Green Brick Partners Inc (GRBK) 2016 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to Green Brick Partners earnings call for the first quarter ended March 31, 2016. Following today's remarks, we will hold a question-and-answer session. (Operator Instructions)

The slide show supporting today's presentation is available on Green Brick Partners's website, www.greenbrickpartners.com, in the Investor Presentation 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, performance strategies, prospects and other aspects of the business of Green Brick Partners are based on current expectations and are subjected 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, May 9 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 home-building gross margin, which are non-GAAP financial measures. The reconciliation of adjusted EPS to net income attributable to Green Brick and adjusted home-building gross margin to home-building 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 CEO Jim Brickman. Please go ahead, sir.

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

During the quarter we experienced the best sales order in our Company's history. We closed homes valued at $66.6 million, and increased our units in backlog to 280 homes.

The dollar volume of our backlog at March 31, 2016 now sits at approximately $129.2 million, up 47% from year end, and that is after executing a quarter during which home closing revenues were up 34% more than Q1 2015. Backlog was up so strongly because our net new orders increased 29% over the first quarter of 2015.

Rising lot and construction costs are a concern for future profit margins in our industry. Our adjusted gross margin of 23.5% is among the highest in the industry. And because of our superior markets, lot positions and infill locations, we believe our superior profit margins, relative to peers, will continue in future quarters.

We believe that Dallas and Atlanta should continue to be two of the largest and best housing markets in the United States.

Please refer to our investor presentation slide deck.

Housing demand is highly correlated to job growth. Page 4 shows that we operate in Dallas and Atlanta, two of the top six job growth markets in the United States. During the 12 months ending February 2016, Dallas added 116,800 jobs, and Atlanta added 72,500 jobs.

As noted in earlier calls, the level of corporate relocation activity remains at all-time highs. All of our neighborhoods are typically within a short drive of major new corporate campuses being constructed for companies like Toyota, JPMorgan, Liberty Mutual, Raytheon in Dallas, and Mercedes and other corporations in Atlanta. As page 5 shows, Dallas has now surpassed Houston and is the number one housing market in the country with 28,878 annual starts. Atlanta was the third most active with 19,967 starts.

Page 6 shows that Dallas has only a two-month supply of finished new homes in our primary price range of $250,000 to $750,000.

Page 7 shows that Atlanta only has only a three-month supply of finished new-home inventory. We think a six-month supply would be a balanced market. We expect that because of a pro-business climate, two of the largest airports in the world, central locations, and a positive feedback loop of growth, Dallas and Atlanta should remain two of the best housing markets in the nation in 2016 and beyond.

Risk-adjusted returns should be considered by investors 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 page 8, as of March 31, 2016 our debt to capital was under 13% which compares to an average 50% ratio for the public builder sector. In your calculation, net debt excludes cash.

We believe we can increase our debt to capital ratio to the 35% range, which is still considered a conservative improvement leverage, but would allow us to have continued and expensive growth in our builders, land and another acquisitions.

During the last two quarters, we have purchased land for approximately 1,000 homesites in Dallas and Atlanta that we expect will support earnings growth in 2017 through 2020. Overall, this brings our total number of lots owned and controlled to 4,700.

Based on the strong demand to purchase our lots by third-party builders, and our ability to replace these lots with new profitable developments, we plan to accelerate the sale of some of our homesites to third-party public builders we have done business with. We also have an ample supply of AAA located lots to expand and grow our controlled builders.

From an operating standpoint, we believe that 30% increase in active selling communities during 2015, new deals that we are working on, and our strong backlog should allow us to continue to grow revenue and profits as the year progresses.

Next, I will introduce Rick Costello, our CFO, who will discuss our first-quarter 2016 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 2016 first-quarter financial results. Please refer to page 9 of the investor call presentation.

First, here are preliminary highlights of some key operational metrics for the three months ended March 31, 2016 versus the three months ended March 31, 2015.

