Green Brick Partners, Inc.
Q1 2017 Earnings Call Transcript

Published: 13 May 2017

[Operator:]

Good afternoon, everyone, and welcome to Green Brick Partners’ Earnings Call for the First Quarter Ended March 31, 2017. Following today’s remarks we’ll hold the question-and-answer session. As a reminder, this call is being recorded, and will be available for playback. The playback will be posted to the company’s website following today’s 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 & Webcasts. The company’s reminds you that during today’s -- 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, performances, strategies, prospects and other aspects of the business of Green Brick Partners are based on current expectations and are subject to risks and uncertainties. And 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, May 8th, 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:]

Hi, everybody. Thanks for joining our call. With me is Rick Costello, our CFO. As the operator mentioned, the presentation that accompanies this earnings call can be found on our web page at greenbrickpartners.com. At the top of our web page, click on Investors & Governance, then click on the white tab that says, Presentations & Webcasts, that’s where you see the first quarter investor call presentation. I will give everybody a few seconds to get there. Let’s start with Slide 3. We had a great start to the year. As a result, our first quarter pretax income was $10.1 million, that’s an increase of 123% from the first quarter of 2016. Home closings were up 40% in Q1 year-over-year. Total revenues were up 42% in Q1 year-over-year. Our increase in homebuilding revenues was not at the expense of depleting our backlog. Our net new orders increased 20% during Q1 2017 compared to Q1 2016. So we have the tables set for future growth in 2017. Plus, our business continues to experience top line revenue growth without sacrificing gross margins. Our adjusted gross margin for the last 12 months remained at 23.1%, the same as last quarter. Please flip to Slide -- 4, excuse me. During the last year, Dallas continued to be ranked as the second largest job growth market in the nation. Atlanta added 95,400 jobs, which means Atlanta has moved up to number three in the nation job growth. We talked about the huge level of corporate relocation activity in our past calls. Fortunately, this trend continues. On Slide 5, you can see that Dallas continues to be the #1 new housing market in the nation, adding more than 30,000 starts. Atlanta has almost caught up with Houston as the third largest market and is expanding at an even faster rate. Slide 7 shows that in Dallas, the lot inventory levels are at a very healthy 19.7-month supply. What the graph does not tell you is how supply-constrained lots in the most prime AAA locations have become. Green Brick owns or controls over 3,400 lots in the Dallas Metroplex, in AAA locations, like Frisco and Allen. Slide 8 shows that Atlanta, despite double-digit growth in starts and closings is still about 65% below peak. Most of this growth is in the North where all of Green Brick Atlanta’s communities are located. On April 10, the Dallas Homebuilders’ Association held its annual awards ceremony. As you can imagine in a marketplace as large and as vibrant as Dallas, the biggest new home marketplace in the country, with many of the best developers and builders in the country, the competition was intense. I am pleased to share with you just a few other results. First, Green Brick Partners was named Dallas Developer of the Year. Our Village at Twin Creeks was named Master Planned Community of the Year under 600 acres. Our Bluffs at Austin Waters won Community of the Year. Centre Living Homes won Best Architectural Design priced from $500,000 to $600,000. Southgate Homes won the Best Architectural Design priced from $600,000 to $800,000 and also won Production Home of the Year. Centre Living Homes won Best Architectural Design above $800,000. Normandy Homes won Best Patio Home Interior Merchandising and CB JENI won Best Architectural Townhome Plan. So our home designs won at nearly every price point ranging from $300,000 to over $800,000 and even better, these homes are in award-winning neighborhoods that we developed. Only six sales agents were awarded for selling more than $15 million of new homes in 2016, four of the six were our builder sales counselors. Atlanta’s awards were in the fall, we expect to repeat last year’s fantastic results that was highlighted by Bellmoore Park winning Master Planned Neighborhood of the Year. One of the latest examples of superior land planning and new home design is our East of Main neighborhood in Alpharetta, Georgia. This 83-home community is directly connected to the town center shops and restaurants , a nearly 100-year-old farmhouse was restored and converted into our marketing center. Sales are significantly ahead of plan. Our 162-home Townes at Chastain AAA infill neighborhood in Sandy Springs, Georgia is another example. This is a very complicated infill neighborhood to entitle, develop and execute. Sales pace and margins are just great. Putting all this together, this quarter results shows that our focus on creating better neighborhoods paid off in the bottom line, and in creating better neighborhoods for our homebuyers and for the cities we build in. Next, Rick Costello, our CFO, will discuss our first quarter results in more detail. Please turn to Slide 10 for a summary of those results.

[Rick Costello:]

Thanks, Jim. And thank you for joining us today to review our 2017 first quarter financial results. I’m going to start with the highlights, and then move into the details. For Q1’17 versus Q1’16, here is some key operational metrics. Net new orders increased by 20%. Home deliveries increased by 40%. Home sales revenues also increased by 40%. The dollar value of units in backlog increased by 12%. And as Jim mentioned, our pretax income was up 123%. Now for more details; for the first quarter, the number of net new homeowners was 287 homes an increase of 20% compared to the first quarter of 2016. And for the quarter, Green Brick delivered 226 homes, 40% more than the first quarter of ‘16. Home sales revenue were $93.4 million for the quarter, an increase of 40% over first quarter of ‘16. The average sales price of homes delivered was $413,000 for the quarter, flat versus Q1 of ‘16. And at the end of the quarter -- the first quarter, Green Brick had a total of 52 active selling communities and that’s a year-over-year increase of 18%. Homes under construction increased 16% to 625 units as of March 31, compared to 541 units as of March 31 in 2016. The adjusted homebuilding gross margin percentage increased to 21.7% for Q1 2017, for 21.6% for Q1 of 2016. Now our last 12 months gross margin percentage is at 23.1%, which is the same as last quarter. And please recall that our cost to sales include the cost of sales commissions. This diverges from the majority of other public builders who include commissions and SG&A or as a standalone item. So in any period presented, you can add about 4.0% to our reported margins to increase them and thereby make them comparable to most other public builders. At March 31, 2017, our builder operations segment had a backlog of 298 sold but unclosed homes, with a total value of approximately $145.2 million, an increase of 12% from the prior year. At March 31, the average sales price for the homes in backlog was approximately $487,000, an increase of 6% compared to the prior year. Finally and perhaps most importantly, is the bottom line. Income before taxes attributable to Green Brick was $10.1 million for the first quarter of 2017 compared to $4.5 million for the first quarter of 2016; as we’ve said, an increase of 123%. Adjusted earnings per share was $0.21 per share for the first quarter of 2017 versus $0.09 per share for the first quarter of 2016, an increase of 133%. I will now turn the call back to Jim, who will wrap up our part of the call prior to opening things up for Q&A. Jim?

