Green Brick Partners Inc (GRBK) 2017 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the Green Brick Partners' Earnings Call for the Third Quarter Ended September 30, 2017. (Operator Instructions) As a reminder, this call is being recorded and will be available for playback. Details for accessing this replay will be made available at the end of the call. A slideshow supporting today's presentation is available on Green Brick Partners' website, www.greenbrickpartners.com. Go to the Investor Presentation tab and click on Reporting and scroll down to the SEC filings.

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 Monday, November 6, 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. This -- the reconciliation of adjusted EPS to net income attributable to Green Brick and adjusted homebuilding gross margin to homebuilding gross margins 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.

Hi, everybody. Thanks for joining our call. With me is Rick Costello, our CFO; and Jed Dolson, President of the Texas region, and congratulations, Jed, on your promotion to being the President of the Texas region. As the operator mentioned, a presentation that accompanies this earnings call can be found on our webpage at greenbrickpartners.com. At the top of the webpage, click on Investors and Governance, then click on Reporting and scroll down to SEC filings. That's where you see the third quarter investor call presentation. I'll give everyone a second to do this. Our pretax income of $14.6 million was a record quarter for Green Brick and represents an increase from Q3 of 2016 at 48%. This record income was achieved on a quarterly -- on quarterly revenues of $113.7 million, which is an increase of 24% over third quarter 2016. Despite the strong revenue growth, our backlog as of the end of the third quarter still grew 19% over September 13, 2016.

During the third quarter of 2017, and the last 12-month basis, our revenues stand at $419 million, a year-over-year increase of 40%.

Please flip to Slide 4. Since the Great Recession, the housing market has been undersupplied every year to such an extent that the cumulative housing surplus had been completely eliminated. The band remained strong. The challenge for homebuilders is now to build homes that buyers want in locations they can afford.

Now let's move to Slide 5. Two of the best markets are our core markets of Dallas and Atlanta. During the last year, Dallas and Atlanta continued to be ranked the second and third largest job growth markets in the nation. Not only have they both ranked markets adding significant numbers of new jobs, but both markets also boast the 2 highest job growth rates among the 10th largest job markets in the country.

We've talked about the robust level of corporate low cash and great relocation activity in many of our past calls. Fortunately, this trend continues.

On Slide 6, you can see that Dallas continues to be the #1 new housing market in the nation, adding almost 232 new starts. Atlanta, the third-largest market, is expanding at even a faster rate. And now Green Brick has entered Colorado Springs, part of the sixth largest market that were investment in Challenger Homes through our investment in Challenger Homes.

Slide 7 shows that starts and closing in Dallas are still expanding but still below peak activity.

Slide 8 shows that Dallas -- that in Dallas, the lot inventory lows are a very healthy 18.7 months supply. What the graph does not tell you is how supply constrained the lots out in the most prime AAA locations. Green Brick owns or controls over 4,100 lots in AAA locations in the Dallas metroplex in areas like Bristol and Allen(inaudible)

Slide 9 shows that Atlanta, despite double-digit growth in start and closings, is still about 65% below peak. Most of this growth is attributable to the North, where all of Green Brick's Atlanta communities are located.

On Slide 10, Green Brick at a glance, you will see an adjustment this quarter to who we are as we have made an investment in an unconsolidated builder, Challenger Homes, in Colorado Springs.

Please see Slide 11. Challenger Homes represents a long-term investment in a rapidly expanding metropolitan area. We're excited about this investment where, after Challenger's first 2 months of operations, we have already seen an annualized return on equity of 37%.

Please turn to Slide 13, where we present a new feature to our earnings call, where we will spotlight a different Green Brick story each quarter.

Our East of Main community in Alpharetta, Georgia is a great example of how we became, organizationally, to be a small private developer and a successful builder. Here, we modified our product and community presentation by incorporating the historic farmhouse into the fabric of the neighborhood. The renovation of the Ben Manning

House into our sales office was a complex site planning and preservation task where we have been rewarded with strong sales and very strong margins.

Slide 14 graphically presents our annual revenue growth since inception and speaks for itself. We have the balance sheet and operations to significantly seal our business.

