Green Brick Partners, Inc. — Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2015. Amounts below are in millions of dollars unless noted. Green Brick combines residential land development and homebuilding, primarily in Dallas, Texas, and Atlanta, Georgia. Because the October 2014 transaction was accounted for as a reverse recapitalization, prior-period results reflect JBGL, the accounting predecessor.
Financial performance and position
- Third-quarter revenue: $75.2, up 51.4% from $49.7. Residential-unit revenue rose to $69.2 from $39.9; land-and-lot revenue fell to $6.0 from $9.8.
- Third-quarter profit: Gross profit was $15.8 versus $15.0; gross margin declined to 21.0% from 30.3%. Operating profit increased to $7.4 from $6.4. Net income was $5.3 versus $6.1, while net income attributable to Green Brick was $2.8 versus $3.7. Diluted EPS was $0.06 versus $0.33.
- Nine-month revenue: $205.6, up 15.2% from $178.5. Gross profit was $49.4 versus $47.4; gross margin declined to 24.0% from 26.5%. Operating profit was $25.2 versus $27.2. Net income attributable to Green Brick was $10.6 versus $18.5; diluted EPS was $0.29 versus $1.66.
- Cash flow: Operating activities used $21.5, compared with $4.7 provided in the prior-year period. Inventory increased $31.5 and earnest-money deposits increased $10.0. Investing activities provided $1.8; financing activities provided $12.9. Cash decreased $6.9 to $14.4.
- Liquidity and debt: Cash was $14.4, restricted cash $2.3, and total assets $440.1 at September 30. Outstanding borrowings comprised $14.0 on lines of credit and $11.5 of notes payable; the $150.0 related-party term loan had been repaid. Management reported debt to total capitalization below 7% and compliance with revolving-credit covenants. The filing does not provide a current ratio.
- Other balances: Inventory was $318.0, up from $274.3 at year-end 2014. Deferred tax assets, net, were $83.4. Stockholders’ equity totaled $364.0.
Material changes versus comparable periods
- Home deliveries increased 17.6% to 154 in the quarter and 9.0% to 461 for nine months. Average delivered home prices rose 47.5% to $449,123 in the quarter and 13.7% to $388,709 for nine months; management attributed the increases partly to product mix and market appreciation.
- Despite higher home revenue, homebuilding gross margin fell to 20.2% from 31.8% in the quarter and to 23.5% from 26.8% for nine months. The filing cites prior-year closings in unusually high-margin communities, closeouts of existing communities, and capitalized-interest amortization.
- Net new home orders rose 5.3% to 140 in the quarter and 0.8% to 487 for nine months. Cancellation rates increased to 16.2% from 11.3% in the quarter and to 15.2% from 12.2% year to date; backlog was 235 homes, valued at $98.3.
- On July 1, the company issued shares for approximately $170.0 net proceeds, repaid the Greenlight term loan using approximately $154.9, and used remaining proceeds for working capital and general corporate purposes. Shares outstanding rose to 48.8 million from 31.3 million at year-end 2014, materially affecting per-share comparisons.
- Income-tax expense increased to $1.9 for the quarter and $6.2 for nine months, reflecting the change in JBGL’s tax status to taxable entities. The reported effective tax rates were 26.0% and 25.2%, respectively.
Outlook, risks and unusual items
- Management described Dallas and Atlanta housing conditions as improving, citing employment growth, demand, and supply constraints, and said it intends to acquire and develop lots while maintaining positive builder margins. No quantified earnings or revenue guidance was provided.
- Management reported more than 4,100 owned or controlled home sites. It stated an intention to target debt to total capitalization of approximately 40% to support growth, compared with less than 7% at quarter-end.
- Key risks include housing-market cyclicality, mortgage-rate and financing availability, land and construction costs, labor and materials availability, development approvals, cancellations, geographic concentration, and weather, regulatory, warranty, and litigation exposure. The company noted homebuilding seasonality and substantial cash needs during early community-development stages.
- The term-loan repayment resulted in a $0.4 write-off of unamortized debt issuance costs. The new $50.0 Inwood revolving facility is secured by specified land and related assets, bears a floating rate subject to a 4% floor, and matures July 30, 2017.
- Disclosure controls and procedures were deemed ineffective at September 30, 2015 because previously reported material weaknesses in internal control over financial reporting had not been remediated. Management reported ongoing remediation efforts. No material litigation or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether higher home prices and deliveries can be sustained while homebuilding margins and order absorption remain under pressure.
- How backlog converts to closings, given the higher cancellation rate; the filing cautions that backlog may not predict future revenue.
- Whether inventory investment and earnest-money deposits can be funded while operating cash flow is negative.
- The effect of the equity issuance and expanded share count on future per-share results, and the company’s planned use of leverage and growth capital.
- Progress in remediating the material weaknesses in internal controls and continued compliance with revolving-credit covenants.