Green Brick Partners Inc (GRBK) 2018 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to Green Brick Partners' earnings call for the second quarter ended June 30, 2018. (Operator Instructions) As a reminder, this call is being recorded and will be available for playback.

A slideshow supporting today's presentation is available on Green Brick Partners' website, www.greenbrickpartners.com. Go to Investors and Governance, and then click on the option that says Reporting, and then scroll down the page until you see the second quarter investor call presentation.

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 few 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, August 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 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 margins to home-building gross margins 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.

Thank you, operator. Hi, everybody. With me is Rick Costello, our CFO; Jed Dolson, the President of our Texas region; and Summer Loveland, our CAO.

Thanks for joining our call and a special hello to all the new investors joining us who were part of the recent secondary offering. We thank Third Point for their long-term investment with us, which helped preserve our extremely [valuable] net operating loss. A collateral benefit of the secondary is that our trading volume is now multiples of our previous average daily debt leverage daily trading volume.

As the operator mentioned, the presentation that accompanies this earnings call can be found on our webpage at greenbrickpartners.com. At the top of our webpage, click on Investors and Governance, then click on the option that says Reporting, and then scroll down the page until you see the second quarter investor call presentation.

I'll give everyone a second to open the presentation. I am excited to announce that our adjusted pretax income of $20.7 million was a record for any quarter. It was also a 72% increase from Q2 2017, with EPS up 81%. Our backlog grew 90% year-over-year, and our homebuilding gross margin came in 20 basis points higher than in Q2 2017.

The performance of many builders this quarter from a net new orders standpoint has slowed due to increased home prices and rising interest rates. Green Brick, however, is a bright exception. For the quarter, our year-over-year absorption, measured as new orders per average selling community, increased by 20% to over 6.2 homes per community in the second quarter of 2018 from under 5.2 homes per quarter in Q2 2017.

This is a function of our competitive strategy of operating in only the best or A-rated submarkets in our cities. While other builders have migrated to a lower priced, homogenized, outlying markets, we have remained committed to our quality of land positions. Yet, while our last 12-month revenues have increased from Q2 2016 to 2Q 2018 by 66%, our average sales price has risen only 7%. We have done this through a greater mix of townhomes and smaller lot sizes, along with more efficient home designs and smartly chosen standard features, making our offerings extremely competitive. Even better, as we will discuss later and show on our slides, our significant increase in absorption was not at the expense of margin. Putting all this together, this quarter was our best quarter ever.

Please flip to Slide 4. Two of the best markets in the country are our core markets of Dallas and Atlanta. During the last 12 months, Dallas and Atlanta continued to be 2 of the largest markets in terms of generating job growth.

On Slide 5, you can see that Dallas continues to be the #1 new housing market in the nation, adding over 35,000 starts. Atlanta is the fourth largest market, and our Challenger Homes subsidiary operated in Colorado Springs is now part of the seventh largest market.

Slide 6 shows that starts and closing in Dallas are still expanding, and while the chart doesn't go back quite far enough, note Dallas is still well below the 2006 peak activity of more than 50,000 starts.

Slide 7 shows that in Dallas, the lot inventory levels are a very healthy 18.9 months' supply. Again, what the graph does not tell you is how supply-constrained lots are in the most prime A locations. Green Brick owns or controls over 4,700 lots in the Dallas Metroplex A locations like Frisco, McKinney and Allen.

Slide 8 shows that Atlanta, despite double-digit growth in starts and closings, is still almost 60% below peak. Most of this growth is attributed to the North, where all of Green Brick's Atlanta's communities are located.

On Slide 9, we demonstrate what we mean by A-rated submarket. John Burns Real Estate Consulting has published maps of our Atlanta and Dallas metropolitan areas where we have designated grades on submarkets of A through E based on a variety of subjective factors, such as quality of schools, proximity of jobs, existence of infrastructure and basic quality of life. We have taken those maps and overlaid the locations of our Green Brick communities with green dots. As you can see, our communities are located in the very best A-rated submarkets.

On Slide 10, you can see that Green Brick operates in 3 of the most supply-constrained markets in the country, with resale months' supply of inventory at historically low levels, which persists and provide us with ample leverage to sell homes at profitable prices and healthy rates of absorption.

On Slide 12, this quarter's development spotlight is on The Reserve on Parker in Carrollton, Texas. Normandy Homes has been outselling, competing large-cap builders with an average sales rate of almost 11 homes per month. In contrast, the second highest sales rate of [comparable] communities was just over 4 sales per month.

Next, Rick Costello, our CFO, will discuss our second quarter results in more detail. Rick?

