Green Brick Partners, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Green Brick is a homebuilding and land-development company operating principally in Dallas, Atlanta, and, following an April acquisition, Vero Beach, Florida. It also holds a noncontrolling investment in Colorado Springs-based Challenger Homes.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $155.0 million | $105.0 million | $283.3 million | $204.3 million |
| Gross profit | $34.6 million | $22.9 million | $61.7 million | $44.2 million |
| Operating profit | $20.6 million | $13.4 million | $35.0 million | $25.0 million |
| Net income attributable to Green Brick | $14.9 million | $7.7 million | $26.1 million | $13.9 million |
| Diluted earnings per share | $0.29 | $0.16 | $0.51 | $0.28 |
- Q2 revenue rose 47.7%; attributable net income rose 93.4%. For the first half, revenue increased 38.7% and attributable net income increased 87.7%.
- Q2 homebuilding gross margin was 21.9%, versus 21.7%; first-half homebuilding gross margin was 21.7%, versus 21.4%. Total gross margin was approximately 22.3% in Q2 and 21.8% for the first half.
- Home deliveries were 327 in Q2, up 38.0%, and 594 in the first half, up 28.3%. Net new orders increased 43.3% in Q2 and 47.4% in the first half. Q2-end backlog was 700 homes valued at $314.2 million, up 111.5% in units and 90.2% in value; the acquisition of GHO contributed 195 backlog homes.
- Cash and restricted cash totaled $41.2 million at June 30, including $37.1 million unrestricted. Inventory was $581.4 million, up from $496.1 million at year-end 2017.
- First-half operating cash flow was negative $12.3 million, versus positive $3.7 million in 2017; investing cash outflow was $27.3 million, mainly reflecting the GHO acquisition. Financing provided $40.5 million, principally from increased credit-line borrowings.
- Credit-line borrowings were $166.4 million net of debt issuance costs, versus $105.8 million at year-end; notes payable were $1.2 million, down from $9.9 million after repayment of a $9.0 million note. Management reported a 27.6% debt-to-total-capitalization ratio and compliance with debt covenants.
Material changes and unusual items
- On April 26, Green Brick acquired an 80% controlling interest in GHO Homes for approximately $33.9 million of total consideration, expanding into Vero Beach. GHO contributed $10.9 million of homebuilding revenue and $0.9 million of pretax income from acquisition through June 30. Purchase-price allocation remains preliminary; contingent consideration is subject to performance targets, and the minority interest is redeemable under a put/call arrangement beginning in 2021.
- Equity-method income from unconsolidated entities was $2.3 million in Q2 and $3.8 million for the first half, primarily reflecting Challenger Homes, acquired as an investment in 2017.
- The effective tax rate declined to 21.6% for Q2 and 21.1% for the first half, compared with 31.7% and 31.9%, respectively, largely reflecting the federal tax-rate reduction and other factors.
- Corporate and other first-half SG&A included approximately $0.8 million of one-time costs related to a public secondary offering. The company reported all interest costs were capitalized in both comparison periods.
- ASC 606 was adopted January 1, 2018; the company reported no material income-statement impact and no opening retained-earnings adjustment.
Outlook, risks, and contingencies
- Management described housing conditions in its core markets as strong, citing demand, supply constraints, consumer confidence, and employment growth. It reported no numerical earnings or revenue guidance. Management expects normal homebuilding seasonality: orders tend to be strongest in spring and summer, with more deliveries and cash receipts typically in the second half.
- Management targets a debt-to-capitalization ratio of approximately 30%–35% to support investment and growth. It expects to redeploy proceeds from inventory sales into land and lot opportunities and may pursue further acquisitions, joint ventures, or other strategic investments.
- Key risks include housing-market cyclicality, geographic concentration, mortgage-rate increases and financing availability, construction labor and material costs, land acquisition and development delays, cancellations, weather and natural disasters, and competition. The filing highlights additional regulatory risk from the new mortgage-services joint venture and risks from noncontrolling joint-venture investments.
- Land and lot options represented potential purchase payments of $272.3 million if exercised; the company generally may terminate these contracts by forfeiting deposits. Performance bonds were $4.3 million and letters of credit $0.2 million. The company reported no material litigation and did not expect material claims under the bonds or letters of credit.
Important facts for investors to verify
- How much of the growth in revenue, backlog, and earnings reflects underlying markets versus the GHO acquisition and changes in product mix.
- Whether the preliminary GHO valuation, contingent consideration, and redeemable minority-interest estimate change as appraisals and purchase-price work are completed.
- Whether inventory growth and negative operating cash flow convert into cash as homes and lots close, and how much borrowing capacity remains under borrowing-base limits.
- Whether rising mortgage rates, construction costs, or weaker local demand affect orders, cancellations, pricing, and margins.
- How the company’s leverage and capital needs evolve, including the effect of its land-option commitments and planned investment in new markets and joint ventures.