Green Brick Partners, Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Mar 2021

[Operator:]

Good afternoon everyone, and welcome to Green Brick Partners Earnings Call for the Fourth Quarter Ended December 31, 2020. As a reminder, this call is being recorded and will be available for playback. A slide show supporting today’s presentation is available on Green Brick Partners’ website at www.greenbrickpartners.com. Go to Investors and Governance, then click on the option that says reporting, and then scroll down the page until you see the fourth 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, including its financial and operational expectations for 2020 and the future and anticipated impact of COVID-19 on our future operations prospects and other aspects of our business. Investors are cautioned that such forward-looking statements are based on current expectations and are subject to risk and uncertainties and could cause actual results or outcomes to differ materially from those set forth in our forward-looking statements.

[Jim Brickman:]

Thank you, operator. Hi everyone. I hope this call finds everyone well. With me is Rick Costello, our CFO; Jed Dolson, our COO. Thanks for joining the call. As the operator mentioned, a presentation that accompanies this earning call can be found on our webpage at greenbrickpartners.com. At the top of the page, click on Investors and 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’ll give everybody a few minutes to do this. Looking back over the past year, the value of a home has never been greater, whether it’s from the desire to work from home, start a family or enroll in the best schools our buyers continue to place a premium on homeownership. In fact, demand for our homes has been tremendous at all price points and continues to climb with net new orders of 63% year-over-year in the last half of 2020. This secular shift toward homeownership has driven Green Brick’s financial success to new highs this year, especially in the suburban high growth Sunbelt markets where we operate. Our diluted EPS of $2.24 in 2020 represents an all-time record for the company and is up 93% over the prior year. This robust growth represents a 34% compounded annual growth rate from our fiscal year 2015 results and is a testament to the hard work and dedication of our employees and team builders. I would like to thank everyone in the Green Brick family for their hard work and look forward to building upon these results in 2021. A key element of our future success will be determined by the significant investment Green Brick made in land and lots in 2020, because we pivoted so quickly when we saw demand pickup last June, our lots owned and controlled reach a record 14,468 lots as of December 31, this is up 58% from just six months ago. This growth was accomplished, despite reaching an all time high of 1,780 units under construction after starting a record 1,004 homes in the fourth quarter of 2020. This is a 99% increase over the fourth quarter of 2019. We believe these record inventory levels will keep us competitive in our core markets and provide us the capacity to continue to address the tremendous demand for new homes for years to come.

[Jed Dolson:]

Thanks, Jim. Take a look at Slide 8 growth drivers, which demonstrates that Green Brick still has a long pathway for future growth. On an annual basis, total revenues from 2018 to 2020 have grown 57% over that two year period. Additionally, our backlog grew at an astounding 160% to $687 million as of December 31, 2020. These improvements indicate that Green Brick has been successful in capturing waves of new buyers and we believe is well positioned to continue to capitalize on the booming demand for new homes.

[Rick Costello:]

Thanks, Jed, and thank you all for joining us today to review our 2020 fourth quarter financial results. Let’s start with Slide 13 of our presentation, where we compare our fiscal year 2020 gross margins with available peer data. Our gross margin reported for the full year was 24.2%. This was up 280 basis points over fiscal year 2019. And for the fourth quarter 2020 alone, gross margins were 25.1% and up 350 basis points over our margins reported in Q4 2019. This chart demonstrates that our performance is among the best in the industry. We believe our superior margin experience is evidence of our conservative land underwriting and prudent planning that Jed mentioned earlier. This is a winning strategy that has well prepared us to manage the pace and price during the remainder of 2021 and beyond.

[Jim Brickman:]

Okay, thanks Rick. The outstanding order growth we are seeing today continues to accelerate, thanks to historically low mortgage interest rates, the aging of the millennial generation, the migration of renters from high density living conditions to homes and us operating in the best housing markets in the country. In the first two months of this year, net new orders were up 80% over the first two months of 2020. We achieved this remarkable growth despite the strong comparisons last year where net orders in January and February were up 76% from the same prior period in 2019. We are now raising prices faster than costs and are not executing contract offers when or where our capacity is constrained. We expect these higher prices to lead to slower orders, but even higher profitability, one should flow through the income statement in the latter half of the year. Additionally, our Board of Directors approved a two-year $50 million share repurchase program on March 1, 2021. This authorization provides an additional opportunity for Green Brick to increase the value for our shareholders and addition to our continued robust investment in land and lots. Despite the challenges we faced this past year, I believe Green Brick has entered 2021 as a stronger and more efficient company. I am confident that the teams we have in place will continue to strive to build and sell superior quality homes for our homebuyers. I’ll now turn the call back to the operator for questions. Thank you.

