Green Brick Partners Inc

NYSE:GRBK

Earnings Call Transcript 2017-Q4

[Operator]

Good afternoon, everyone and welcome to Green Brick Partners’ Earnings Call for the Fourth Quarter Ended December 31, 2017. 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. Details for accessing this replay will be made available at the end of the call. A slideshow supporting today’s presentation is available on Green Brick Partners’ website at www.greenbrickpartners.com. Go to the Investors Presentations tab and click on Presentations and Webcast.

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 some 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 number of 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 Monday, November 6th, 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 the course of this call. Today, the company will be referring to adjusted EPS and adjusted homebuilding gross margin, which are non-GAAP financial measures. The reconciliation of adjusted EPS to net income attributable to Green Brick and adjusted homebuilding gross margin to homebuilding gross margin are 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, Chief Executive Officer]

Hi, everybody. Thank you for joining our call. With me is Rick Costello, our CFO and Jed Dolson, our President of the Texas region. As the operator mentioned, a presentation that accompanies this earnings call can be found on our webpage at greenbrickpartners.com. At the top of our webpage, click on Investors & Governance, then click on the option that says Reporting and then scroll down the page until you see the fourth quarter investor call presentation. I will give everyone a second to do this.

Our pre-tax income of $17.2 million was another record quarter for Green Brick and represents an increase from Q4 2016 of 26%. Our full year 2017 pre-tax income of 53.9 million was up 38% year-over-year.

Please flip to Slide 4, since the great recession the housing market has been undersupplied every year to such an extent that the cumulative housing surplus has been completely eliminated. Demand remained strong. The paradigm shift is understanding that the challenge for homebuilders now is to build new homes that buyers want in locations they can afford.

Now let's move to Slide 5, two of the best markets in our core markets are Dallas and Atlanta. During the last year Dallas rose to become top ranked as the largest job growth market in the nation, surpassing New York City. Not only are both Dallas and Atlanta getting significant numbers of new jobs, but both markets also boasts two of the highest job growth rates nationally. We talked about the robust level of corporate relocation activity in our past calls. Fortunately, this activity continues.

On Slide 6 you can see the Dallas continues to be the number one new housing market in the nation adding over 33,000 starts. Atlanta is the third-largest market and our Challenger Homes operates in Colorado Springs, part of the seventh largest housing market.

Slide 7 shows that starts and closing in Dallas are still expanding, but still well below peak activity.

Slide 8 shows that in Dallas the lot inventory levels are a very healthy at an 18.2-month supply. What the graph does not tell you is how supply constraints are in the most prime AAA locations. Green Brick owns or controls almost 4,600 lots in the Dallas Metroplex in AAA locations like Frisco, McKinney and Allen.

Slide 9 shows that Atlanta despite double digit growth in starts and closings is still about 60% below peak. Most of this growth is attributable to the north where all Green Bricks' Atlanta communities are located.

On Slide 11 Challenger Homes, our unconsolidated building partner Colorado Springs has performed with very strong results, generating over $2.7 million of profit for Green Brick in five months.

Please turn to Slide 13 where we continue our spotlight feature on a different Green Brick story each quarter. Our Heritage Creekside townhome community in Plano, Texas is another example of where we work with a nationally recognized developer to create value. Our residential lot development is part of Heritage Creekside, Rosewood's $900 million mixed-use master plan neighborhood which is close to a major employment center. State Farm's and [Radiance] new headquarters are about a mile away. Sales, velocity and margins are just great here.

Slide 14 graphically updates our annual revenue growth since inception and speaks for itself. We have the balance sheet and operations to significantly scale our business.

Next, Rick Costello, our CFO will discuss our fourth quarter results in more detail. Please turn to Slide 15 for a summary of those results. Rick?

[Rick Costello, Chief Financial Officer]

Thanks Jim. Hi everyone. Thanks for joining us today to review our fourth quarter 2017 and full year financial results. First, as shown on Slide 15 our significant growth in revenues and earnings has been accomplished despite keeping one of the lowest if not the lowest net capital -- debt to capital ratios of any public builder. Our net debt to capital ratio where net debt is debt minus cash was approximately 16% as of December 31st. This compares to an average 40% for public builder peers.

Now let's move on to Slide 16, where I'm going to start with the highlights and then move into the details. For Q4 of '17 versus Q4 of '16 and for year-over-year comparisons, here's some operational metrics.

Net new orders increased by 35% for the quarter and 21% for the year. Home deliveries increased by 6% for the quarter and 17% for the year. Home sales revenues increased by 14% for the quarter and 19% for the year. Year-over-year homes under construction are up 30% with homes started up 29%. The dollar value of units and backlog increased by 40% year-over-year, and most importantly our pretax income was up 26% for the quarter and 38% for the year.

