels to be acquired and/or developed;

 

   

our current debt levels;

 

   

our current and expected future earnings;

 

   

our cash flow; and

 

   

the market price per share of our common stock.

Recently, domestic financial markets have experienced unusual volatility, uncertainty and a tightening of liquidity in both the high yield debt and equity capital markets. Credit spreads for major sources of capital widened significantly during the U.S. credit crisis as investors demanded a higher risk premium. Given the current volatility and weakness in the capital and credit markets, potential lenders may be unwilling or unable to provide us with financing that is

 

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attractive to us or may charge us prohibitively high fees in order to obtain financing. Consequently, there is greater uncertainty regarding our ability to access the credit market in order to attract financing on reasonable terms. Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure additional financing on reasonable terms, if at all.

Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity financings or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities and other purposes. We may not have access to such equity or debt capital on favorable terms at the desired times, or at all.

Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive provisions.

Our current financing arrangements contain, and the financing arrangements we enter into in the future likely will contain, provisions that limit our ability to do certain things. In particular, our secured revolving credit facilities include provisions requiring the net worth and liquidity of LGI Homes Group, LLC and its subsidiaries to be equal to or greater than $18.5 million and $2.5 million, respectively. With respect to the ratio of consolidated total liabilities to net worth, the leverage ratio of LGI Homes Group, LLC and its subsidiaries must be, for any period ending on or before September 30, 2013, equal to or less than 1.75 to 1.00. For any period ending after September 30, 2013, the leverage ratio of LGI Homes Group, LLC and its subsidiaries must be equal to or less than 1.50 to 1.00. If we fail to meet or satisfy any of these provisions, we would be in default under our credit facilities and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral. A default also could limit significantly our financing alternatives, which could cause us to curtail our investment activities and/or dispose of assets when we otherwise would not choose to do so. In addition, future indebtedness may contain financial covenants limiting our ability to, for example, incur additional indebtedness, make certain investments, reduce liquidity below certain levels and pay dividends to our stockholders, and otherwise affect our operating policies. If we default on one or more of our debt agreements, it could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

Interest expense on debt we incur may limit our cash available to fund our growth strategies.

As of June 30, 2013, we had $40 million of revolving credit facilities. As of June 30, 2013, we had outstanding borrowings of $22.5 million under our credit facilities and we could borrow an additional $1.7 million under our credit facilities without breaching any of the facilities’ financial covenants. As of June 30, 2013, borrowings under our credit facilities bore interest at a weighted average rate of 4.03% per annum. If our operations do not generate sufficient cash from operations at levels currently anticipated, we may seek additional capital in the form of debt financing. Our current indebtedness has, and any additional indebtedness we subsequently incur may have, a floating rate of interest. Higher interest rates could increase debt service requirements on our current floating rate indebtedness and on any floating rate indebtedness we subsequently incur, and could reduce funds available for operations, future business opportunities or other purposes. If we need to repay existing indebtedness during periods of rising interest rates, we could be required to refinance our then-existing indebtedness on unfavorable terms or liquidate one or more of our assets to repay such indebtedness at times which may not permit realization of the maximum return on such assets and could result in a loss. The occurrence of either such event or both could materially and adversely affect our cash flows and results of operations.

 

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Risks Related to this Offering and Ownership of our Common Stock

There is currently no public market for shares of our common stock, a trading market for our common stock may never develop following this offering and our common stock price may be volatile and could decline substantially following this offering.

Prior to this offering there has been no market for shares of our common stock. Although we intend to apply to list the shares of our common stock on the NASDAQ Global Select Market, an active trading market for the shares of our common stock may never develop or if one develops, it may not be sustained following this offering. Accordingly, no assurance can be given as to the following:

 

   

the likelihood that an active trading market for shares of our common stock will develop or be sustained;

 

   

the liquidity of any such market;

 

   

the ability of our stockholders to sell their shares of common stock; or

 

   

the price that our stockholders may obtain for their common stock.

If an active market does not develop or is not maintained, the market price of our common stock may decline and you may not be able to sell your shares. Even if an active trading market develops for our common stock subsequent to this offering, the market price of our common stock may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the future market price of our common stock.

The offering price per share of our common stock offered by this prospectus may not accurately reflect the value of your investment.

Prior to this offering there has been no market for our common stock. The offering price per share of our common stock offered by this prospectus was negotiated among us and the representatives of the underwriters. Among the factors considered in determining the offering price were our results of operations, our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, our management, and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to our company. The offering price may not accurately reflect the value of our common stock and may not be realized upon any subsequent disposition of the shares.

If you purchase common stock in this offering, you will experience immediate dilution.

The offering price of our common stock is higher than the net tangible book value per share of our common stock outstanding upon the completion of this offering. Accordingly, if you purchase common stock in this offering, you will experience immediate dilution of approximately $         in the net tangible book value per share of our common stock, based upon an assumed initial public offering price equal to $        , the midpoint of the price range set forth on the cover page of this prospectus. This means that investors that purchase shares of our common stock in this offering will pay a price per share that exceeds the per share net tangible book value of our assets.

 

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We have broad discretion to use the offering proceeds, and our investment of those proceeds may not yield a favorable return.

Our management has broad discretion to spend the proceeds from this offering in ways with which you may not agree. The failure of our management to apply these funds effectively could result in unfavorable returns. This could harm our business and could cause the price of our common stock to decline.

Concentration of ownership of the voting power of our capital stock may affect other stockholders from influencing corporate decisions and create perceived conflicts of interest.

Immediately following completion of this offering, Eric Lipar, our Chief Executive Officer and chairman of the board, and Thomas Lipar, his father and one of our founders, and their respective affiliates will collectively beneficially own approximately     % of our outstanding shares of common stock (    % if the underwriters exercise in full their option to purchase additional shares of common stock). They have stated to the Company that they are not acting as a group. However, they will be in a position, if they choose to act as a group in the future, to affect the election of our directors, adoption of our policies and operations and the outcome of corporate transactions or other matters submitted for stockholder approval, including mergers, consolidations, the sale of our assets or a change in control of us. Eric Lipar and Thomas Lipar may have interests that differ from yours and may vote in ways with which you disagree and which may be adverse to your interests. This ownership concentration may adversely impact the trading of our capital stock because of a perceived conflict of interest, thereby depressing the value of our capital stock.

We do not intend to pay dividends on our common stock for the foreseeable future.

We currently intend to retain our future earnings, if any, to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments and such other factors as our board of directors deems relevant. Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them.

Future sales of our common stock could cause the market value of our common stock to decline and could result in dilution of your shares.

Following completion of this offering, we will have outstanding              shares of common stock (             shares if the underwriters exercise in full their option to purchase additional shares of common stock). The              shares sold in this offering may be publicly offered and sold without restriction, unless they are purchased by our affiliates. Shares of our common stock outstanding prior to completion of this offering will be “restricted securities” under the Securities Act. These restricted securities may be sold only if they are registered under the Securities Act by us or pursuant to an applicable exemption from the registration requirements of the Securities Act, including Rule 144 thereunder.

Moreover, upon the completion of this offering, our officers and employees will be granted an aggregate of              restricted stock units (based upon the midpoint of the price range set forth on the cover page of this prospectus) pursuant to our 2013 Equity Incentive Plan and our non-employee directors will be granted an aggregate of              restricted stock units upon the completion of this offering pursuant to our 2013 Equity Incentive Plan (based upon the midpoint

 

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of the price range set forth on the cover page of this prospectus). The actual number of restricted stock units will be based upon the price at which the shares are sold to the public in this offering. In connection with this offering, we intend to file a registration statement on Form S-8 to register the total number of shares of our common stock that may be issued under our 2013 Equity Incentive Plan, including the restricted stock units to be granted to the members of our management team, other officers and employees and our non-employee directors upon the completion of this offering pursuant to our 2013 Equity Incentive Plan.

Further, upon the completion of this offering, GTIS will beneficially own              shares of our common stock representing     % of our outstanding shares of common stock.

In connection with this offering, we and each of our officers and directors and all of our stockholders, including GTIS, have agreed that, and purchasers of our shares through the directed share program will agree that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Deutsche Bank Securities Inc., dispose of or hedge any shares or any securities convertible into or exchangeable for our common stock, subject to certain exceptions. Deutsche Bank Securities Inc. in its sole discretion may release any of the securities subject to these lock-up agreements at any time, which, in the case of officers and directors, shall be with notice. If the restrictions under the lock-up agreements are waived, shares of our common stock may become available for resale into the market, subject to applicable law, which could reduce the market price for our common stock.

Sales of substantial amounts of our common stock, or the perception that such sales could occur, by large stockholders or otherwise, could cause the market price of our common stock to decrease significantly. We cannot predict the effect, if any, of future sales of our common stock, or the availability of our common stock for future sales, on the market price of our common stock.

Anti-takeover provisions contained in our certificate of incorporation and bylaws and Delaware law could impair a takeover attempt that our stockholders may find beneficial.

Our certificate of incorporation, bylaws and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:

 

   

authorizing our board of directors, without further action by the stockholders, to issue blank check preferred stock;

 

   

limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;

 

   

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

   

authorizing our board of directors, without stockholder approval, to amend our bylaws;

 

   

limiting the determination of the number of directors on our board of directors and the filling of vacancies or newly created seats on our board of directors to our board of directors then in office; and

 

   

subject to certain exceptions, limiting our ability to engage in certain business combinations with an “interested stockholder” for a three-year period following the time that the stockholder became an interested stockholder.

 

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Additionally, Delaware anti-takeover laws may impair a takeover attempt that our stockholders may consider beneficial. Any provision of our certificate of incorporation or bylaws that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Future offerings of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by making offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to make a dividend distribution to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers of our common stock in this offering bear the risk of our future offerings reducing the market price of our common stock and diluting their ownership interest in our company.

Non-U.S. holders may be subject to United States federal income tax on gain realized on the sale or disposition of shares of our common stock.