[Operator:]

Thank you. Our first question comes from Michael Rehaut with JPMorgan. You may proceed with your question.

[Maggie Wellborn:]

Hi, this is Maggie on for Mike. First question, I guess I have is – on how sales placed or orders trended throughout 4Q and into 1Q. I think last quarter, you had said that October was going to be up and around somewhere in the 80% range. And then obviously 4Q finished it 44%. And then you saw the big step up again as we came into 1Q in January and February. So can you talk about what you were seeing there in any kind of dynamics driving the different growth rates and how you adapted to the environment? And also, I guess more recently, have you seen any change in demand given the step – the recent step up in rates?

[Jim Brickman:]

Yes. This is Jim and I’m going to have Jed to answer the second part of the question. Obviously, mainly management’s job is to balance pace, price, building cadence, and our lot position. I think Jed, why don’t you take Maggie through kind of what we’re doing and to answer her question.

[Jed Dolson:]

Yes, sure. From a high level, Maggie, we have seen very strong demand since December 1 of last year. We saw strong demand prior to that, but it really hit the accelerator. For us in December, we’ve consistently raised prices on a monthly basis. We are still seeing strong demand, albeit a little moderation as a result of the mortgage rate spikes the past two weeks. We’re now seeing mortgage rates jumped from – in Q4, they were in the 2.6% to 2.7% range. And we’re now seeing them in the two point – sorry, the 3.25% to 3.5% range. That’s enough insight.

[Maggie Wellborn:]

Yeah. Okay. Thank you. And then I guess, secondly on ASP, obviously, you talked about raising price. I think you said, you’re raising price higher than cost right now. But at the same time, Trophy and CB JENI are becoming continuing to grow as a part of the business? I think last quarter you made a comment that somewhere around the $420 million range would be kind of a good way to think about ASP through 2021. But as I look at the average order price and the average price in backlog are significantly higher. So how can we think about ASP this year?

[Jed Dolson:]

Yes, Maggie. This is Jed again. I’ll take that. It is going to be higher this year. I think we’re projecting it to be more in the $450 million range. When we talked in last quarter, we thought lumber prices were going down and they were trending down temporarily. They did a head fake and they’ve really gone up this year as a lumber is double what it was this time last year on our lumber backs. So part of that is – part of the ASP rise is the lumber price increases. As far as our backlog ASP versus our closing ASP, we typically see a lot of buyers, especially at our CB JENI townhouse and our Trophy entry level builders that purchase spec homes that are 30 to 60 days out. We’re lucky enough at those two brands to have inventory still while many of our competitors have very limited inventory. So at the – that’s why our backlog ASP is higher than our closing ASP. But I think as we look for the year, I think $450 million ASP would be a good number.

[Rick Costello:]

Maggie, for some additional color on both the backlog and on our sales success, if you were to take a historical look, you will find consistently that our ASP on backlog runs quite a bit hotter than our actual ASP for the reasons that Jed just laid out. And we really have some of the more – most expensive product that we sell is in backlog for quite a period as well. I was just looking at the absorption rates and absorption was really started to kick up in 2019 in November and December, we had really seen that move for – at a pretty strong rate November, December, January, February until COVID hit in March. So while our October number was really bright to get the overall 44% increase for Q4 was against a very strong comp, but what’s really remarkable is January and February, where we’re at 80% over some very high strong comps. I mean, like Jim said, the 2020, those two months were up 79% over 2019. So we were really doing exceptionally well in early 2020, which just speaks to how strong demand is. And when we say that we’re trying to slow sales, we’re not trying to go below our strong absorption rates. We’re trying to just moderate a pace to a level that is sustainable from a production standpoint.

[Maggie Wellborn:]

Got it. That’s really helpful. Thanks.

[Jim Brickman:]

Thanks for your questions.

[Operator:]

Thank you. Our next question comes from Carl Reichardt with BTIG. You may proceed your question.

