Green Brick Partners, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Dollar amounts are in millions unless otherwise noted. Green Brick operates in residential land development and homebuilding, primarily in the Dallas, Texas, and Atlanta, Georgia, markets. The October 2014 acquisition was accounted for as a reverse recapitalization; pre-transaction comparatives reflect JBGL’s historical results.
Financial performance and key metrics
- Q2 revenue: $72.0, up 9.3% from $65.8. Residential-unit revenue was $60.4, up 9.7%; land-and-lot revenue was $11.6, up 7.6%.
- Six-month revenue: $130.4, up 1.2% from $128.9. Residential-unit revenue rose 5.1% to $110.0, while land-and-lot revenue declined 15.6% to $20.4, reflecting fewer third-party lot deliveries as more lots were sold internally to builders.
- Profit: Q2 gross profit was $17.3 versus $16.5; operating profit was $9.3 versus $10.8; and net income attributable to Green Brick was $3.8 versus $7.4. For six months, gross profit was $33.6 versus $32.3, operating profit $17.8 versus $20.8, and attributable net income $7.8 versus $14.8.
- Margins: Homebuilding gross margin was 23.6% in Q2 versus 25.1% a year earlier, but 25.5% for the six-month period versus 24.9%. Higher Q2 salary and SG&A costs weighed on operating profit; management linked higher expenses to growth, additional communities, and public-company costs.
- Per-share results: Basic and diluted EPS attributable to Green Brick were $0.12 for Q2 and $0.25 for six months, versus $0.67 and $1.33, respectively. Comparisons are affected by the reverse recapitalization and substantially different weighted-average shares: 31.3 million in 2015 versus 11.1 million in 2014.
- Cash flow: Six-month operating cash flow was negative $11.7 versus positive $12.9, primarily reflecting a $28.1 increase in inventory and lower net income. Investing cash flow was positive $2.1; financing cash flow was positive $3.5. Cash declined $6.1 to $15.2.
- Balance sheet and liquidity at June 30: Total assets were $418.1, including inventory of $301.0. Total liabilities were $225.7 and equity $192.4. Cash was $15.2, with an additional $2.0 of restricted cash. Inventory increased from $274.3 at year-end 2014.
- Debt at June 30: $150.0 term loan, $20.5 drawn on credit lines, and $11.8 notes payable. The term loan was a secured, related-party facility from funds managed by Greenlight, bearing 9% interest through October 2015 and 10% thereafter. The company reported covenant compliance at quarter-end.
Operating trends and changes
- Q2 home deliveries increased 5.2% to 162; average delivered home price rose 4.2% to $372,648; and net new orders increased 12.7% to 169. Six-month deliveries rose 5.1% to 307 and net new orders rose 6.8% to 347.
- At June 30, backlog was 249 homes, valued at $102.4, up 29.8% in value year over year. The average backlog price increased 25.1% to $411,249, which management attributed to product mix and local appreciation. Backlog may not convert to revenue because contracts can be canceled.
- Q2 cancellation rate was 16.7%, up from 15.3%; the six-month rate was 14.7%, down from 15.4%. Q2 average absorption per selling community fell year over year, which management attributed partly to the timing of community openings and closings.
- Lots owned and controlled totaled 4,665 at June 30, up from 4,156 at December 31, 2014. Management said it had over 4,700 home sites when including its broader reported estimate.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance was provided. Management described Dallas and Atlanta housing conditions as improving and cited demand, supply constraints, affordability, and employment trends as supportive. It intends to continue acquiring and developing lots.
- After the offering and term-loan repayment, management reported debt to total capitalization below 8% and stated an intent to target approximately 40% to support investment and growth. This is a stated capital-structure target, not earnings guidance.
- Subsequent financing: On July 1, the company issued 17.0 million shares at $10 per share and used net offering proceeds, together with proceeds from the subsequent over-allotment sale, to generate approximately $169.8 million net. It repaid approximately $154.9 million of term-loan principal, interest, and premium; remaining proceeds were designated for working capital and general corporate purposes. The underwriters purchased an additional 444,897 shares on July 23.
- On July 30, the company replaced its $25.0 million revolving facility with a facility of up to $50.0 million, maturing July 30, 2017; $20.9 million was drawn as of August 4.
- Key risks include homebuilding cyclicality, mortgage-rate and financing availability, land and construction cost changes, labor and material availability, development and regulatory delays, geographic concentration, cancellation rates, and warranty or litigation exposure. The filing reported no outstanding litigation or related accrual at June 30.
- Warranty obligations are estimated and accrued; homes generally carry one-, two-, and ten-year coverage for specified defects. Land purchase and option agreements can require deposits, though the company generally may terminate by forfeiting deposits.
- Controls: Management concluded disclosure controls and procedures were ineffective at June 30 because previously reported material weaknesses in internal control over financial reporting had not been remediated. Remediation efforts were ongoing.
- Income tax expense increased following the change in JBGL’s tax status. Deferred tax assets were $85.2, net of a $1.2 valuation allowance for state loss carryforwards; management’s realization assessment depends on future taxable income.
Important facts for investors to verify
- Whether the July equity issuance, debt repayment, and new revolving facility materially change interest costs, share dilution, and available liquidity.
- Whether backlog converts to closings and revenue, particularly given cancellations and the higher average backlog price driven partly by product mix.
- Whether inventory investment and community expansion generate adequate cash flow and margins; operating cash flow was negative $11.7 for the first half.
- Whether rising salary, selling, and administrative costs moderate as new communities mature and begin generating revenue.
- Progress in remediating internal-control material weaknesses and the continued recoverability of deferred tax assets.
- Actual leverage relative to management’s approximately 40% target and the terms, collateral, and usage of the expanded revolving facility.