Because of our anticipated holdings in United States real property interests following the completion of the Transactions, we believe we will be and will remain a “United States real property holding corporation” for United States federal income tax purposes. As a result, a non-U.S. holder (as defined in “Certain Material U.S. Federal Income Tax Considerations”) generally will be subject to United States federal income tax on any gain realized on a sale or disposition of shares of our common stock unless our common stock is regularly traded on an established securities market and such non-U.S. holder did not actually or constructively hold more than 5% of our common stock at any time during the shorter of (a) the five-year period preceding the date of the sale or disposition and (b) the non-U.S. holder’s holding period in such stock. In addition, if our common stock is not regularly traded on an established securities market, a purchaser of the stock generally will be required to withhold and remit to the Internal Revenue Services (the “IRS”) 10% of the purchase price. A non-U.S. holder also will be required to file a United States federal income tax return for any taxable year in which it realizes a gain from the disposition of our common stock that is subject to United States federal income tax. We anticipate that our common stock will be regularly traded on an established securities market following this offering. However, no assurance can be given in this regard and no assurance can be given that our common stock will remain regularly traded in the future. Non-U.S. holders should consult their tax advisors concerning the consequences of disposing of shares of our common stock.

 

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If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

If a trading market for our common stock develops, the trading market will be influenced by whether industry or securities analysts publish research and reports about us, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. We may not obtain analyst coverage in the future. Any analysts who do cover us may make adverse recommendations regarding our stock, adversely change their recommendations from time to time, and/or provide more favorable relative recommendations about our competitors. If any analyst who may cover us in the future were to cease coverage of our company or fail to regularly publish reports on us, or if analysts fail to cover us or publish reports about us at all, we could lose, or never gain, visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

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CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

Various statements contained in this prospectus, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. The forward-looking statements in this prospectus speak only as of the date of this prospectus, and we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events, including those set forth in the JBREC market study. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. The following factors, among others, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements:

 

   

adverse economic changes either nationally or in the markets in which we operate, including increases in unemployment, volatility of mortgage interest rates and inflation;

 

   

a slowdown in the homebuilding industry;

 

   

continued volatility and uncertainty in the credit markets and broader financial markets;

 

   

the cyclical and seasonal nature of our business;

 

   

our future operating results and financial condition;

 

   

our business operations;

 

   

changes in our business and investment strategy;

 

   

availability of land to acquire and our ability to acquire such land on favorable terms or at all;

 

   

availability, terms and deployment of capital;

 

   

decline in the market value of our land portfolio;

 

   

continued or increased disruption in the terms or availability of mortgage financing or the number of foreclosures in our markets;

 

   

shortages of or increased prices for labor, land or raw materials used in housing construction;

 

   

delays in land development or home construction resulting from natural disasters, adverse weather conditions or other events outside our control;

 

   

uninsured losses in excess of insurance limits;

 

   

the cost and availability of insurance and surety bonds;

 

   

changes in, or the failure or inability to comply with, governmental laws and regulations;

 

   

the timing of receipt of regulatory approvals and the opening of projects;

 

   

the degree and nature of our competition;

 

   

increases in taxes or government fees;

 

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an inability to develop our projects successfully or within expected timeframes;

 

   

the success of our operations in recently opened new markets and our ability to expand into additional new markets;

 

   

poor relations with the residents of our projects;

 

   

future litigation, arbitration or other claims;

 

   

availability of qualified personnel and third party contractors and our ability to retain our key personnel;

 

   

our leverage and future debt service obligations;

 

   

continued volatility and uncertainty in the credit markets and broader financial markets;

 

   

other risks and uncertainties inherent in our business; and

 

   

additional factors discussed under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.”

 

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USE OF PROCEEDS

The net proceeds from the sale of the shares of our common stock in this offering are estimated to be approximately $             million (approximately $             million if the underwriters’ option to purchase additional shares of common stock is exercised in full), assuming an initial public offering price of $             per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We expect to use $             million of the net proceeds from this offering to make a payment to GTIS as the cash portion of the purchase price to acquire all of the joint venture interests of GTIS in the LGI/GTIS Joint Ventures which we do not own and we expect to use the remainder of the net proceeds for working capital and for general corporate purposes, including the acquisition of land, development of lots and construction of homes.

Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the number of shares, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and other estimated offering expenses. We may also increase or decrease the number of shares in this offering. An increase of             shares in this offering, together with a concomitant $1.00 increase in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase the net proceeds from this offering by approximately $             million, after deducting the underwriting discounts and commissions and other estimated offering expenses. Conversely, a decrease of              shares in the number of shares in this offering, together with a concomitant $1.00 decrease in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would decrease the net proceeds from this offering by approximately $             million, after deducting the underwriting discounts and commissions and other estimated offering expenses. The as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

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CAPITALIZATION

The following table sets forth the capitalization of LGI Homes, Inc., as of June 30, 2013:

 

   

on an actual basis (for our predecessor, not on an aggregate basis); and

 

   

on a pro forma basis, giving effect to the Formation Transactions and the issuance and sale of shares of our common stock in this offering and the use of proceeds as described under “Use of Proceeds.” See “Summary—The Transactions” for a description of the Formation Transactions.

This table should be read in conjunction with “Use of Proceeds,” “Unaudited Pro Forma Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our predecessor’s financial statements and related notes appearing elsewhere in this prospectus.

 

    June 30, 2013  
    Actual     Pro Forma  
    (Unaudited)        
    (in thousands)  

Cash and cash equivalents

    $15,205      $                
 

 

 

   

 

 

 

Long-term debt

   

Notes payable

    $23,065      $     
 

 

 

   

 

 

 

Total debt

    $23,065      $     

Stockholders’ equity

   

Preferred stock, $.01 par value, 5 million shares authorized, no shares issued and outstanding, actual; no shares issued and outstanding, pro forma

             

Common stock, $.01 par value, 250 million shares authorized, 1,000 shares issued and outstanding, actual;              shares issued and outstanding, pro forma

        

Additional paid in capital

        

Retained earnings

        
 

 

 

   

 

 

 

Total stockholders’ equity

        

Total owners’ equity

    32,115          

Non-controlling interests

    15,163          
 

 

 

   

 

 

 

Total capitalization

    $70,343      $     
 

 

 

   

 

 

 

 

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DIVIDEND POLICY

We intend to retain all of our earnings to provide funds for our operations and expansion, and, therefore, we do not anticipate paying cash dividends on our common stock in the foreseeable future. Our future dividend policy will be determined by our board of directors based on various factors, including our results of operations, financial condition, business opportunities, capital requirements, credit restrictions and such other factors as our board of directors may deem relevant.

 

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DILUTION

Purchasers of shares of our common stock in this offering will incur an immediate and substantial dilution in net tangible book value per share of their shares of our common stock from the assumed initial public offering price, based upon the midpoint of the price range set forth on the cover page of this prospectus.

The difference between the per share offering price paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to purchasers in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities, by the number of outstanding shares of our common stock.

As of                     , 2013, our net tangible book value was approximately $            , or $             per share of our common stock. After giving effect to the Formation Transactions, the sale of shares of our common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, the receipt by us of the net proceeds from this offering and the deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of                     , 2013 would have been approximately $            , or $             per share of our common stock. This amount represents an immediate increase in net tangible book value of approximately $             per share of our common stock to our existing stockholders and an immediate dilution in net tangible book value of approximately $             per share of our common stock, or approximately     %, to purchasers in this offering.

The following table illustrates the dilution to purchasers in this offering on a per share basis:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of                     , 2013

   $                   

Pro forma increase in net tangible book value per share attributable to purchasers in this offering

     

Pro forma net tangible book value per share immediately after offering

     

Dilution in pro forma net tangible book value per share to purchasers in this offering

     
     

 

 

 
      $     
     

 

 

 

Dilution is determined by subtracting pro forma net tangible book value per share after this offering from the initial public offering price per share.

Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma net tangible book value per share immediately after this offering by $             per share and the dilution in pro forma net tangible book value per share to purchasers in this offering by $             per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us in connection of this offering.

We may also increase or decrease the number of shares we are offering. An increase of              shares in the number of shares of our common stock offered by us, together with a

 

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concomitant $1.00 increase in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase the pro forma net tangible book value per share immediately after this offering and the dilution in pro forma net tangible book value per share to purchasers in this offering by $             and $            , respectively, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Conversely, a decrease of              shares in the number of shares of our common stock offered by us, together with a concomitant $1.00 decrease in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would decrease the pro forma net tangible book value per share immediately after this offering and the dilution in pro forma net tangible book value per share to purchasers in this offering by $             and $            , respectively, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The following table sets forth, as of                     , 2013, on the pro forma basis as described above, the differences between the number of shares of our common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by purchasers in this offering after giving effect to the Transactions, before deducting the underwriting discounts and commissions and other estimated offering expenses payable by us, at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

     Shares Purchased     Total Consideration     Average
Price

Per Share
 
     Number    Percent     Amount      Percent    

Existing stockholders

               $                             $                

New Investors

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $           100   $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

If the underwriters exercise their option to purchase additional shares of common stock in full, the following will occur:

 

   

the number of shares of our common stock held by purchasers in this offering will increase to             shares, or approximately     % of the total number of shares of our common stock outstanding; and

 

   

the pro forma net tangible book value per share will be the same amounts as described above and the immediate dilution experienced by purchasers in this offering will be the same amounts as described above.

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma balance sheet as of June 30, 2013 and the unaudited pro forma statements of operations for the six months ended June 30, 2013 and for the year ended December 31, 2012, present our financial position and results of operations after giving pro forma effect to the Formation Transactions, as described in “Summary—The Transactions” and this offering, as if the Formation Transactions and this offering had been completed as of June 30, 2013 with respect to the unaudited pro forma balance sheet as of June 30, 2013, and as of January 1, 2012 with respect to the unaudited pro forma statements of operations for the six months ended June 30, 2013, and the year ended December 31, 2012.

The pro forma adjustments column includes adjustments related to the Formation Transactions, which includes the LGI Transaction (our acquisition of all the equity interests of our predecessor (LGI Homes Group (Predecessor)) in exchange for shares of our common stock) and the GTIS Transaction (our acquisition of all of GTIS’s equity interests in the LGI/GTIS Joint Ventures in exchange for cash and shares of our common stock), as well as this offering, and the use of proceeds from this offering as described under “Use of Proceeds.” The GTIS Transaction will be accounted for as an acquisition using purchase accounting as of the date of the GTIS Transaction, which will be the date of this offering. In the LGI Homes Group (Predecessor) financial statements, the LGI/GTIS Joint Ventures interests have been accounted for using the equity method and our predecessor’s share of the LGI/GTIS Joint Ventures’ net earnings are included in income from unconsolidated joint ventures.

