Green Brick Partners, Inc. — Q3 2017 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2017, compared with the same 2016 periods. Green Brick combines homebuilding and land development, primarily in Dallas and Atlanta, and entered Colorado Springs through a 49.9% interest in Challenger Homes.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $113.7 million | $91.7 million | $318.0 million | $260.6 million |
| Gross profit / margin | $25.4 million / 22.4% | $20.6 million / 22.5% | $69.6 million / 21.9% | $57.2 million / 21.9% |
| Operating profit | $15.9 million | $11.3 million | $40.9 million | $29.0 million |
| Net income attributable to Green Brick | $9.3 million | $6.2 million | $23.2 million | $16.1 million |
| Diluted EPS | $0.19 | $0.13 | $0.47 | $0.33 |
- Q3 residential revenue rose 23.5%; deliveries increased 19.9% to 235 homes, and average selling price increased 3.0% to $461,434. Homebuilding gross margin was 21.8%, versus 22.2%.
- For the nine months, residential revenue increased 21.8%; deliveries rose 22.7% to 698, while average selling price decreased 0.7% to $432,921. Homebuilding gross margin was 21.5%, versus 21.4%.
- Land and lot revenue was $5.3 million in Q3 and $15.8 million year to date. Nine-month lot deliveries were 119, compared with 95.
- Q3 net income included $1.0 million of equity-method income from Challenger Homes. The nine-month effective tax rate was 31.5%, versus 29.7%.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $20.7 million, restricted cash $4.4 million, and inventory $478.4 million, up from $410.3 million at year-end 2016. Total assets were $606.5 million.
- Nine-month operating cash flow was negative $23.6 million, compared with negative $3.7 million in 2016, largely reflecting inventory growth of $70.6 million and increased earnest money deposits. Investing cash outflow was $0.3 million; financing cash inflow was $9.4 million. Cash, cash equivalents and restricted cash ended at $25.1 million.
- Lines of credit totaled $95.0 million outstanding and notes payable were $10.2 million. The company reported a 19.9% debt-to-total-capitalization ratio and stated a target range of approximately 35%–40%.
- The unsecured revolving facility’s commitments increased to $130 million in September, with a possible increase to $200 million subject to terms. The secured facility provides up to $50 million. Availability is subject to borrowing-base limitations. The company reported compliance with debt covenants.
Material changes, outlook and risks
- Q3 net new home orders rose 18.1% to 241; backlog was 337 homes valued at $164.6 million, up 18.7% in value year over year. Nine-month orders increased 16.8% to 798. Cancellation rates rose to 14.2% for Q3 and 14.7% year to date.
- Management cited improving housing conditions, consumer confidence, affordability and constrained lot supply in its core markets, and said it believes demand conditions support future growth. No specific financial guidance was provided. Backlog may not convert to revenue because contracts can be canceled.
- The Challenger investment broadened the company into Colorado Springs. Consideration included 1.477 million shares issued and 20,000 additional shares held back, expected to be issued in Q2 or Q3 2018 if indemnification matters are satisfactorily resolved. The company has no controlling interest; the partners direct operations. Challenger contributed $1.0 million of equity income through September 30.
- Key exposures include housing-market cyclicality, mortgage and borrowing-rate increases, land and construction cost inflation, labor and material availability, geographic concentration, and development and regulatory risks. A 1% increase in rates was estimated to raise annual interest incurred by approximately $1.0 million, potentially capitalized to inventory.
- Warranty accruals were $1.5 million at quarter-end. The company reported no material litigation and believes legal matters will not materially affect results, liquidity or financial condition. Management concluded disclosure controls were effective.
- Prior-period classification was revised to move certain project costs into cost of residential units; management stated there was no effect on prior-period net income.
Investor verification priorities
- Assess whether higher deliveries and orders convert into sustained revenue and cash generation, given the increase in inventory and operating cash use.
- Track gross margins, average selling prices, cancellation rates and backlog conversion, including product mix effects.
- Verify borrowing-base availability, covenant headroom, debt costs and the company’s planned use of additional leverage.
- Evaluate Challenger Homes’ results and governance, the potential for partner disputes, and the impact of share issuance and any future purchase option.
- Review exposure to interest-rate, labor, materials, land-price and market-demand changes in the concentrated Texas and Georgia markets.