Green Brick Partners, Inc.
Q4 2016 Earnings Call Transcript

Published: 14 Mar 2017

[Operator:]

Good afternoon everyone and welcome to Green Brick Partners Earnings Call for the Fourth Quarter ended December 31, 2016. Following today’s remarks, we will host a question-and-answer session. As a reminder, this call is being recorded and will be available for playback. Details for accessing the replay will be made available at the end of the call. A slide show supporting today’s presentation is available on Green Brick Partners website, www.greenbrickpartners.com. Go to the Investor Presentations tab and click on Presentations and Webcasts. The Company reminds you that during this conference call, it will make various forward-looking statements within the meaning of 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 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, March 13th, and the risks 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 adjusted homebuilding gross margin to homebuilding gross margins are contained in the earning release that Green Brick issued yesterday. I would like to now turn the conference call over to Green Brick’s CEO, Jim Brickman. Please go ahead, sir.

[Jim Brickman:]

Hi. Thanks for joining our call. With me are Rick Costello, our CFO; and Jed Dolson, our Head of Land Development and Acquisition. 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 white tab that says Presentations & Webcasts, that’s where you’ll see the fourth quarter investor call presentation. I’ll give everybody a few seconds to go to slide three. As slide three shows, we had a very strong finish to the year. As a result, our fourth quarter pretax income was $13.7 million, that’s an increase of 80% from the fourth quarter of 2015. Home closings were up significantly year-over-year. This increase was not at the expense of depleting our backlog. Out net new orders increased 36% during 2016 compared to 2015. So, we are staged for growth in 2017. Homebuilder margin compression continues to be a hot topic by analysts, investors at every industry conference I attend. Our adjusted gross margin for the year of 23.1% increased from our 2015 adjusted gross margin of 22.1%. While we do not project this favorable margin to expand, we believe that our superior lot position and business model will allow us to continue to have some of the better margins in the industry. Our goal is to continue to balance sales velocity, margins and SG&A leverage to maximize pre-tax income. Please flip to slide four. Housing demand is highly correlated to job growth. During the 12 months ending December 31, 2016, Dallas added a whopping 114,800 jobs, which was number two in growth in the nation. Atlanta added 68,200, which was number four in the nation. On slide five, you can see that Dallas shut passed Houston for the number of one new housing market in the nation, adding 30,000 starts and growing year-over-year at 11.5%. And Atlanta is the third best growing at an even faster, 13.7%. Slide six shows that starts and closing in Dallas are still expanding but still below peak activity. Slide seven shows that the supply of lot inventory in Dallas continues to fall, which in turn is driving up lot prices, particularly in AAA locations. Green Brick owns or controls 3,500 lots in the Dallas Metroplex, all in AAA locations. Our job in any market, particularly in one with accelerating lot price growth is to best manage how many lots we sell to Green Bricks builders versus third-party builders than on the lots we sell to our builders we strive to balance between sales velocity and builder margins to maximize pretax profits over the long run. One niche market segment that we have been focusing on for the last two years is buying infill land near downtown Dallas. We now have about 300 lots in this extremely supply-constraint market. We have accelerated building on these high-margin infill homes with Centre Living Homes brand. Another growth opportunity which we are pleased with is our Southgate Homes brand that is building semicustom Homes above $550,000 in the Dallas area. Most of these homes are presold build jobs which often bring lower risk and higher margins as compared to spec homes. We expect to see increased community and unit counts in 2018 and beyond in both the Centre Living and Southgate brands. Slide eight 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 communities are located. In September 2016, Jeff Kingsfield joined our Atlanta builder and became the CEO of the Providence Group. Jeff’s ability to match skills he learned at many large builders via entrepreneurial spirit and culture that Jolly Family created on Atlanta builder, the Providence Group is showing great results. We are particularly pleased with recent sales activity and margins at our award-winning community called Bellmoore Park. Our significant growth in revenue and earnings was accomplished despite keeping one of the lowest, if not the lowest, net debt to capital ratios of any public builder. Our net debt to capital ratio where debt is -- is debt mine cash, was under 12% as of December 31st. This compares to an average of 40% for public builder peers as shown on slide nine. As noted on prior calls, unlike many peers, Green Brick has no off balance sheet debt and risk increasing unconsolidated joint ventures. To fund our growing backlog and develop more land, we are prudently increasing our leverage. In turn, increasing our leverage should lower our cost of capital as we borrow at low rates which are around 4% on our line of credit facilities and then fund assets that are underwritten to yield double-digit returns. This financial leverage should increase our pretax earnings. Last week, Flagstar Bank increased its commitment under our unsecured revolving credit facility to $35 million. This increased the overall lending commitments under this facility from $70 million to $85 million. This facility has an accordion feature that allows further expansion to a $110 million. A few investors have asked me why we do not issue senior notes. We may in the future but our strong banking relationships and the size and pricing premium for senior notes does not make sense for us now. Next, Rick Costello, our CFO, will discuss our fourth quarter results in more detail. Please turn to slide 10 for a summary of those results. Rick?

