Green Brick Partners, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Green Brick is a residential land developer, homebuilder and construction lender, operating primarily in the Dallas, Texas and Atlanta, Georgia markets. Amounts below are in millions unless otherwise stated.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $58.5 | $63.0 |
| Gross profit | $16.4 | $15.8 |
| Gross margin | 28.0% | 25.2% |
| Income before taxes | $8.4 | $10.2 |
| Income tax provision | $2.2 | $0.3 |
| Net income | $6.2 | $9.8 |
| Net income attributable to Green Brick | $4.0 | $7.3 |
| Basic and diluted EPS | $0.13 | $0.66 |
| Operating cash flow | $(10.4) | $2.8 |
- Residential-unit revenue was essentially flat at $49.7 million. Land-and-lot revenue fell 34.3% to $8.8 million, primarily as fewer third-party lots were delivered; more lots were sold internally to Green Brick builders, with revenue deferred until home closings.
- Homebuilding gross margin improved to 27.9% from 24.7%, which management attributed largely to community-closing timing and lower-cost-basis homes. Overall gross profit increased 3.2% despite lower total revenue.
- Net income declined 37% and parent-attributable EPS fell to $0.13. The comparison is affected by the post-transaction capital structure: weighted-average shares were 31.3 million in 2015 versus 11.1 million in 2014. The filing also reports a higher tax provision following the change in JBGL’s tax status.
- Cash and cash equivalents were $17.1 million at quarter-end, down from $21.3 million at December 31, 2014; restricted cash was $2.2 million. Inventory rose to $289.3 million from $274.3 million, contributing to operating cash use.
- Debt included a $150.0 million term loan, $19.5 million drawn on lines of credit and $10.8 million of notes payable. The term loan is from funds managed by Greenlight, a major shareholder; it bears 9% interest through October 2015 and 10% thereafter. The company reported compliance with its debt covenants at March 31.
- Deferred tax assets were $87.2 million, net of a $1.2 million valuation allowance. Total assets were $409.0 million and stockholders’ equity was $187.6 million.
Material changes and operating indicators
- Home deliveries increased 5.1% to 145, while average delivered home price decreased 4.8% to $342,490, which management attributed to a greater mix of lower-priced townhomes.
- Net new home orders rose 6.3% to 186; cancellations were 26 and the cancellation rate improved to 12.3% from 15.4%. Backlog increased 8.5% to 242 homes, with value up 33.5% to $92.8 million. Backlog may not convert to revenue because contracts can be canceled.
- Land-and-lot gross profit declined to $2.5 million from $3.6 million. The average selling community count rose to 36 from 25, while the company reported 3,876 owned or controlled lots at quarter-end, down from 4,156 at year-end.
- Salary and benefits and selling, general and administrative expenses increased, reflecting higher headcount, growth-related spending, new communities and costs of operating as a public company.
Outlook, risks and other notable items
- No specific revenue, earnings or home-delivery guidance was provided. Management cited improving housing conditions, demand and supply constraints in its Dallas and Atlanta markets, and plans to reinvest proceeds in land acquisition and development. These are management views, not assured outcomes.
- Management noted typical homebuilding seasonality: orders are generally strongest in spring and summer, with more deliveries and cash receipts in the second half of the year. Early-stage land and community development can require substantial cash before related earnings are recognized.
- Key risks include housing and land-market cycles, mortgage-rate and financing availability, land and construction costs, labor and materials availability, community-development and approval timing, cancellations, geographic concentration, substantial debt and legal, warranty, regulatory and environmental matters.
- Disclosure controls and procedures were reported ineffective as of March 31, 2015 because material weaknesses in internal control over financial reporting had not been remediated. Management said remediation efforts were ongoing. The company reported no material litigation or legal accruals at quarter-end.
- The October 2014 acquisition of JBGL was accounted for as a reverse recapitalization; historical financial statements reflect JBGL as the accounting predecessor, and no goodwill was recorded.
Important facts for investors to verify
- Whether backlog converts to closings and whether order growth, cancellations and average selling prices remain favorable.
- Whether investment in inventory and communities can be funded while operating cash flow is negative.
- The cost and terms of the $150 million related-party term loan, future interest burden, covenant headroom and refinancing or repayment needs.
- Whether expense growth and the tax provision continue to pressure parent-attributable earnings and EPS.
- Progress in remediating the disclosed internal-control material weaknesses, and the effect of the reverse recapitalization and share-count change on period comparisons.