Green Brick Partners Inc (GRBK) 2015 Q4 法說會逐字稿

Good afternoon, everyone, and welcome to Green Brick Partners' earnings call for the fourth quarter ended December 31, 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. A slide show supporting today's presentation is available on Green Brick Partners' website www.greenbrickpartners.com in the Investor Presentations tab.

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. 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 Thursday, March 10, 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.

Hello, everyone. Thank you for joining us today. With me today are Rick Costello, our CFO, and Jed Dolson, our Head of Land Development & Acquisition.

Before we begin, I wanted to note that, as we mentioned in our earnings release, we have not yet completed our internal review process and, accordingly, the results we will be discussing today are unaudited.

That said, I am very pleased to announce that we exceeded the upper end of our earnings guidance given last fall of between $22 million and $24 million of pretax earnings by generating approximately $24.4 million of pretax earnings in 2015. Rick will provide more detail later on that.

The most important takeaway is that we have the people, lot position, and balance sheet to execute our plan for significant growth. As many of you know, we operate in Dallas and Atlanta. These are two of the largest and best housing markets in the United States. Please refer to our investor presentation slide deck, and I will give you a second to do that.

Housing demand is highly correlated to job growth. Slide 4 shows that we operate in Dallas and Atlanta, two of the top four job growth markets in the United States.

During 2015, Dallas added 98,900 jobs and Atlanta added 77,800 jobs. The level of corporate relocation activity is the highest I have ever seen after living in Dallas for over 40 years. Our neighborhoods are typically within a short drive of major corporate campuses being constructed for companies like Toyota, JPMorgan, Liberty Mutual, and Raytheon in Dallas, or Mercedes and other corporate campuses in Atlanta.

As slide 5 shows, during 2015, Dallas was the second most active housing market in the United States with 26,905 starts, and Atlanta was the third most active with 18,958 starts.

Slide 6 shows that Dallas has only a 1.4 to 2.2 month supply of finished new homes in our primary price range of $250,000 to $750,000. N

New homes also compete for buyers with existing homes. Slide 7 shows that Dallas has only a 2.1 month supply of existing home inventory. This is as low as I recall ever seeing in Dallas.

Slide 8 shows that Atlanta has only a 2.7 month supply of finished new home inventory.

Slide 9 shows that Atlanta has the lowest inventory of existing homes on record, with only a 2.9 month supply.

The combination of strong job growth, low levels of new housing inventory, and low levels of existing housing inventory is very clear evidence that we operate in two of the best new home markets in the nation. We expect that Dallas and Atlanta should remain two of the best housing markets in 2016.

The 665 homes that Green Brick closed in 2015 represents less than 1.5% of housing starts in both of our markets. This gives us a huge runway for organic growth in both of our markets.

Risk matters. In evaluating how we stand in our industry, risk-adjusted returns should be considered by investors when evaluating the quality of our earnings and our earnings multiple versus peers. We continue to have one of, if not the most, unlevered balance sheets of any public builder.

As shown on slide 10, as of December 31, 2015, our debt to capital was under 14%, which compares to an average 50% ratio for the public builder sector. We believe we can increase our debt to capital ratio to the 35% range, which is still a conservative and prudent leverage, but will allow us to have continued and inexpensive growth in our builders and land or lot positions.

Consistent with that goal, during the fourth quarter, we increased our debt capacity by closing a new $40 million line of credit led by Citibank where the interest rate was under 3% at year-end. During the fourth quarter, we also purchased land for two large neighborhoods in Dallas of about 800 homesites that we expect will be highly accretive to earnings in 2017 through 2020.

Consistent with our goal to optimize returns to our investors, given ongoing labor constraints and high demand for lots by third-party builders in our superior locations, we currently plan to sell some of these homesites to a large public builder that we have done business with.

Overall, this brings our total number of lots owned and controlled to over 4700 lots.

From an operating standpoint, we believe our 30% increase in active selling communities during 2015, along with our backlog in units under construction, will feed continued growth throughout 2016.

The dollar volume of our backlog at December 31, 2015, now sits at approximately $88.1 million, up 12% from the prior year, and that is after executing a record quarter during which home closing revenues was up 34% more than Q4 2014.