The unaudited pro forma financial statements reflect the following:

 

   

The acquisition of the equity interests of the entities comprising our predecessor from Thomas Lipar, one of our founders, Eric Lipar, our Chief Executive Officer and Chairman of the Board, and their respective affiliates, in exchange for              shares of our common stock (assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus) and the issuance of              shares of common stock (assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus) to the other equity owners of the entities comprising our predecessor and the non-controlling interests in a subsidiary of one of the entities comprising our predecessor, all of which are collectively referred to herein as the “LGI Transaction.” The LGI Transaction has been accounted for as a combination of entities under common control, including:

 

   

The issuance of              shares of our common stock (assuming an initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover page of this prospectus) in settlement of accrued management and executive bonuses;

 

   

The recognition of income taxes related to the LGI Transaction, including:

 

   

Recording deferred income taxes related to the LGI Transaction and our conversion to a taxable entity; and

 

   

Our taxation as a corporate entity;

 

   

Adjustments to account for non-controlling interests in an entity formed in 2013 and consolidated by our predecessor for the period from inception through June 30, 2013;

 

   

Adjustments to reflect the diminished role of Thomas Lipar, one of our founders and a principal owner of certain of the entities comprising our predecessor, subsequent to the Formation Transactions; and

 

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Planned distributions to the owners of the entities comprising our predecessor for estimated federal income taxes on the earnings of our predecessor for the period from January 1, 2013 through the offering;

 

   

The issuance and sale of shares of our common stock to the public in this offering;

 

   

The use of the proceeds from this offering to (i) pay underwriting discounts and commissions and other expenses of this offering, (ii) make a payment of $36.9 million to GTIS as the cash portion of the GTIS Transaction purchase price and (iii) fund working capital and for other general corporate purposes;

 

   

The GTIS Transaction concurrent with this offering and the application of purchase accounting, including:

 

   

The issuance of              shares of our common stock (assuming an initial public offering price of $          per share, which is the midpoint of the price range set forth on the cover page of this prospectus) to GTIS as the stock portion of the consideration for the GTIS Transaction whereby we will acquire all of GTIS’s interests in the LGI/GTIS Joint Ventures, and thereafter own 100% of the equity interests in the LGI/GTIS Joint Ventures;

 

   

Adjustments made as a result of the application of purchase accounting in connection with the GTIS Transaction, including:

 

   

Recording the net tangible assets of the LGI/GTIS Joint Ventures, primarily real estate inventory, at fair value;

 

   

Recording goodwill for the excess of the sum of the GTIS Transaction purchase price and the estimated fair value of our predecessor’s equity interests in the LGI/GTIS Joint Ventures over the estimated fair value of the identifiable net tangible assets of the LGI/GTIS Joint Ventures;

 

   

Recording a marketing-related intangible asset;

 

   

Recording a gain as a result of the re-measurement of our predecessor’s equity interests in the LGI/GTIS Joint Ventures to fair value, based on the estimated enterprise value of the LGI/GTIS Joint Ventures; and

 

   

Recording deferred income taxes related to the conversion of the LGI/GTIS Joint Ventures to taxable entities and purchase accounting adjustments;

 

   

Taxation as a component of a corporate entity; and

 

   

Adjustments to eliminate transactions, balances and payments between our predecessor and the LGI/GTIS Joint Ventures which will not be recorded following the GTIS Transaction when our predecessor and the LGI/GTIS Joint Ventures are consolidated, including:

 

   

The payment of management and warranty fees by GTIS to our predecessor in connection with operating the LGI/GTIS Joint Ventures;

 

   

Certain other related party transactions between our predecessor and the LGI/GTIS Joint Ventures; and

 

   

Adjustments to account for our interest in the LGI/GTIS Joint Ventures on a consolidated basis rather than the equity method.

The unaudited pro forma statements of operations and balance sheet were derived by adjusting the historical combined financial statements of our predecessor, LGI Homes Group (Predecessor), and the financial statements of the four LGI/GTIS Joint Ventures (LGI—GTIS Holdings, LLC, LGI—GTIS Holdings II, LLC, LGI—GTIS Holdings III, LLC and LGI—GTIS Holdings IV, LLC), which are combined for presentation in the pro forma financial information as the LGI/GTIS

 

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Joint Ventures. The adjustments are based on currently available information and certain estimates and assumptions. Our management believes that the assumptions provide a reasonable basis for presenting the significant effects of the Formation Transactions and this offering as contemplated and the pro forma adjustments give appropriate effect to those assumptions. The pro forma statements of operations do not include an adjustment for the estimated additional general and administrative expenses that we anticipate we will incur as a result of being a public company. All pro forma adjustments and their underlying assumptions are described more fully in the notes to our unaudited pro forma balance sheet and statements of operations.

We estimate the fair value of our communities using a discounted cash flow model. The forecasted cash flows of each community are significantly impacted by estimates related to the absorption pace, sales prices, construction costs, cost of materials, sales and marketing expenses, the local economy and other factors for that particular community. The historical performance of each community as well as current trends in the market and economy impacting the community are evaluated for each of the estimates above. Critical assumptions are the absorption pace, sales prices and the costs to build and deliver homes on a community by community basis as well as the weighted average cost of capital (discount rate).

In order to arrive at the assumed absorption pace for home sales included in our cash flow model by community, we primarily analyze the historical absorption pace in the community and other comparable communities in the geographical area. In addition, we consider internal market data, which generally includes, but is not limited to, the availability of competing products in the geographic area. When analyzing our historical absorption pace for home sales and corresponding internal market data, we place greater emphasis on more current metrics and trends such as the absorption pace realized in the most recent quarters. In order to determine the assumed sales prices included in our cash flow models, we analyze the historical sales prices realized on homes delivered in the community and other comparable communities in the geographical area. In order to arrive at our assumed costs to build and deliver homes, we generally assume a cost structure reflecting contracts currently in place with vendors adjusted for any anticipated cost reduction initiatives or increases in cost structure.

Using all available information, we calculate the best estimate of projected cash flows for each community. While many of the estimates are calculated based on historical and projected trends, all estimates are subjective and change from market to market as market and economic conditions change. The determination of fair value also requires discounting the estimated cash flows at a rate we believe a market participant would determine to be commensurate with the inherent risks associated with the assets and related estimated cash flows. The discount rate used in determining each asset’s fair value depends on the community’s projected life and development stage. The discount rates used to value our predecessor’s investments in the GTIS Joint Ventures were 16-18% depending on the length of the remaining development cycle of the communities in each joint venture.

The unaudited pro forma financial information is included for illustrative purposes only and does not purport to reflect our results of operations or financial position that would have occurred had the Formation Transactions been consummated during the periods presented, and this offering would have been completed as of June 30, 2013, or to project our results of operations or financial position for any future period. The unaudited pro forma financial information should be read in conjunction with the sections of this prospectus captioned “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the audited and unaudited combined financial statements of our predecessor, LGI Homes Group (Predecessor), and related notes, and the audited and unaudited financial statements of the LGI/GTIS Joint Ventures and related notes included elsewhere in this prospectus.

 

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LGI HOMES, INC.

UNAUDITED PRO FORMA BALANCE SHEET

AS OF JUNE 30, 2013

(in thousands)

 

    LGI Homes Group
(Predecessor)
    LGI/GTIS Joint
Ventures(1)
    Adjustments           LGI Homes, Inc.
Pro Forma
 
    (unaudited)     (unaudited)                    

ASSETS

         
         

Cash and cash equivalents

  $ 15,205      $ 4,643      $          (a )(b)(f)    $     

Accounts receivable

    2,718        1,690                 4,408   

Accounts receivable, related parties

    885        174        (983     (b     76   

Real estate inventory

    49,191        33,744        7,224        (b     90,159   

Pre-acquisition costs and deposits

    3,060                        3,060   

Investments in subsidiaries

    5,326               (5,326     (b       

Property and equipment, net

    874        139                 1,013   

Goodwill and other intangible assets

                  9,530        (b     9,530   

Other assets

    2,544        179                 2,723   
 

 

 

   

 

 

   

 

 

     

 

 

 

Total assets

  $ 79,803      $ 40,569      $          $     
 

 

 

   

 

 

   

 

 

     

 

 

 

LIABILITIES AND EQUITY

         

Accounts payable

  $ 6,312      $ 3,333      $        $ 9,645   

Accounts payable, related parties

    42        983        (983     (b     42   

Accrued expenses and other liabilities

    3,107        747        (1,275     (e     2,579   

Deferred tax liabilities, net

                  1,983        (b )(d)      1,983   

Notes payable

    23,065                        23,065   
 

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities

  $ 32,526      $ 5,063      $ (275     $ 37,314   
 

 

 

   

 

 

   

 

 

     

 

 

 

COMMITMENTS AND CONTINGENCIES

  

       

Equity:

         

Common stock

                    (a )(c)   

Additional paid in capital

                    (a )(c)   

Predecessor owners’ equity

  $ 32,114      $ 35,506      $ (67,620     (c )(f)    $   

Retained earnings

                  3,551        (b )(d)      3,551   
 

 

 

   

 

 

   

 

 

     

 

 

 

Total owners’ equity

    32,114        35,506         

Non-controlling interest

    15,163               (15,163     (c       
 

 

 

   

 

 

   

 

 

     

 

 

 

Total equity

    47,277        35,506         
 

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities and equity

  $ 79,803      $ 40,569      $          $     
 

 

 

   

 

 

   

 

 

     

 

 

 

 

(1) This column is a combination of the financial statements of LGI—GTIS Holdings, LLC, LGI—GTIS Holdings II, LLC, LGI—GTIS Holdings III, LLC and LGI—GTIS Holdings IV, LLC, each of which is presented in separate financial statements included elsewhere in this prospectus.

 

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Notes to Unaudited Pro Forma Balance Sheet

 

(a) Reflects use of proceeds from this offering assuming the issuance of             shares of common stock at a price of $             per share (the mid-point of the estimated public offering range set forth on the cover of this prospectus), net of $             million to pay underwriting discounts and commissions and expenses related to this offering;

 

(b) Reflects the GTIS Transaction concurrent with this offering. The purchase price of $41.4 million for the GTIS Transaction includes $36.9 million cash and $4.5 million in newly issued shares of common stock in LGI Homes, Inc. The presentation of the GTIS Transaction reflects the application of purchase accounting. The GTIS Transaction has been reflected at estimated fair value, and the following are the related pro forma adjustments:

 

   

Increase by approximately $7.2 million (step up) to the historical cost basis of the real estate inventory of the LGI/GTIS Joint Ventures of $33.7 million to reflect its estimated fair value. The estimated fair values of finished lots and completed homes, including sales models, as of June 30, 2013 of $8.5 million and $20.1 million, respectively, was determined, in conjunction with realized sales prices, by comparing the sales prices of lots and homes with similar size, amenities and community developments of nearby communities, generally in the immediate vicinity. The fair value of homes in progress of $6.9 million was estimated by multiplying the estimated fair value of a completed home in the development by the respective percentage of completion of each home in progress. The estimated fair value of land under development of $5.4 million was based upon the development costs incurred to date and the forecasted cash flows of the planned community; the estimated fair value of land under development approximates book value.

