Green Brick Partners Inc

NYSE:GRBK

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, everyone, and welcome to Green Brick Partners Earnings Call for the Second Quarter Ended June 30, 2019. Following today's remarks, we will hold a question-and-answer session. As a reminder, this call is being recorded and will be available for playback. A slideshow supporting today's presentation is available on the Green Brick Partners website, www.greenbrickpartners.com. Go to Investors & Governance, then click on the option that says Reporting, and then scroll down the page until you see the Second Quarter Investor Call Presentation.

The Company reminds you that during this conference call, it will make various forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, prospects and other aspects of the business of Green Brick Partners are based on current expectations and are subject to risks and uncertainties.

A few factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. Please read the cautionary statement regarding forward-looking statements contained in the Company's press release, which was released on Thursday, August 8, and the risk factors described in the Company's most recent annual and quarterly filings with the Securities and Exchange Commission.

Green Brick Partners undertakes no duty to update any forward-looking statements that are made during this call. Today, the Company will be referring to pre-tax income attributable to Green Brick as a percentage of total revenues, pre-tax income as a percentage of average invested capital, EBITDA, net income return on average equity and adjusted homebuilding gross margin, which are non-GAAP financial measures.

The reconciliation of adjusted homebuilding gross margin to homebuilding gross margin and the reconciliation of net income attributable to Green Brick to adjusted pre-tax income attributable to Green Brick are both contained in the earnings release that Green Brick issued yesterday.

I would now like to turn the conference call over to Green Brick's CEO, Jim Brickman. Please go ahead sir.

[Jim Brickman, CEO]

Hi everybody. With me is Rick Costello, our CFO and Jed Dolson, the President of our Texas Region. Thank you for joining our call. As the operator mentioned, the presentation that accompanies this call can be found on our webpage at greenbrickpartners.com. At the top of our webpage click on investors and governance, then click on the option that says reporting and then scroll down the page and you'll see the second quarter investor call presentation. I'll give everybody a few seconds to get this done.

Starting off the call, we had a great second quarter with record tying earnings of $0.29, record residential unit revenue of $175 million and a record backlog of $331 million. Our adjusted home building gross margin increased 180 basis points to 23.3% in the second quarter of 2019 from 21.5% in the first quarter of 2019. We expect earnings growth to inflect positively starting in the third quarter of 2019 on a year-over-year basis.

Due to great progress with our Trophy Signatures Home brand, we expect this entry level platform for which the company now controls over 1,600 home sites to significantly contribute to 2020 earnings and beyond. Further, we continue to expect that we will grow from 76 communities on January 1, 2019 to 92 communities by either the end of this year or the first quarter of 2020 depending on weather. This 21% community growth is being accomplished while maintaining a very conservative balance sheet with net debt to total capital of only 28.7% as of June 30, 2019.

Please move to Slide 5. Two of the best markets in the country are core markets of Dallas and Atlanta. During the last 12 months, Dallas and Atlanta continued to be two of the largest markets in terms of generating job growth.

On Slide 6, you can see that Dallas continues to be the number one new housing market in the nation adding about 33,100 starts. Atlanta is the fifth largest market and our Challenger Home affiliate operates in Colorado Springs part of the sixth largest market. We are 2% to 5% of the starts in three of the largest markets in the United States giving a significant opportunity for growth in each one of these markets.

Slide 7 demonstrates what we mean by A-rated sub markets. John Burns Real Estate Consultant has published maps of our Dallas and Atlanta metropolitan areas where they have designated grades in submarkets as the most desirable in A-market through the most affordable an F-market placed on a variety of subjective factors such as quality of schools, proximity of jobs, and the existence of infrastructure for quality of life.

We have taken those maps and overlaid the locations of our Green Brick communities with green dots. As you can see, the preponderance of our communities is in the best or very A-lots and desirable rated submarkets. What the prior graph did not tell you is how supply constrained lots in these most prime A-locations still are.

Green Brick owns or controls almost 5,800 lots in the Dallas Metroplex and over 2,400 lots in Atlanta, primarily in A-locations, over 1,600 of these lots for the Trophy Signature Homes and our new builder entry-level and first-time homebuyers.

