Green Brick Partners, Inc. — 10-Q Summary
Period: Unaudited quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. The company operates homebuilding and land-development businesses, including Central and Southeast markets.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $183.5 million | $157.3 million | $352.1 million | $286.5 million |
| Gross profit | $40.3 million | $41.1 million | $75.6 million | $73.7 million |
| Operating profit | $18.0 million | $21.1 million | $29.4 million | $35.6 million |
| Net income attributable to Green Brick | $14.5 million | $14.9 million | $27.1 million | $26.1 million |
| Diluted EPS | $0.29 | $0.29 | $0.53 | $0.51 |
- Q2 revenue rose about 16.6%, but gross profit declined and operating profit fell about 14.6%; parent-attributable net income decreased about 2.8%. Six-month revenue rose about 22.9%, while operating profit declined about 17.4% and parent-attributable net income increased about 3.8%.
- Q2 residential-unit gross margin was 22.0%, versus 26.0%; six-month margin was 21.5%, versus 25.9%. Management cited higher construction-material costs and customer sales incentives. Q2 deliveries increased 20.5% to 394 homes; six-month deliveries increased 28.3% to 762. Average delivered-home prices declined 0.5% in Q2 and 2.2% for the six-month period, primarily due to product mix.
- At June 30, cash was $34.4 million and restricted cash was $4.5 million. Inventory was $719.9 million, up from $669.0 million at year-end 2018. Total assets were $833.0 million and total liabilities $321.8 million.
- Net borrowings on credit lines were $232.7 million, compared with $200.4 million at year-end; gross outstanding borrowings were approximately $234.0 million. Management reported debt-to-total-capitalization of about 32.0% and net debt-to-total-capitalization of 28.7%, with a target debt ratio of approximately 30%–35%.
- For the six months, operating cash flow was negative $20.8 million, versus negative $12.3 million. The principal use was a $50.6 million inventory increase. Investing cash use was $1.1 million, versus $27.3 million; financing provided $19.0 million, versus $40.5 million. Cash and restricted cash totaled $38.9 million at period-end.
Material changes and management commentary
- Homebuilding growth reflected more active selling communities and the April 2018 acquisition of GRBK GHO; the company reported 75 active communities at June 30. Net new orders rose 17.1% in Q2 and 9.4% in the first half. Backlog was 717 homes valued at $331.3 million, up 2.4% in units and 5.4% in value year over year.
- Cancellation rates increased to 13.7% in Q2 from 12.6%, and to 14.1% for six months from 11.4%. Management characterized the rates as below its estimated 15%–20% industry range. The six-month absorption rate per active community declined 10.6%.
- Land-and-lots revenue declined 24.1% in Q2 and 18.6% in the first half, mainly reflecting fewer land sales; Q2 lots revenue was approximately flat. Equity-method income increased, while SG&A rose in dollars but declined slightly as a percentage of revenue over the six-month period.
- The company adopted the lease accounting standard on January 1, 2019, recognizing operating lease right-of-use assets and liabilities. It also reclassified sales commissions from cost of residential units to SG&A; management stated this presentation change did not affect net income.
Outlook, risks, contingencies and unusual items
- No numerical full-year earnings or revenue guidance is provided. Management described Dallas and Atlanta market conditions as favorable, citing demand and supply constraints, but cautioned that results are subject to housing-market and other risks. The company expects its typical seasonal pattern to continue: stronger spring and summer orders and more deliveries and cash receipts in the second half.
- Key stated risks include homebuilding cyclicality, mortgage-rate and financing changes, land and inventory values, construction-cost inflation and labor availability, cancellations, regulation, weather, competition, and access to capital. A 1 percentage-point increase in rates on June 30 credit-line balances was estimated to raise annual interest incurred by about $2.3 million, subject to possible capitalization.
- Land and lot option contracts covered 3,050 lots and represented potential purchase payments of $184.7 million through 2022 if all options were exercised. Letters of credit were $2.0 million and performance bonds $4.7 million; the company did not expect material claims. Management reported no material litigation and no material change to previously disclosed risk factors.
- After quarter-end, a customer forfeited $2.4 million of earnest money in July; it was recognized as subsequent-period other income. On August 8, the company issued $75.0 million of 4.00% senior unsecured notes due 2026, received $73.3 million in proceeds, repaid $56.0 million of existing debt, and expected to apply remaining proceeds to revolving debt. The notes include financial covenants and scheduled principal payments in 2024, 2025 and 2026.
Important facts for investors to verify
- Whether higher deliveries and backlog convert to revenue without further margin pressure from construction costs, incentives or product mix.
- Whether rising cancellations and lower absorption per community affect future orders and closings.
- How inventory investment, lot-option commitments and credit-line borrowings affect cash generation and leverage.
- The impact of the August 2019 notes issuance, debt repayments, interest expense and covenant requirements.
- That the July $2.4 million deposit forfeiture is a post-quarter item, not included in Q2 results.