Green Brick Partners Inc

F:2G1

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Green Brick Partners, Inc. Second Quarter Conference Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Rick Costello, Chief Financial Officer. Please go ahead.

[Richard Costello, executive]

Good afternoon, and welcome to the Green Brick Partners' Earnings Call for the Second Quarter ended June 30, 2024. Following today's remarks, we will hold a Q&A session. As a reminder, this call is being recorded and will be available for playback. In addition, a presentation will accompany today's webcast and is also available on the company's website at investors.greenbrickpartners.com. On the call today is Jim Brickman, Co-Founder and Chief Executive Officer; Jed Dolson, President and Chief Operating Officer; and myself, Rick Costello, Chief Financial Officer. Some of the information discussed on this call is forward-looking, including the company's financial and operational expectations for 2024 and beyond. In yesterday's press release and SEC filings, the company detailed material risks that may cause its future results to differ from its expectations. The company's statements are as of today, August 1, 2024, and the company has no obligation to update any forward-looking statement it may make. The comments also include non-GAAP financial metrics. The reconciliation of these metrics and the other information required by Regulation G can be [indiscernible] that the company issued yesterday and, in the presentation, available on the company's website. With that, I'll turn the call over to Jim. Jim?

[James Brickman, executive]

Thank you, Rick. I'm extremely proud of our record performance in the second quarter. During the second quarter, we achieved another set of record-breaking results for the company. First, we delivered a record 987 homes and join underrated record home closing revenue of $547 million, an increase of 20% year-over-year. Second, our homebuilding gross margin showed to a record 34.5%, which is the highest among public homebuilding peers as shown on Slide 4. Year-to-date, the net income attributable to Green Brick grew 35.3% and earnings per share increased 38% year-over-year to $4.14. This performance was highlighted by a record quarterly EPS of $2.32, up 42.3% year-over-year. Thanks to the collective effort of our team, we have consistently generated some of the best returns in the industry. We believe that our unique business model will continue to demonstrate its strength and position us for sustainable growth. With our record results, Green Brick's annualized return on equity for the first half of 2024 was 28.3%. Our book value at the end of the quarter increased 26% year-over-year to $31.21 per share. Equally important, our growth was created on one of the least leveraged balance sheets and one of the lowest cost of debt among our small and mid-GAAP peers. At the end of the second quarter, our total debt to total capital ratio was 17.7%, while our net debt to total capital ratio was only 10.9% with a weighted average pay rate of 3.4%. As shown on Slide 5, since 2022, we have consistently generated exceptional homebuilding gross margins, achieving margins of more than 30% in all the 3 quarters. Our extraordinary performance is a result from superior locations in high-growth markets, our investment-grade balance sheet, our self-development strategy and the commitment and expertise of our team. The land light model has gained traction on Wall Street with many major homeowners prioritizing being land like regardless of the cost and resulting potential degradation of margins. Green Brick has taken a different approach. By thoroughly evaluating and understanding our markets, we prioritize acquiring, entitling and developing land ourselves, allowing us to achieve significant cost savings compared to retail priced option lots. We understand land risk and compensate for that risk with strong underwriting and a very low leverage balance sheet. Land bankers known for the sophistication in the real estate industry often aim to maximize their profit by demanding high implicit interest rates and significant earnest money deposits where the builders assume land development costs and completion risk. Builders agree to these additional costs in order to transfer land risk and financial burden of the homebuilders' balance sheet. Given the current interest rate environment, the increasing finished lot costs associated with the land light model make an unattractive option for us, and we anticipate these dynamics to continue. For Green Brick, we are not experiencing those increased finished lot costs as Rick will cover shortly. More importantly, for Green Brick being land heavy hasn't translated into inferior returns. In fact, we have produced consistently strong return on assets and equity, as shown on Slide 5. Our return on equity since 2022 averaged 28% and the return on assets averaged 18%. We have been able to significantly increase our land position while deleveraging our balance sheet, as shown on Slide 11. Additionally, in our largest markets, Dallas-Fort Worth and Avana through our very few third-party lot developers being able to self-develop land unlocks access to more land opportunities, especially in desirable infill and infill adjacent submarkets. This approach also allows us to produce finished lots at wholesale prices as opposed to buying at retail and control the pace of lot deliveries. We believe our unique strategy and land provides us with strong competitive advantages to continue to gain market share in a capital-efficient manner. So, the U.S. housing market, it has been challenging for most homes to break free from the golden handcuffs of mortgage rates at 76% of outstanding mortgages are still locked in at mortgage rates of less than 5% as shown on Slide 6. As a result, existing home inventory continues to remain near historic lows during the second quarter, as shown on Slide 7. The lack of supply is more evident in infill and invent adjacent submarkets will get consistently generated over 80% of our revenues. Green Brick has strategically posed to capitalize on what we believe are long-term secular demographic shifts. As shown on Slide 8, a wave of millennials and Gen Z continues to enter their prime home buying age over the next decade. Two forms were built over the years since the great financial crisis, which created systemic housing shortage estimated to be between 4 million to 7 million units. An aging housing stock presents another challenge. The average age of owner-occupied loans in the U.S. is estimated to be 40 years old. These dynamics create significant growth opportunity for new home sales, and we believe Green Brick is well positioned to capture additional market share over the longer term. Over the past year, we have focused on securing new land opportunities to fill our pipeline and develop in lots to our builders as quickly as possible. Jed will discuss more about our land and lot position shortly. Lastly, I'm excited to announce our strategic decision to establish our wholly owned mortgage company, Green Rick Mortgage, which will replace our existing joint venture in which we own 50%. We expect Green Brick Mortgage to harvest 100% of the mortgage profits in the beginning of 2025. This transition will enhance our control over the mortgage origination process, allow us to optimize our customer experience, improve operational efficiency and capture more earnings and profitability by aligning our mortgage operations more closely with our overall business strategy and company culture. With that, I'll now turn it over to Rick to provide more detail regarding our financial results.