Indeed, Q4 2015 was a record quarter for Green Brick in terms of homebuilding revenues, homes closed, total revenues, and average sales price and backlog.

Next, I will introduce Rick Costello, our CFO, who will discuss our unaudited fourth-quarter 2015 results in more detail. A summary of those results are on slides 11 and 12.

Rick?

Thank you, Jim. Hello, everyone. Thank you for joining us today to review our unaudited 2015 fourth-quarter financial results.

As Jim mentioned, the 2015 audit is still in process, primarily due to the ongoing internal control testing and evaluation of our compliance and reporting processes. We expect the audit to be completed and the 10-K filed not later than March 30, 2016.

Please refer to slide 11. First, here are preliminary highlights of some key operational metrics for the three months ended December 31, 2015, versus the three months ended December 31, 2014. Home deliveries increased by 18%. Home sales revenues increased by 34%. The average sales price of homes delivered increased by 13%. The dollar value of units in backlog increased by 12%. And the average sales price of units in backlog increased by 17% to over $438,000.

And here are the preliminary highlights of some key operational metrics for all of 2015 as compared to 2014. Home deliveries increased by 12%. Home sales revenues increased by 27%. The average sales price of homes closed increased by 13.5%. Homes under construction at year-end increased by 9.5%, and full-year starts increased by 8.2%.

Green Brick delivered a record number of homes with 194 homes closed in the fourth quarter of 2015, an 18% increase over the fourth quarter of 2014. For the full year, we delivered 655 homes, a 12% increase. And the average sales price of homes delivered was $387,000 for the quarter, an increase of 13% from $342,000 from the prior year.

For the fourth quarter, the number of net new home orders increased 36% to 160 homes compared with 118 homes in Q4 of 2014.

So combining quarterly delivery growth of 18% more units with average sales price growth of 13% yields an increase in builder operating revenues for the quarter of 34% at $75.1 million compared to $56.1 million for the prior year.

Now similarly, for the full year, builder operating revenue increased 27% to $254.3 million compared to $200.7 million for the prior year.

As shown on slide 12, at the end of the fourth quarter of 2015, Green Brick had a total of 43 active selling communities, a year-over-year increase of 30%. The Company also increased home starts for the year to 699 units versus 646 units for 2014, an increase of 8.2%.

As slide 12 shows, despite strong growth in starts, we were still able to increase our total lots owned and controlled from 4156 lots to 4734 lots. The adjusted homebuilding gross margin percentage increased to 23.2% for the fourth quarter versus 22.1% for Q4 of 2014. For the full year, the adjusted homebuilding gross margin percentage was 24.2% compared with 25.6% in the prior year. And, as expected, our amortization of capitalized interest reduced margins by 1.5% for the year.

Year over year, there was a decrease in land development revenue. This is a result of our intentional increase in intercompany lot sales to our controlled builders where we don't recognize revenue until the home closes. We believe these sales are 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, for the full year, our land development revenues declined from approximately $45.5 million to approximately $36.9 million as the number of finished lots delivered declined 28% from 449 to 323 lots, but was offset by a 13% increase in the average sales price of those lots. Land development gross margin improved to 26.4% for the year compared with 25.0% for 2014.

At December 31, our builder operations segment had a backlog of 201 sold but unclosed homes with a total value of approximately $88.1 million, an increase of 12% from the prior year. At December 31, the average sales price of homes in backlog increased 16.5% to approximately $438,000 compared to approximately $376,000 for the prior year. The increase of value of backlog units reflects a strong 36% growth in quarterly orders, offset by an equally strong 34% growth in closing revenues.

Income before taxes attributable to Green Brick is expected to be approximately $7.6 million for the quarter and $24.4 million for the year, compared to $6.4 million and $25.1 million for the same periods in the prior year. Adjusted EPS improved from $0.13 per share for the fourth quarter of 2014 to an expected $0.16 per share for the fourth quarter of 2015. Despite over 18% growth in total revenues, full year adjusted EPS remained essentially flat, primarily due to almost $4 million in amortization of capitalized interest, as well as increased G&A expenses from becoming a public company and from gearing up for continued growth in operations.