As Jim mentioned, net new orders increased by 29%. Home sales revenues increased by 34%. The average sales price of homes delivered increased by 21%. The dollar value of units in backlog increased by 39%, and the average sales price of units in backlog increased by 20% to over $461,000.

Green Brick delivered 161 homes in the first quarter of 2016, an 11% increase over the first quarter of 2015. Also, the average sales price of homes delivered was $414,000 for the quarter, an increase of 21% from $342,000 for the prior year. So, combining the quarterly delivery growth of 11% more units with average sales price growth of 21%, yields an increase in builder operating revenue for the quarter of 34% at $66.6 million compared to $49.7 million for the prior year.

For the first quarter, the number of net new home orders increased 29% to 240 homes compared with 186 homes in the first quarter of 2015.

Now, as shown on page 10, at the end of the first quarter of 2016, Green Brick had a total of 44 active selling communities, a year-over-year increase of 19%. The adjusted home-building gross margin percentage decreased to 23.5% for the first quarter versus 26.6% for Q1 2015. Regarding this margin performance, the Q1 adjusted margin percentages in 2015 was exceptionally high at 27.6% versus our still very strong 2016 Q1 adjusted margins of 23.5%.

Q1 2015 included substantial closings in our two highest margin communities that were closing out where the land had been purchased at the bottom of the cycle. The current quarter margins Q1 2016 of 23.5% are consistent with our margins for the last 12 months, which now stand at 23.4%.

Year over year, there was a decrease in land development revenue that -- 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 for the first quarter, our land development revenues declined from approximately $8.8 million to approximately $3.3 million as the number of finished lots delivered declined 61% from 72 to 28. Now, land development gross margins improved to 29.7% for the quarter, as compared to 28.6% for Q1 of 2015. At March 31, our builder operation segment had a backlog of 280 sold but unclosed homes, with a total value of approximately $129.2 million, an increase of 39% from the prior year.

At March 31, the average sales price of homes in backlog increased 20% to approximately $461,000 compared to approximately $383,000 from the prior year.

Income before taxes attributable to Green Brick was $4.5 million for the first quarter compared to $6.2 million for the same period in the prior year. Adjusted EPS was $0.13 per share for the first quarter of 2015 versus $0.09 per share for the first quarter of 2016. The decrease in pretax income is attributable to an increase in amortization of capitalized interest of $1 million and to an increase in lot sales to Green Brick's builders where revenue was not recognized until the house closing.

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

Thanks, Rick. I am pleased with how our business has progressed again this quarter, particularly in the significant growth of our backlog. We do not break out the results of our title business, but that platform is operating profitably and should continue to grow. If any of our Dallas investors on this call has a real estate transaction that requires a title policy, please keep us in mind and give us a call.

Our pristine balance sheet gives us the flexibility to employ leverage to pursue opportunities whether with our existing builders in land acquisitions, or even potentially launching or acquiring additional homebuilders. We are exploring all avenues to produce superior risk-adjusted returns and good long-term returns for our investors.

Creating and maintaining a good culture separates the average companies from the great ones. The building business is very competitive. Great lots and low leverage are very important, but in the end, it all gets down to people.

I am really pleased with the progress we're making in our teambuilding effort, and each quarter we continue to attract talent and build our team side-by-side with our team builders.

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

(Operator Instructions) Mike Dahl, Credit Suisse.

Jim, was wondering if you could provide a little more color on regional sales performance and also kind of product mix and how that played out, especially since -- just given such strong growth in both delivered and sales price.

Sure, Mike. First of all, we've had a lot of growth, and we are really pleased with the growth in our Southgate platform; we did not disclose it per se in the Q, but I think that currently Southgate's backlog as a startup business really that had almost no backlog a year ago for example, is like a $26 million backlog as of yesterday. And they are operating in the $750,000 price point, so that is pushing up our average selling price through the Southgate backlog.

Our Townhouse business in the $300,000 price range in both Atlanta and Dallas is very strong and our Normandy, which is our $450,000 to $550,000 price point has remained about the same. So we really gained traction in the $300,000 price point and at the $750,000 price point.