[Richard Costello, executive]

Thank you, Jim. Please turn to Slide 9 of the presentation. As Jim mentioned earlier, the second quarter was a record for Green Brick on multiple fronts. We achieved record home closings revenue of $547 million, up 20.4% year-over-year on a record 987 homes closed, an increase of 26%. The increase in deliveries is attributable for limited competition in our infill and infill-adjacent communities, reduced cycle times and increased starts leading to higher levels of available spec inventory. As discussed during our past earnings calls, our shift in community mix from closing out infill communities to opening new communities and surrounding infill-adjacent areas, especially under our Trophy brand, has moderately lowered our ASP from a year ago. In the second quarter, ASP declined slightly by 4.4% year-over-year to $554,000. This was our smallest decline in ASP in the past 4 quarters. We continue to expect ASP to be in the range of $540,000 to $560,000 for the second half of the year, subject to changes in product mix and business conditions. Another record that we broke this quarter was homebuilding gross margins, which reached 34.5%. Gross margins were up 320 basis points year-over-year and 110 basis points higher than our previous record of 33.4% achieved last quarter. More importantly, homebuilding margins were strong across all builder brands, including Trophy that primarily build entry-level and first-time move-up homes. As shown on Slide 4, we continue to lead our peers in gross margin performance. The gains in gross margins were due to lower incentives on closed homes year-over-year as a result of our infill and infill-adjacent communities and favorable construction and average lot cost. Green Brick expects that over the 2 years from calendar year 2023 to calendar year 2025, our average developed lot cost as a percentage of average sales price is expected to increase only 30 basis points per year. We anticipate that this expected minimal increase in our average developed lot costs will stand in contrast to our land light peers who often pay annual escalators of 6% to 7% to third-party land developers. Even worse for land light peers for John Burns' research, brokers indicate that prices rose 11% year-over-year in Q2 '24 for finished lots and 10% for both undeveloped land and development costs. Back to Slide 9. SG&A as a percentage of residential units' revenue for the second quarter improved 30 basis points year-over-year to 10.5%. Driven by our record gross margins on record revenues, our net income attributable to Green Brick increased 40% and diluted earnings per share for the second quarter grew 42% to $2.32 per share, both records for any quarter in company history. During the quarter, we benefited from an $0.11 discrete tax benefit for equity compensation deductions. However, even excluding this discrete tax benefit, we delivered the highest EPS in company history. Net new orders in Q2 were up 4.0% year-over-year to 855 homes, the highest level for any second quarter in company history. Jed will further discuss our sales pace momentarily. In the second quarter, we continued to expand our footprint to position us to capture additional market share. Asset selling communities at the end of the period grew 22% year-over-year to 105. In particular, our ending community count for Trophy grew by 41% year-over-year to 38%. Our cancellation rate for the second quarter remained low at 9.2%. This was again one of the lowest cancellation rates among public homebuilding peers, as shown on Slide 12. Our cancel rate remained in a historically low range under 10%, which it has been since 12/31 of '22. As shown on Slide 10, year-over-year units under construction were up 23%, which starts averaging 952 homes for the last 4 quarters. Year-to-date, we have now sold 1,926 homes, delivered 1,808 homes and started 1,980 homes, closely matching the sales pace in the production phase. Year-to-date, we delivered 1,808 homes, generating home closing revenue of $990 million, an increase of 9.6% year-over-year. Homebuilding gross margins increased 450 basis points to 34.0%. As a result, net income attributable to Green Brick grew 35.3% year-to-date to $189 million and diluted EPS came 38.0% to $4.14 for the 6 months ended June 30, 2024. Next, our backlog value at the end of the second quarter increased 11% year-over-year to $650 million. Backlog is up 17% year-to-date. Now, as opposed to closing ASP backlog, ASP increased 10.1% to $732,000. Trophy, a spec home builder continues to represent only 15% of the overall backlog value due to reduced construction cycle times and quick inventory turns. Spec units under construction as a percentage of total units under construction increased slightly sequentially to 65% at the end of the second quarter as we started more spec homes. Our investment-grade balance sheet continues to serve as a strong springboard for future growth. At the end of the second quarter, our net debt to total capital ratio was 10.9%, and our total debt to total capital ratio was only 17.7%. As shown on Slide 11, this level of financial leverage is running among the best of our small and mid-cap public homebuilding peers. 100% of our outstanding debt is fixed rate with a weighted average interest pay rate of 3.4%. Furthermore, at the end of the quarter, we had $133 million of cash on hand readily available for deployment and $360 million in undrawn lines of credit. Finally, we remained active with share buybacks during the second quarter. We bought back approximately 1.5% of our shares outstanding valued at $38 million with a weighted average price of $55.58 per share. The remaining dollar value of shares that may yet be purchased under the 2023 repurchase plan was approximately $61.3 million as of June 30, 2024. We continue to weigh and balance investment opportunities for share repurchases with the goal of delivering best-in-class risk-adjusted returns for our shareholders over the long term. With that, I'll now turn it over to Jed. Jed?

