Green Brick Partners Inc (GRBK) 2015 Q2 法說會逐字稿

Good afternoon everyone, and welcome to the Green Brick Partners' earnings call for the second quarter ended June 30, 2015. 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 the replay will be made available at the end of the call.

The Company reminds you that during this conference call, it will make various forward-looking statements within the Private Securities -- sorry, within the meaning of the safe harbor provisions of the US 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. 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 Wednesday, August 12, 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 over to Green Brick's CEO, Jim Brickman. Please go ahead sir.

Good afternoon everyone. Thanks for joining us today to review our second-quarter 2015 financial and operating results. With me in the room is Rick Costello, our CFO, and Jason Corley, our COO.

Since our last conference call, we have been very busy, and Green Brick successfully completed and oversubscribed secondary offering of our common stock at $10 a share through the issuance of 17,445,000 shares. The offering closed on July 1, 2015, the day after the end of our second quarter.

I want to welcome all of our new investors listening to our earnings call for the first time.

We raised net proceeds of $169.8 million, which enabled us to repay in full the outstanding $150 million term loan and also provide us significant working capital for growth. This offering means we now have one of the most unlevered balance sheets of any public builder and the capital and lot positions to execute our plan for significant growth.

From an operating standpoint, our increase in backlog and units under construction will feed continued growth during the second half of the year. The dollar volume of our backlog at June 30, 2015 increased to $102.4 million, up 30% from the prior year. Significantly, our average sales price of units in backlog grew to over $410,000, an increase of 25% over the prior year.

After strong starts in the first half of 2015, we (technical difficulty) 22 homes under construction at the end of the quarter. This is an increase of 40% from a year ago. This construction activity provides excellent visibility into a strong back half of the year, particularly in the fourth quarter.

We expect our operating metrics to continue to improve as new communities opened in 2014 become fully operational in 2015. As of the end of June, we have 39 average selling communities compared to 30 at the start of the year. This is an increase of over 30%.

In addition to our housing inventory being very positive, pricing continues to be in our favor. During the 12 months ended April 30, 2015, homes in the Dallas and Atlanta markets appreciated by 8.8% and 4.9% respectively, according to Case-Shiller.

From a demographic standpoint, in June 2015, Dallas was the number three job growth market in the nation and Atlanta was number four according to Metrostudy. Bellmoore Park, our largest Atlanta neighborhood that will have more than 600 homes, opened its model row during the quarter. This is the most outstanding new neighborhood in Atlanta with homes priced from $460,000 to over $1 million. We now have 43 homes under construction with 15 homes sold, and these 15 homes sold even though we have not opened our $4 million amenity center. Our Olympic sized swimming pool is just under construction and are eight tennis courts are under construction. This neighborhood should be a really great place to live and provide really superior returns for investors for many years to come.

Our Village at Twin Creeks neighborhood in Texas with over 900 homes is a few months behind Bellmoore and we expect similar favorable results when homes start closing later this year and early next year.

We encourage our investors to visit these neighborhoods. If you do, you will immediately see what sets Green Brick apart from most public builders.

Based on current market conditions and favorable demand supply metrics and our superior locations, we continue to expect 2015 pretax income attributable to Green Brick to be in the 29 to 30 (technical difficulty)(sic-see press release �$29 million to $32 million�). Next I will introduce Rick Costello, our CFO, who will discuss the second-quarter results in more detail. Rick?

Thanks Jim. Hello everyone. Thank you for joining us today to review our 2015 second-quarter financial results.

First, here are the highlights of some key operational metrics for the quarter ended June 30, 2015 as compared to the second quarter ended June 30, 2014. First, home sales revenues increased by 9.7%. The dollar value of units in backlog increased by 30%. The average sales price of units in backlog increased by 25% to over $411,000. Net new home orders increased by 12.7% and homes under construction increased by 40%.

During the second quarter of 2015, Green Brick was selling homes from a total of 43 communities, a year-to-date increase of 30% from 33 communities total as of the start of the year. This follows an increase during calendar 2014 of 32% in total selling communities. Management expects community count to grow by at least 30% again by the end of 2016.

Green Brick has delivered more homes this year, which we attribute to an increased community count. 162 homes were delivered in the second quarter, a 5.2% increase, compared to 154 in second quarter 2014. Year-to-date, we have delivered 307 homes, a 5.1% increase as compared to 292 units in the first two quarters of last year.

The Company also increased home starts year-to-date to 366 units versus 261 units for the first half of 2014, an increase of 40%. And as Jim mentioned, as of June 30, 2015, we now have 522 homes under construction compared to 373 at June 30, 2014, an increase of 40%.

The average sales price of homes delivered was $372,600 for the quarter, an increase of 4.2% from $357,500 for the prior year. The increase in the average sales price of homes closed in the second quarter was the result of changes in product mix, including closings in new selling communities at higher prices.