Thanks, Jim, and thank you all for joining us today to review our 2018 second quarter financial results. First, as shown on Slide 14, our 2-year growth of 66% in building revenues and 2-year growth of 142% in pretax income has been accomplished despite keeping one of the lowest net debt-to-capital ratios of any public builder. We've also been in the enviable position of utilizing our net operating losses of our predecessor company and thereby not pay federal income taxes. As a result, we have been able to grow rapidly while increasing our financial leverage through low interest rate revolving lines of credit.

As of June 30 of this year, we've continued that gradual increase to a point where our net debt-to-capital ratio, where net debt is debt minus cash, has increased to 22.7%, which is up 83% from 12.5% at June 30 of last year. In fact, our gross debt-to-capital ratio now stands at 27.4%, which is closing in on our eventual target of 30% to 35%.

Now let's review Slide 15. I'm going to start with the highlights and then move into the details. For Q2 of 2018 versus Q2 of '17, and year-to-year comparisons, there are some key operational metrics. Net new orders increased by 43% for the quarter and 47% year-to-date. Home deliveries units increased by 38%, with revenues up 43% for the quarter. For year-to-date, home deliveries increased by 28%, with homes sales revenue up by 36%. Year-over-year, homes under construction are up 38%, with homes started on a last 12 months basis up 26%. The dollar value of units in backlog increased by 90% year-over-year; and our adjusted pretax income was up 72% for the quarter and 60% for year-to-date.

Now for more details. For the second quarter, the number of net new home orders was 387 homes, an increase of 43% compared to the second quarter of 2017. For year-to-date 2018 versus 2017, our net new home orders have grown by 47% from 557 to 821.

Green Brick delivered 327 homes for the quarter, 38% more than the second quarter of 2017. For year-to-date 2018 versus 2017, Green Brick has delivered 594 homes, a 28% increase over 2017.

Home sales revenues were $143.9 million for the quarter, an increase of 43% over the second quarter of '17. And year-to-date, Green Brick's home sales revenues grew to $264.2 million, up 36% over the first 2 quarters of 2017.

The average sales price of homes delivered was $440,000 for the quarter and $445,000 year-to-date, up 4% over Q2 of '17 and up 6% year-to-date 2017. And as mentioned by Jim, the mix of homes sold has trended more towards townhomes, which typically are lower priced compared to single-family homes. And additionally, this lower-than-market rate of ASP growth is a function of our intentional strategy to control price creep through reducing lot sizes to control home square footage and, therefore, home prices; moving product mix to more townhomes; and modifying house design through both value engineering and adjusting standard features.

At the end of the second quarter, Green Brick has a total of 69 active selling communities, a year-over-year increase of 28%. We expect the pace of net community openings to increase over the balance of the year.

Homes under construction increased 38% to 988 units as of June 30, compared to 714 units as of June 30, 2017.

Now let's review some of the key metrics on a last 12 months basis. Regarding construction, in the last 12 months, we've started 1,241 homes versus 988 homes as of June 30, 2017, an increase of 26%, and now we have 38% more units under construction. Regarding sales, net new orders for the last 12 months stand at 1,327 homes, up 39% from 958 homes as of the end of the second quarter of '17.

Regarding closings, units closed for the last 12 months totaled 1,121 homes, up 20% for the 12 months ending June 30, 2017. And revenues are up 27% over this period on a last 12-month basis.

Regarding lot inventory, the number of lots owned and controlled has grown to 7,650 lots, up from about 5,400 lots from a year-ago period for an increase of 42% as of June 30. And this was accomplished despite starting almost 1,250 homes in the last 12 months. And as we've mentioned, our backlog is up 90% year-over-year.

Margins. Our homebuilding gross margin increased to 21.9% for the second quarter of 2018 from 21.7% for Q2 of 2017. As shown on Slide 16, for the past 12 months ending June 30, the adjusted homebuilding gross margin percentage remained constant from Q1 to Q2 at 22.2%; that's the adjusted margin. Please recall that our cost to sales includes the cost to sales commissions. This diverges from the majority of other public builders, who include commission and SG&A or as a stand-alone line item. So in any period presented, you can add about 4.0% to our reported margins to increase them and thereby make them more comparable to most other public builders.

Now the process of balancing sales velocity and margin is something we monitor daily, but we do expect that our gross margin will continue to remain as one of the highest in the industry.

Now that same Slide 16 demonstrates our performance as measured by pretax income as a percentage of homebuilding revenues or pretax margin.