[Jed Dolson, executive]

Thank you, Rick. Demand was healthy during the second quarter. Net new orders moderated from a near record level in first quarter of 2024, but grew slightly year-over-year to 855 sales, representing our best Q2 order level in company history. For sales paced for the second quarter was 8.5 homes per average active selling community, down from 11.4% in Q1 when our backlog grew 31% sequentially. In the latter part of the second quarter, we saw sales pace slightly moderate as we exited the spring selling season, returning, we believe, to the normal pre-pandemic seasonality that we have traditionally experienced. Increased mortgage rates during the quarter and metering of sales on certain infill communities also contributed to moderated orders. However, incentives for new orders picked up only modestly in the second quarter to 4.5% from 3.8% in March. We were still able to raise base prices moderately in approximately 1/3 of our communities due to our footprint of infill and infill-adjacent submarkets where supply is limited from both new homes and existing homes. Incentives were only targeted in select communities where traffic and orders were below desired levels and/or with spec homes at later stages of construction. We continue to offer many of our buyers the flexibility to use their incentive package for closing costs, partial rate buys downs or both. FICO declassed using our affiliate and mortgage company continued to demonstrate strong qualifying profiles with an average FICO score of 741 and a debt-to-income ratio of 38% during the second quarter. With homebuilding gross margins be at an all-time high of 34.5%, we possess an abundance of flexibility and price adjustments if the market shifts. We remain optimistic that with our focus on infill and infill-adjacent locations, we are well positioned to capitalize on long-term secular demographic shifts and rising demand if or when mortgage rates drop. Through the diversification of our 7 brands and a wide array of product types and price ranges, we believe Green Brick will appeal to a broad base of homebuyers led by the growth of Trophy Signature Homes in the entry level and move-up segments. As Jim mentioned earlier, Green Brick has been able to generate superior returns and growth over the past several years because of our unwavering approach to capital allocation and our land strategy. To propel this growth forward, we have diligently executed under a strategic capital allocation plan that we believe positions us for future success. In the second quarter of 2024, we increased our funding and land acquisition and finished lots to approximately $119 million. We spent another $40 million in land development. Year-to-date, our total spend has reached over $300 million, and we are on track to meet our original land acquisition and development target of $700 million in total for the full year of 2024. Please, recall that this is taking place with a total debt-to-capital ratio of under 20%. We have added close to 10,700 new lots, offset by approximately 3,800 charge for a net increase of approximately 6,900 lots owned and controlled, a 26% increase year-over-year. Approximately 67% of these lots will be infill and infill-adjacent locations with the remaining 33% in outlying high-growth corridors. This brings our total lots owned and controlled to over 33,300, a new all-time high for the company and a 16% increase from the start of the year. Excluding 16,700 lots in long-term community, it provides approximately 5 years of lot supply based on the start date in non-master communities over the last 12 months. Over 97% of our current inventory of lots owned and controlled are expected to be self-developed. We believe the emphasis on self-development will allow Green Brick to continue generating industry-leading gross margins and performance as these self-developed lots avoid expensive premiums charged by third-party land developers and will allow us to control the pace of lot development and delivery as well as starts. Cycle times now stabilized and averaged 5.4 months for