Green Brick Partners, Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. Green Brick is a homebuilder and land developer operating primarily in Central and Southeast markets. Results include GRBK GHO, acquired in April 2018, in which the company holds an 80% controlling interest.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $168.6 million | $129.2 million | +30.6% |
| Gross profit | $35.4 million | $32.6 million | +8.4% |
| Operating profit | $11.4 million | $14.5 million | −21.5% |
| Net income | $11.5 million | $13.2 million | −13.2% |
| Net income attributable to Green Brick | $12.6 million | $11.2 million | +12.5% |
| Diluted EPS | $0.25 | $0.22 | +$0.03 |
| Cash used in operations | $9.2 million | $20.2 million | Improved by $11.0 million |
- Residential units revenue was $161.6 million, up 33.3%; land and lots revenue was $7.0 million, down 10.9%.
- Residential units gross margin fell to 20.9% from 25.9%, primarily because of increased customer incentives. Total gross margin was approximately 21.0%, versus 25.3%.
- SG&A was $23.5 million versus $18.1 million; it remained 14.0% of revenue. The company reclassified sales commissions from cost of residential units to SG&A beginning in Q1 2019; prior-period figures were reclassified for comparison.
- Cash and restricted cash totaled $26.6 million at quarter-end, including $23.9 million unrestricted cash, versus $41.8 million combined at year-end 2018. Inventory was $690.8 million.
- Net borrowings on credit lines were $206.5 million, compared with $200.4 million at December 31, 2018. Management reported debt-to-total-capitalization of approximately 30.0% and net-debt-to-total-capitalization of 27.5%; its stated target debt ratio is 30%–35%.
Material changes and operating trends
- Deliveries increased 37.8% to 368 homes; average delivered home price decreased 4.0% to $432,698. Management attributed revenue growth to organic expansion and GRBK GHO, which contributed $25.2 million in residential revenue.
- Net new orders rose 2.3% to 444, while the cancellation rate increased to 15.4% from 10.3%. Backlog grew 37.9% to 658 homes, valued at $307.5 million; GRBK GHO accounted for $72.9 million of backlog value.
- Operating cash outflow reflected a $21.7 million inventory increase and a $4.5 million decrease in accounts payable. Financing cash outflow was $5.3 million, including $10.7 million of distributions to noncontrolling partners; $37.0 million of credit-line borrowings partly offset debt repayments.
- Equity income from unconsolidated entities increased to $1.8 million from $1.5 million. Other income rose to $2.1 million from $0.6 million, primarily due to forfeited customer deposits and increased title and settlement services.
Outlook, risks and unusual items
- No specific company revenue or earnings guidance was provided. Management cited favorable demand and supply constraints in its Dallas and Atlanta markets, while noting results are seasonal and Q1 performance is not necessarily indicative of full-year results.
- Management targets prudent leverage to support land acquisition, development and homebuilding. A 1 percentage-point increase in interest rates would raise annual interest incurred by approximately $2.1 million on the reported credit-line balance; the lines carry variable rates. Higher mortgage rates may also weaken affordability and housing demand.
- Land and lot option contracts covered 2,308 lots; exercising all options would entail potential payments of $206.4 million through 2022. Deposits and pre-acquisition costs of $0.5 million were written off on abandoned options during the quarter.
- Eleven selling communities with 259 homesites and approximately $66.7 million of carrying value had impairment indicators; no inventory impairment was recorded after analysis. The company reported $2.2 million of letters of credit and $5.4 million of performance bonds and did not expect material claims. It reported no material litigation.
- GRBK GHO contingent consideration liability increased by $0.5 million to $2.7 million. A further $1.8 million earned for 2018 performance was paid in April 2019; estimated potential payouts for the remaining performance period range from $1.4 million to $3.7 million.
- The company adopted lease accounting Topic 842 on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. At March 31, lease liabilities were $4.0 million. Management reported effective disclosure controls and no material change in internal control other than including GRBK GHO in its assessment.
Investor verification points
- Assess whether higher deliveries and backlog can be sustained, particularly given the higher cancellation rate and increased sales incentives.
- Review the drivers and durability of residential margin compression, including the effect of the sales-commission reclassification.
- Track cash conversion, inventory investment, credit-line usage and remaining borrowing capacity against land commitments and planned growth.
- Monitor impairment assessments for flagged communities and the performance assumptions underlying contingent consideration.
- Evaluate sensitivity to mortgage and borrowing rates, seasonality, labor and material costs, land availability, and the other homebuilding risks described in the filing.