Green Brick Partners, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. Unless stated otherwise, dollar amounts below are in millions.
Business context and reporting period
Green Brick combines residential land development, construction financing and homebuilding, principally in the Dallas, Texas and Atlanta, Georgia markets. It reported 2015 through controlled homebuilders and land-development operations, with 50% controlling interests in several builders and noncontrolling interests reported separately. The October 2014 acquisition of JBGL was accounted for as a reverse recapitalization; historical financial statements therefore reflect JBGL as the accounting predecessor.
Financial and operating performance
| Metric | FY 2015 | FY 2014 | Change / context |
|---|---|---|---|
| Total revenue | $291.1 | $246.1 | Up 18.3% |
| Home sales revenue | $254.3 | $200.7 | Up 26.7%; 655 homes delivered versus 587, and average selling price rose 13.6% to $388,194 |
| Land and lot sales | $36.9 | $45.5 | Down 18.9%; delivered lots fell 25.2% to 336 |
| Gross profit / gross margin | $67.5 / 23.2% | $62.2 / 25.3% | Gross profit rose, but margin declined |
| Operating profit | $33.1 | $36.0 | Down 7.9%, as operating expenses grew faster than gross profit |
| Net income attributable to Green Brick | $15.3 | $50.0 | 2014 included a one-time tax benefit of about $26.6; 2015 diluted EPS was $0.38 versus $3.40 |
| Operating cash flow | $(47.6) | $1.8 | Cash used mainly reflected higher inventory and land-option deposits |
| Cash and cash equivalents | $19.9 | $21.3 | At year-end |
| Debt | $57.7 | $176.2 | 2015 comprised $47.5 of line borrowings and $10.2 of notes payable; term loan was repaid |
Homebuilding gross margin fell to 22.7% from 25.3%. Management cited the prior-year closeout of unusually high-margin communities, the closeout of existing communities in 2015, and amortization of capitalized interest. The company reported $344.1 of inventory, up from $275.1, and $17.8 of earnest-money deposits, up from $6.7.
Net cash from investing activities was $2.5; financing activities provided $43.8. Total assets were $473.9 and stockholders’ equity was $371.9 at year-end. The company reported a debt-to-total-capitalization ratio below 14%. It had $47.5 outstanding under credit lines, including $17.5 secured and $30.0 unsecured; disclosed remaining borrowing capacity was $32.5 and $10.0, respectively. Both facilities had financial covenants, and the company reported compliance at year-end.
In July 2015, the company issued 17.0 million shares, plus 444,897 over-allotment shares, for net proceeds of approximately $170.0. It used approximately $154.9 to repay the Greenlight term loan, including interest and a prepayment premium, and used the balance for working capital and general corporate purposes.
Fourth quarter, unaudited: Revenue was $85.5, gross profit $18.4, net income attributable to Green Brick $4.7, and diluted EPS $0.10. Fourth-quarter 2014 revenue was $67.6 and attributable net income was $31.6; the latter was boosted by the tax benefit associated with the 2014 transaction and tax-status change.
Changes, outlook, risks and unusual items
- Net new home orders rose 7.7% to 647, while year-end backlog declined 3.8% to 201 homes; backlog value increased 12.2% to $88.1. The cancellation rate eased to 14.3% from 15.0%.
- Average selling communities increased 36.7% to 41. Management attributed higher deliveries partly to the larger community count. Average absorption per selling community declined, partly due to the timing of openings and closings.
- Management described Dallas and Atlanta housing conditions as improving, citing demand, affordability, employment and constrained supply, and said it expected to continue investing in land and development. No specific numerical revenue or earnings guidance was provided.
- Management intended to target debt-to-capitalization of approximately 35%–40% to support investment and growth. In March 2016, the board authorized repurchases of up to 1 million shares; the program is discretionary and may be changed or discontinued.
- Principal risks include homebuilding cyclicality, geographic concentration in Dallas and Atlanta, mortgage availability and interest rates, land and home price changes, permitting and environmental requirements, and subcontractor and labor availability. The filing says labor shortages and higher subcontractor costs had already caused delays and cost increases in both markets. Results and cash flows are seasonal.
- Controls: Management concluded disclosure controls were ineffective at year-end due to material weaknesses involving the third-party ERP service organization, journal-entry review, related-party transactions, period-end accruals and inventory/cost recording, and financial-statement classification and disclosure. The auditor issued an adverse opinion on internal control, but an unqualified opinion on the financial statements. Management planned remediation during 2016.
- Unusual items: The company recorded a $1.9 out-of-period adjustment in 2015 for an overaccrual of distributions payable in 2014, which management judged immaterial to both periods. No inventory impairment was recorded in 2015 or 2014. The filing reported no material litigation and no year-end accrual for asserted or unasserted legal matters.
- Federal NOL carryforwards were approximately $158.9, beginning to expire in 2029; management expected to use substantially all, subject to future taxable income and ownership-change limits. The filing also described related-party land transactions and post-year-end development partnerships involving an affiliate of a controlled builder’s president.
Most important facts for investors to verify
- Whether the material weaknesses are remediated and whether future reporting remains reliable.
- Whether inventory growth and negative operating cash flow convert into home deliveries, cash generation and acceptable margins.
- Whether homebuilding margin pressure, slower absorption per community and declining backlog units persist.
- Actual available borrowing capacity, covenant headroom, and the effect of floating rates and future land investment on liquidity.
- Whether federal NOLs remain usable under Section 382 and whether projected taxable income supports the deferred tax asset.
- The terms, approvals and economics of related-party lot purchases and development partnerships, as well as the influence of large shareholders.