Next, Rick Costello, our CFO, will discuss our third quarter results in more detail. Please turn to Slide 15 for a summary of those results.

Thanks, Jim. Hello, everyone. Thank you for joining us today to review our 2017 third quarter and year-to-date financial results.

First, as shown on Slide 15, our significant growth in revenues and earnings has been 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 net debt is debt minus cash, was approximately 70% as of September 30. This compares to an average of 40% per public builder peers.

Now let's review Slide 16. I'm going to start with the highlights and then move into the details. For Q3 of '17 versus Q3 of '16, and year-to-date for the first 3 quarters of this year versus, of course, the last year, here are some key operational metrics. Net new orders increased by 18% for the quarter and 17% year-to-date. Home deliveries increased by 20% for the quarter and 23% year-to-date. Home sales revenues increased by 23% for the quarter and 22% year-to-date. So you can see a lot of similarities between the quarterly performance and the year-to-date performance. The dollar value of units in backlog increased by 19% year-over-year, and our pretax income was up 48% for the quarter and 45% year-to-date.

Now for some more details. For the third quarter, the number of net new home orders was 241 homes, an increase of 18% compared to the third quarter of 2016. For the first 3 quarters of 2017 versus 2016, our net new home orders have grown by 17% from 683 to 798. Green Brick delivered 235 homes for the quarter, 20% more than the third quarter of 2016. Year-to-date, Green Brick delivered 698 homes, a 23% increase over the first 3 quarters of 2016. Home sales revenues were $108.4 million for the quarter, an increase of 23% over the third quarter of '16. And year-to-date, Green Brick's home sales revenues grew to $302.2 million, up 22% over the first 3 quarters of 2016.

The average sales price of homes delivered was $461,000 for the quarter and $433,000 year-to-date, up 3% and down 1% versus 2016. As we mentioned last quarter, the mix of homes sold has leaned more towards townhomes, which typically are lower-priced compared to single-family homes. At the end of the third quarter, Green Brick had a total of 56 active selling communities, a year-over-year increase of 14%. Homes under construction increased 8% to 715 units as of September 30, compared to 665 units as of September 30, 2016.

Now let's review some of these key metrics on the last 12 months basis. Regarding construction, over the trailing 12 months, we have started 1,023 homes versus 886 homes as of September 30, 2016, an increase of 15%. Regarding sales, net new orders for the last 12 months stand at 995 homes, up 19% from 835 homes as the end of Q3 2016. And regarding closings, units closed for the last 12 months totaled 973 homes, up 28% from 763 at 9/30 of '16. The adjusted home building gross margin percentage increased to 22.4% for Q3 2017 versus 22.7% for Q3 2016. I should say decreased slightly.

As shown on Slide 17, our last 12 months adjusted gross margin percentage is at 23.0%, which is down slightly from 23.1%, where it stood previously for 3 quarters running. Now please recall that our cost of sales includes the cost of sales commissions. This diverges from the majority of other public builders who include commissions and SG&A or as a standalone item. So at 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.

At September 30, 2017, our builder operations segment had a backlog of 337 sold but unclosed homes with a total value of approximately $164.6 million, an increase of 19% from the prior year. At September 30, the average sales price of homes in backlog was approximately $489,000, an increase of 11% compared to the prior year.

Finally, and perhaps most importantly, is the bottom line. Income before taxes attributable to Green Brick was $14.6 million for the third quarter of 2017. As Jim said, a record compared to $9.9 million for the third quarter of 2016, an increase of 48%. Adjusted EPS was $0.29 per share for the third quarter of 2017 versus $0.20 per share for the third quarter of 2016, an increase of 45%. Year-to-date, Green Brick income before taxes is up 45% to $36.7 million, and adjusted EPS is up 42% to $0.74.

To put our performance in perspective, with homebuilding revenues up 22% year-to-date, our pretax income is up 45%. Clearly, our earnings performance is expanding far faster than our revenue growth rate, resulting in markedly improved return on total invested capital.

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?

Thanks, Rick. I'm really proud of everybody at Green Brick. They really worked hard this quarter to produce such great results. We have a number of land deals under contract that we've been working on for a long time that should fuel our growth in 2018 and beyond. Even without these new deals, the number of lots owned and controlled has grown to approximately 5,700 lots.