Pretax margins takes into consideration building margins as well as operating expenses and has improved on a last 12-month basis from 11.5% to 13.3% from Q2 of '17 to Q2 of '18.

Now flip to Slide 17. Here we provide more perspective on this pretax margin of 13.3% on a last 12-month basis. As you can see, this measure of profitability ranks Green Brick as one of the very best in the industry of all building companies.

At June 30, 2018, our Builder Operations segment had backlog of 700 sold, but unclosed homes, with a total value of approximately $314 million, an increase of 90% from the prior year-end -- from the prior June 30, I should say. At June 30, the ASP of homes in backlog was approximately $448,000, a decrease of 10% compared to the prior year. Now this change in ASP is a function of mix of more townhomes as well as the acquisition of GHO Homes, which sells its homes at lower price points. Mind you, our ASP will always be prone to fluctuations.

Perhaps, most importantly, is the bottom line. Adjusted income before taxes attributable to Green Brick was $20.7 million for the second quarter of 2018 compared to $12 million for the second quarter of 2017, an increase of 72%.

Adjusted EPS was $0.41 per share for the second quarter of 2018 versus $0.25 per share for Q2 of '17, an increase of 64%.

Green Brick -- Year-to-date, Green Brick's adjusted income before taxes is up 60% to $35.4 million and adjusted EPS is up 56% to $0.70. EPS is up 81% for the quarter and 86% year-to-date.

Finally, to put all this in perspective, to put our performance in perspective, with homebuilding revenues up 43% for the quarter, our pretax income is up 72%. Year-to-date, with homebuilding revenue up 36% for the year, our pretax income is up 60%. Clearly, our earnings performance is expanding faster than our revenue growth rate, resulting in markedly improved operating leverage and, therefore, improved return on total invested capital.

In fact, look at Slide 18. We present our return on total invested capital on a last 12-month basis. Our total return on capital, which now stands at 13.3%, has consistently improved to the point that our performance is one of the best in the industry, not just on par, but in fact better than most large-cap and mid-cap banks.

I'll now turn the call back to Jim, who will wrap up our part of the call prior to opening up things for Q&A.

Thanks, Rick. I'm really proud of the entire Green Brick team that worked very hard to produce this great quarter, which had record pretax profits, record home revenues, record total revenues and record ending backlog. The 90% increase in our backlog bodes well for our future. Like book value, not all backlogs are created equally. When people -- our cancellation rate was less than 13% for the quarter. This is very low.

When people [contracts] for our homes, about 87% of those people close their homes. As a result, we believe that our backlog is of much higher quality and lower risk than many peers. Based on that record backlog and continued sales momentum through July, we believe the future will be even better.

We are geographically diversified and have 7 building brands operating in 4 markets at various price points, with a track record of growing our business very profitably, with only 23% net debt to capital. And as a result, we are producing superior absolute and risk-adjusted returns for investors.

I'll now turn the call back to the operator for questions.

(Operator Instructions) Your first question comes from the line of Scott Schrier with Citi.

I wanted to start off on some of your comments. So absorptions are strong, you are clearly not sacrificing margins, you're in tight markets with strong job growth. So can you give some comment on how you're thinking about price versus pace? It seems like you're really trying to manage the price creep, as you said, particularly with more townhomes. So as you try to optimize your profit, can you just talk about of you look at the price versus pace discussion?

Yes. This is Jim, and, Rick, you can chime in on top of my comments or after them. But I think one of the biggest differences in our company versus many peers is that we have very good confidence that we can replace the land pipeline with new neighborhoods that are also going to produce high margins. So it's not like we're waiting and delaying or doing anything else because of fear of replacing our land pipeline. So we're just looking at every community and just trying to maximize the internal rate of return of that community. And we kind of look at that really on a community-by-community basis.

And Scott, yes, I would like to add, it really is an intentional strategy that we've spoken to in terms of within our market space to control the amount of overall sales price growth by just changing mix and lot size and features, et cetera. It seems that every other public builder has an enunciated strategy to move to the outlying areas in order to address the first-time homebuyer. And this means that we don't have to compete head-to-head with those builders that truly have some cost advantages when it comes to building widgetized houses and homogenized communities. But instead, we have stayed in our A markets and, because of that, we're finding that buyers will pay more to be in our locations simply because the jobs are close, the schools are there, the retailer is there, et cetera. But there's less competition in our market. So -- but the fact that we've only increased ASP over 2 years by 7% is because of our change in strategy to not move, but just to change in place. So we find that really -- as long as we can maintain our margins and maintain our volume, it's a very good situation we find ourselves in.

