Green Brick Partners, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 13, 2017. The filing also reports unaudited fourth-quarter results. Green Brick is a residential land developer and homebuilder operating primarily in the Dallas, Texas and Atlanta, Georgia markets.
Business context and performance
The company acquires and develops residential land, finances construction and land purchases by controlled builders, and shares in their profits. It reported 5,189 owned or controlled lots at year-end and delivered 844 homes during 2016.
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $380.3 million | $291.1 million |
| Home sales revenue | $365.2 million | $254.3 million |
| Land and lot sales revenue | $15.2 million | $36.9 million |
| Gross profit | $86.4 million | $62.3 million |
| Operating profit | $47.7 million | $32.3 million |
| Net income attributable to Green Brick | $23.8 million; $0.49 per share | $15.3 million; $0.38 per share |
| Operating cash flow | $(7.1) million | $(47.7) million |
Consolidated gross margin was approximately 22.7% and operating margin approximately 12.6% in 2016. Homebuilding gross margin improved to 22.4% from 20.6%, which management attributed primarily to new communities, improved profitability on lots sold to controlled builders, and lower amortization of capitalized interest. The 2014 comparison is affected by a one-time tax benefit related to the change in tax status following the reverse recapitalization.
Material changes versus 2015
- Home deliveries rose 28.9% to 844; average selling price increased 11.5% to $432,659. Home sales revenue grew 43.6%.
- Net new home orders increased 36.0% to 880. Year-end backlog rose 17.9% to 237 homes, valued at $108.0 million, up 22.6%. The cancellation rate declined to 13.3% from 14.3%.
- Land and lot revenue fell 58.9%, reflecting 65.2% fewer finished lots delivered to third parties; management said more lots were sold internally to controlled builders, with revenue recognized when the homes close.
- Net income attributable to Green Brick increased 55% approximately, while diluted EPS rose from $0.38 to $0.49. Weighted-average shares also increased substantially, following the 2015 equity offering.
- Cash used in operations narrowed to $7.1 million from $47.7 million, but remained negative as inventory and development activity absorbed cash.
Fourth-quarter results
Fourth-quarter 2016 revenue was $119.8 million, gross profit $29.2 million, net income attributable to Green Brick $7.7 million, and diluted EPS $0.16. In fourth-quarter 2015, these were $85.5 million, $16.9 million, $4.7 million, and $0.10, respectively.
Liquidity, debt and cash flow
- Year-end cash and cash equivalents were $35.2 million; restricted cash was $4.4 million. Inventory was $410.3 million and total assets were $541.0 million.
- Total debt was $85.9 million: $75.0 million drawn on revolving facilities and $10.9 million of notes payable. Total liabilities were $139.5 million and stockholders’ equity was $401.5 million. The company reported a debt-to-total-capitalization ratio of approximately 18%.
- At December 31, revolving commitments were $50 million secured and $70 million unsecured, with reported available capacity of $35 million and $10 million, respectively. The unsecured facility’s aggregate commitment increased to $85 million on March 6, 2017, after year-end.
- Cash increased by $14.0 million during 2016, supported by $21.5 million of net financing cash flow, despite operating cash use of $7.1 million and investing cash use of $0.5 million. Operating cash flow benefited from higher accrued expenses and customer and builder deposits.
- Management intends to use leverage prudently and stated a target debt-to-capitalization ratio of approximately 35%–40% to support investment and growth. The company was in compliance with its credit covenants at year-end.
Outlook, risks and unusual items
Management expressed optimism about continued housing demand in Dallas and Atlanta, citing employment, population growth, affordability and supply constraints. It provided no specific numerical revenue or earnings guidance. Its strategy is to expand homebuilding, develop land and selectively sell finished lots, while pursuing additional builder acquisitions and potentially entering new markets.
- Key risks include housing-market cyclicality, higher mortgage rates or tighter financing, concentrated exposure to Dallas and Atlanta, land and inventory valuation, permitting and development delays, and labor and subcontractor shortages. The company reported recent labor shortages, higher subcontractor wages and project delays in both markets.
- Other material exposures include construction-material cost changes, weather and natural disasters, warranty and product-liability claims, regulatory and environmental requirements, and dependence on controlled builders and their noncontrolling owners. Certain builder agreements contain buy-sell provisions.
- Federal NOL carryforwards were approximately $116.6 million and begin expiring in 2029; management expects sufficient taxable income to use them, but ownership changes may restrict use. State NOLs were assessed as unlikely to be realized and are subject to a valuation allowance.
- No inventory impairment was recorded in 2016, 2015 or 2014, and the company reported no material litigation. Warranty accruals were $1.2 million at year-end.
- The company completed remediation of several previously identified internal-control weaknesses and management and the auditor reported effective internal control over financial reporting at December 31, 2016. A $1.9 million out-of-period adjustment was recorded in 2015 for an overaccrual of distributions payable; management deemed it immaterial. Prior-period cost classifications were also changed, with no effect on net income.
- A board-authorized repurchase program allows purchases of up to 1 million shares through 2017; no shares were repurchased in 2016. The company does not anticipate paying cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether backlog converts to closings and cash receipts, and how cancellations and selling-community growth develop.
- How much inventory growth and land development require in cash, and whether operating cash flow turns positive as deliveries increase.
- Availability, borrowing-base capacity, maturity terms and covenant headroom under the revolving facilities, including the post-year-end commitment increase.
- Whether higher labor, materials and land costs pressure margins or delay community openings, particularly in the company’s concentrated markets.
- Realizability of deferred tax assets and federal NOLs, including any ownership-change limitations; also review related-party land transactions and controlled-builder arrangements.