homes that completed construction during the second quarter. This was a reduction of more than 2 months from the second quarter of 2023 and 5 days shorter than the previous quarter. As the third largest homebuilder in Dallas-Fort Worth, we see potential to further optimize our cycle times and reduce costs by leveraging our scale. Securing high-quality land remains our top priority. Despite persistent high mortgage rates, our land markets remain competitive in most of our key submarkets. We continue to underwrite deals with a minimum of 21% unleveraged IRR threshold. Our deep local market presence, knowledge, relationships and reputation grants us an un-risible visibility on land opportunities, while a robust balance sheet enables us to act swifter. Slides 13 and 14 provide additional detail on our finished lot pipeline in some markets of Dallas-Fort Worth and Atlanta, 2 of our largest submarkets. We currently have 41 communities under development. Over the next 6 months, we plan to complete these lots for delivery to our builder brands of approximately 1,700 lots. By the end of 2024, we expect to have an inventory of approximately 4,700 finished lots for our subsidiary homebuilders, with over 1,900 of those finished lots being allocated to Trophy. Green Brick is well positioned for continued growth into 2025 and beyond, having secured both short- and long-term land needs. For the first half of 2024, Trophy, our intra-level first-time move-up value builder, closed 810 homes, representing approximately 45% of our total number of home closings, resulting in 34% of our total home closing revenue. We expect this platform for which the company now controls over 23,500 home sites to continue contributing significantly to our 24% earnings and beyond. With that, I will turn it over to Jim for closing remarks.

[James Brickman, executive]

Thank you, Jed. In closing, I would like to give another round of applause and thanks to our incredible team. Our record-breaking quarter is a direct result of the hard work of our people and years of meticulous planning and execution. These results are just the beginning for Green Brick. With a cooperative economy, our superior investments in land and lot inventory and constantly improving building operations have created a long runway for sustained growth, particularly through Trophy. This concludes our prepared remarks, and we will now open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Carl Reichardt with BTIG.

[Carl Reichardt, analyst]

So, Rick, historically, we've talked about your start pace and that being a driver to delivery volume 6 months out, and you've been running 952, I think, was the average is what you said. So, now Trophy's growing, supply chain more normal lot count is up. Can we expect that sort of 950, maybe 1,000 start paces to start picking up as we look quarters out? Or is your anticipation that it will stay kind of flat from there as we move into '25 based on what you know now?

[Richard Costello, executive]

Well, it's certainly going to be a function of what happens on the sales floor. We're obviously developing a lot of communities in the lot of lots, but we're not really going to suggest forward beyond what you see. I mean, you're talking about the best indicator, but directionally, eventually, it's going to go up, but from the timing standpoint, we're going to remain silent.

[Carl Reichardt, analyst]

But the 6-month relationship, you expect that, that will continue on a go-forward basis. It won't shorten to 5 months or go to 7 or something like that based on the mix that you plan?

[Richard Costello, executive]

Five months or 7 months cycle time. Are you talking about cycle time?

[Carl Reichardt, analyst]

So, what I mean is, if I look at your starts 6 months ago, 2 quarters ago, and I model that as deliveries 6 months hence, that relationship has held pretty tight, pretty consistently over a long period of time. So, I'm wondering if cycle times are improving, if Trophy's bigger portion of your mix going forward, does that shrink down to like a 5-month lead as opposed to a 6?