[Carl Reichardt:]

Thanks. Hi, everybody. So Rick, on that question there, but your comment you just made, this is kind of what I want to follow-up on. So up 80% in the first two months, my – what that seems to tell me is that raising prices isn’t working this little direction, so although the rates may be according to Jed the last couple of weeks. So I guess I’m a little confused as to what is the production target that – what’s kind of the growth rate in sales, you think matches production?

[Jim Brickman:]

This is Jim and Jed is going to chime in on this too, because this is obviously a major topic of discussion internally among top management. But our January and February sales pace really would not be sustainable, even though the demand is there just because of construction capacity within our business. It was a wonderful problem to have, nobody wants to tell a customer that you can’t execute a contract in neighborhood that want to buy a home, but we’ve actually had to do that on some neighborhoods where we have kept sales and we’re really not accepting offers. So our demand is so robust that we’re really trying to manage that to serve our customers and maintain our profit margins or hopefully improve these profit margins and pass through the lumber costs. Jed, do you want to – so I wouldn’t take January and February and multiply it times six in those two months and forecast our business. At the same time, I think our book business is just – it’s really doing remarkably well. And Jed, what do you want to chime in on that?

[Jed Dolson:]

Yes, I mean, I think Jim pretty much covered it.

[Rick Costello:]

Yes. And Carl, from a production standpoint, we started an excess of 1,700 homes in the last six months of the year. I think that right there is probably a lot more telling in terms of what our current capacity is?

[Carl Reichardt:]

Yes. That – Rick, that’s what I was going to ask, Jim, is – then that starts paces something you think is relatively sustainable over the course of the – over a course of a rolling six month period. Is that the right way to think about it then?

[Rick Costello:]

Yes, sir.

[Jim Brickman:]

Yes, Carl. The other thing that we’re seeing in our business is our higher end builders are the more exposed in this cycle our lower end abilities have as much simpler process and a much faster inventory turn. And the bottlenecks in supplies constraints that we’re seeing are much more impact the higher price points and lower price points. And as you know, we’re really focused on those lower price points no more than the higher price points now.

[Carl Reichardt:]

How nice that actually gets right to my second question, which is as Trophy Signature’s now I think it was in your presentation, 23% I think of total turnover now, which is significant from zero a few years ago. Where do you want that business to be Jim? Sort of what percentage of your business would you like Trophy Signature to be? And I might as well add onto that, we talked before a little bit about potential market expansion you were thinking about prior to COVID. How are you thinking about that now that we’re starting to see an ease in the pandemic and is new market expansion for Trophy or any brand likely on the table in the next 12 months?

[Jim Brickman:]

Likely it’s always a hard thing for me to handicap because you never know what makes sense until you really underwrite it. And we’re not currently underwriting any new markets for Trophy. Although, we’re evaluating two markets that we think would be natural markets for Trophy to expand into over the next few years. We have such growth in Dallas for you that we’re just blessed trying to manage that growth right now. In terms of our other builders and how we allocate capital, I think a good way to look at it would be, we don’t plan really on most of our builders reducing any of our capital commitments to them. The Providence Group is a 500 or 600 start builder there. They’re in a much more complicated infield complex market. We just plan on recycling that cash. But really if you look at your earnings estimates and you take a look at what that implies in earnings in 2021, and if we borrow about 25% to 30% debt to capital that $200-plus or minus million, we really want to use to expand Trophy because it’s scalable, it’s easier to manage. And that’s really where our growth is going to be.

[Carl Reichardt:]

Okay. Thank you, Jim. Thanks everybody.

[Operator:]

Thank you. Our next question comes from Alex Rygiel at B. Riley. You may proceed with your question.

[Alex Rygiel:]

Thank you. Nice quarter, gentlemen. Based upon your land underwriting hurdles are higher prices necessary to achieve gross margins of 25% or higher.

[Jed Dolson:]

This is Jed. We do not factor price escalation in our underwriting models and we’re not factoring cost escalation either.

[Alex Rygiel:]

Excellent. And can you also talk about the competitive environment. Are you seeing competitors in new geographies raise prices as well as aggressively as you’re attempting to?

[Jed Dolson:]

Absolutely. I would say the big publics less so because they control more lots, but the smaller privates and some of the smaller publics that don’t have the community count or the lot runway are very aggressive, trying to moderate sales as they get from A to B.

[Jim Brickman:]

Yes. We are doing a lot of transactions with one other mid cap public builder that we really enjoy doing business with and pretty much we’re in lock step in these neighborhoods where we’re building with them and raising prices.

