Green Brick Partners, Inc. — Q1 2017 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. Green Brick combines residential land development and homebuilding, primarily in the Dallas and Atlanta markets, and provides land and construction financing to controlled builders.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $99.3 million | $70.0 million | +42% |
| Gross profit | $21.3 million | $14.4 million | +48% |
| Gross margin | 21.4% | 20.6% | +0.8 percentage points |
| Operating profit | $11.6 million | $5.4 million | +113% |
| Net income | $8.2 million | $4.5 million | +83% |
| Net income attributable to Green Brick | $6.2 million; $0.13 per diluted share | $3.1 million; $0.06 per diluted share | About +100% |
| Operating cash flow | $16.6 million | $(16.4) million | Improved $33.0 million |
- Homebuilding revenue rose 40% to $93.4 million as deliveries increased 40% to 226 homes; average delivered home price was essentially unchanged at $413,261.
- Homebuilding gross margin increased to 21.0% from 20.1%. Management cited new communities, improved profitability on lot sales to controlled builders, and lower amortization of capitalized interest.
- Land and lot revenue increased 78% to $5.9 million, primarily reflecting more finished lots delivered to third parties.
- The effective tax rate rose to 32.1% from 24.4%; the filing attributes the increase to the mix of non-controlled earnings and discrete tax items.
Financial position, debt and liquidity
- At March 31, cash and cash equivalents were $32.3 million, restricted cash was $5.5 million, and inventory was $406.2 million. Total assets were $533.5 million; stockholders’ equity was $406.5 million.
- Lines of credit totaled $62.5 million outstanding, down from $75.0 million at year-end; notes payable were $10.2 million. Debt to total capitalization was approximately 15.6%.
- Credit commitments were $50 million on the secured facility and $85 million on the unsecured facility. Availability is subject to borrowing-base limits and covenants; the filing does not provide a clear figure for immediately available borrowing capacity. The company reported compliance with facility covenants.
- Operating cash flow was positive, versus cash use in Q1 2016, chiefly reflecting working-capital movements, including the inventory change. Financing activities used $18.3 million, including $17.5 million of line-of-credit repayments and $4.6 million of distributions to noncontrolling interests. Cash, cash equivalents and restricted cash ended at $37.8 million.
- Management said it targets a debt-to-capitalization ratio of approximately 35%–40% to support investment and growth.
Operating trends and management outlook
- Net new home orders rose 19.6% to 287, while backlog increased 6.4% to 298 homes and 12.4% in value to $145.2 million. Average backlog selling price increased 5.6% to $487,128.
- Cancellations increased to 53 from 27; the cancellation rate rose to 15.6% from 10.1%. Management said a 15%–20% rate is representative of the industry.
- Management described improving housing conditions in Dallas and Atlanta, citing consumer confidence, affordability, supply constraints and employment. It believes the markets offer favorable conditions for growth, but provided no quantified financial guidance.
- The company owned or controlled 4,956 lots at quarter-end, down from 5,189 at December 31, 2016.
- Management expects the usual homebuilding seasonality: stronger order activity in spring and summer, with more deliveries and cash receipts generally in the second half. It cautioned that quarterly results are not necessarily indicative of future periods.
Risks, contingencies and notable items
- Key risks include housing-market cyclicality, mortgage-rate increases and reduced buyer financing availability, land and construction cost inflation, labor and materials constraints, land acquisition and development risks, geographic concentration, regulation, weather, cancellations, and access to capital.
- A 1 percentage-point increase in interest rates was estimated to raise annual interest incurred by approximately $0.6 million, based on quarter-end line borrowings; the company’s variable-rate debt and buyer sensitivity to mortgage rates are exposures.
- The filing reports no material litigation and states that legal claims are not expected to materially affect results, liquidity or financial condition. Warranty accruals were $1.3 million at quarter-end.
- Share-based compensation expense increased to $1.9 million from $0.2 million. The company also disclosed related-party land transactions and transactions involving controlled builders; see Note 9 for details.
- A stated risk is that U.S. corporate tax reform could reduce the value of net operating loss carryforwards and potentially require a valuation allowance. The timing and effect of any tax changes were uncertain.
- The company early adopted the restricted-cash cash-flow standard in Q1 2017. It was still assessing the impact of the new revenue-recognition standard, scheduled for adoption in 2018.
Important facts for investors to verify
- Whether higher orders and backlog convert into closings and cash, particularly given the increased cancellation rate.
- Whether homebuilding margins and lot-sale profitability are sustainable as community mix, costs and capitalized interest change.
- Actual borrowing-base availability, covenant headroom, and sensitivity to variable interest rates.
- Inventory quality and development commitments, including the timing and economics of owned and optioned lots.
- The effect of tax reform on deferred tax assets and net operating loss carryforwards, and the eventual impact of the new revenue-recognition standard.
- Related-party transactions and noncontrolling-interest distributions, including their terms and effect on cash available to Green Brick shareholders.