The pro forma statements of operations for the six months ended June 30, 2013 and the year ended December 31, 2012 do not reflect an increase in the cost of sales associated with the step up of the real estate inventory since the step up does not have a continuing impact on the results of our operations due to the short term (less than one year) impact on our financial performance. Based upon the forecasted sale of primarily all of the finished lots, homes in progress and completed homes and models to which the step up applies, $7.1 million of the step up is expected to amortize to cost of sales over the twelve month period following the GTIS Transaction with the remaining $75,000 recognized in the following year. The timing of the amortization is dependent upon the Company’s ability to complete the development of the land, construction of the homes, and the sales of the related inventory, as fully explained in the introduction to the pro forma financial statements;

 

   

Record goodwill of approximately $8.7 million, which will have an indefinite life, as the excess of the (i) sum of (x) the GTIS Transaction purchase price of $41.4 million and (y) the re-measurement of our predecessor’s equity interests in the LGI/GTIS Joint Ventures at the estimated fair value of $10.8 million for a total estimated enterprise fair value of the LGI/GTIS Joint Ventures of $52.2 million over (ii) the estimated fair value of the identifiable net assets at the transaction date of $43.5 million. Because the Company was able to obtain control of the LGI/GTIS Joint Ventures by acquiring the equity interests of the other partner through the GTIS Transaction, we do not believe the purchase price of the GTIS transaction is indicative of a market participant’s fair value of our pre-existing non-controlling investment in the joint ventures. Our acquisition of the LGI/GTIS Joint Ventures included a premium for acquiring the operations of the LGI/GTIS Joint Ventures that, when combined with our predecessor’s operations, enables greater access to capital markets. Therefore, we estimated the fair value of 100% of the equity interests of the LGI/GTIS Joint Ventures on a stand-alone basis of $46.7 million as of

 

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June 30, 2013 using the discounted cash flow model for all communities included in the GTIS Transaction and using discount rates of 16-18% as noted above. Our predecessor’s expected share of the present value of the forecasted cash flows by community of $14.4 million is based upon the distribution allocations established in the respective joint venture agreements applied to the total present value of the forecasted cash flows of each joint venture. The stand-alone value of our predecessor’s equity interests in the GTIS Joint Ventures of $10.8 million was estimated by applying a lack of control and marketability discount of 25% to our predecessor’s share of the discounted future cash flows of $14.4 million. We believe the lack of control and marketability discount of 25% is appropriate given our predecessor’s shared control of the LGI/GTIS Joint Ventures;

 

   

Record an intangible asset for the reacquired rights to the LGI Homes trade name used in the operations of the LGI/GTIS Joint Ventures at the estimated fair value of $0.8 million with a useful life of three years. The estimated fair value was calculated based upon the forecasted revenues of the LGI/GTIS Joint Ventures using a relief-from-royalty valuation model. The significant assumptions used in the relief-from-royalty model were the forecasted revenues of the LGI/GTIS Joint Ventures, a royalty rate of 0.5% which is indicative of our predecessor’s operational control of the LGI/GTIS Joint Ventures and a discount rate of 25%. The useful life of three years is consistent with the timing of a majority of the forecasted revenues of the LGI/GTIS Joint Ventures;

 

   

Record a gain of $5.5 million from the re-measurement of our predecessor’s equity interests in the LGI/GTIS Joint Ventures to estimated fair value of $10.8 million. Additionally, a deferred tax liability of $1.9 million for the difference in the fair value and the tax basis of our predecessor’s equity interests of $5.3 million was recorded on the balance sheet as of June 30, 2013. The gain on re-measurement and the deferred tax liability are recognized on the pro forma balance sheet as of June 30, 2013 with offsetting entries to retained earnings for a net adjustment to retained earnings of $3.6 million. Because the gain on re-measurement and the related deferred taxes are one-time charges recognized in the period of acquisition, these charges are not reflected in the pro forma statements of operations;

 

   

Eliminate our predecessor’s investment in the LGI/GTIS Joint Ventures and our predecessor’s related party receivable balance of $5.3 million and $1.0 million, respectively; and

 

   

Record a net deferred income tax liability of $31,000 for deferred income taxes related to the GTIS Transaction and our conversion to a taxable entity;

 

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(c) Reflects the following adjustments attributable to the (i) LGI Transaction and the issuance of                      shares of common stock (assuming an initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus) to (x) the equity owners of the entities comprising our predecessor and (y) the non-controlling interests in a subsidiary of one of the entities comprising our predecessor in exchange for their non-controlling interests in the subsidiary; (ii) elimination of the equity ownership of GTIS in the LGI/GTIS Joint Ventures as a result of the GTIS Transaction, (iii) the issuance of                  shares of common stock (assuming an initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus) in settlement of accrued management and executive bonuses, and (iv) the issuance of                      shares of common stock pursuant to this offering. The LGI Transaction reflects a combination of entities under common control. The pro forma adjustments reflect the issuance of equity interests, including:

 

     Predecessor’s
owners’
equity
    Non-controlling
interests
    Paid in
capital
 
     (dollars in thousands)  

Contribution of our predecessor’s businesses recorded and, in connection with the LGI Transaction, the issuance of shares of common stock to (x) the equity owners of the entities comprising our predecessor and (y) the non-controlling interests in a subsidiary of our predecessor (less $                 par value of shares issued)

   $ (32,114   $ (15,163   $ 47,277   

Elimination of the LGI/GTIS Joint Ventures’ equity and issuance of shares of common stock to GTIS (less $                 par value of shares issued)

     (35,506    

Issuance of shares of LGI Homes, Inc. common stock in settlement of accrued management and executive bonuses (less $         par value of shares issued)

      

Issuance of shares of LGI Homes, Inc. common stock (less $          par value of shares issued)

      

Underwriting fees and other offering expenses

      
  

 

 

   

 

 

   

 

 

 
   $ (67,620   $ (15,163   $     
  

 

 

   

 

 

   

 

 

 

 

(d) Records a net deferred income tax liability of $26,000 for deferred income taxes related to the LGI Transaction and our conversion to a taxable entity;

 

(e) Reflects the settlement of accrued liabilities for management and executive bonuses of $1.3 million through the issuance of                  shares of common stock of equal value (assuming an initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus); and

 

(f) Reflects planned distributions of $4.5 million to the equity owners of the entities comprising our predecessor for estimated income taxes on the results of operations for the period from January 1, 2013 through the closing of this offering.

 

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LGI HOMES, INC.

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2013

(in thousands)

 

    LGI Homes Group
(Predecessor)
    LGI/GTIS Joint
Ventures(1)
    Adjustments         LGI Homes, Inc.
Pro Forma
 
    (unaudited)     (unaudited)                  

Home sales

  $ 57,998      $ 37,971      $        $ 95,969   

Management, consulting and warranty fees

    1,302               (1,302   (a)       
 

 

 

   

 

 

   

 

 

     

 

 

 

Total revenues

    59,300        37,971        (1,302       95,969   

Cost of sales

    42,142        27,390        (67   (a)     69,465   

Selling expenses

    5,493        3,671                 9,164   

General and administrative

    5,026        2,049        (1,284   (a)(b)     5,791   

Income from unconsolidated joint ventures

    (944            944      (a)       
 

 

 

   

 

 

   

 

 

     

 

 

 

Operating income

    7,583        4,861        (895       11,549   

Interest expense

    (6                     (6

Other income, net

    22        62                 84   
 

 

 

   

 

 

   

 

 

     

 

 

 

Net income before income taxes

    7,599        4,923        (895       11,627   

Income taxes

    136        96        3,837      (a)(b)     4,069   
 

 

 

   

 

 

   

 

 

     

 

 

 

Net income

    7,463        4,827        (4,732       7,558   

Loss attributable to non-controlling interests

    (146            146      (b)       
 

 

 

   

 

 

   

 

 

     

 

 

 

Net income attributable to owners

    7,609        4,827        (4,878       7,558   
 

 

 

   

 

 

   

 

 

     

 

 

 

Pro forma net income per share:

         

Basic

          $     

Diluted

          $     

Pro forma weighted average common shares outstanding:

         

Basic

          $     

Diluted

          $     

 

1) This column is a combination of the financial statements of LGI—GTIS Holdings, LLC, LGI—GTIS Holdings II, LLC, LGI—GTIS Holdings III, LLC and LGI—GTIS Holdings IV, LLC, each of which is presented in separate financial statements included elsewhere in this prospectus.

Notes to Unaudited Pro Forma Statement of Operations for Six Months Ended June 30, 2013

 

(a) Reflects the GTIS Transaction as if it had been completed as of January 1, 2012. The presentation of the GTIS Transaction reflects the application of purchase accounting, including the following adjustments to the statement of operations for the six months ended June 30, 2013:

 

   

Elimination of our predecessor’s equity in the income of the LGI/GTIS Joint Ventures;

 

   

Reflects amortization of the intangible asset recorded in the GTIS Transaction. The trade name rights have an estimated useful life of three years based upon the timing of the forecasted revenues of the LGI/GTIS Joint Ventures and are amortized on a straight-line basis. Pro forma amortization expense was $133,000 for the six months ended June 30, 2013;

 

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Reflects the pro forma federal and state income taxes attributable to the change in the taxable status of the LGI/GTIS Joint Ventures as a result of the GTIS Transaction. State income taxes have been recognized in the results of operations of the LGI/GTIS Joint Ventures for the six months ended June 30, 2013. Certain states require pass-through entities to pay corporate income taxes when the parent is a taxable entity for federal income tax purposes. The federal and incremental state income taxes resulting from the change to a taxable entity were calculated using an estimated 33% effective tax rate. The difference between the effective tax rate of 33% and the statutory tax rate is primarily due to our anticipated qualification for the Domestic Production Activities Deduction (DPAD) upon conversion to a taxable entity; and

 

   

