Green Brick Partners, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Amounts below are in millions of dollars unless stated otherwise. Green Brick is a homebuilder and land developer operating in Central and Southeast markets.
Financial and operating performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $232.8 | $183.5 | $446.1 | $352.1 |
| Gross profit | $53.9 | $40.3 | $102.9 | $75.6 |
| Income before taxes | $36.2 | $21.5 | $58.9 | $36.8 |
| Net income attributable to Green Brick | $33.6 | $14.5 | $49.6 | $27.1 |
| Diluted earnings per share | $0.66 | $0.29 | $0.98 | $0.53 |
- Q2 residential revenue rose 30.6% to $228.7 million; homes delivered increased 40.4% to 553. Average delivered home price fell 6.3% to $410,100, reflecting product mix.
- Residential gross margin improved to 23.2% from 22.0% in Q2 and to 23.1% from 21.5% in the first half. Management attributed gains to lower sales incentives, price increases in certain communities, and building on company-developed lots.
- Net new home orders increased 28.5% in Q2 and 35.2% in the first half. Q2-end backlog was 999 homes valued at $446.6 million, up 39.3% in units and 34.8% in value year over year. Cancellation rates were 16.7% for Q2 and 16.6% for the first half.
- Land and lots revenue declined 50.7% in Q2 to $4.2 million, but increased 69.4% in the first half to $26.2 million.
- Q2 income tax expense was $1.3 million, versus $5.3 million a year earlier; the first-half effective tax rate was 12.5%, versus 24.9%. A $6.7 million federal energy-efficient-home tax benefit from credits reinstated for prior years materially reduced tax expense.
Cash flow, debt and liquidity
- First-half operating cash flow was positive $39.0 million, versus cash used of $20.8 million in the prior-year period. Investing used $1.7 million; financing used $23.7 million. Cash and restricted cash totaled $51.3 million at June 30, including $43.2 million of unrestricted cash.
- Total debt, net of debt issuance costs, was approximately $221.7 million: $143.9 million on revolving lines, $73.5 million of senior notes, and $4.2 million of other notes payable. The senior notes carry a 4.00% fixed rate and mature in 2026; revolving borrowings carried rates of 2.67%–4.00% at quarter-end.
- Debt to total capitalization was 27.8%; net debt to total capitalization, a non-GAAP measure, was 23.7%. Management’s target debt-to-capitalization range is approximately 30%–35%.
- The company drew its unsecured revolver fully during Q1 amid market uncertainty, then reduced borrowings during Q2 to approximately prior-year-end levels. Management said cash, available credit and expected operating cash flows should cover debt service and liquidity needs for the next 12 months. The company reported compliance with debt covenants.
Material changes, outlook and risks
- COVID-19 initially depressed sales and increased cancellations: April 2020 net sales were down 42.1% year over year. Sales rebounded in May and June, up 51.7% and 82.1%, respectively. Management reported July net sales up 29.2% year over year.
- Management restarted previously paused construction, land purchases and development as activity improved. It cited low mortgage rates, market demand and more active selling communities as factors supporting sales, and reported moderate product price increases to offset input-cost pressures.
- Q2 other income included a net $1.9 million reversal of allowances on option deposits and pre-acquisition costs recorded in Q1; the first-half result still included a net $1.5 million expense for those allowances. The $5.3 million contingent consideration earned by the GRBK GHO partner in 2019 was paid in April 2020; no further payout was expected for the specified remaining period.
- On April 29, 2020, Green Brick acquired the remaining interests in CB JENI Homes, making it an indirect wholly owned subsidiary. It also formed BHome Mortgage, a 49%-owned joint venture, in May.
- Risks include renewed pandemic restrictions or a prolonged downturn, higher cancellations or lower demand, unemployment and mortgage-market changes, supply-chain constraints (including appliance availability), rising labor and material costs, inventory impairment, and land-entitlement, financing and execution risks. Management noted that these conditions could affect closings, margins, cash needs and land investment.
- Other exposures include $23.2 million of earnest money deposits at risk on options for 3,306 lots with an aggregate purchase price of about $254.6 million; $9.0 million of letters of credit and $9.3 million of performance bonds. The company did not expect material claims under the latter instruments in the foreseeable future.
Most important facts to verify
- Whether the May–July sales rebound and the $446.6 million backlog convert into closings at expected prices and cancellation levels.
- Whether gross-margin gains persist amid lumber, appliance and other supply-cost pressures.
- How the $6.7 million tax-credit benefit affects comparability with future periods; it is a significant nonrecurring factor in reported tax expense.
- Available revolver capacity, covenant headroom and the company’s ability to fund planned land and construction spending if conditions weaken.
- The value and recoverability of option deposits and inventory, and any subsequent change in COVID-19-related operating conditions or supply constraints.