Green Brick Partners Inc (GRBK) 2024 Q4 法說會逐字稿

Thank you for standing by. My name is Janine, and I will be your lead operator for today. At this time, I would like to welcome everyone to the Green Brick Partners, Inc., fourth-quarter 2024 earnings call. (Operator Instructions)

I will now turn the call over to Rick Costello, Chief Financial Officer. Sir, please go ahead.

Good afternoon, and welcome to Green Brick Partners' earnings call for the fourth quarter and full year ended December 31, 2024. Following today's remarks, we will hold a Q&A session. As a reminder, this call is being recorded and will be available for playback on the company's website. In addition, a presentation will accompany today's webcast and is also available on the company's website at investors.greenbrickpartners.com.

On the call today is Jim Brickman, Co-Founder and Chief Executive Officer; Jed Dolson, President and Chief Operating Officer; and myself, Rick Costello, Chief Financial Officer.

Some of the information discussed on this call is forward-looking, including the company's financial and operational expectations for 2025 and beyond. In yesterday's press release and SEC filings, the company detailed material risks that may cause its future results to differ from its expectations. The company's statements are as of today, February 27, 2025, and the company has no obligation to update any forward-looking statements it may make. These comments also include non-GAAP financial metrics. The reconciliation of these metrics and the other information required by Regulation G can be found in the earnings release that the company issued yesterday and, in the presentation, available on the company's website.

With that, I'll turn the call over to Jim. Jim?

Thank you, Rick. We are extremely pleased to report record fourth quarter and full year 2024 results as we celebrate Green Brick's tenth anniversary as a public company. During the fourth quarter, we closed a record 1,019 homes and grew home closing revenue by 24% year-over-year to the $557 million over 80% of which were once again generated from infill and infill adjacent submarkets. Year-over-year -- sales orders in the fourth quarter increased 29% while average selling communities grew 19%.

Net income attributable to Green Brick during the fourth quarter grew 42% to [$104 million] and diluted EPS increased 46% year-over-year to $2.31, both records for any fourth quarter in the company's history. 2024 was the best year in company history as we achieved several milestones despite a [10] mortgage rate environment. Our diluted annual EPS of $8.45 beat last year's record EPS by the 8%.

Since 2015, Green Brick has been able to achieve substantial growth and expansion. Here are our achievements. Home closings grew almost sixfold from 665 units in 2015 to 3,783 in 2024, generating home closing revenues that exceeded $2 billion for the first time. Full year homebuilding gross margins improved from 20.6% in 2015, 33.8% in 2024, representing a 64% improvement to a level that is the highest gross margin performance among our product homebuilding peers.

Diluted EPS grew from $0.38 in 2015 to $8.45 in 2024 with adjusted diluted EPS of $8.21 after excluding the $0.24 after-tax impact of a warranty reserve reversal we recorded in Q4, both resulting in a compounded annual growth rate of 41%. We are the third largest homebuilder in DFW in the nation's largest high market based on annual starts. Trophy Signature Homes, which started in 2018, and closed its first home in 2019 is now on its own sixth largest builder in DFW.

Furthermore, we have significantly strengthened our land and lot position. Total land inventory has grown almost eightfold increasing from approximately 4,700 lots at the end of 2015 to over 37,800 lots at the end of 2024. This expansion was achieved while maintaining a low debt to total capital ratio of 17.2% at the end of 2024, which was the lowest year-end level since 2015. These achievements reflect the strength of our business model and balance sheet, the quality of our product and services and the dedication of our exceptional team.

Our workforce has expanded significantly from approximately 200 employees in 2015 to 650 in 2024. Their commitment has played a -- role in our success and I would like to express my sincere gratitude for their invaluable contributions. While favorable housing fundamentals have provided general tailwinds for the industry, we believe there are several key factors specific to Green Brick that have driven our success and exceptional performance.

Land has always been the cornerstone of our business and one of our big strategic advantages. Over the last several years, we believe we have assembled one of the best land and lot positions in industry. As with any real estate asset, location matters the most. Our footprints are concentrated in some of the fastest-growing residential markets in the country, notably Dallas-Fort Worth and Atlanta, which both benefit from robust demographic trends and healthy job markets. Additionally, we are focused primarily on infill and into adjacent submarkets where supply is more constrained, competition is more limited, and homes are more desirable.

Secondly, we own 86% of our land on our balance sheet, and we self-develop over 95% of our lots. The scarcity of land developers with the ability to develop large residential -- plan communities in our markets create significant opportunities for Green Brick and our subsidiary builders. By avoiding retail prices on land, which is often associated with the land light operating model, we have been able to effectively control our lot costs and development and delivery timelines, which are key drivers of our industry-leading gross margins and returns.