[Rick Costello:]

Thanks, Jim, and thank you all for joining us today to review our 2016 fourth quarter and full year financial results. I’m going to start with the highlights and then move into the details. For Q4 2016 versus Q4 2015, here are some key operational metrics. Net new orders increased by 23% in Q4; home deliveries increased by 42%; home sales revenues increased by 56%; and the dollar value of units and backlog increased by 23%. Now for all of 2016 versus 2015, here is how the year stack up. Net new orders increased by 36% year-over-year; home deliveries increased by 29%; home sales revenues increased by 44%; the average sales price of homes delivered increased by 12%; and new homes under construction increased by 11%. Now for some more details. For the fourth quarter, the number of net new home orders was 197 homes, an increase of 23% compared to the fourth quarter of 2015. For the full year, net new orders were 880, an increase of 36% over 2015. Green Brick delivered 275 homes for the quarter, 42% more than the fourth quarter 2015; and for the full year, Green Brick delivered 844 homes, 29% higher than 2015. Home sales revenues were $117 million for the quarter, an increase of 56% over the fourth quarter of 2015. For the full year, Green Brick closed $365.1 million in builder revenues, an increase of 44% year-over-year. The average sales price delivered was $425,000 for the quarter, an increase of 10% versus Q4 2015. At the end of the fourth quarter, Green Brick had a total of 50 active selling communities, a year-over-year increase of 16%. Homes under construction increased 11% to 564 units as of December 31, compared to 507 units as of December 31, 2015. The adjusted home building gross margin percentage increased to 23.1% for all of 2016 versus 22.1% for all of 2015. Now, with respect to margins, I’d like to point out two things that need to be taken into account in comparing our margin percentage to other builders. So, to be clear, no matter how you measure or report margins, our gross margin percentage has now improved for five consecutive quarters and is very favorable when compared to other builders. Now, the two points. First, certain indirect project costs previously classified as either salary or SG&A expense, have been classified now as cost of residential units for 2015, and this conforms to the current year presentation. Now, the impact of this to net income is zero, to change the geography. However, this change had the effect of lowering our margins in both years, 2015 and 2016, by 2.1% and 1.6% respectively. But second, our cost of sales includes the cost of sales commissions. At this diverges from the majority of the other public builders who include commissions and SG&A or is a standalone line item in their P&L. 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. Moving on, year-over-year, there was a decrease in land development revenue, as we’ve noted in previously quarter calls. This is a result of an intentional increase in intercompany lot sales to our control builders where we don’t recognize revenue until the home is built and sold. We believe these sales are the best use of these assets as we will be rewarded long-term by further investing in our builders. Specifically in the fourth quarter, our land development revenues declined from $10.4 million to $2.8 million. At December 31, 2016, our builder operations segment had a backlog of 237 sold but unclosed homes with a total value of approximately $108 million, an increase of 23% from the prior year. At December 31, our average sales price of homes in backlog was approximately $456,000, an increase of 4% compared to the prior year. Finally and perhaps most importantly is the bottom-line. Income before taxes attributable to Green Brick was $13.7 million for the fourth quarter of 2016, compared to $7.6 million for the fourth quarter of 2015, an increase of 80%. Adjusted EPS was $0.28 per share for Q4 2016 versus $0.16 per share for the fourth quarter of 2015, an increase of 75%. And for the full year, income before taxes for Green Brick was $39.0 million, a 60% increase over $24.4 million for 2015. Adjusted EPS was $0.80 per year for all of 2016 versus $0.50 per year for 2015, an increase of 60%. I’ll 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. In 2016, our focus on operations resulted in superior results for our investors. Some very valuable hires over the last year included Jeff, our Atlanta COO; Bill Inglis, our VP of Operations for CB JENI Homes; and Sandy Drew, our Corporate Controller. Our team along with our lot position will allow us to scale-up our business. In addition, we continually evaluate the best way to grow our business, which still includes but is not limited to buying builders in other markets. Capital always matters, but today great people and culture are what separates the good companies from the great ones. And we are very pleased with both our capital situation and our people, which positions us to maximize our pretax income over the long run. Thank you for your help and support. I’ll now turn the call back to the operator for questions.