Reflects the elimination of $1.3 million of management and warranty fees our predecessor charged to the LGI/GTIS Joint Ventures during the period pursuant to the management services agreements. Effective as of the completion of the GTIS Transaction, the applicable agreements will be terminated, and the fees will no longer be charged. $1.2 million and $67,000 were included in general and administrative expense and cost of sales of the LGI/GTIS Joint Ventures, respectively;

 

(b) Reflects the LGI Transaction as if it had been completed as of January 1, 2012. The presentation of the LGI Transaction reflects the combination of entities under common control, including the following adjustments to the statement of operations for the six months ended June 30, 2013:

 

   

Eliminates income attributed to the non-controlling interests in an entity formed in 2013 and consolidated by our predecessor for the period from inception through June 30, 2013 that will become our wholly-owned subsidiary upon the completion of the LGI Transaction;

 

   

Reflects compensation to Thomas Lipar, one of our founders and an owner of certain of the entities comprising our predecessor, of $0.2 million included in general and administrative expenses during the six months ended June 30, 2013 that will not be incurred by LGI Homes, Inc. subsequent to the LGI Transaction. Mr Lipar will perform limited duties at a reduced level of compensation under a consulting agreement with us subsequent to this offering. Our management team will perform the duties Mr. Lipar will relinquish;

 

   

Reflects the pro forma federal and state income taxes attributable to reflect the change in our predecessor’s taxable status to a C Corporation as a result of the LGI Transaction. State income taxes have been recognized in the results of operations of our predecessor for the six months ended June 30, 2013. Certain states require pass-through entities to pay corporate income taxes when the parent is a taxable entity for federal income tax purposes. The federal and incremental state income taxes resulting from our change to a taxable entity were calculated using an estimated 33% effective tax rate. The difference between the effective tax rate of 33% and the statutory tax rate is primarily due to our anticipated qualification for the Domestic Production Activities Deduction (DPAD) upon conversion to a taxable entity; and

 

   

Reflects incremental compensation expense of $17,000 included in general and administrative expenses for equity awards to be awarded to certain employees subsequent to this offering.

 

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LGI HOMES, INC.

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2012

(in thousands)

 

    LGI Homes Group
(Predecessor)
    LGI/GTIS Joint
Ventures(1)
    Adjustments         LGI Homes, Inc.
Pro Forma
 
    (unaudited)     (unaudited)                  

Home sales

  $ 73,820      $ 69,558      $        $ 143,378   

Management and warranty fees

    2,401               (2,401   (a)       
 

 

 

   

 

 

   

 

 

     

 

 

 

Total revenues

    76,221        69,558        (2,401       143,378   

Cost of sales

    54,531        49,830        (132   (a)     104,229   

Selling expenses

    7,269        6,101                 13,370   

General and administrative

    6,096        3,305        (2,367   (a)(b)     6,934   

Income from unconsolidated joint ventures

    (1,526            1,526      (a)       
 

 

 

   

 

 

   

 

 

     

 

 

 

Operating income

    9,851        10,322        (1,428       18,745   

Interest expense

    (1     (1              (1

Other income, net

    173        42                 215   
 

 

 

   

 

 

   

 

 

     

 

 

 

Net income before income taxes

    10,023        10,364        (1,428       18,959   

Income taxes

    155        187        6,256      (a)(b)     6,598   
 

 

 

   

 

 

   

 

 

     

 

 

 

Net income

    9,868        10,177        (7,684     $ 12,361   

Income attributable to non-controlling interests

    163                        163   
 

 

 

   

 

 

   

 

 

     

 

 

 

Net income attributable to owners

  $ 9,705      $ 10,177        (7,684     $ 12,198   
 

 

 

   

 

 

   

 

 

     

 

 

 

Pro forma net income per share

         

Basic

          $     

Diluted

          $     

Pro forma weighted average common shares:

         

Basic

          $     

Diluted

          $     

 

(1) This column is a combination of the financial statements of LGI—GTIS Holdings, LLC, LGI—GTIS Holdings II, LLC, LGI—GTIS Holdings III, LLC and LGI—GTIS Holdings IV, LLC, each of which is presented in separate financial statements included elsewhere in this prospectus.

Notes to Unaudited Pro Forma Statement of Operations for Year Ended December 31, 2012

 

(a) Reflects the GTIS Transaction as if it had been completed as of January 1, 2012. The presentation of the GTIS Transaction reflects the application of purchase accounting, including the following adjustments to the statement of operations for the year ended December 31, 2012:

 

   

Elimination of our predecessor’s equity in the income of the LGI/GTIS Joint Ventures;

 

   

Reflects amortization of the intangible asset recorded in the GTIS Transaction. The trade name rights have an estimated useful life of three years based upon the timing of the forecasted revenues of the LGI/GTIS Joint Ventures and are amortized on a straight-line basis. Pro forma amortization expense was $268,000 for the year ended December 31, 2012;

 

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Reflects the pro forma federal and state income taxes attributable to the change in the taxable status of the LGI/GTIS Joint Ventures as a result of the GTIS Transaction. State income taxes have been recognized in the results of operations of the LGI/GTIS Joint Ventures for the year ended December 31, 2012. Certain states require pass-through entities to pay corporate income taxes when the parent is a taxable entity for federal income tax purposes. The federal and incremental state income taxes resulting from the change to a taxable entity were calculated using an estimated 33% effective tax rate. The difference between the effective tax rate of 33% and the statutory tax rate is primarily due to our anticipated qualification for the Domestic Production Activities Deduction (DPAD) upon conversion to a taxable entity; and

 

   

Reflects the elimination of $2.4 million of management and warranty fees our predecessor charged to the LGI/GTIS Joint Ventures during the period pursuant to management services agreements. Effective as of the completion of the GTIS Transaction, the applicable agreements will be terminated, and the fees will no longer be charged. $2.3 million and $132,000 were included in general and administrative expense and cost of sales of the LGI/GTIS Joint Ventures, respectively;

 

(b) Reflects the LGI Transaction as if it had been completed as of January 1, 2012. The presentation of the LGI Transaction reflects the combination of entities under common control, including the following adjustments to the statement of operations for the year ended December 31, 2012:

 

   

Reflects compensation to Thomas Lipar, one of our founders and an owner of certain of the entities comprising our predecessor, of $0.4 million included in general and administrative expenses during the year ended December 31, 2012 that will not be incurred by LGI Homes, Inc. subsequent to the LGI Transaction. Mr. Lipar will perform limited duties at a reduced level of compensation under a consulting agreement with us subsequent to this offering. Our management team will perform the duties Mr. Lipar will relinquish;.

 

   

Reflects the pro forma federal and state income taxes attributable to reflect the change in our predecessor’s taxable status to a C Corporation as a result of the LGI Transaction. State income taxes have been recognized in the results of operations of our predecessor for the year ended December 31, 2012. Certain states require pass-through entities to pay corporate income taxes when the parent is a taxable entity for federal income tax purposes. The federal and incremental state income taxes resulting from our change to a taxable entity were calculated using an estimated 33% effective tax rate. The difference between the effective tax rate of 33% and the statutory tax rate is primarily due to our anticipated qualification for the Domestic Production Activities Deduction (DPAD) upon conversion to a taxable entity; and

 

   

Reflects incremental compensation expense of $35,000 included in general and administrative expenses for equity awards to be awarded to certain employees subsequent to this offering.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

The following table presents our selected historical and pro forma financial and operating data as of the dates and for the periods indicated.

The selected historical balance sheet and statement of operations information presented as of December 31, 2012 and 2011 and for the years ended December 31, 2012 and 2011 are derived from the audited historical combined financial statements of our predecessor, LGI Homes Group (Predecessor), that are included elsewhere in this prospectus. The selected historical balance sheet and statement of operations information presented as of June 30, 2013 and for the six months ended June 30, 2013 and 2012 are derived from the unaudited historical combined financial statements of LGI Homes Group (Predecessor) that are included elsewhere in this prospectus. The historical combined financial statements of our predecessor account for investments in the LGI/GTIS Joint Ventures using the equity method. The following table should be read together with, and is qualified in its entirety by reference to, the historical combined financial statements of LGI Homes Group (Predecessor) and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The selected pro forma financial information presented as of June 30, 2013 and for the six months ended June 30, 2013 and the year ended December 31, 2012 gives effect to the Formation Transactions, the issuance and sale of shares of our common stock in this offering and the use of proceeds thereof as described under “Use of Proceeds” and is derived from the unaudited and audited combined financial statements of LGI Homes Group (Predecessor) and the unaudited and audited financial statements of the LGI/GTIS Joint Ventures, included elsewhere in this prospectus. See “Summary—The Transactions” for a description of the Formation Transactions. The selected pro forma financial information should be read together with our unaudited pro forma financial statements included elsewhere in this prospectus and “Unaudited Pro Forma Financial Information.”

 

    Pro Forma
Six Months
Ended
June 30,
    Six Months
Ended June 30,
    Pro Forma
Year Ended
December 31,
    Year Ended
December 31,
 
    2013     2013     2012     2012     2012     2011  
    (dollars in thousands)   

Statement of Operations Data:

           

Home sales

  $ 95,969      $ 57,998      $ 27,861      $ 143,378      $ 73,820      $ 49,270   

Management and warranty fees

           1,302        992               2,401        1,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 95,969      $ 59,300      $ 28,853      $ 143,378      $ 76,221      $ 50,456   

Cost of sales

    69,465        42,142        20,273        104,229        54,531        36,700   

Selling expenses

    9,164        5,493        2,863        13,370        7,269        4,884   

General and administrative

    5,791        5,026        2,451        6,934        6,096        5,125   

Income from unconsolidated joint ventures

           (944     (586            (1,526     (715
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 11,549      $ 7,583      $ 3,852      $ 18,745      $ 9,851      $ 4,462   

Interest expense

    (6     (6     (25     (1     (1     (28

Other income, net

    84        22        24        215        173        204   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income taxes

  $ 11,627      $ 7,599      $ 3,851      $ 18,959      $ 10,023      $ 4,637   

Income taxes

    4,069        136        65        6,598        155        125   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 7,558      $ 7,463      $ 3,786      $ 12,361      $ 9,868      $ 4,512   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Income) loss attributable to non-controlling interests

           146        (68     (163     (163     (1,162
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to owners

  $ 7,558      $ 7,609      $ 3,718      $ 12,198      $ 9,705      $ 3,350   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial and Operating Data:

           

Active communities during period(1)

    18        11        6        11        7        5   

Home closings

    664        397        204        1,062        536        376   

Average sales price of homes closed

  $ 145      $ 146      $ 137      $ 135      $ 138      $ 131   

Gross margin(2)