Since the start of 2022, we have generated homebuilding gross margins in excess of 30% with the exception of only three quarters. Our full year return on equity in 2024 was 26.8% and return on assets was 18.2%. Return on equity and return on assets over the last five years averaged 25.7% and 16.2%, respectively. Lastly, our superior returns have not been achieved at the expense of our community quality. We aspire to be more than just another homebuilder in our submarkets. We allocate significant capital and community development emphasizing superior design, enhanced common area amenities, better landscaping, than other aesthetic features that contribute to long-term value appreciation.

Over the years, our builders have won Uverse prestige awards in the industry and earned the reputation of building superior products. This strong reputation has proven invaluable in navigating the competitive land market and the complexities, embedment and the development process. The Green Brick's trust among land sellers, municipalities and local governments, establishing Green Brick as a reliable partner and a preferred builder developer.

As we enter our second decade, we remain optimistic about the long-term housing demand despite the current challenges posed by elevated mortgage rates. We expect that the entry of millennials and Gen Z into their prime home buying years will continue to fuel significant demand. Furthermore, the housing market remains undersupplied by an estimated 4 million to 7 million units, while the existing home market inventory levels remain at historic lows. We are well positioned to further capitalize on this incremental demand, leveraging our career land positions, particularly through our Trophy brand that specializes and more affordable housing options that cater to the largest segment of the potential homebuyer market.

With that, I'll now turn it over to Rick, who will provide more detail regarding our financial results. Rick?

Thank you, Jim. Home closings revenue for the fourth quarter increased 24% year-over-year to $557 million, a company record. Record revenues were driven by the highest volume of closings and company of 1,019 units, up 23.5% year-over-year. Closing ASP was essentially flat in Q4 versus Q4 2023 at $547,000 and as Trophy represented 51% of Green Brick's total closings in 4Q '24.

Trophy sales reflected an ASP below the company average as Trophy sells more first-time higher and first-time move-up buyer inventory in primary locations. We continue to generate strong gross margins during fourth quarter of 34.3%, a 290 basis points year-over-year. During the fourth quarter, we reduced our estimated warranty reserve which resulted in a positive impact of $13.2 million or 230 basis points to our quarterly Homeland gross margin.

This adjustment was based on analysis of our warranty reserve accruals, compared to actual warranty spend, which was less than previously anticipated. This adjustment also reflects regions in our risk exposures due to various factors, including a reduction of our structural warranty periods due to legislative changes and enhancements to our insurance compliance program with our contractors. Even after these adjustments, our warranty reserves remain at the high end of our peers based on estimated reserves versus actual warranty spend levels.

The positive impact of the warranty adjustment was partially offset by slightly higher incentives in Q4 due to elevated mortgage rates. SG&A as a percentage of residential revenue for the fourth quarter improved 50 basis points year-over-year to 10.9%. Net income attributable to Green Brick increased 42% year-over-year to $104 million and diluted earnings per share for the quarter grew 46% to $2.31 per share. both company records for any fourth quarter. For the full year, we delivered 3,783 homes, which was 21.1% more units than 2023. Generating home closing revenues of [$2.0 billion], a record for the company and representing growth of 17.1% year-over-year.

Homebuilding gross margin increased 290 basis points to 33.8% for the full year, which was also a record. Net income attributable to Green Brick increased 34.1% year-over-year to $382 million, and diluted EPS grew 37.6% of 2023 to $8.45 per share, the highest in company history. Net new home orders during the fourth quarter grew 29.3% year-over-year to 878, one of the highest growth rates among public homebuilders. For the full year 2024, our net new home sales totaled 3,681 an increase of 9.7% year-over-year.

Backlog revenue at the end of the fourth quarter decreased 10.7% year-over-year to $496 million. Trophy continue to represent a low percentage of overall backlog revenue at less than 14%, as Trophy has continued to increase the percentage of spec homes it builds to meet the needs of its buyers. As a result, backlog ASP of $742,000 remained higher than our average sales price on delivered homes.

Our community count at the end of 2024 increased 17% year-over-year to 106 active selling communities, 35% which were trophy communities. Sales pace for the fourth quarter was 8.3 homes per average active selling community, which was up 9.2% over Q4 of '23. Our cancellation rate for the fourth quarter remained low at 7.8%, one of the lowest among public homebuilding peers. We started 22% more homes in 2024 than the previous year with 4,067 total starts in 2024. Total units under construction increased 14% at year-end to 2,341 homes.