A quick note about GAAP EPS, which is shown in the press release at $0.38 for the year and $0.07 for the quarter. Now, the $0.07 is the difference between the $0.38 total for the year and the amounts that we previously reported for quarters one, two, and three. However, if you calculate Q4 on a standalone basis, our EPS is $0.10 rather than the $0.07 for the quarter.

Now, this material difference is due primarily to the impact of the quarterly and annual weighted average share calculations. And, after discussions with our auditors and based on evidence of industry practice, we believe that the $0.10 per share to be the better representation of our quarter.

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

Thanks, Rick. We remain optimistic, given our AAA neighborhood locations, unlevered balance sheet, our over [4700] owned and controlled lots providing many years of runway for growth, and the collective experience of our builders in construction and marketing.

In the long run, homebuilding success is driven by location, product, superior management, and a strong balance sheet. Based on this criteria, we believe that Green Brick is very well positioned for strong growth and providing superior risk-adjusted long-term returns to our investors.

Given the decline of our stock price, along with the general market, public homebuilders and in particular with small cap homebuilders, and our belief that the Company's common stock is significantly undervalued, our board has authorized a share repurchase program of up to 1 million shares of the Company's common stock through 2017. The timing, volume, and nature of share repurchases will be at management's discretion and dependent on market conditions, corporate, and regulatory requirements, as well as other factors.

Recently, BlackRock CEO, Larry Fink, and some other astute investors, have called on CEOs to focus on long-term goals, commenting that a focus on near-term earnings may be at odds and/or undermine the abilities of companies to best invest for the future. We believe we have a superior business model that will produce superior long-term results for our investors. This business model allows us to opportunistically sell land and lots to either our control builders or to third-party builders. This, combined with our significant builder growth, makes our quarterly and even annual earnings much more lumpy and difficult to predict than many traditional homebuilders.

Last year, we gave earnings guidance which we have learned is not reasonably forecastable in the short term. As a result, we may have attracted some shareholders that became disappointed and we believe contributed to the recent decline in our share price. We think that our shareholders and Company are best served looking at the results that our business will produce over time and attracting a shareholder base that shares that same view.

After careful consideration, given our long-term focus, our management and our Board of Directors has determined that it is not in our Company's or investors best interest to provide future quarterly or other short-term earnings guidance. Instead, we intend to provide our investors with our insights into market conditions and the qualities of our asset positions.

In summary, I am pleased with how our business has progressed. Our team worked hard and effectively, and that showed in the fourth quarter, producing what we expect will be record results. We have the people, lot position, and balance sheet to execute our plan for significant growth. Each of our four controlled builders should grow during 2016. We have been opportunistically acquiring prime land. We have a clean balance sheet that gives us the flexibility to employ leverage to pursue opportunities with our existing builders, land acquisitions, or even potentially launching or acquiring additional builders. I am very excited about 2016 and beyond.

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

(Operator Instructions) Will Randow, Citigroup.

Good progress relative to the guidance for the quarter. I know you don't want to focus on any, I will call them, short-term metrics, but could you give us a sense on active community growth, either qualitatively or quantitatively, what you expect over the next one to two years on a net basis?

Yes, Will. This is Jim Brickman. Yes, we can talk about community growth, but let me take a step backward for you and all of our investors in that looking at pure numbers of community growth isn't necessarily totally representative of how our communities grow because some communities may have a 40-lot inventory and some communities may have an 80-lot inventory. So, as we look at these numbers, really, some of the community growth depends on how large the underlying lots are in the communities. And, for that reason, I think we are going to start to get away from just providing pure community growth numbers. Although, if you want to take a look at our builders' websites, every one of their communities is highly visible on their own websites, and you can actually see what is going on within the communities. And we think that is probably a better way to approach that.

Got it. But in the past, you have talked about the ramp-up in regard to your communities over the next, I'll call it, year or two. Has anything substantially changed relative to that growth pace of, I'll call it, 10 communities added each year?