[Operator:]

[Operator Instructions] And your first question comes from Will Randall from Citi. Your line is open.

[Will Randall:]

Hi, guys. Thanks for taking my questions and congratulations on continued progress.

[Jim Brickman:]

Thanks Will.

[Rick Costello:]

Thanks Will. Good to hear from you.

[Will Randall:]

I guess thinking about returns on equity. Your net margins are solid, as you guys discussed. But one of the key issues remains is really from crossing, I’ll call it that double-digit threshold for returns on equity is low leverage. So, I guess two things on that. Do you think the way your business model is structured, meaning the financing cost charge to your builders prohibits increasing leverage? And then, two, it seems like your call it, asset base is large enough to put senior notes out there. I realize the pricing may be slightly prohibitive. But I guess how do you think about the risk reward? Obviously, you have a long-term debt out there as something you are hanging your hat on?

[Rick Costello:]

Sure. Yes, those are good questions. The intercompany charges to our builders really just creates a situation of best practices more than anything; it really doesn’t limit our growth. Really, our strong cash flow, not paying taxes has been to-date the issue with increasing the leverage. But, we still believe that as we are successful in the acquisition arena that we’ll be able to increase our financial leverage, and that’s going to be the real seminal event for us. We continue to replace our lot inventory on a quarterly basis. So, we are spending dollars there, but really the game changer will be on the acquisition side. From a senior debt standpoint, it’s still expensive. We only have $75 million under our line of credit at this point, and it’s very inexpensive compared to the rates that we’d be hit with on a senior debt facility. So, senior debt facility can be in our future as part of permitting capital, but we can probably grow our lines to closer to $200 million before we reach that threshold of the senior debts, which really like to be more than $200 million. So, we’ve got some growth potential prior to hitting those expensive tranches of senior debt. But, we’ll never say never, but right now, it doesn’t make sense quite yet.

[Will Randall:]

And then, just thinking about revenue growth, it sounds like you believe you can hold margin next year. But on revenues in particular, how should we think about net growth in active communities over the year? And then, similarly, your backlog conversion’s been pretty strong in 2016 versus 2015. Can you hold that level? And I guess thirdly, how should we think about ASPs? Thank you.

[Jim Brickman:]

In terms of our backlog. Well, this is Jim. We had our backlog grew significantly as of December 31st. We’re still seeing our backlog growth accelerate into this year. So, we feel very good about our backlog and backlog conversion and fueling our organic growth. Our revenue growth from average selling price is probably going to be about the same. We’re seeing in Dallas some of our lower end product is getting greater sales price than our higher end product, but at the same time our Southgate brand is really growing about $550,000 which is going to mitigate some of the shifting in lower prices in the CB JENI and Normandy brands. In Atlanta, our Bellmoore Park has really started to take off, and that average selling price is north of $500,000. So, I think that will mitigate any downward pressure on average selling price in Atlanta. And in terms of growing revenues and looking at other markets, that’s really still a wildcard. And we’re looking at a lot of different types of builders and price points, so we really can’t really give any guidance on that.

[Will Randall:]

Roughly speaking, should we expect 10% net community count growth for 2017, 20% in the realm outcomes, where do you think you’ll be?

[Jim Brickman:]

We don’t project community or provide community count growth. But, really, what we advise people to do, and we’re not trying to be secretive of about that, but sometimes it’s counting communities is an art [ph] forum amongst itself and we would really recommend anybody go to each of our builders’ websites, because they show every one of their communities there. And you can see exactly with total visibility and what each of our builders is doing really at their level.

