Kathy Schick and Bill Feingold

HOCS (Hillside Overall Convertible Score) 

The new LGIH convertible received an acceptable HOCS slash line of 58 Overall/61 Growth/52 Safety. While these are fairly good scores for an aged piece of paper they are ordinary at best for a new issue. We generally look for new issues to score in the mid-60's or higher.  While the bond is very attractive optically its scores are penalized for the company's small market capitalization and leverage.

 Company Overview

 PF Cash: $102mm            PF Debt: $235mm LTM EBITDA: $35mm

 LTM FCF: $(161)mm         Leverage:  6.7x      Mkt Cap : $345mm

 LGI Homes (LGIH) is a small homebuilder with operations in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, and South Caroline.  The company has been involved in land development since the mid-1990s and began building homes in 2003.  However, it just went public last November, so there is very little public history.  The company is expanding rapidly with 557 homes closed in 3Q14 an increase of 132% from the year earlier period.  Revenues increased 149% over the same period.  The average sales price increased 7.6% to $166,097.  

LGIH is currently involved in 34 active communities.  It is expanding geographically with construction started this year in Denver, Colorado and Charlotte, North Carolina.  The company is also looking to expand their price points.

All of this growth has required significant cash to fund working capital, primarily inventory.  For the last twelve months the company has burned $161mm.  This was funded with $103mm of net proceeds from the IPO and a secured revolver.  The company entered into a new bank commitment in April.  The line was recently increased to $200mm.  Availability is tied to a borrowing base of assets, which totaled $175.4mm at 9/30/14.  The company has $160.2mm drawn on the line, leaving them with availability of $15.2mm.  LGIH is paying L+275 and the line matures on 4/28/17. 

The company is planning to buy back up to 1mm shares of stock with the proceeds and use the rest for general corporate purposes.  It obviously needs  to bolster its cash balances with a cash burn of $161mm over the last year.  The converts will be subordinated to the secured bank line.  Pro-forma leverage is elevated at 6.7x.  LGIH may need additional liquidity in the not so distant future.