5,100.

From 5,100 lots as of September 30, 2016, despite starting over 1,000 homes in the last 12 months. Thank you for your help and support, and I'll now turn the call over to the operator for questions. Thank you.

(Operator Instructions) Our first question comes from the line of Ken Ling from Citi.

In regards to the Challenger partnership, it's been a couple of months now. It sounds like pretty strong start out of the gates. How does this track compared to your initial expectations?

Well, as you can tell, we're not aggressive in what we project, and it's really turned out much better than we projected. I just met with them last week, or at the beginning of this week, and going over the 2018 business plan, and their projections next year are greater than our projections. And we expect them to really have a really outstanding 2018 also.

Great. And what kind of conditions are you looking for, for Green Brick to take on the additional 20% in the later years?

Well, the primary condition really is that we -- we're confident we're going to produce great financial results. We want to make sure our cultures merge together. I think that's going to be the place. Brian Bahr and the team he's put together are just great operators, great people, honest people and have a great culture. And we expect that transaction to progress as we intended when we bought it.

Sounds good. A quick question on community count. It's been growing double digits for the last few quarters. Is there something we can expect going forward into 4Q and also next year?

We really don't speak to forward-looking projections. You can see that year-to-date, our new order growth and our revenue growth has exceeded, are increased in net new communities actively selling. We certainly like that trend and hope that can continue. But that -- we really don't want to set those kinds of expectations, Ken.

Ken, but I can give you a little bit of color. One of the things, I think, you're going to see at Green Brick is that we are going to have more store fronts openings because many of our communities are smaller. And we're aggregating a lot more small communities, under 100 lot communities. So yes, I think you are going to see a pretty good community comp growth because of that and just the change of direction into small -- many more aggregate in smaller communities, and that's really the kind of thing that I think differentiates us from some of the giant builders because who's -- we're aggregating high-margin smaller communities that we think can be highly accretive to earnings.

That's helpful. Let me sneak in one last question. I guess, congrats to Jed, first of all, being promoted. Does that change anything for land acquisition and development for the Georgia, Atlanta area?

No. It doesn't at all. Our business strategy, and we think our advantage is very different from the Giants. And one of the reasons why we just haven't had made a lot of acquisitions other than the Challenger Homes recently is that it's very important for us to find a local operator that has deep roots in this community because we know that real estate is a local business and the entitlement zoning process, buying process with homes, we need to find partners that have very long relationships in those communities. So we have those in Atlanta. Brian Bahr has that relationship in Colorado Springs. Jed and I and our builders have those relationships in Dallas. And we are trying to seek out other building partners that operate and think the same way in other markets.

(Operator Instructions) Our next question will be coming from the line of Chase Basta from AWH Capital.

You mentioned the 11% increase in the average sales price of homes in the backlog this quarter. Just curious what's causing this to accelerate? Is it kind of a -- is it a mix issue? Or is it reflective of the home price environment in Atlanta?

It's definitely a mix issue. The -- you'll also see that our single-family homes tend to populate the backlog more so than our townhomes. And we've had a fantastic amount of growth at Southgate Homes, which is our premier semi-custom builder here in town, where their ASP is significant higher and they're really building their business through backlog growth.

Okay. Makes sense. And then can you comment just generally on the outlook and what you're seeing in Atlanta and Dallas and the kind of differences in those 2 markets?

Well, Atlanta, the -- I think the market is very competitive. Dallas is also very competitive. We're in 2 of these big markets, and obviously, every giant public builder, when they see those kind of housing starts, they're going to seek out that revenue growth. So both markets are competitive. But our -- as you can see from our gross margins, they haven't been -- they've held up. We can see them continuing to hold up because our AAA locations, we have supply constraints in all of the locations. So yes, the cities are both very competitive. We're not competing against giants like Lennar entering the market and merging to make them even bigger, but we try to stay out of their way.

And at this time, I'm not showing any further questions. I would like to turn the call back over for closing remarks.

Well, we'd like to thank everyone for their participation and their support. Continue to look for positive results from Green Brick. Thank you. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.