[Jim Brickman:]

Thanks, Rick. I’m very proud of the entire Green Brick team that led us to this really great quarter. Because of our decade’s long relationship with many large and small landowners and mixed-use developers, and our strong relationships with staff and the many municipalities in which we operate, we are continuing to see land development opportunities that should allow us to grow our business profitably. We have a number of these deals teed up that will generate opportunities for us in 2018 and beyond. We are having our annual meeting at our home office on May 24th and encourage our investors to come visit us then. And hopefully you’ll come see many of our developments. We think you’ll see a really big difference in what we do compared to many other developers. Thank you for your help and support. I’ll now turn the call back to the operator for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Will Randow with Citigroup. Will, your line is now open, please go ahead.

[Will Randow:]

Hey, I guess good morning in Texas and congrats on the progress. In terms of thinking about gross margin and backlog what’s the trajectory look like? Are you seeing incremental improvement through the rest of the year, it sounds like you are -- and how do you feel about pricing power here, today, given you are in two of the strongest markets of the country. It sounds like throughout the country, the order pace is picking up, and there is probably some room for some incremental pricing despite the fact we are already in the second quarter?

[Jim Brickman:]

Well, I think we have to give you an extended answer to your question. In many of our larger communities, we expect to have really strong pricing power because, for example, at Twin Creeks, Bellmoore Park, Deerfield, Chastain and some others demand is great and those lots were bought very attractively years ago. So we think we’ll have great pricing power in those. But I think more importantly, going forward, we’re still putting deals together that are going to be consistent with past margins. And these are complicated deals to entitle. We’ve been working on many of them in the long time. Next week, I’m going to Atlanta to take a look at three or four deals they have been working on there. So we’re very optimistic about maintaining margins and growing top line revenues, which should help our earnings.

[Will Randow:]

Makes sense, thanks for that. And then I guess, I mean the balance sheet, while there is -- there’s really two parts to this. One is you guys have had the strong community count growth of 18% year-over-year. Your balance sheet still would -- some might perceive as a bit lazy, which likely could fuel further growth in terms of active communities. Do you think you guys can hold the teens pace in terms of growth for a number of quarters or how should we think about that?

[Rick Costello:]

Yes, I think the real value in the balance sheet, Will, is the fact that we’ve got -- we’ve made a lot of significant land acquisition closings over the last 12 months. We’ve had three fairly large ones that are in development now. And when you add in the dollars associated with that and the dollars associated with our larger developments, like Twin Creeks or in Dallas or Bellmoore Park in Atlanta, those deals once they get developing and start clicking, the basis goes down and that same amount of revenue is a higher and higher return on those assets. So they’ve been accruing over time, if you will. We underwrite everything at a high unleveraged internal rate of return. And what happens is, we actually start to see that revenue come forward. So that’s a big manifestation from what you’re talking about in terms of a lazy balance sheet. It’s actually profit that’s been building that we get to see and experience over the course of preceding quarters and years actually.

[Jim Brickman:]

Will, for example, one of the deals I don’t think we never talked about in the conference call is probably off the radar for most of our investors is a 500-plus home community in the town of Flower Mound. Flower Mound is a very supply constrained really antigrowth community in -- right near the airport. And we have a very large development with, I believe, the only lots and townhomes that are sub $400,000 -- $450,000 price point in the whole community, that community is going to open up next year. And we think it’s going to have great sales velocity and some of the best margins we’ve ever had.

[Rick Costello:]

And on point of what I’m talking about, I’m sure, everybody has their own favor of metrics that we track. But one of the ones that we are most keenly aware of is the trailing 12 months EBITDA return on equity. As a nonpayer of income taxes, we focus on EBITDA. And if you look at that on our equity, from where we sat this point last year; that was 7.6% for the trailing 12 months. And right now, it’s at 12%. So we’re starting to see that profitability shine through.

[Will Randow:]

And I guess, just lastly, given -- you mentioned that in terms of being a noncash taxpayer, will you value that DTA/NOL at today on a net basis meaning what dollar amount of tax, would it offset going forward? Just a -- just as an update...

[Rick Costello:]

Well, we’ve have got as of the end of the year, $116 million worth of NOL still remaining. So the portion of our deferred tax asset that relates to the NOLs is about $40 million, which is basically the federal rate times that, those NOLs that we’re carrying forward.

[Will Randow:]

[Indiscernible]

[Rick Costello:]

We burned through $40 million last year. At that pace, if we can sustain that pace, we will have fully utilized it around 2019, we hope.

[Operator:]

[Operator Instructions] There are no further questions at this time. Thank you, ladies and gentlemen. This concludes today’s conference call. You may now disconnect.