Now for more details, for the fourth quarter the number of net new home owners was to 265, an increase of 35% compared to fourth quarter '16. For full year 2017 versus '16 our net new home owners have grown by 21% from 800 to 1,063. Green Brick delivered 292 townhomes for the fourth quarter, 6% more than for the fourth quarter of 2016. For the entire year, Green Brick delivered 990 homes, a 17% increase over 2016.

Home sales revenues were $133.5 million for the quarter, up 14% over the fourth quarter of 2016. And for the full year, Green Brick’s home sales revenues grew to $435.6 million, up 19% over 2016. The average sales price of homes delivered was 457,000 for the quarter and 440,000 for the year, up 7% and 2% versus 2016. Now as we've mentioned all year, the mix of homes closed has lean more towards townhomes which typically are lower priced compared single-family homes yet our ASP continues to advance.

At the end of Q4, Green Brick had a total of 55 active selling communities a year-over-year increase of 10%. But if you view our homebuilding neighborhood table on pages six through eight of the 10-K, you will see a long list of communities where we hope to see 2018 as our first year of home deliveries. Homes under construction increased 30% in 2017 as of year-end to 736 units compared to 564 units at the end of 2016.

Now let's review some of these key metrics on the last 12 months basis. Regarding construction during 2017, we started 1,162 homes versus 902 homes as of December 31, 2016, an increase of 29% and now we have 30% more units under construction.

Regarding sales, net new orders for the last twelve months standard at 1,063 homes, up 21% from the end of 2016. Regarding closings, units closed for 2017 totaled 990 homes, up 17% from 2016.

Regarding lot inventory, the number of lots owned and controlled has grown to approximately 6,200 lots, up from about 5,200 lots for an increase of 20% as of the year-end 2016. So, we're up 1,000 lots and this was accomplished despite starting over 1,150 lots in the last twelve months because those lot counts do not include what we have under construction. So, add to this our backlog being up 40% year-over-year and you can appreciate our excitement about 2018.

For all of 2017, the adjusted homebuilding gross margin percentage decreased 1% to 22.1% from 23.1%. But that was offset by decreases in total operating expenses as a percentage of sales of 1.6% and non-controlling interest of 0.8%.

So, on a net basis, our operating margin performance actually improved by 1.4% as a percentage of homebuilding revenues. And that balancing of sales velocity and margin is something we monitor daily. We expect that our gross margin will remain as one of the highest in the industry.

Now, please recall that our cost to sales includes the cost of sales commissions. This divergence from the majority of other public builders who include commissions in SG&A as a standalone item, cost of sales as far as we're concerned. So, in any period presented you can add about 4% to our reported margins to increase them and thereby make them comparable to most other public builders.

At December 31, 2017, our builder operation segment had a backlog of 310 sold but unclosed homes with a total value of approximately $151.5 million, an increase of 40% from the prior year end and at year-end, the average sales price of homes in that backlog was approximately $489,000, an increase of 7% compared to the prior year.

Perhaps most importantly is the bottom line, income before taxes attributable to Green Brick was $17.2 million for the fourth quarter of 2017 compared to $13.7 million for the fourth quarter of 2016, an increase of 26%. Adjusted EPS was $0.34 per share for the fourth quarter '17 versus $0.28 for the fourth quarter '16, an increase of 21%.

For the full year Green Brick income before taxes is up 38% to 53.9 million and adjusted EPS is up 36% to $1.09. Now I should note something regarding income taxes. The Tax Act which was signed into law in December dropped the corporate rate from 35% to 21%.

Accordingly, we remeasured our deferred tax assets and this resulted in 19 million of additional tax expense. However, the 40% drop in rates will reduce tax expense starting in 2018 and if one were to assume the same level of pretax income into the future that we saw in 2017 we’ll more than recover that additional tax expense within three years.

Now, finally, to put our performance in perspective with homebuilding revenues up 19% year-over-year our pretax income is up 38% or twice the growth in revenues. Clearly our earnings performance is expanding faster than our revenue growth rate resulting in markedly improved operating rates, and therefore return in total invested capital.

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

[Jim Brickman, Chief Executive Officer]

Thanks, Rick. I'm very proud of the entire Green Brick team that has really worked hard to produce a great quarter and year. We have a number of land deals that we have recently closed or under contract that we've been working on for a very long time that should fuel our growth in 2018 and beyond.

To fund our growth, we are pleased that JPMorgan recently joined our unsecured credit facility with a $30 million commitment which increases the facility to a 160 million. Our secured and unsecured credit facilities now total 235 million.

Going into 2008, we are coming out of a quarter that saw 35% increase in new home owners that has helped push our backlog up 40% higher than in the end of 2016. With 30% more homes under construction at year-end 2017 versus '16 we are looking forward to a wonderful start to 2018. Thank you for your help and support.

I'll now turn the call back to the operator for questions.

[Jim Brickman, Chief Executive Officer]

I'd like to thank everybody for joining us today. Obviously, we're available offline. We look forward to a great 2018. Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.