[Richard Costello, executive]

Over time, it will certainly shorten because trophies delivering houses in 3.8 months versus 5.3 overall. So, yes, I mean, certainly, that is a dynamic, and it's a positive one.

[Carl Reichardt, analyst]

And then can you guys do you mind at all, Jim, talking a little bit about July? And as I sort of look at rate movements have come down a lot, there seems to be a lot of elasticity in the marketplace for demand based on how rates are going. Is your sense that, that's still the critical driver to how sales role? Or are you seeing any sort of softening related to the consumer being concerned about their job or the election or sort of macro things beyond just sort of the mathematics of home ownership?

[James Brickman, executive]

Good question, Carl. Let me do a segue on this. And one of the things CEOs just don't talk about very much anymore because everybody is talking about financial engineering and doing a lot of other stuff is. Our goal is to create value entitling and developing larger, longer-duration neighborhoods that people want to live in, today and tomorrow. For some reason, that whole message of creating neighborhoods that people want to live in is absent from so many investor calls that I read transcripts zone. That's really our primary goal. July sales had maintained at a pace that we expected. We didn't have to incentivize sales any more than we expected to achieve those sales. And we aren't seeing really any diminished demand in any of our businesses other than 1 or 2 neighborhoods in Florida are soft right now.

[Operator]

Your next question comes from the line of Alex Rygiel with B. Riley.

[Alexander Rygiel, analyst]

With incentives up a bit sequentially, does that suggest some modest headwind to gross margins in the third quarter? And where we were our incentives in July relative to 2Q?

[James Brickman, executive]

Well, I really don't want to talk about that in specificity. We're focusing on the current quarter. But certainly, what's happening on the sales floor translates more quickly with as much spec concentration that we have, particularly in Trophy were 70%, 80% of their homes that they closed in the quarter were sold the same quarter. So, if interest rates are going up, incentives go up if the thrust rates are going down, incentives come down, subject to changes in seasonality, which we really saw a lot of people take vacations in June and traffic was down. So, I mean the direct answer is, it will be more variable, but it runs both directions. Good and bad.

[Alexander Rygiel, analyst]

And then as we think about monthly absorption, clearly, the last 2 years or so been a notable step-up in that absorption and understanding your mix shift at all. But is that sort of kind of the new norm of, let's call it, 3% per month per community.

[James Brickman, executive]

That's a very comfortable level. And really, when you look at it from a year-to-date standpoint. Q1 was a lot quicker from an absorption standpoint, but we also grew backlog sequentially 3%. And as a predominantly a spec builder that is not necessarily where we're taking the organization. So, the fact that we're up year-to-date still like 17% is a strong dynamic. But which tells you that the year-to-date numbers are very pleasing to us because we have that quality between sales starts and closings.

[Operator]

[Operator Instructions] And your next question comes from the line of Jay McCanless with Wedbush.

[James McCanless, analyst]

The first one I had, I think, Jed, you may have talked about pricing only being able to raise prices in roughly 1/3 of communities during the quarter. I would have thought with the heavier weight of infill, you would have been able to push a little more price and maybe what was going on with that?

[Jed Dolson, executive]

I think just some seasonality that we exited towards the later part of the quarter.

[James McCanless, analyst]

And then, I guess with Trophy solemn closing 70% to 80% of their homes in a given quarter. I guess, what's plan B if things start to slow down if we start to see some job losses, et cetera. Do you think those homes go into the SFR/BTR market? Or what's the business plan for those if things do slowdown from the economy standpoint.

[James Brickman, executive]

Jay, this is Jim Brickman. Now, we don't sell into the build-to-rent market. We focus on creating nicer longer-duration communities and the people that are moving in those communities are not expecting to move into a rental community. One of the really huge benefits of making 34.5% margins is that we can take a 10% margin hit and still have margins that are typical to our peers. And our peers take a 10% margin yet, they go negative income. So, I don't lose sleep over a few jobs. We're in this business for the long run, and we have plenty of cushion in margin to maintain sales velocity.

[Richard Costello, executive]

Hi, Jay, this is Rick. One more. I mean that was the answer A and B. But also in that environment where there are job losses, obviously, the FED is going to respond with more aggressive rate cuts and the number of people who will qualify with those rate cuts exceed the number of people who will be without jobs. So, I think that the numbers work pretty well for us, especially being in a stronger job markets like Dallas and Atlanta.

[Operator]

[Operator Instructions] There are no further questions, and that concludes today's call. Thank you all for joining. You may now disconnect.