  $ 26,504      $ 15,856      $ 7,588      $ 39,149      $ 19,289        12,570   

Gross margin %(3)

    27.6     27.3     27.2     27.3     26.1     25.5

Adjusted gross margin(4)

  $ 27,279      $ 16,631      $ 7,981      $ 39,958      $ 20,098      $ 13,831   

Adjusted gross margin %(3)(4)

    28.4     28.7     28.6     27.9     27.2     28.1

Adjusted EBITDA(5)

  $ 12,760      $ 8,489      $ 4,322      $ 20,340      $ 10,845      $ 5,803   

Adjusted EBITDA margin %(3)(5)

    13.3     14.6     15.5     14.2     14.7     11.8

 

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     Pro Forma
Six Months
Ended
June 30,
     Six Months
Ended

June 30,
     Year Ended
December 31,
 
      2013      2013      2012      2011  
     (in thousands)  

Balance Sheet Data (as of end of period):

           

Cash and cash equivalents

   $         $ 15,205       $ 7,069       $ 5,106   

Real estate inventory

   $ 90,160       $ 49,191       $ 28,489       $ 12,526   

Total assets

   $         $ 79,803       $ 45,556       $ 23,513   

Notes payable

   $ 23,065       $ 23,065       $ 14,969       $ 6,415   

Total liabilities

   $ 37,598       $ 32,526       $ 20,345       $ 8,878   

Total equity

   $         $ 47,278       $ 25,211       $ 14,635   

 

(1) With respect to the six months ended June 30, 2013 and 2012, defined as the sum of the number of communities in which we were closing homes as of the first day of the year and the last day of each quarter during the first half of the year divided by three. With respect to the year ended December 31, 2012 and 2011, defined as the sum of the number of communities in which we were closing homes as of the first day of the year and the last day of each quarter during the year divided by five.
(2) Gross margin is home sales revenue less cost of sales.
(3) Calculated as a percentage of home sales revenue.
(4) Adjusted gross margin is a non-GAAP measure used by management as a supplemental measure in evaluating operating performance. For a description of adjusted gross margin, the reasons our management believes adjusted gross margin is useful to investors and the limitations associated with adjusted gross margin, see “Summary—Summary Historical and Pro Forma Financial and Operating Data.”

The following table reconciles adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable:

 

    Pro
Forma
Six
Months
Ended
June 30,
    Six Months
Ended

June 30,
    Pro Forma
Year Ended
December 31,
    Year Ended
December 31,
 
     2013     2013     2012     2012     2012     2011  
    (dollars in thousands)  

Home sales

  $ 95,969      $ 57,998      $ 27,861      $ 143,378      $ 73,820      $ 49,270   

Cost of sales

    69,465        42,142        20,273        104,229        54,531        36,700   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

  $ 26,504      $ 15,856      $ 7,588      $ 39,149      $ 19,289        12,570   

Capitalized interest charged to cost of sales

    775        775        393        809        809        1,261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted gross margin

  $ 27,279      $ 16,631      $ 7,981      $ 39,958      $ 20,098      $ 13,831   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin %(a)

    27.6     27.3     27.2     27.3     26.1     25.5

Adjusted gross margin %(a)

    28.4     28.7     28.6     27.9     27.2     28.1

 

  (a) Calculated as a percentage of home sales revenue.

 

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(5) Adjusted EBITDA is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. For a description of adjusted EBITDA, the reasons our management believes adjusted EBITDA is useful to investors and the limitations associated with adjusted EBITDA, see “Summary—Summary Historical and Pro Forma Financial and Operating Data.”

The following table reconciles adjusted EBITDA to net income, which is the GAAP financial measure that our management believes to be most directly comparable:

 

    Pro
Forma
Six
Months
Ended
June 30,
    Six Months Ended June 30,     Pro Forma
Year Ended
December 31,
    Year Ended
December 31,
 
     2013             2013                     2012             2012     2012     2011  
    (dollars in thousands)  

Net income

  $ 7,558      $ 7,463      $ 3,786      $ 12,361      $ 9,868      $ 4,512   

Interest expense

    6        6        25        1        1        28   

Income taxes

    4,069        136        65        6,598        155        126   

Depreciation and Amortization

    303        131        77        518        185        80   

Capitalized interest charged to cost of sales

    775        775        393        809        809        1,261   

Other income, net

    (84     (22     (24     (215     (173     (204

Purchase accounting adjustment(a)

    133                      268                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 12,760      $ 8,489      $ 4,322      $ 20,340      $ 10,845      $ 5,803   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin %(b)

    13.3     14.6     15.5     14.2     14.7     11.8

 

  (a) This adjustment results from the application of purchase accounting in connection with the acquisition of all of the equity interests of GTIS in the GTIS Transaction and represents amortization of the fair value of a marketing-related intangible asset. See “Unaudited Pro Forma Financial Information.”
  (b) Calculated as a percentage of home sales revenue.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following in conjunction with the sections of this prospectus entitled “Risk Factors,” “Cautionary Note Concerning Forward-Looking Statements,” “Selected Historical and Pro Forma Financial and Operating Data,” “Unaudited Pro Forma Financial Information” and “Our Business,” as well as the financial statements and related notes thereto included elsewhere in this prospectus of our predecessor, LGI Homes Group (Predecessor), and of the LGI/GTIS Joint Ventures. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors,” “Cautionary Note Concerning Forward-Looking Statements” and elsewhere in this prospectus.

Presentation Note: Unless we state otherwise or the context otherwise requires, the financial, operational and other data included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus are presented on an aggregate basis by adding the historical results/data of our predecessor and the LGI/GTIS Joint Ventures and eliminating the transactions, balances and payments between them. The financial data presented on an aggregate basis are non-GAAP financial measures. For a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure, see ”—Results of Operations.”

Overview

We are one of the nation’s fastest growing homebuilders engaged in the design and construction of entry-level homes in high growth markets in Texas, Arizona, Florida and Georgia. Our business model is based on skillfully building and selling high quality, entry-level homes in attractive locations that include well-designed floor plans with features that appeal to renters. We focus on converting renters of apartments and single-family homes into homeowners by offering superior value at affordable prices in affordable locations and by utilizing a well-established sales and marketing approach, a culture of customer service excellence and a highly efficient construction process. Our strategy has driven our industry-leading build times, inventory turnover and returns on capital. We intend to expand within our existing markets and into new markets where we identify opportunities to build homes that meet our profit and return objectives.

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% (20.2% 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. Since 2010, we achieved profitability within six months of our first home closings in each of our new communities in these markets.

 

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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. As of the date set forth below, we owned and controlled the following number of lots in each of our regions:

 

     June 30, 2013     June 30, 2012     December 31, 2012     December 31, 2011  
     Owned     Controlled     Total     Owned     Controlled     Total     Owned     Controlled     Total     Owned     Controlled     Total  

Central

    2,250        5,900        8,150        1,261        2,351        3,612        2,263        2,053        4,316        1,174        2,076        3,250   

Western

    353        387        740        39        145        184        292               292        18        85        103   

Eastern

    595        477        1,072                             139        351        490                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    3,198        6,764        9,962        1,300        2,496        3,796        2,694        2,404        5,098        1,192        2,161        3,353   

As we enter new markets or open new communities, our capital requirements generally consist of the acquisition cost of the land or lots, construction costs and start-up costs primarily related to staffing the community prior to commencing sales. The amount of capital required depends on a number of factors, including, but not limited to, whether or not the lots are finished or require development expenditures and the expected amount of units under construction, the size of and number of expected new communities and the number of units expected to be built at any one time in each community. To the extent we use indebtedness to finance a portion of the costs, the required capital may be reduced if we obtain leverage through a facility with our lenders. Historically, the amount of capital required in a new community can range between $1.0 million to over $10.0 million. We believe we are well-positioned to continue our profitable growth within existing and new markets and capitalize on the U.S. housing recovery.

After successfully establishing ourselves as homebuilders in the Houston market, we demonstrated that our operating model could flourish in additional markets including Dallas/Fort Worth, San Antonio, Austin and Phoenix. After conducting extensive due diligence and market studies, we entered the Tampa market in 2012 and the Atlanta and Orlando markets in 2013. As of the dates set forth below, our completed homes, homes in progress and active communities in each of our regions were as follows:

 

     June 30, 2013     June 30, 2012     December 31, 2012     December 31, 2011  
     Completed     Homes in
Progress
    Active
Communities
    Completed     Homes in
Progress
    Active
Communities
    Completed     Homes in
Progress
    Active
Communities
    Completed     Homes in
Progress
    Active
Communities
 

Central

    156        269        15        90        142        10        174        135        13        119        77        8   

Western

    51        73        2        2        17        1        11        42        2               7          

Eastern

    6        38        1                                                                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    213        380        18        92        159        11        185        177        15        119        84        8   

By December 31, 2013, we expect to have 17 active communities in our Central region, three in our Western region and four in our Eastern region for a total of 24 active communities. We expect to add one new active community in our Western region (Phoenix) and one in our Eastern region (Orlando) during the third quarter of 2013, and two new active communities in our Central region (Houston and Fort Worth) and two in our Eastern region (Atlanta) in the fourth quarter of 2013. As of June 30, 2013, we have made $11.7 million of capital expenditures relating to these new communities. We expect to spend an additional $6.0 million-8.0 million for these new communities during the remainder of 2013. As of June 30, 2013 we had 13 completed homes and 62 homes in progress in these communities. We believe our markets are attractive because many of our existing markets, including Austin, Houston, Dallas/Fort Worth, Phoenix and San Antonio, are ranked among the top 10 markets for fastest population growth in the United States from 2000 to 2010, according to the U.S. Census Bureau. In addition, according to

 

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JBREC, all of our existing markets, except for San Antonio, experienced job growth above the national average in the twelve months ended June 30, 2013, while San Antonio matched the national average. According to JBREC, all of the Company’s markets experienced increased new homes sales in the twelve months ended June 30,2013.