No, that hasn't changed. But the kind of thing that has changed, for example, is that in December, thanks to our Citicorp team and our Credit Suisse team, we are able to get a line of credit and close on a large piece of land in Frisco, which is probably the most dynamic market in the country. We may sell -- that could be three or four communities. We want to add them to our builders. Right now, we're looking at selling those lots to other builders, and I am just saying that, when you look at forecasting community count and we are trying to be flexible and make the greatest return to our investors, those numbers could widely shift if we decide to sell lots to third-party builders or retain them for our own builders.

Understood. And then, just a follow-up, thinking about working capital meeting bricks, sticks, and land, how are you thinking about the balance sheet for 2016 in terms of working capital use, if you will?

Hey, Will. Rick Costello. Thanks for the questions. I think we have, as Jim mentioned, a long-term goal to ramp up our leverage to the 35% range. Certainly, the most cost-effective, as we have seen, has been through the use of our lines of credit where our city facility, for instance, was paying less than 2.9% at the end of the year. So between our available credit facilities and the built-in increases that are available there under, that will be our first line of funding sources. Part of the question lies in whether or not we find an acquisition target in our ongoing search of capital allocation between acquisition targets and organic growth. We have got a tremendous platform now where we have -- with our 4700 lots, we have complete runway for starts in 2016, 2017, and 2018. So the key really for us is to fund that through inexpensive line of credit debt initially, and we will go from there.

[Chuck Walter], [Houck].

Jim, could you just confirm, were both Frisco and Flower Mound closed in the fourth quarter, or was one of those actually closed in the first quarter?

No. They were both closed in the fourth quarter. The Flower Mound deal was closed first. That is about 450 lots, isn't it, Jed?

Yes.

And the Frisco lots were closed right at the end of the year. And let me just make a quick comment. One of the advantages we have by having 40 years-plus experience in the land development business in Dallas and Atlanta is that we were able to react very quickly because we had a really great balance sheet, we were able to close a $40 million line very quickly, and thanks to the Credit Suisse call out to you guys for helping us and close these deals. But they were done in a short time, and we think they are really going to be great for our Company in 2017 to 2020.

Okay. And just to follow up on the plan, it sounds like you are thinking about or will partner with a public builder, at least to maybe sell some lots. Can you give us any more color on the timing of when you will start to develop the deal?

Jed, why don't you answer that? You are running the development.

Hey, Chuck. Jed. We expect to develop sometime in the summer, depending on city permits, on both projects.

Okay. And when would the earliest point be that we would actually see some lot sales?

Sometime in 2017.

Okay. Thanks, guys.

And, again, let me just -- the lots that we sell to our builders we don't recognize that income until the house is actually sold. The lots we sell to a third-party builder, we recognize when we get the cash from that builder.

Understood. Thank you.

Mike Dahl, Credit Suisse.

Jim, wanted to talk about just the overall environment. Clearly, Dallas and Atlanta are very strong markets at a high level. Just curious, if you look at the order growth, 36% seems pretty solid, but community count and understand the nuances there. But community count is obviously running higher. So I guess I am wondering just relative to your internal expectations, how did the orders play out through the quarter, and was there any real meaningful difference in terms of progression in Atlanta versus Dallas?

No. Both markets -- actually, things stalled out a little in the third quarter, and we really didn't understand why in the later third quarter things really picked up in both markets pretty equally in the fourth quarter. And, really, fortunately, we are seeing accelerating sales continue right now into 2016. If I didn't read the paper -- Wall Street Journal -- I would be totally happy all the time because our business is not really reflected. It is really quite good. And some of the news that we see and looking at some stock prices because our business is great.

Okay. And those comments on 2016, it is kind of similar growth rates as we were looking at in 4Q?

Yes. We are not going to get into specific growth rates, but we are not seeing anything other than really good growth so far this year in both markets.

Got it. And then, just within the markets, you guys serve a wide range of price points, and it seems like the order price ticked down in the fourth quarter. So curious to hear if you think you are seeing any inflection points within your buyer segments like the first time or the more entry-level stuff starting to really accelerate or any color you can give on differences among the segmentation there?