As the bottom of Slide 7 shows, you'll also see that we have 35 communities under development. As I mentioned at the opening, we continue to expect that we will grow community count by 21% to 92 communities by either end of the year or the first quarter of 2020.

Slide 8 takes a closer look at our growth story of annual revenue and the related investment in land and land development. A look at the chart and you can see the direct correlation between our growth and total lots owned and controlled with resulting growth in annual revenues. Over the last 12 months, we've grown our revenues by 28% and our total lots owned and controlled by 20%.

I want to thank the entire Green Brick team for their hard work and great results in second quarter. Next Jed Dolson, our President of the Texas Region will discuss our growth drivers and our diversification efforts. Jed?

[Jed Dolson, President, Texas Region]

Thanks Jim. Green Brick is truly one of the best growth stories in the public homebuilder space. Take a look at Slide 9 titled Growth Drivers. The chart shows the growth in the last 12-month total revenues from Q2 of 2017 to Q2 of 2019 is 63% over that two-year period, but even more impressive is our setup for the future. Over the last two years, our backlog grew 101% to $331 million as of June 30, 2019 which was both a doubling of our 2017 backlog and a record for any quarter in our existence. During these last 24 months, we also increased our lots owned and controlled by 70%. We grew the total number of selling communities by 67%.

Now let's focus on just the 12 months ending June 30, 2019. We increased our number of units started by 36% versus the 12 months ended June 30, 2018, with an increase to 1,682 units started. In fact, we have an average starting of over 420 units per quarter from Q3 of 2018 through Q2 of 2019. As of June 30, 2019, we have 1,214 units under -- sorry. So Green Brick has the backlog, the construction starts, the level of units under construction and a lot inventory to sustain further dynamic growth.

On Slide 10, we highlight the diversification of our product offerings. From 2018 we significantly increased our focus on townhome communities, thanks to years of planning, land acquisition and development. In fact, we've grown our townhome revenues 53% over the last 24 months. A robust single-family growth of 66% in the 24 months from June 30, 2017 to June 30, 2019 is highlighted by GHO's revenues in the last 12 months of a $100 million at a lower ASP with the more affordable age targeted product. Over this period this has helped us maintain affordability while offering a high-quality product. Over the last two years, our average sales price has risen by only 2.8% in total.

Slide 11 visually demonstrates that our range of homes and diversified homebuyer mix have grown our revenues and provided stable earnings by not concentrated on any one homebuyer segment. We now have five distinct consumer segments which all experienced strong revenue growth into Q2 of 2019. You can easily see in the pie chart on the right side of the page. The more even the sizes of the various target segments versus last year at this time.

Our 26% year-over-year growth has been an important balancing and diversification of our target consumer mix. And please remember, what you saw back on Slide 8, most of our communities are located in desirable A-submarkets. The additional move to include different consumer segments and product types are part of Green Brick's longer-term strategy to diversify our offerings and limit risk without reliance on constantly growing sales prices or a single group of homebuyers.

Next Rick Costello, our CFO will discuss our second quarter results in more detail.

[Rick Costello, CFO]

Thanks Jed. First everybody, I was notified that there was an issue with our website. If you hit refresh on our website and go to the Investors and Governance page and Reporting you will see the second quarter investor call presentation about half way down the page under SEC filings and reports. I'll give you folks a minute to do that if you’re relying on our website.

Thank you for joining us today to review our 2019 second quarter financial results. Before moving to the financial results, let's first review Slide 13 about our closing yesterday of long-term debt. We're really excited to announce that we've established a relationship with one of the largest and most reputable institutions in the world to help fund our future growth.

On August 8, yesterday, we issued $75 million of senior unsecured notes with Prudential Private Capital in a private placement. Our superior credit metrics allowed us to price seven-year notes at a fixed rate of 4.00%. This rate is only slightly higher than long-term rates paid by the lower leverage large cap builders like [NVR VR Horton] and more attractive than the long-term rates paid by all small cap and all mid cap builders. And as you can see in the table provided, our small cap peers have incurred at high cost to stack maturities on a longer term basis than provided in revolving credit lines. So instead of paying higher rates, we have reduced our cost of borrowing and therefore our overall cost to capital, pretty exciting stuff.