[Operator:]

And your next question comes from Chase Basta from AWH Capital. Your line is open.

[Chase Basta:]

Good morning, guys. Thanks for taking my questions.

[Jim Brickman:]

Good morning.

[Chase Basta:]

Any update you can provide on M&A activity along those lines? How do you guys weigh, whether it would make more sense for you look to at buying smaller builders in other markets or instead selling Green Brick to a larger builder that trades at a premium and find your lot position advantageous?

[Jim Brickman:]

This is Jim. To answer the first part of your question, I -- we’re in business to grow Green Brick, and we’re also in business to maximize the return for our investors of which my families run and in the long run, so we’re always balancing that. I can tell in terms of our lot position, Jed Dolson is sitting here. We sell lots to at least four public builders and four large private builders. So, we can tell you right now in this market, there is a huge demand. Jed, why don’t you chime in on what your experience is with working on lot sales and builders?

[Jed Dolson:]

I think what we’re seeing in both Dallas and Atlanta is a eminent lot shortage in the very good locations, which has caused everybody to go out to the periphery where land is more available. So, luckily, as Jim mentioned, we have made investments several years back for A locations. So, we’re pretty satisfied with our current lot locations. Although, we’re always looking to grow.

[Jim Brickman:]

On the builder acquisition status, we’re actively looking at builders in other markets; it’s really a question of, do they have a lot position, do they have the culture that matches the kind of culture that we want to have and we hope define they make, but we can’t tell you that we’re going to.

[Chase Basta:]

Okay, thanks. And any commentary on activity you guys have seen in Q1 than following the public deed records? And it would suggest that you’re running in a little bit of harder pace than maybe the backlog or homes under construction numbers you gave would indicate. Just curious what you’re saying.

[Jed Dolson:]

We don’t like to comment and get into the routine and looking at activity beyond our reporting period. So, we’d prefer not to give any indication of guidance in the current quarter, current year.

[Operator:]

[Operator Instructions] And your next question comes from Will Randall from Citi. Your line is open.

[Will Randall:]

Hi, guys. Thanks for the follow-up. In terms of SG&A, how should we think about leverage or growth in SG&A in 2017? And your tax has been running a little light, call it 30% in 2016. Should we think about a similar level for 2017?

[Rick Costello:]

Yes. The taxes are a little bit of an odd bird, because the pre-tax income includes the builder share, which is the non-controlling interest. So, it’s better to look at that income before taxes and then subtract out the income attributable to non-controlling interest, and then you compare that sub-total to the tax provision. And I think you’ll see numbers that generally are going to be in the high-30s, like 37% to 39%, which is reflective of the corporate 35%, plus the state taxes that we pay in both Georgia and Texas. So, if you look at it that way, I think you’ll see a little more consistency of application. The MCI has been moving around a bit. From a standpoint of total salaries, G&A line et cetera, you definitely see a big tick down in our Q4 numbers, because of our great revenue performance, and that’s actually wonderful operating leverage. You see fairly consistent year-over-year numbers. We’ve gotten to the point where we’re no longer having to add tremendously in advance. Although Southgate Homes and Centre Living Homes certainly are still in the heavy growth period. So, individually, builder-by-builder, those builders are going experience more positive SG&A leverage into the future. But, certainly from a Green Brick level, we don’t add a whole lot of overhead when we grow our builders. So, we do expect continuation of positive operating leverage.

[Jim Brickman:]

Will, if we made an acquisition, for example in another market and we bought $150 million revenue builder, the incremental SG&A leverage at Green Brick’s level would be really de minimis. So, we would get all the benefit of that SG&A leverage from that acquisition.

[Operator:]

And we have no further questions at this time. I will now turn the call back over to the presenters.

[Rick Costello:]

I’d like to thank everybody like Jim said before for their continued support, and we’ll speak to you real soon in early May with Q1 results.

[Jim Brickman:]

And if anybody wants to call us afterward with follow-ups, we’re available to answer your questions.

[Rick Costello:]

Thank you.

[Operator:]

This concludes today’s conference call. And you may now disconnect.