And can you talk a little bit about what you're seeing in terms of consumer behavior as far as the demand for townhomes versus single-family products. It seems like you are moving a little bit more to the townhome-type products?

Well, obviously, the consumer is paying more for a house today. And the consumer probably is doing this, frankly, because they don't have as many choices because new homes have always traditionally competed with existing homes. And with existing homes being at 1 month's supply in Colorado Springs and 2 months' supply in Dallas and Atlanta, that opportunity or that option for a buyer is taken out of the mix. So no, consumer isn't jumping up and down about paying more for a new home, but they really don't have a lot of choices, particularly in the A markets that we build in.

Got it. And as I'm thinking about themes, obviously, a big theme is cost inflation. And I'm curious if you can give some context on maybe some of the different buckets of input costs that you're seeing and labor and cycle times. And I mean, obviously, in terms of cycle times, the townhouse helps mitigate some of that. But can you just talk about what you're seeing there in terms of labor and inflation? I think that's something that would be helpful.

Jed, why don't you talk about that since you deal with that more on a direct basis all the time?

Yes, it's a little bit of whack-a-mole where we get 1 vendor under control or 1 subgroup under control and then another one pops up. Homebuilding is an assembly line. It starts with plumbing and foundation and ends with carpet. So there's always going to be what we found is there's always a bottleneck at some point recently. And usually, where the bottleneck is, is where we're experiencing the highest prices.

Scott, we met today, we have -- we've just started a national purchasing accounts division. Our guy was in -- from Atlanta was visiting with [me] before this call. We see continued price pressures going on because of the labor markets, so we don't think it will be that much better. But our hope and goal as we go into 2019 is that we will offset some of these pressures through our mortgage company that we really didn't talk at all about in the call, where we can pick up some margin from our mortgage company, our title company and financial services, the national purchasing accounts. And Summer Loveland, who is sitting in the room, has spent a great deal of time with her team, really, on our standardization of accounting systems and processes that, we think, are going to help our bottom line. So we're not immune to these pressures, but we're doing all we can to offset them in other ways.

I would just add, obviously, with the new tariffs, lumber's been a very sensitive item, and we, for the first time this year, have seen our lumber packages go down in the past 2 months. So we feel like at least temporarily that's peaked.

Got it. You talked about that you're roughly 1,250 starts LTM. So as you are growing more on a homebuilding side, how are you thinking about your lots supply? Where you are? And knowing that you really focus on some of these A locations, can you talk about the opportunities to grow lot supply in some of these locations?

Yes, I think one of the advantages we have in our team builder local model is, these guys have been in their markets for a very long time and understand their markets really well. And what we're seeing, for example, in Dallas is that because relationships with 35,000 starts right now, we're still seeing significant land opportunities to fuel pretty strong organic growth in 2019. Atlanta is not that way. If we want to stay in the very best A locations in Atlanta, we can't have the kind of growth that we're having in Dallas and still maintain our margins. But when we can combine Dallas, Atlanta, Florida and Colorado, we think we're still going to have strong growth in 2019. But it's going to be market-by-market, and we're not going to chase deals just to grow.

Great. And last one for me. Can you give any color on the cadence of the community count ramp in the back half of the year?

We expect very strong growth. We could see 6 to 9 communities in Q3 alone and continued into Q4. So it's just a function of how many of those names on Pages 6 to 8 of the 10-K actually turn into grand openings from a sales perspective. But we expect continued and increased growth.

Your next question comes from the line of Carl Reichardt with BTIG.

I wanted to ask you, Rick, about the comment you made about value engineering and then sort of extend that to a little bigger national purchasing. As you've grown here, I'm curious, specifically, what you think you can get out of value engineering, where the lowest hanging fruit is. And then second, just can you talk a little bit about your efforts from a national purchasing standpoint and how you're leveraging your size as you grow?

Yes, I think, Jed will take the value engineering question and Jim will take the national accounts question, I think.

I can take both. So on national accounts, we're now, when we include our Challenger Homes minority interest, which does not show up in our 1,200 -- trailing 12-month starts...

And there are about 500 starts a year.

So we're -- next year, we'll be well over 2,000 starts. We are in a different league with the vendors and national guys like Sherwin and carpet guys on -- you're reaching into the top 40 builders of the country, and you're able to just garner a lot more attention, a lot better rates than we previously have, especially when the model previously has been 500 builders in this market, 500 in another market. We really haven't had anyone centrally focused on aggregating those units. As far as the value engineering, I mean, I don't think we're doing anything different than anybody else is doing out there in the market. I mean, we're dropping plate heights [of food] and bumping up in master bedrooms, if you are familiar with that concept, we're smaller lots, smaller square footages, more open space -- sorry, more open rooms, less walls, compartmentalizing the home. Those are some of the things that come off the top of my head.