The number of net new home orders for the quarter increased 12.7% to 169 homes compared with 150 homes in the prior year. Year to date, the number of net new home orders increased 6.8% to 347 homes compared with 325 homes in the prior year. The overall absorption rate for the quarter was an average of 4.3 home sales per selling community compared to an average of 60.0 units in the prior year. Now, the decrease was in part due to the timing of the opening of new communities and the closing out of existing communities. With the opening of nine different model centers this June, we expect the absorption rate to return to historic rates over the second half of the year.

Builder operating revenues for the quarter increased 9.7% to $60.4 million compared to $55.0 million for the prior year. Year-to-date builder operating revenue increased 5.1% to $110.0 million compared to $104.7 million for the prior year. Adjusted homebuilding gross margin was $15.2 million for the quarter, up $9.7 million compared with $13.8 million for the prior year. Year-to-date adjusted homebuilding gross margin was $29.0 million, up 10.9% compared to $26.2 million for the prior year.

Now, while the adjusted homebuilding gross margin was unchanged at 25.1% for the quarter versus the prior year, for the year-to-date, the percentage of our adjusted homebuilding gross margin was 26.4% compared with 25.0% in the prior year.

It should be noted that our cost of residential units includes all internal and external sales commissions. If we were to reclassify commissions to SG&A expense as some other builders report, our adjusted gross margin percentages would be in excess of 30%.

For the first half of 2015, there was a decrease in land development revenue. Now, this is a result of an increase in intercompany lot sales to our controlled builders where revenue is not recognized until the home closes. While internal lot sales delay revenue recognition, we believe these sales were the best use of these assets as we will be rewarded long-term by further investing in our builders and thereby improving future margins.

Specifically, compared to the first half of 2014, our land development revenues declined 15.6% from $24.2 million to $20.4 million as the number of finished lots delivered declined 23.6% from 242 to 185 lots, but was offset by a 10% increase in the average sales price per lot closed from $100,000 up $210,000. Land development gross margin improved to 26.0% for the quarter and 27.1% year-to-date. Both increased as compared to 24.6% and 25.9% for the same periods in the prior year.

Total SG&A expense, including salaries, was $8.0 million, or 11.1% of total revenues, for the second quarter of 2015 compared to $5.7 million, or 8.7% of total revenues, for the same period of 2014. Year-to-date total SG&A expense, including salaries, was $15.8 million, or 12.1% of total revenues, for the first two quarters of 2015 compared to $11.5 million or 8.9% of total revenues for the same periods of 2014. The increase in SG&A was primarily the result of an increase in headcount driven by our growth in our transition from a privately held company to a public company as well as an increase in front-end expenses incurred on new communities and other costs to support the growth in our builder operation segment. For example, this increase in SG&A has helped fuel our growth in the number of selling communities and have homes under construction by 40% year-over-year.

At June 30, our builder operation segment had a backlog of 249 sold but unclosed homes with a total value of approximately $102.4 million, an increase of just under 30% from the prior year. At June 30, the average sales price in backlog increased 25% to approximately $411,000 compared to about $329,000 from the prior year. The increase in the value of backlog units reflects the combination of an increase in the number of homes in backlog, an increase in the average selling community count, as previously described, and of course an increase in the average sales price of the homes in backlog.

Income before taxes attributable to Green Brick was $5.9 million for the quarter and $12.1 million year-to-date compared to $7.4 million and $15.1 million for the same periods in the prior year. Adjusted EPS declined from $0.24 per share for the second quarter of 2014 to $0.19 per share for the second quarter of 2015. Year-to-date adjusted EPS declined from $0.48 for the first two quarters of 2014 to $0.39 for the first half of 2015. The decrease in net income before taxes is a result of the increase in overall SG&A as we gear up for the second half of 2015.

Finally, one subsequent event, on July 30, 2015, the Company extended an increase of revolving line of credit with Inwood National Bank from $25 million to $50 million and renewed the facility until July 30, 2017. Multiple banks are now courting our business in regards to expanding our line to $100 million as we own the most conservative balance sheet of any public builder that we follow.

I will now turn the call back to Jim who will provide some concluding remarks. Jim?

Thanks Rick. Because of our decades-long relationship with landowners and municipalities in our markets, we get first look at many land deals. We are continuing to find attractive land investment opportunities that, upon development, should translate into strong profits and favorable gross margins for our builders. To that end, during the first six months of 2015, we have increased the number of total lots owned and controlled by 509 net lots from 4,156 lots at December 31, 2014 to 4,665 lots at June 30, 2015. These lots do not include homes under construction, and since we started construction on 366 units year-to-date, we actually added 875 lots on a gross basis to our inventory of lots owned and controlled during the first half of the year. This is an increase of 21% of the lot count. If we were to include homes under construction in our totals, as of June 30, 2015, we would show almost 5,200 total lots owned and controlled.