Our home sales revenue and closings by region for the six months ended June 30, 2013 and 2012 and the years ended December 31, 2012 and 2011 were as follows (dollars in thousands):

On An Aggregate Basis

 

     Six Months
Ended
June 30, 2013
     Six Months
Ended
June 30, 2012
     Year Ended
December 31, 2012
     Year Ended
December 31, 2011
 
      Revenue      Closings      Revenue      Closings      Revenue      Closings      Revenue      Closings  

Central

   $ 83,623         578       $ 51,553         387       $ 128,299         959       $ 82,265         627   

Western

     10,157         71         4,694         35         15,079         103                   

Eastern

     2,189         15                                                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 95,969         664       $ 56,247         422       $ 143,378         1,062       $ 82,265         627   

Predecessor

 

     Six Months
Ended
June 30, 2013
     Six Months
Ended
June 30, 2012
     Year Ended
December 31, 2012
     Year Ended
December 31, 2011
 
      Revenue      Closings      Revenue      Closings      Revenue      Closings      Revenue      Closings  

Central

   $ 51,201         352       $ 23,169         171       $   58,741         433       $ 49,270         376   

Western

     6,797         45         4,692         33         15,079         103                   

Eastern

                                                               
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home sales

   $ 57,998         397       $ 27,861         204       $ 73,820            536       $ 49,270         376   

See “—Results of Operations” for a reconciliation of total revenues presented on an aggregate basis to the total revenues of our predecessor.

The U.S. housing market experienced a significant downturn from 2006 to 2011 but has recently shown signs of a strong recovery. Our focused geographic footprint positions us to benefit from the ongoing recovery in the U.S. housing market. We currently operate in four states, Texas, Arizona, Florida and Georgia, that are benefitting from positive momentum in housing demand drivers, including nationally leading population and employment growth trends, favorable migration patterns, general housing affordability, and desirable lifestyle and weather characteristics. These four states accounted for 29.7% of the 829,658 building permits issued for privately owned homes for the year ended December 31, 2012, and are forecasted to grow at an average annual rate of 3.7% as compared to a national rate of 1.6% between 2010 and 2030, according to the U.S. Census Bureau. We believe that our geographic footprint will enable us to capture the benefits of the expected increasing home sales volumes and home prices as the U.S. housing recovery continues. See “Market Opportunity.” However, to the extent housing demand and population growth slows in these states, we may not realize a competitive advantage as a result of the markets in which we focus.

 

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Presentation of Results of Operations and Other Data

In this prospectus, we present certain financial, operational and other data on an aggregate basis by adding the historical results of our predecessor and the LGI/GTIS Joint Ventures and eliminating the transactions, balances and payments between them. Unless we state otherwise or the context otherwise requires, the results of operations and other financial and operational data included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus are presented on an aggregate basis by adding the historical results/data of our predecessor and the LGI/GTIS Joint Ventures and eliminating the transactions, balances and payments between them. The financial data presented on an aggregate basis are non-GAAP financial measures. For a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure, see “—Results of Operations.” Our management manages our business on an aggregate basis. Our operating and business model apply to all of our communities, regardless of whether they are part of our predecessor or the LGI/GTIS Joint Ventures. We believe our presentation of certain financial, operational and other data on an aggregate basis provides investors with a meaningful comparison of our results of operations and is necessary for investors to understand our financial condition and results of operation. In addition, we believe this presentation better represents our financial condition following the consummation of the Formation Transactions because following the consummation of the Formation Transactions we will own all of the equity interests in the LGI/GTIS Joint Ventures and we will account for them on a consolidated basis rather than by using the equity method.

The presentation of our results of operation and other data on an aggregate basis may yield results that are not directly comparable with the sum of the results of our predecessor and the LGI/GTIS Joint Ventures because this presentation gives effect to the elimination of certain transactions, balances and payments between them, including the investment by our predecessor in the LGI/GTIS Joint Ventures, the capital balances of the LGI/GTIS Joint Ventures and the management and warranty fees paid by GTIS to our predecessor in connection with operating the LGI/GTIS Joint Ventures.

You should read this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in conjunction with the information provided in “Summary—Summary Historical and Pro Forma Financial and Operating Data,” “Unaudited Pro Forma Financial Information” and the historical financial statements and related notes of our predecessor and the LGI/GTIS Joint Ventures included elsewhere in this prospectus.

Our business model is based on building homes according to projected closings each month and is not based on executed sales contracts. Our average home completion time is approximately 45 to 60 days. When entering a new community, we build a sufficient number of move-in ready homes to meet our budget for that community and base future home starts on closings. In light of our business model, we believe that the number of completed homes in inventory and homes in progress in inventory at the end of a reporting period provide more meaningful information to investors than cancellation rates, conversion rates, new orders and backlog.

Factors Affecting Our Results of Operations

Availability of Mortgages; Applicable Interest Rates

Since many customers use long-term mortgages to purchase homes, the availability of mortgage loans and level of underwriting standards significantly affect consumers’ ability to finance a home purchase. During the recent downturn, mortgage financing was severely

 

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limited. Although we believe the residential mortgage market has recently shown signs of improvement, limited loan products and strict underwriting standards continue to make financing difficult for many prospective homebuyers. This can affect demand for our homes, our home sales revenue and profitability.

Costs of Building Materials and Labor

We generally contract for our materials and labor at a fixed price for the anticipated construction period of our homes. This allows us to mitigate the risks associated with increases in building materials and labor costs between the time construction begins on a home and the time it is closed. Increases in the cost of building materials and subcontracted labor may reduce gross margins to the extent that market conditions prevent the recovery of increased costs through higher home sales prices. Typically, the raw materials and most of the components used in our business are readily available in the United States. In addition, the majority of our raw materials are supplied to us by our subcontractors, which is included in the price of our contract with such contractors. Most of the raw materials necessary for our subcontractors are standard items carried by major suppliers. However, a rapid increase in the number of homes started could cause shortages in the availability of such materials or in the price of services, which could cause delays in the closing of homes under construction. Substantially all of our construction work is done by third party subcontractors, most of whom are non-unionized. Any union activity could increase our costs in retaining subcontractors. More generally, our costs could increase if skilled subcontractors are not available at reasonable rates in our markets. During our operating history, both materials and labor costs have remained relatively level and have not materially affected our gross margins; however, a significant increase in any such costs could adversely affect our margins. We continue to monitor the supply markets to achieve the best prices available. Typically, the price changes that most significantly influence our operations are price increases in commodities and lumber. Drastic price increases of these materials may negatively impact our cost of sales and in turn, our home sales revenues.

Changes in Price and Availability of Land

Our sourcing and acquisition activity is affected by changes in the general availability of land, the willingness of land sellers to sell land at competitive prices, competition for available land, availability of financing to acquire land, zoning, regulations that limit housing density, and other market conditions. If the supply of land appropriate for development of communities is limited because of these or other factors, we may acquire and develop fewer projects and we may pay higher prices for the parcels we acquire. To the extent that we are unable to acquire land at competitive prices, or at all, our home sales revenue, margins and other results of operations could decline.

Changes in Product Mix

We build homes across a variety of price points, ranging from approximately $115,000 to $260,000, and home sizes ranging from approximately 1,200 to 3,000 square feet. This range enables us to adjust readily to changing consumer preferences and affordability and general economic conditions. If we build a greater portion of homes at lower price points during a particular period or in a particular community, on a relative basis we may achieve higher net home closings but lower overall sales dollars and margins for the period or community. The converse is also true, with higher price points potentially yielding higher average sales prices and margins, with lower home closings.

 

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Inflation

Our homebuilding operations can be adversely impacted by inflation, primarily from higher costs of land, financing, labor, material and construction. In addition, inflation can lead to higher mortgage rates, which significantly affect the affordability of mortgage financing to homebuyers. Although we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we may be unable to offset cost increases with higher selling prices.

Housing Supply and Demand

The primary factors affecting new home sales are home price stability, home affordability, and housing demand. Housing supply may affect both new home prices and the demand for new homes. When the supply of new homes exceeds new home demand, new home prices may generally be expected to decline. Home foreclosures also cause the inventory of existing homes to increase, which may add additional downward price pressure on home prices. Declining new home prices may result in diminished new home demand as homebuyers postpone a new home purchase until they are comfortable that stable price levels have been reached. As rental rates increase, we become a more attractive alternative to renters. A similar effect occurs when occupancy rates increase in the local area. When new home demand exceeds new home supply, new home prices may generally be expected to increase, and rising new home prices may result in increased new home demand as homebuyers become confident in home prices and accelerate their timing of a new home purchase.

Length of Time/Costs for Obtaining Entitlements

We typically must secure entitlements to land parcels that we option or acquire prior to our commencement of any land development or homebuilding activities. The entitlement process requires that we satisfy all conditions and restrictions imposed in connection with various federal, state, county and municipal governmental approvals, including, among other things, construction of infrastructure improvements, payment of impact fees—for conditions such as parks and traffic mitigation—and restrictions on permitted uses of the land. We actively work with the community, regulatory agencies, and legislative bodies at all levels of government in an effort to obtain necessary entitlements. Delays and unexpected expense requirements in connection with the entitlement process could increase our costs and delay sales in a particular period.

Seasonality

In all of our regions, we have historically experienced similar variability in our results in operations and capital requirements from quarter to quarter due to the seasonal nature of the homebuilding industry. We generally close more homes in our second, third and fourth quarters. Thus, our revenue may fluctuate on a quarterly basis and we may have higher capital requirements in our second, third and fourth quarters in order to maintain our inventory levels. Our revenue and capital requirements are generally similar across our second, third and fourth quarters.

As a result of seasonal activity, our quarterly results of operation and financial position at the end of a particular quarter, especially the first quarter, are not necessarily representative of the results we expect at year end. We expect this seasonal pattern to continue in the long term.

 

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Factors Affecting Comparability

Purchase Accounting—GTIS Transaction

Following this offering, we will apply purchase accounting in connection with the GTIS Transaction and, as a result:

 

   

We will adjust the carrying value of the net tangible assets of the LGI/GTIS Joint Ventures, primarily real estate inventory, to fair value as of the date of this offering; as of June 30, 2013, this adjustment would have been $7.2 million.

 

   

We will record a marketing-related intangible asset with an estimated fair value of $0.8 million.

 

   

As of June 30, 2013, we had a $5.3 million investment in the LGI/GTIS Joint Ventures, which will be removed from our assets since we will own those entities following the GTIS Transaction.

 

   

We will record a gain as a result of the re-measurement of our predecessor’s equity interests in the LGI/GTIS Joint Ventures at fair value, based on the estimated enterprise value of the LGI/GTIS Joint Ventures. As of June 30, 2013, this gain would have been $5.5 million.

 

   

We will record deferred income tax resulting from our purchase accounting.