Carl, by the way, thanks for joining in and asking questions. But from a cost standpoint, we kind of look at the national accounts as a great way -- along with our new mortgage operation as a great way to hedge against what are those constant cost pressures from materials and labor. It's kind of an unknown as to how large that can be in any period. But we see a bulk of those moves on our part as good avenues to maintain our margins on a long-term, going-forward basis.

(Operator Instructions) Your next question comes from the line of Chase Basta with AWH Capital.

Looking at the backlog increase from March 31, it's up about $88 million. Can you break out the increase in terms of what the GHO acquisition added an organic increase?

Sure. Yes, I'm glad you brought that up. We've had some questions that we're happy to answer off-line as well in terms of the metrics and how they're impacted by GHO. GHO has a different business model in which they do a lot of forward selling. Almost all of their sales are for future deliveries. So they added approximately $7X million to our backlog as of the end of Q2. So our organic backlog would have grown 46% year-over-year without GHO. So they took us up to that 90% level on a year-over-year basis. They really haven't affected our starts numbers that much. Our lot inventory went up instead of being 27% Dallas and Atlanta. It was 42% growth in lot inventory, for instance, because they have a nice inventory of lots, which are fairly an expensive lots too. The community count still would have been up, 7% or 8% this quarter without GHO. But suffice it to say that the community count growth, looking forward, is not GHO. That's organic in Texas and in Georgia.

Got it. That's helpful. And then you mentioned that the ASP on the GHO Homes is lower and that impacted the ASP in the backlog. Can you touch on the direction of the backlog ASP for just the Texas and Georgia builders like directionally up or down relative to last year?

It was down also. I'm going to answer this generally and say that approximately 60% of the decline was GHO and 40% of the decline was related to just Dallas and Atlanta. It's the time of year when -- well, first of all, we have a lot more townhome communities opened up that have brought that down. You don't see it much in ASP, but you do see it in the actual backlog numbers versus delivery numbers.

Okay. And then just a high-level question for you guys. It seems like your business is growing nicely, margins are holding steady. Just curious how you guys think about what you're seeing in your business versus what the markets generally downbeat view on homebuilders right now. Do you feel like there's something the market is missing on builders? Or is there something about your markets in particular? Just kind of curious how you see things.

Well, obviously, I think, if you talk to any builder, everybody would like to see their stock price doing better, most of them would. I think that many builders and the market is viewing very slow order growth. As we said in the conference call, our organic growth is strong. GHO made it even better. With our backlog, we're seeing really pretty good visibility in the next year, with strong growth in the next year. And I really think it's because of our lot position. We have a lot of different levers that, I think, investors are starting to realize. For example, Southgate Homes is having a really strong sales experience this summer because of decreased competition, where everybody has pretty much abandoned that $650,000 price point. And they're selling great this summer. And really, I just think we have a pretty good business model working right now.

Chase, it really does seem like they've thrown the baby out with the bathwater here. From our standpoint, we're one of the few companies out there that is growing top line revenues aggressively at 20% to 30% for any period, and our bottom line is growing even faster than that. I think you've just got that general environment where everybody says, "Oh, this is an interest-sensitive industry and, therefore, rates seem to be going up, so gosh, there's going to be a correction," whereas we're not seeing that, we're seeing strong sales growth, where absorption growth -- you've got -- that chart that we've got in there in the months' supply of existing inventory is probably the biggest economic statistic from a macro standpoint that's available. And it's pointing to the fact that there is a continued disequilibrium where not just Green Brick, but building industry in general has pricing power and the ability to push up the supply-demand curve. So I think Green Brick and many other builders continue to think that this is a Goldilocks kind of environment, and we continue to make strong bottom line returns and return on equity, return on invested capital.

Chase, let me add one thing that I think it's really important for investors to understand -- I've been very fortunate as CEO because our board has taken a long-term approach to letting us make the best decisions for our business. We weren't under pressure on a quarterly basis to produce earnings and basically burn through lots just to make short-term results. We have a good lots supply. And I think that, that approach is starting to pay off right now and we are fortunate to have a board that took this long-term approach rather than a quarterly approach.

And there are no further questions. I'll turn the call back over to the presenters.

Well, thank you for your support. And we continue to view our future as bright. Please keep up with us. And if you'd like to speak further, we're always available, and we'll speak with you next quarter. Thank you.

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