In addition, one of the things we are starting to push, and we have really made some, I think, really nice infill acquisitions in that we are expanding our near downtown infill business with Centre Living homes. We have two or three deals we have teed up with them that will be affordable infill price point homes in the $500,000 price point. Does that pretty well answer your question? Or do you want --?

No, that's great, thank you. And then, I think just along the lines of kind of the risk-adjusted returns, and just wanted to understand your decisions and to accelerate some of the lot sales.

Again, on one hand, it can help on a risk-adjusted return basis. On the other hand, you've got prime lots in two of the strongest markets in the country, so just a little more color on what's driving the decision to accelerate some of the lot sales, and your ability to replace those.

I think that's the key. We wouldn't be interested in selling lots, unless we thought we could be replacing them with deals that we are going to meaningfully grow our earnings.

For example, we recently -- I guess as of last week, signed up a very large public builder to close about 183 lots in a deal. And we would not have sold those. We think they are going to be a big contributor to 2017, 2018 and 2019 earnings. But we would not have sold them unless we already had another deal about the same size teed up.

So it's kind of a mix and match if we can find a deal that we could make good returns on, sell to a well-capitalized third-party builder and get 15%-plus nonrefundable earnest money, we would do that if and only if we can replace those lots accretively for our own builders.

Okay, and then I guess tying that into some of the margin commentary, then, the comment on 23.5% here, obviously comping off of some very elevated levels, but then on an LTM basis you are also right around 23.5%. So, should we expect that that is a -- what you are viewing as a more sustainable gross margin going forward?

Yes, we don't really see that declining. We see the potential for it actually could go up a little, as long as our homebuilders -- our captive homebuilders -- can pass through the increased lot costs we are charging them to the homebuyer.

Okay, great, thanks.

(Operator Instructions) Will Randow, Citigroup.

Nice results. In terms of community count, given the recent -- or the lot sales you mentioned and previously an expectation for 30% growth in 2016, do you feel like that target is still achievable? And how are things shaping up for 2017?

We can see at least 20% community growth in 2016. We have three or four deals that are on the cusp right now that we cannot predict how they are going to fit into 2017, but between the community growth and increasing sales velocity in the community, we feel pretty good about our revenue growth prospects this year and next year.

And as a follow-up to one of Mike's questions, more related towards margin, as he sought pretty dramatic job growth in markets, for example, like [plan out], you had prices move pretty far and fast and land tracts them well.

How do you feel about gross margins? I will call it maybe not this year, but next, given that I am sure the land purchases are a little bit more rich, relative to ASPs.

Well, there was an interesting article -- this is Jim again. There's an interesting article in the Dallas newspaper today that Dallas is finally caught up to being about the average price market. We used to be less expensive. So, that is the negative news.

The good news is the kind of jobs that are being created, particularly in the Frisco market, a lot of these buyers are coming from California for Toyota, for example. And they think that our homes are just a bargain of the year. Southgate has sold a couple of homes to Toyota executives; they are working with another one. And many of these people that are relocating here really can't believe the values that we are providing.

Got it; makes sense. And I guess, from a land price perspective, I would imagine that that is more than keeping pace with home price appreciation right now in those markets?

Yes, exactly.

And then just one last follow-up. In terms of your repurchase authorization, how do you feel about utilizing some of your balance sheet capacity for purchased shares given the market doesn't seem to be perceiving, for example, today's results as good results?

We have the authorization at various price points to execute that repurchase. I am not sure that a one-morning retracement of yesterday's advances necessarily indicative of anything other than sell the news. Our view continues to be a long-term view and we will execute the repurchase when the price of the shares is appropriate for us to execute that plan.

So the homebuilder stocks are in and out of favor, so that continues to be very volatile. So we will -- we are in this for the long haul, so we will see what the reaction is after Q2 and Q3 and Q4.

That's more than fair. Congrats again on the progress from my seat, at least.

There are no further questions at this time. Ladies and gentlemen, thank you for joining today's conference call. You may now disconnect.