Upon the consummation of the GTIS Transaction, we will determine, primarily on the basis of a third party valuation of the assets and liabilities of the LGI/GTIS Joint Ventures, the fair value of all tangible and intangible assets that will be included in our financial statements after the GTIS Transaction. The $41.4 million purchase price for the GTIS Transaction and the estimated fair value from the valuation are expected to result in an increase to the carrying value of the LGI/GTIS Joint Ventures’ inventory of approximately $7.2 million, the recognition of a $0.8 million marketing-related intangible asset, as well as approximately $8.7 million recorded as goodwill as of the date of the GTIS Transaction. As the written-up inventory flows through the cost of sales, gross margins will be negatively impacted; we believe the majority of this impact on margins and results of operations from the inventory adjustment will be recognized over the next 12 months. In addition, the fair value of the marketing-related intangible asset will be amortized over the estimated three-year life of the asset.

Income Taxes

Prior to this offering, we are comprised of various pass-through entities that are all treated as partnerships for federal income tax purposes but are subject to certain minimal taxes and fees; however, income taxes on taxable income or losses realized by our predecessor and the LGI/GTIS Joint Ventures are the obligation of the individual members or partners. Following the Transactions, we will be a corporation and subject to corporate-level taxes, and our future income taxes will be dependent upon our future taxable income and our net income in future periods will reflect such taxes.

General and Administrative Expenses

Our cost structure will be affected by the consummation of this offering, following which we need to comply with laws, regulations and requirements, and pay the associated expenses, as a public company, including certain provisions of the Sarbanes-Oxley Act and related SEC regulations, and the requirements of if our common stock is approved for listing. Since we are an “emerging growth company,” we will be subject to reduced public company reporting requirements. See “—Implications of Being an Emerging Growth Company.” Compliance with the requirements of being a public company will require us to increase our operating expenses

 

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in order to pay our employees, legal counsel, and accountants to assist us in, among other things, external reporting, instituting, and monitoring a more comprehensive compliance and board governance function, establishing and maintaining internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, and preparing and distributing periodic public reports in compliance with our obligations under the federal securities laws. We may need to hire additional employees to perform this compliance and reporting function. In addition, being a public company will make it more expensive for us to obtain director and officer liability insurance. We estimate that incremental annual public company costs will be between $1.0 million and $2.0 million.

In addition, our general and administrative expenses for the year ended December 31, 2012 included base salary of $480,769 for Thomas Lipar, one of our founders. In connection with the completion of this offering, we will enter into a three-year consulting agreement with Mr. Lipar, pursuant to which Mr. Lipar will receive $100,000 per year as compensation for his consulting services. As a result, our general and administrative expenses will decrease by slightly more than $380,000 per year upon completion of this offering. Our management team will perform the duties Mr. Lipar will relinquish.

Components of Results of Operations

Below are general definitions of the income statement line items set forth in our period over period changes in results of operations.

Home Sales.    Revenues from home sales are recorded at the time each home sale is closed, title and possession are transferred to the buyer, and there is no significant continuing involvement with the home. Home sales proceeds are generally received within a few days from closing. Home sales are reported net of sales discounts and incentives granted to homebuyers which are primarily seller-paid closing costs.

Management and Warranty Fees.    Our predecessor has entered into a management services agreement with each of the LGI/GTIS Joint Ventures, and provides administration, supervision, marketing, insurance and various other services to the LGI/GTIS Joint Ventures. Our predecessor charges the LGI/GTIS Joint Ventures a management fee of approximately 3% of all home sales revenue from each project and charges one of the LGI/GTIS Joint Ventures a management fee of approximately 3% of construction costs for the development of land, as applicable. Our predecessor also collects a warranty fee of $250 from each of LGI/GTIS Joint Ventures upon the closing of the sale of each home. Our predecessor provides a homebuilder’s limited warranty to the buyer of each home. Our predecessor is responsible for the full, timely and proper performance, satisfaction and discharge of any warranty claims asserted against the LGI/GTIS Joint Ventures.

Cost of Sales.    Cost of sales includes the construction costs of each home and allocable land acquisition and land development costs, capitalized interest, and related common costs (both incurred and estimated to be incurred). Inventory costs are allocated to cost of sales as the homes are sold. Land, development and other allocated costs including interest and property taxes incurred during development and home construction are capitalized. Land, development and other common costs that benefit the entire community, such as field construction supervision and related direct overhead are allocated to individual lots or homes, as appropriate. Home construction costs and related carrying charges (principally interest and property taxes) are allocated to the individual homes using the specific identification method. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated to the remaining homes in the community on a prorata basis.

 

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Selling Expenses.    Selling expenses are comprised of direct selling expenses, including internal and external commissions, related sales and marketing expenses, such as advertising and sales office operating costs, and are recorded in the period incurred. Sales commissions are paid based on homes closed. Advertising and direct mail costs are expensed as incurred.

General and Administrative.    General and administrative expenses represent corporate and divisional overhead expenses such as salaries, benefits, office expenses, outside professional services and travel expenses and are recorded in the period incurred.

Other Income, Net.    Other income, net consists of interest income, forfeiture of customer deposits, and certain consulting fees after a project is closed out.

Income Tax Provision.    Prior to this offering, we are comprised of various pass-through entities that are all treated as partnerships for federal income tax purposes but are subject to certain state taxes.

 

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Results of Operations

The following table sets forth our results of operations for the periods indicated:

 

    Six Months Ended
June 30,
    Year Ended
December 31,
 
    2013     2012     2012     2011  
    (dollars in thousands)  

Statement of Income Data (Predecessor)

       

Revenues:

       

Home sales

  $ 57,998      $ 27,861      $ 73,820      $ 49,270   

Management and warranty fees

    1,302        991        2,401        1,186   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    59,300        28,852        76,221        50,456   

Expenses:

       

Cost of sales

    42,142        20,273        54,531        36,700   

Selling expenses

    5,493        2,863        7,269        4,884   

General and administrative

    5,026        2,451        6,096        5,126   

(Income) from unconsolidated joint ventures

    (944     (586     (1,526     (715
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    7,583        3,851        9,851        4,461   

Interest expense, net

    (6     (25     (1     (28

Other income, net

    22        24        173        204   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income before income taxes

  $ 7,599      $ 3,850      $ 10,023      $ 4,637   

Income tax provision

    136        64        155        125   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 7,463      $ 3,786      $ 9,868      $ 4,512   

(Income) loss attributable to non-controlling interests

    146        (68     (163     (1,162
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to owners

  $ 7,609      $ 3,718      $ 9,705      $ 3,350   
 

 

 

   

 

 

   

 

 

   

 

 

 

Statement of Income Data (On An Aggregate Basis)

       

Total revenues(1)

  $ 95,969      $ 56,247      $ 143,378      $ 82,265   

Gross margin(1)(2)

  $ 26,548      $ 15,851      $ 39,238      $ 22,924   

Gross margin %(1)(2)(3)

    27.7%        28.3%        27.4     27.9

Operating income(1)

  $ 11,500      $ 7,195      $ 18,692      $ 8,620   

Net income(1)

  $ 11,347      $ 7,106      $ 18,518      $ 8,563   

Other Financial and Operating Data (On An Aggregate Basis)

       

Active communities during period(4)

    16.7        10.0        11.4        7.0   

Home closings

    664        422        1,062        627   

Average sales price of homes closed

  $ 145      $ 133      $ 135      $ 131   

 

(1) Total revenues, gross margin, operating income and net income, presented on an aggregate basis, are non-GAAP financial measures. We calculate these measures on an aggregate basis by adding the historical results of our predecessor and the LGI/GTIS Joint Ventures and eliminating the transactions, balances and payments between them, including the investment by our predecessor in the LGI/GTIS Joint Ventures, the capital balances of the LGI/GTIS Joint Ventures and the management and warranty fees paid by GTIS to our predecessor in connection with operating the LGI/GTIS Joint Ventures.
(2) Gross margin is total revenues less cost of sales.
(3) Calculated as a percentage of total revenues.
(4) With respect to the six months ended June 30, 2013 and 2012, defined as the total of the number of communities in which we were closing homes as of the first day of the year and the last day of each quarter during the period divided by three. With respect to the year ended December 31, 2012 and 2011, defined as the total of the number of communities in which we were closing homes as of the first day of the year and the last day of each quarter during the year divided by five.

 

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Our management manages our business on an aggregate basis. Our operating and business model apply to all of our communities, regardless of whether they are part of our predecessor or the LGI/GTIS Joint Ventures. We believe our presentation of these financial measures on an aggregate basis provides investors with a meaningful comparison of our results of operation and is necessary for investors to understand our financial condition and results of operation. Our management also believes this presentation better represents our financial condition following the consummation of the Formation Transactions and this offering because following the consummation of the Formation Transactions we will own all of the equity interests in the LGI/GTIS Joint Ventures and we will account for them on a consolidated basis rather than by using the equity method.

The following table reconciles total revenue, gross margin, operating income and net income on an aggregate basis with the total revenue, gross margin, operating income and net income of our predecessor, which are the GAAP financial measures that management believes to be most directly comparable.

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 
     2013     2012     2012     2011  

Total Revenues

        

LGI Homes Group (Predecessor)

   $ 59,300      $ 28,852      $ 76,221      $ 50,456   

LGI/GTIS Joint Ventures

     37,971        28,386        69,558        32,995   

Eliminations(a)

     (1,302     (991     (2,401     (1,186
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

   $ 95,969      $ 56,247      $ 143,378      $ 82,265   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of Sales

        

LGI Homes Group (Predecessor)

   $ 42,142      $ 20,273      $ 54,531      $ 36,700   

LGI/GTIS Joint Ventures

     27,390        20,222        49,830        22,794   

Eliminations(b)

     (111     (99     (220     (152
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Sales

   $ 69,421      $ 40,396      $ 104,141      $ 59,342   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Margin(c)

        

LGI Homes Group (Predecessor)

   $ 15,856      $ 7,588      $ 19,289      $ 12,570   

LGI/GTIS Joint Ventures

     10,581        8,164        19,729        10,202   

Eliminations

     111        99        220        152   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Gross Margin

   $ 26,548      $ 15,851      $ 39,238      $ 22,924   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

        

LGI Homes Group (Predecessor)

   $ 7,583      $ 3,851      $ 9,851      $ 4,461   

LGI/GTIS Joint Ventures

     4,861        3,929        10,367        4,874   

Eliminations(d)

     (944     (585     (1,526     (715
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Income

   $ 11,500      $ 7,195      $ 18,692      $ 8,620   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

        

LGI Homes Group (Predecessor)

   $ 7,463      $ 3,786      $ 9,868