I'm now going to move it to the financial highlights. So please move to Slide 14. For Q2 of 2019 versus Q2 of 2018 and for year-to-date comparisons, here are some of the high-level key operational metrics. Net new orders increased by 17% for the quarter and 9% year-to-date. Home deliveries increased by 20.5% with home closing revenues up by 20% for the quarter and for year-to-date home deliveries have increased by 28% with home closing revenues up by 26%, fantastic growth.

Year-over-year homes under construction are up 36% with homes started on a last 12-month basis up by 23%. The dollar value of units and backlog increased by 5% year-over-year to a record level and our EPS tied our record for a second quarter of $0.29 and that's a record for any quarter during any of our years. Q2, 2018, we also had $0.29 and that was our toughest comp of the year and as Jim mentioned before, we expect earnings growth to inflate positively starting in Q3 of this year on a year-over-year basis.

Now for more details, for the second quarter, the number of net new home orders was 453 homes, an increase of 17% compared to the second quarter of 2018 and for year-to-date 2019 versus 2018, our net new home orders have grown by 5% from 821 to 898. We saw a large improvement in Q2 relative to the prior year with absorption per sell active selling community just 4.8% lower than the rapid pace of Q2, 2018, but 13.5% greater than absorption per community in Q2 of 2017, so 13.5% on an absorption basis greater than 2017.

Green Brick delivered 294 homes for the quarter of 20% more than the second quarter of 2018. For year-to-date 2019 versus 2018 Green Brick delivered 762 homes, a 28% increase over last year. Residential units revenue were $175 million for the quarter, an increase of 20% over the second quarter of 2018. Year-to-date residential units revenue grew to $337 million, up 26% over the first two quarters of 2018.

The average sales price of homes delivered was about $437,800 for the quarter and $435,300 year-to-date down just 2% for both Q2 of 2018 and year-to-date 2018. Most of the decline is a function of mix. At June 30, 2019, our builder operation segment had a backlog of 717 sold, but unclosed homes with the total value of approximately $331 million, an increase of 5% from June 30, 2018. At June 30, the average sale price in backlog was approximately 462,000, an increased a 3% compared to the prior year. Again this is a record level of backlog.

Now let's introduce and review some of our key growth metrics on the last 12 months basis. Regarding sales, net new orders for the last 12 months stand at 1,474 homes, up 11% from 1,327 homes after the end of Q2 of 2018. Regarding closing, units closed for the last 12 months total 1,455, up 30% from the 12 months ended June 30, 2018 and therefore residential units revenues are up 27% over this period on a last 12-month basis.

For Q2, 2019, Green Brick had an average of 77 active selling communities, a year-over-year increase of 24%. Regarding lots inventory, the number of lots owned and controlled has grown to just under 9,200 lots, up from about 7,650 lots from the year ago period for an increase of 21% as of the middle of this year. And this was accomplished despite starting almost 1,700 homes in the last 12 months. Homes under construction increased 23% to 1,214 homes as of June 30, compared to 988 homes as of June 30, 2018 again that's 23% up in homes under construction. In the last 12 months, we started 1,682 homes versus 1,241 homes as of June 30, 2018, an increase of 36%.

During Q2, our adjusted homebuilding gross margin declined 23.3% for the second quarter of 2019 from 26.7% from Q2 of 2018 due to increased sales incentives to customers to promote sales pace. But importantly, adjusted margin improved 180 basis points sequentially from Q1 of 2019 to Q2 of 2019 and this improvement is attributable primarily to a decline in that level of those sales incentives to customers.

Again, and as reiterated in prior calls, it's critical to understand the corresponding decrease in income allocated to our non controlling builder partners, our NCI. From Q2 of 2018 to Q2 of 2019, our non-controlling income declined. So this expense in effect declined by 1.8% and also declined 2.1% year-to-date. Our business model was established to incentivize our builders by sharing income after Green Brick earns lot profits and a high rate of return on our capital invested in each builder.

When there is operating margin compression, bottom line operating margin compression which impacts the profitability of one of our builders that builder shares in the bottom line operating margin decline to the extent of their last in the waterfall interest at typically 50%. So our business model is working as demonstrated with these strong results.