With our superior land and lot position, our experienced land development team and builder operation, and thanks to our investors, our very strong balance sheet, we believe that Green Brick is very well positioned for strong growth for the long term.

Thank you for your interest in Green Brick and for joining us on the call today. I will now turn the call back to the operator for questions.

(Operator Instructions). [Darius Strong, Shark Point].

Thanks for taking the question. I recently read about an acquisition, I think it was reported on July 22, regarding land for about 135 homes at the Heritage Creekside. Can you give us an idea of the price there and how long you expect it to take to develop those properties? Thank you.

Sure. This is Jim Brickman. That land acquisition is a really good example of what differentiates us and our business model from the typical large volume production builder. In this case, Rosewood is -- I don't know if any of you stay at Rosewood hotels. It's a very well capitalized development company owned by the Hunt family here in Dallas. They're doing a $900 million mixed-use development. We worked on this deal for over a year with the CEO of Rosewood, and we were selected because they believe we were going to offer the best quality and product, and they were very sensitive of that because our residential component is 135 home sites. The townhomes will probably start selling in the low $300,000s, and our single-family product on the Creek will probably be in the $600,000 price range.

But from Rosewood's perspective, what is so important to them, our residential component is let's say $60 million, $70 million. Their largest concern in selecting us is they wanted to make sure that we could play in the sandbox with them because these developments are very fluid. They require a lot of cooperation over a very long time, and they wanted to make sure that the product was going to be not only compatible but really enhance the $900 million development that they had surrounding us. So, I guess that's a long-winded answer to say that our price point is running from the $300,000 to about a $600,000 price point.

And what do you think the split is between townhomes and single?

It's about two-thirds townhomes.

Okay, thank you.

Chip Saye, AWH Capital.

It's Austin Hopper, AWH Capital. Appreciate you taking the question. You paid back the $150 million in debt after you did the secondary. Can you talk about interest expense and kind of where that is in your income statement and how we will kind of see interest change because of the debt pay down and the timing of that?

Good to hear from you. This is Rick Costello. Going into it, obviously from a cash flow standpoint, that's a massive savings. We were looking at the rate on that term loan being 10% starting this October, so that's $15 million a year, which has essentially gone away. Now, our interest expense is primarily consumed of a 4% rate on our line of credit. So a huge cash flow savings from $15 million to a tiny number.

From -- previously you didn't see it in the P&L because we capitalize all interest. Our qualifying assets from a GAAP standpoint, all of our land under development and interactive communities as well as our construction process on homes underway, far exceeds our debt. So it's been capitalized. And you saw in the current footnotes in the 10-Q the amortization of that interest coming online as part of cost of sales. And you will continue to see that to the extent of maybe 1.4% or 1.5% of home sales as we close out units, and that should continue on that way, certainly for the next year and a half to two years, I would say, and then it will depend on what our future debt profile of the Company is.

Not a lot of our interest cost is expensed on a very short-term basis because we are a very land heavy business model. And as such, a lot of the capitalized interest goes into our land, which we don't recognize the expense of that through cost of sales until we sell it to the eventual homeowner. So, it's a huge cash savings bottom-line and that amortization is going to play out for what's already been capitalized. And you will see that bleed out slowly, but not at an extensive level over the next couple, three years. And then after that, you will see the margins be unaffected for interest costs unless we do some other capitalization event. Does that make sense?

Yes. Great. Thank you.

(Operator Instructions). David Wells, Hanson Wells Partners.

Thank you for taking my question. Given the state of the balance sheet in the now cash balance, can you talk a little bit about your geographic priorities and thinking around looking at other geographies from an expansion perspective, or is your preference to just look at deploying capital into your two core geographies? I guess, as you think about the business over the next three to five years, really where do you see I guess kind of the evolution from just a scope and range perspective?

Hi David. This is Jim Brickman again. Let me back into that. First of all, I take my job as CEO as a steward of your and our families' capital, and our investors' capital, really seriously. And as we move forward, that is the most important value I want to instill in our culture.

Our current team of builders really thinks the same way. As we expand, and if we expand, which we expect to into other markets, we'll seek out builders that are profitable, are competent, hard-working, have a reputation in their market, and think like we do culturally.

When we were doing our roadshow raising capital, we talked and said that our primary focus right now is on the organic growth of our builders, but I am also exploring other markets right now, and we are looking at other builders and benching them against what those returns would be and possibly generate versus growing organically. So right now, we are playing all ends against the middle. We have a lot of excess capital and we are going to prudently deploy it as we think best.

Great. Thank you very much.

We have no further questions at this time. I'll turn the call back over to the presenters.

We really we don't have -- unless you guys want to add anything else, we really appreciate everybody joining our call today. And if anybody ever wants to ask a question off-line, just give Rick or Jason or myself a call.

Also, there is, in the earnings release, information on how to access this call if you want to listen to the replay. And otherwise, we will talk to you separately or next quarter. Thank you.

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