At the end of the fourth quarter, our net debt to total capital ratio was 10.7%, and our total debt to total capital ratio was only 17.2% which was down 390 basis points year-over-year to the lowest year-end level since 2015. This was among the lowest leverage ratios of our small and mid-cap public homebuilding peers. As of December 31, 2024, 93% of our outstanding debt is fixed rate with an interest rate of 3.3%.

With that, I'll now turn it over to Jed. Jed?

Thank you, Rick. Our fourth quarter net new orders increased 29% year-over-year to 878, a record for any fourth quarter in company history. Demand in October and November was robust but decelerated in December due to both seasonality and the impact of rising mortgage rates. We responded to the softening of demand with more aggressive incentives in December. Overall, for the fourth quarter, incentives averaged 6.4%, up from 5.9% in the previous quarter.

During the fourth quarter, Trophy continued to exhibit strong performance, contributing 54% of net new orders by volume. The cancellation rate for trophy was only 6.7% and slightly lower than the company average. The DFW housing market continued to perform well, incentive levels for Southgate and Normandy Homes, which cater to higher end move-up buyers decreased selecting the persistent mortgage lock-in effect on the existing home market in infill submarkets Trophy, which primarily targets entry-level and first-time move-up homebuyers experienced a more pronounced impact from the rising interest rates necessitating an increase in incentives and rate buy-down programs in most of its communities.

Similar trends were observed in the Austin market where Trophy currently sells Some's price to entry-level home buyers. Atlanta remained healthy with strong orders and a modest incentive increases. As we enter the spring selling season, we are diligently monitoring our spec inventory sales pace, incentive levels and starts. We believe our industry-leading gross margins will provide us with greater flexibility to adjust home prices and incentives as needed.

Our buyers' financial profiles remained healthy. Applicant -- closed using our prior mortgage joint venture, which ceased accepting new applications in the fourth quarter at an average [pi] score of 742 and a debt-to-income ratio of 37% during the fourth quarter. New applications through a new wholly owned mortgage subsidiary with anticipated closings in the first quarter of 2025 demonstrate comparable financial resilience.

Turning to capital allocation. Our full year spend on Atlanta acquisition finishes off with over $375 million with over $200 million spent on Atlanta development. In 2025, we plan to increase our spend on land development by 46% to approximately $300 million. As Jim mentioned earlier, we entered 2025 with a strong land position. Year-over-year, we have added 13,000 new lots on a gross basis. On a net basis, total lots owned and controlled at the end of the year increased by 32% to over 37,800 lots with approximately 92% of those in Texas, 5% in Georgia and 3% in Florida.

Trophy, our primary growth engine owns approximately 70% of total loss. Excluding our 21,600 lots in long-term communities, our current pipeline provides approximately five years of lot supply based on start pace and non-master communities over the last 12 months. Additionally, over 97% of our current inventory of lots owned and controlled are expected to be self-developed.

At the end of the year, we had approximately 4,800 finished lots, over 80% of which are infill and infill adjacent areas. With our existing land and lot position, we're taking a more opportunistic approach on land acquisitions within the current competitive land market where land prices have remained sticky. We will continue to evaluate our capital allocation strategy with the objective of maximizing shareholder value. Commensurate with the strategy, our Board recently authorized a new share repurchase plan to buy back up to $100 million of common shares. We also continue to expand our geographic footprint through the Trophy brand.

In 2024, Trophy closed over 100 homes in Austin. We currently have two active selling communities in the market. Furthermore, we are making substantial progress in our newest market, Houston. We anticipate completing the first phase of lots this summer, and Trophy is expected to open for sales in its inaugural Houston community this fall. We are excited about expanding the Trophy brand's presence in one of the largest homebuilding markets in the United States.

Lastly, we are pleased with the progress on the construction side. With housing stores declining in many of our markets, we are still seeing bargaining power on labor and materials and certain trades and in some markets. Not only our overall construction costs stable, but cycle times for homes completed in the fourth quarter averaged approximately 5.3 months. Trophy cycle time was only 3.4 months in Dallas about two weeks shorter than at the beginning of the year.

With that, I'll turn it over to Jim for closing remarks.

Thank you, Jed. Let me conclude by saying that I'm incredibly proud of our team's hard work that has resulted in this record-breaking year despite operating in an elevated mortgage rate environment that creates affordability challenges for many own buyers. Our success in the past decade as a public company provides us with a strong foundation for future growth. We will continue to invest in our team and business to deliver exceptional value to our shareholders. Thank you for your continued support.

This concludes our prepared remarks, and we now open the line for questions.

(Operator Instructions) Carl, BTIG.