Now move to Slide 15, which demonstrates our performance as measured against our peers. The chart begins on the left with two critical measures of pre-tax income performance. Pre-tax income takes into consideration building margins as well as operating expenses. As you can see, pre-tax income as a percentage of revenues or our pre-tax margin stands at 10.2% for the last 12 months. This puts us far above our small cap and mid cap peers.

A second measure of pre-tax income performance is based on return on invested capital. Again, our return of 10.5% for the last 12 months stands head and shoulders above our small cap peers as reflected in pre-tax ROIC and comfortably higher than our mid map peers. Of course, most important is the bottom line. Our EPS of $0.29 per share for Q2 flat from Q2 of 2019 that translates into a return on equity which stands at 11.2% for the 12 months ended June 30, 2019 which is in line with our mid-cap and small-cap peers. We've considered Slide 16 for the rest of that story.

As shown on that slide, our return on equity has been accomplish despite keeping one of the lowest net debt to capital ratios of any public builder except [indiscernible] shown on the chart. We've been able to grow rapidly while increasing our financial leverage through low-cost revolving lines of credit and now it's going to be also through our lower cost or long-term capital.

As of June 30, 2019 we've continued that gradual increase to a point where our net debt to capital ratio, where net debt is debt minus cash has increased to 28.7%. Note that other peer builders have leverage to an average of 42%, but if you look more closely the slide shows that the seven builders on the left side of the slide or the wrong side of the slide are all small cap and mid cap builders.

Now, their net debt to capital ratios ranges from 36% to 70% for an average of 50%. So, they are accomplishing the same return on equity that we are at a similar return on equity but with almost 75% more financial levers than does Green Brick.

Now, one final note on something that we've been talking about our expected increase in community account to 92 active selling communities. The implication is a corresponding increase in construction starts which we should see starting with Q3 coming up as we begin building toward another market increase in annual revenues in 2020.

I'll now turn the call back to Jim, who will wrap up this part of the call prior to opening things up for Q&A.

[Jim Brickman, CEO]

Okay, thanks Rick. Well, we had a great quarter, our team builders did a wonderful job of managing pace versus price to generate the best second quarter of net income and the largest backlog in Green Brick's history.

Unlike most peers, I'm able to tell its accelerating. We will grow from 76 communities at January 01, 2019 to 92 communities by the end of the year or the first quarter of 2020. And this 21% community growth is being accomplished as Rick just discussed while maintaining a very conservative balance sheet or a net debt to capital is only 28.7%.

One other metric Rick didn’t mention is that we also don’t do any off balance sheet land banking which many peers do that's kind of disguised leverage. As we discussed, our superior equipment brings a largest of entire growth with a new 4%, $75 million senior term loan with credential.

This low cost of capital is a huge advantage over our peers. We now also have the most homes under construction at our history. Operationally, we are seeing house margins improved and the benefits of our standardization in operating systems utilize by all of our builders. Our business has now scaled to where our title and mortgage business are rapidly expanding with great profitability and little risk.

Our entry level first time move of value builder Trophy Signature Homes is off to a great start and should be a significant part of our earnings growth story that we expect to replicate in other markets. I want to thank the entire Green Brick team for their hard work and great results.

I'll now turn the call back to the operator. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Michael Rehaut with JPMorgan. Your line is open.

[Unidentified Analyst]

Hi, this is Maggie on for Mike. The first question I have is on your community account guidance that you reiterated the expectation to get to 92 by the end of the year, the end of the first quarter of next year.

I think last quarter you have said that you expected that growth to happen kind of to be nearly but we actually saw community account sit down a little bit this recent quarters. So, are you expecting more of a jump in the third quarter or are you expecting it to be kind of a consistent piece of growth across the next two or three quarters?

[Jim Brickman, CEO]

This is Jim Brickman, Jed can chime in. We expected we hope will be linear because it's difficult opening and closing communities unless you try to approach in a linear manner but one of the challenges that we get into right now was acceptance of community cities are very demanding and understaffed.

So, our plan is to make it as linear as possible. We hope the cities cooperate with us as well as the weather. You have anything to add to that, Jed?

[Jed Dolson, President, Texas Region]

No. it will be linear.

[Jim Brickman, CEO]

Okay.

[Unidentified Analyst]

Okay. And second, on the incentives, you said they were so offset as up year-on-year but that they were down sequentially. So, I was wondering if you could quantify that for us. And then, also have the homes that were ordered when incentives were at their highest last quarter too.

