Green Brick Partners, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless stated otherwise. Green Brick operates homebuilding and land-development businesses, primarily in Central and Southeast markets.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $213.3 million | $168.6 million | Up 26.5% |
| Residential-unit revenue | $191.2 million | $161.6 million | Up 18.3% |
| Land and lots revenue | $22.1 million | $7.0 million | Up 213.6% |
| Gross profit / gross margin | $49.0 million / 23.0% | $35.4 million / 21.0% | Margin expanded |
| Income before taxes | $22.8 million | $15.3 million | Up 48.5% |
| Net income attributable to Green Brick | $15.9 million | $12.6 million | Up 26.3% |
| Diluted EPS | $0.31 | $0.25 | Up $0.06 |
| Operating cash flow | $1.2 million provided | $9.2 million used | Improved |
- Home deliveries increased 21.7% to 448; average delivered-home price fell 2.4% to $422,400, primarily due to product mix. Management attributed residential margin expansion to fewer sales incentives, price increases in some communities, and lower land costs on company-developed lots.
- Net new home orders rose 42.3% to 632, with average absorption up 17.5% and average active selling communities up 20.5% to 94. Backlog grew 38.9% to $427.3 million (970 homes), while its average price declined 5.8% to $440,500.
- Land and lots revenue increased with lots closed rising 193.6% to 138. Selling, general and administrative expense was $26.9 million versus $23.1 million; as a share of revenue it declined to 12.6% from 13.7%.
- Equity income from unconsolidated entities rose to $2.6 million from $1.8 million. Other loss was $1.9 million versus other income of $1.6 million, mainly reflecting $3.4 million of option-deposit and pre-acquisition-cost write-offs related to COVID-19 decisions.
Liquidity, debt and balance sheet
- At March 31, cash and cash equivalents were $105.9 million, up from $33.3 million at year-end; restricted cash was $6.8 million. Total assets were $975.2 million, including $770.6 million of inventory.
- Lines of credit, net of issuance costs, were $242.8 million, and senior unsecured notes, net, were $73.5 million: approximately $316.2 million of total debt. The company drew the full $215 million available commitment under its unsecured revolver amid COVID-19 market disruption, using part to repay secured borrowings and retaining the remainder as cash. Revolver rates were 3.25%–4.00%; senior notes bear 4.00% interest and mature in 2026.
- Debt to total capitalization was 36.8%; management’s non-GAAP net debt to total capitalization measure was 27.9%, reflecting cash on hand. The stated target debt-to-capitalization range is approximately 30%–35%. The company reported compliance with debt covenants; its trailing-12-month interest coverage was 7.93x against a 2.0x minimum.
- Operating cash flow was $1.2 million, with inventory growth of $16.9 million and earnest-money-deposit growth of $7.4 million among the uses of cash. Financing provided $74.8 million, primarily from $126.0 million of revolver borrowings, partly offset by $48.0 million of repayments and $3.0 million of distributions to noncontrolling interests.
COVID-19, outlook and material risks
- Management said sales-office traffic and sales slowed significantly under stay-at-home restrictions. Net new orders slowed in March: March orders were down 5.9% year over year, while cancellations were 28.4% in March versus 10.7% in January and 11.1% in February. The filing says this slowdown continued into April.
- Management expected lower net sales to adversely affect second-quarter and later-2020 closings and results, and said the extent of the impact could not be estimated. No quantified earnings or revenue guidance was provided.
- The company curtailed land and lot purchases, land development, speculative construction and planned community openings; it also decided not to open Trophy Signature Homes in Houston. It reported an approximately 18% workforce reduction and salary cuts of 5%–30% through year-end. The CEO reduced his base salary by 32%, and directors reduced cash retainers by 30% from April 1.
- Management cited potential prolonged economic weakness, unemployment, tighter mortgage credit, lower demand, increased cancellations, price pressure, construction-cost inflation, land-value impairment and reduced access to credit as risks. Backlog may not convert to revenue because contracts can be canceled.
- The company had $22.5 million of earnest money deposits at risk for contracts covering 2,575 lots with an aggregate purchase price of about $199.0 million; it can generally terminate these contracts by forfeiting deposits. Inventory impairment analysis resulted in a de minimis adjustment in Q1.
Other notable items
- In February, the company and its GRBK GHO minority partner extended the start date for put and purchase options from April 2021 to April 2024. The $5.3 million contingent consideration earned for 2019 performance was paid in April 2020, along with a $1.5 million income distribution.
- On April 29, 2020, the company acquired the remaining 50% interest in one of its controlled builders, obtaining 100% control; accounting was still under evaluation.
- The filing states that disclosure controls were effective as of March 31, 2020 and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subsequent-quarter order, cancellation, backlog-conversion and home-closing trends, particularly against management’s warning of greater COVID-19 effects after Q1.
- Cash use, revolver availability, borrowing costs and covenant headroom as operating conditions and land investment plans evolve.
- Whether backlog converts to closings and revenue, given cancellation exposure and the lower average backlog price.
- Potential further option-deposit write-offs, inventory impairments, and the outcome and accounting for the April builder acquisition.
- Clarify the distinction between the reported debt-to-capitalization ratio (36.8%) and the non-GAAP net debt ratio (27.9%) when comparing leverage.