Thanks. Hey, guys. Nice to talk to you. Thanks for taking the questions. I am curious, first of all, Jed or Jim or Rick, how trends in January and February have been on a sales perspective, particularly related to incentives we had a peer this morning you talked a little bit about incentives beginning to come in, some of that seasonal, some of that builders having worked through spec. So how are you guys seeing things shape up order-wise so far in the first quarter?

Yes, sure. Carl, I'd say we're off to a very similar start from last year on the sales front so far. Mortgage rates have dropped in February. So incentives have actually ticked down because it's not costing as much to buy down the rate currently. But yes, we're seeing a spring fairly similar to last year.

Okay. I appreciate that. That's helpful.

If you do a circle around all of our markets, the inner circle of AAA locations, incentives are still very low. If you move into a B or B- or the next circle, there could be 5%, 6%. And if you go into a C location, it could be 10% or 12%.

Yes. Okay. I appreciate that. And then I wanted to ask a little bit about the development spend. So 46% is a really big increase for you -- I assume that's not 46% more lots, and I assume that's not the same number of lots, but 46% cost inflation. So could you break down that $100 million increase a little bit. Does that mean a substantial number of lot deliveries sort of late in the year, which could lead to community count growth? Or is this sort of in process and that we'll see in '26. It's a really big increase for you guys, and it does certainly seem to indicate some substantial growth coming for you, but I just don't know if it's going to be late this year or into 2027.

That's a really good question, Carl. And I think at this level, investors have a difficult time understanding how long it takes from contracting a lot to getting revenues from a lot. So unfortunately, for an analyst, it doesn't create a linear progression of our business and how things grow.

It's lumpy, and it takes about three years from when we contract a lot in land to getting revenues from there. And our prior investments in land, the reason our land spend is so high is that's all coming to fruition right now. We're spending a lot of dollars in land development.

Jed, do you want to add color to that?

Yes. We bought a lot of land in '23 and in '24, Carl, putting the development dollars on that land this year. That will flow a little bit in next year to -- and you're right that we will, at some point in the very near future, start seeing community count go up.

But it's a lagging investment.

Yeah, that makes sense. All right. I'll get back into you. Thanks a lot, fellas.

(Operator Instructions) Carl.

No, I wasn't expecting that. (laughter) Okay. I'll do one more here. So on the -- or maybe on the SG&A side, I'm curious as to whether or not you guys think that into 2025 you might begin to get a little bit better leverage there. Knowing the store count grew a lot. You're still able to get some leverage of revenue this year.

So how are you thinking about -- you talked about headcount? How are you thinking about headcounting into '25 and into '26 and how much leverage you might anticipate getting there. That's for Rick, I guess, is probably the person to ask.

Yes. It's kind of a tale of two different situations. One is we're going to probably continue with more predominance in our numbers of trophy which means that there's such an efficient operation as a percentage of the total as they grow, we will certainly, over time, see that improvement. We're not in a high-growth mode from a personnel standpoint at right at this time. But it's kind of related to the land story that Jim and Jed were just describing.

There's going to be a delayed impact of when those increase in houses and closings will happen. So a little bit of modest increase there. And really, the unanswerable is on the interest rate side is that move to being more trophy, which can have a more interest rate-sensitive buyer, have to create higher incentives or we see the rates continue to come down, we have lower incentives. So will be an offset in margin, no idea.

Carl, the other thing we really talked about -- Carl when you look at one of the things that we have never really pointed out in prior calls is that we're developing close to 90% of the lots that we're building on right now. And a lot of those costs are added in SG&A. So when you compare us, we're still having 10.4% SG&A. Some of those costs are capitalized. But our SG&A includes a big land development group that some other companies are not having particularly [cyclically buying].

And one other impact here is on the financial services side, Carl, if you look at the range of peers who have full on financial services with title and mortgage companies, the average is probably about 1% of revenues. But we're just in the nascent stages of opening up our mortgage company. And so we're going to get some positive impact from that going forward. That's not part of the SG&A, but it is something that as we particularly move into 2026, you'll see an additional revenue source that really wasn't there.

Okay. Thank you, Rick. And then just on that sort of idea of Trophy, is '25 likely to be sort of a similar 50-50 mix split between core Green Brick and Trophy because I know Houston is coming on. And let's assume that incentives are similar throughout the course of the year. Would you project a similar sort of half, and half mix split between the two for '25 as you stay here today?

Okay. All right. Thank you very much, guys. I appreciate it.

Yes, we're projecting similar volumes at Trophy this year compared to last year.

(Operator Instructions) There are no questions at this time. That concludes our conference call. Thank you for joining today. You may now disconnect.