Have those already hit your P&L or should we expect those to continue flowing through in the third quarter?

[Rick Costello, CFO]

But talking about margins, we think that we don’t provide whether its $10,000, $15,000 or $20,000 whatever the number is in incentives but you can see it reflected in the gross margins. We have seen gross margin improvement, we see inventory clearing in our markets pretty significantly, we're very encouraged by that.

We think our concessions we can see trending down now for the first time and we're very encouraged about not having margin degradation and really improvement throughout the rest of the year.

[Unidentified Analyst]

Okay, thank you.

[Operator]

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

[Carl Reichardt, BTIG]

Thanks. Good morning, guys or afternoon or whatever it is. In the queue you talked about the gross margin change from last year being a function of both the incentives, the sales incentives but also higher material cost. And obviously, lumbers been coming in.

Can you just talk a little bit about that impact and you didn’t note labor as an issue. So, I'm just trying to get a little more color on the year-over-year change in margins.

[Jim Brickman, CEO]

Well, we've had obviously lumbers been a tailwind for margins for our builders and it varies market by market. In Dallas, we are seeing benefits pretty well across the board in all of our purchasing it has been interesting to borrow, I don’t care whether sheet-rocked type created or anything else.

We are not seeing price pressure and we've been able to lower unit costs pretty well across the board. In Atlanta, it's been a little bit more difficult but in Dallas we're seeing a lot of improvement in our unit costs, pretty much across the board whether it's concrete, plumbing.

And the additional tailwind we're experiencing over prior periods is rebates through our national purchasing program that's helping our lower cost significantly as well as value engineering decisions we've made.

[Rick Costello, CFO]

Hey Carl, this is Rick. Thanks for joining the call and then also thanks for that heads up on our website too, we appreciate that.

[Carl Reichardt, BTIG]

Hey, Rick.

[Rick Costello, CFO]

One of the things that's active let's say over the last year as we've been pretty consistent in terms of having our like lot of the 1200 homes under construction. And on the started homes, the cost as the units were started had contracts in place and had purchase orders in place.

But our builders are experiencing a substantial ability to lower those costs on a perspective basis which is being reflected in an improved margins and last Jim said our visibility into the future.

[Carl Reichardt, BTIG]

Rick, is your expectation but I guess I that I can ask about this quarter too. Incentives are coming on, has pricing power returned in any kind of a meaningful way if you look across your community paying a plea, do you see the ability of raise basis?

[Jed Dolson, President, Texas Region]

I think, Carl this is Jed. I think based on pricing has increased in a little but we're getting more bang for the buck by decreasing incentives. And currently, the other thing that we did is we were putting things in homes that we have now not included in the base price because we were getting paid for at this increasing margins.

[Carl Reichardt, BTIG]

Okay alright, that makes sense, thanks Jim. And one more, if you answered this store count question. Just on the new private placement the debt deal going to pay down the secured credit line. Is that are you intending them not to use that secured credit line on a go-forward basis and this is a replacement for that or will that capacity still exist for you?

[Rick Costello, CFO]

Yes, it's actually, Carl, it's paying down pretty much across the line prorate. All of our revolvers both the secured and unsecured, we still -- the pay down is essentially going to convert into the ability to continue to borrow up on our revolvers to fund growth.

[Jim Brickman, CEO]

Sorry to interrupt you, Rick. Here's a probably a very simple way for analyst and investors today could look at how we're going to fund our growth with really attractively price capital. We had approximately $240 million of debt out, at the end of second quarter I think was actually $234 million but let's say its $240 million.

With the Prudential line, we have $365 million of capacity and all of our facilities are unsecured and other facilities. So, there is about a $125 million of available capacity that we haven’t drawn down in. we want to maintain our business at about a 33% debt to total capital which implies that where there is about $250 million of retained earnings that we can fund using this low cost of capital over the next few years.

And we think that's really a great growth story, it's something most peers can't do and we're really excited about.

[Carl Reichardt, BTIG]

Thanks Jim, I appreciate that. Thank you, guys.

[Operator]

There are no further questions in the queue at this time. This completes today's conference call. You may now disconnect.