[Alex Rygiel:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Alex Barron with Housing Research Centers. You may proceed with your question.

[Alex Barron:]

Yes. Thank you, gentlemen. Great job on the quarter. I was just curious if you can comment on, are you guys seeing like a notable increase or acceleration in out of the state buyers when we’re moving into places like Texas?

[Jed Dolson:]

Yes. This is Jed. I’ll take that. The answer is, yes. We thought when Toyota relocated their national headquarters to Plano a couple of years ago, we thought that was going to be the peak of immigration. That has just turned out to be the first wave of immigration. We’re saying, companies from both coasts relocate here on a daily basis and our buyer profile is significantly out of state, especially at the higher price points.

[Jim Brickman:]

I don’t know if you hear, this Jim – this is Jim. And one of the really changes in this market is that the existing house inventory is so low that realtors in the low price point we’re in the $4 million price point in the park cities are literally knocking on doors right now, trying to get listings from people to sell homes because the inventory levels are so low. And we don’t see that really changing very much right now just because our industry doesn’t have the capacity to just overbuild like it did in past building cycles that I’ve experienced in 80’s for example, the industry from zoning and titling land to getting it through the municipalities, to actually building the homes. The capacity is so great that that’s a constraint and we just don’t have the same competitive dynamics that we used to have with existing homes.

[Alex Barron:]

Okay. Great. I was also hoping you could elaborate on the 80% growth you’ve seen so far this year. Is there any way you can break that down by – I don’t know, geography or price points, give us a sense of how different regions or product types are doing relative to that number.

[Jed Dolson:]

Yes, this is Jed again, I’ll take that. The 80% growth rate in the first two months is not sustainable. I think we Carl – we set a target for what is sustainable a couple of questions ago. We are seeing strong demand across every one of our regions at every one of our price points right now. So it’s really a balancing act of raising price to match input cost increases, and get to a good billboard cadence as far as building, being able to start the number of homes that we sell each month.

[Jim Brickman:]

And Trophy is much easier in that building cadence than our higher price points builders that struggle with a more complicated process and it hired much more customer intensive process.

[Alex Barron:]

Understandable. If I could ask one last one on your share buyback you mentioned, you allocated $50 million essentially to buyback. Is that expected to be consistent across the quarters or is that more important?

[Jim Brickman:]

It all depends on whether the stock price is consistent across the quarters, I guess. So I really don’t know how to answer that question. It would be an opportunistic case-by-case basis, depending on how we view a land and lot investments versus buying our own stock at that given point in time.

[Alex Barron:]

That seems like a good deal right now. Thank you.

[Jed Dolson:]

Thank you for that.

[Operator:]

Our next question is from Bill Dezellem with Tieton capital. You may proceed with your question.

[Bill Dezellem:]

Thank you. I have a nitpicking question, but your SG&A was up versus the third quarter both on absolute dollars and on a percentage of revenue basis on lower revenues, which is a little bit counter-intuitive. Would you talk to the dynamics there please?

[Rick Costello:]

Sure, Bill. Thanks for the question. Really in the short run, most of our overhead is going to be fixed over the long run it’s all variable. But as you just mentioned, we have a lower revenue base at a point in time when we increased starts 99% year-over-year. So obviously that requires additional field overhead and back office overhead. So it’s a function of spending the money in advance of recognizing the revenues from a growth standpoint. And also the fact that the revenues were a little bit lower in the quarter than the previous. So that’s that pretty much sums it up.

[Bill Dezellem:]

Thank you, Rick.

[Rick Costello:]

Sure.

[Operator:]

Thank you. Our next question comes from Art Winston with Pilot Advisors. You may proceed with your question.

[Art Winston:]

Thank you. You guys put a very large amount of lots in a very short period of time. I know it’s premature, but as you look back on it, do you say that almost all the money was well spent?

[Jed Dolson:]

This is Jed. Yes, absolutely. We think it was well spent. We’ve seen land prices – most of the land that we closed in Q4, we contracted in June or July or before. And some of it was pre-pandemics land that we temporarily put on hold or terminated and then picked back up. We’ve seen a dramatic increase in land costs compared to the price that we purchased.

[Art Winston:]

Thank you.

[Jed Dolson:]

You’re welcome.

[Rick Costello:]

Thanks, Art.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.