Not really. We have been surprised how broad-based and equally dispersed the sales have been in all price points. We are seeing really great demand, whether it is a $250,000 townhouse, which is our lowest product or at Southgate whose backlog is really ramped up significantly in the $750,000 and $800,000 price point.

Got it. Okay. And one modeling question. Rick, on the interest expense, how should we think about what is likely to flow through cost of sales in 2016?

It should be modestly less in 2016. I think the further away we get from the amount of interest that was incurred on the term loan and capitalized, it should drop off gradually throughout 2016. So the current interest that we are incurring and capitalizing is on 14% debt to capital instead of 50% to 60% debt to capital and a much, much lower interest rate. So it will bleed off, and you will see that with lower -- lowering percentages each quarter throughout the year.

Okay. Thanks, guys, and good luck.

Yes. And, by the way, Mike, thank you -- hat tip to you for helping us noodle through the conversation on EPS and getting that right $0.10 out there. Thank you.

Happy to help.

(Operator Instructions) Will Randow, Citigroup.

Rick, recognizing how tight inventories are and the DFW and Atlanta markets are operating in, how do you think about margins or pricing, what type of pricing have you seen in the fourth quarter relative to incentives? Just to give us kind of a feel. Obviously, the long-term trends look good, and it seems good from all the resale data that we see, but would love to get your take on it.

We haven't really seen a deterioration in our gross margins at all. Fortunately, the market has been robust enough to allow us to pass on what has been increased labor costs and some increased lot costs. Right now that we are seeing less pressure on the labor and lot size and particularly the labor side. And so we think our margins are pretty sustainable this year.

And on a similar note, do you think you'll be able to add and have you added price going into the spring selling season as well as ramped up specs, if possible, in order to balance out some of the construction constraints, if you will?

Well, we went into the first quarter and the second-quarter 2016 with a lot of spec inventory in Atlanta that was a more spec-driven market. We needed to have specs on the ground.

Rick, what are your thoughts?

Well, I think the strong performance that we saw and the primary driver of our higher than expected revenues and beating our lowered guidance was the fact that we were quite successful in delivering those units in Q4.

So from a labor standpoint, that doubles what Jim is saying in terms of there is a little bit less cost pressure in the market as we were able to get those homes closed.

So from a production standpoint, things are working out very nicely. We don't see the deterioration. We don't see the pressures that previously we have seen. A little bit, we are seeing some labor move within the state of Texas from the Houston market as their starts slow down.

I guess, stated differently, are your specs per community up materially higher going into this, I'll call it, next buying season today?

No.

And then, have you been able to add some price as well? I am not talking about deterioration, but actually throwing more price on the market considering inventories are tight at resale?

Well, our spec inventories are appropriate. They have really not declined dramatically or increased dramatically. We feel real good about where we are heading into this spring selling season.

From a pricing standpoint, I think we are moderate. A lot of what we are trying to accomplish is the startup of many of our communities. And when you have got some of these larger communities, you really don't want to get too aggressive because it is hard to turn back when you have got large communities. So we are probably being a little less aggressive than the market in general.

Okay. Thanks for that, and congrats on the progress.

Jackson Gillette, Raymond James.

Can you give us an update on gross margins in Dallas versus Atlanta? And then, follow-up to that, an update on how things are going sales wise in Bellmoore Park in Atlanta?

Yes, I can give you an update, just generally. We don't talk about specific communities' sales paces for obvious reasons, but I can say that our margins are pretty similar in Dallas and Atlanta. I think we have seen a little bit more compression in Atlanta. I think that is attributed to the fact that there were very few public builders there a year ago, and now there are many public builders active in Atlanta that were not there a year ago. And they are pre-disposed to have revenue growth that has pushed margins down just slightly, probably, relative to Dallas. And in terms of both of our large communities, Bellmoore Park and Twin Creeks, we are seeing really -- we are really pleased with the progress and the sales pace increase in both of those communities. And I would really urge anybody to actually visit those communities rather than listen to me talk about them on the phone. They would really see those results in person.

We have no further questions at this time. Thank you for joining the Green Brick Partners fourth-quarter earnings call. This concludes the conference. You may now disconnect.