Business context and reporting period
Green Brick Partners, Inc. filed its Form 10-K for the fiscal year ended December 31, 2018. The company acquires and develops land, finances controlled homebuilders, and participates in builder profits. Its principal markets are Dallas, Atlanta, and Vero Beach, Florida; it also holds a noncontrolling interest in a Colorado Springs builder. Homebuilding generated 94% of 2018 revenue.
In April 2018, Green Brick acquired an 80% controlling interest in GRBK GHO Homes, expanding into Vero Beach. It also formed title and mortgage joint ventures and established Trophy Signature Homes, which expected to begin Dallas-area home sales in the first half of 2019. The company owned or controlled 8,078 lots at year-end.
Financial and operating results
Amounts below are in millions of dollars except per-share data, units, and percentages.
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $623.6 | $458.3 | +36.1% |
| Gross profit | $130.3 | $99.0 | +31.6% |
| Gross margin | 20.9% | 21.6% | -0.7 pts |
| Operating profit | $71.8 | $60.0 | +19.6% |
| Income before tax | $81.7 | $64.2 | +27.1% |
| Net income attributable to Green Brick | $51.6 | $15.0 | +244.9% |
| Diluted EPS | $1.02 | $0.30 | +$0.72 |
| Operating cash flow | $(39.5) | $(18.0) | Greater use of cash |
Revenue growth reflected 1,287 home deliveries, up 30.0%, the GHO acquisition, and higher land-and-lot sales. Average selling price of delivered homes rose 0.9% to $443,805. Residential-unit gross margin eased to 21.0% from 21.4%, which management attributed to capitalized interest, the fair-value step-up on acquired GHO inventory, and fewer homes on company-developed lots.
For Q4 2018, revenue was $185.1 million versus $137.4 million in Q4 2017; gross profit was $37.0 million versus $29.0 million. Net income attributable to Green Brick was $13.4 million, or $0.26 per diluted share, compared with a loss of $8.2 million, or $0.16 per share, in Q4 2017. The prior-year quarter included a $19.0 million deferred-tax charge related to the Tax Cuts and Jobs Act.
Year-end backlog increased 87.7% to 582 homes, valued at $264.3 million (+74.5%); average backlog selling price declined 7.1% to $454,081, substantially reflecting the lower-price GHO product mix. The cancellation rate was 14.9%, compared with 15.0% in 2017.
Balance sheet, debt and liquidity
At December 31, 2018, cash was $38.3 million, inventory $669.0 million, total assets $784.0 million, and total equity $485.6 million. Inventory increased $172.9 million year over year. Borrowings on credit lines were $202.0 million gross ($200.4 million net of debt issuance costs), compared with $107.0 million gross in 2017; notes payable were fully repaid. Management reported debt-to-total-capitalization of 30% and net debt-to-total-capitalization of 26%, targeting 30%–35% debt to capitalization.
Credit facilities mature in 2021 and 2022. Weighted average rates reported for the 2021 and 2022 maturities were 4.99% and 5.25%, respectively. A 1 percentage-point rate increase on year-end borrowings would raise annual interest cost by approximately $2.0 million, although interest costs were capitalized in 2018. The company had $39.5 million of operating cash outflow, $30.8 million of investing outflow, and $71.8 million of financing inflow in 2018; financing inflows primarily reflected net credit-line borrowing. Management cited inventory growth as the principal driver of operating cash use.
Contractual obligations totaled $400.1 million, including $202.0 million of credit-line principal, $193.2 million of land and lot purchase commitments, and $4.8 million of operating leases. The land/lot option commitments may generally be avoided by forfeiting deposits, subject to contract terms.
Changes, outlook and risks
- Net income improved sharply, but the comparison with 2017 is affected by the prior-year $19.0 million Tax Act remeasurement charge. The effective tax rate was 21.0% in 2018 versus 60.8% in 2017.
- GHO contributed $57.8 million of homebuilding revenue and $4.7 million of pretax income from acquisition through year-end. Performance-based contingent consideration was remeasured; the year-end liability was $2.2 million.
- Management expected substantially all year-end backlog, subject to normal cancellations, to close during 2019. No specific full-year 2019 revenue or earnings guidance was provided. Management described housing conditions as strong during 2018 but noted national demand had slowed as interest rates rose.
- Key exposures include the cyclical housing market and concentration in a few geographic markets; mortgage-rate and financing availability; land and inventory values; subcontractor, labor, and material costs; development approvals and environmental requirements; and access to capital. Variable-rate debt and possible LIBOR transition were also identified risks.
- Other items: the company repurchased 136,756 shares for approximately $1.0 million in December under a $30 million authorization. It does not anticipate cash dividends in the foreseeable future. The independent auditor issued unqualified opinions on the financial statements and internal control; GHO was excluded from the 2018 internal-control assessment.
- The company reported no material litigation and considered material claims under its $2.2 million of letters of credit and $5.3 million of performance bonds unlikely. Home warranty liabilities were $3.0 million at year-end. ASC 606 adoption had no material effect; adoption of the lease standard in January 2019 was expected to add approximately $4.2 million in lease assets and liabilities.
Investor verification priorities
- Confirm whether backlog converts to 2019 closings as expected, including cancellations and the lower average backlog price.
- Track inventory growth, operating cash flow, land commitments, and available borrowing capacity alongside the company’s leverage target.
- Assess whether gross margins recover or remain pressured by interest capitalization, product mix, development costs, and acquired inventory basis.
- Review GHO’s post-acquisition performance, the contingent-consideration estimate, and the put/call rights over the minority interest beginning in 2021.
- Monitor home demand, mortgage rates, labor and material costs, and development approvals in the company’s concentrated markets.