Green Brick Partners, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Green Brick develops land and builds homes, primarily in the Dallas and Atlanta markets, and holds a noncontrolling interest in a Colorado Springs builder.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $128.3 million | $99.3 million |
| Gross profit / gross margin | $27.1 million / 21.1% | $21.3 million / 21.4% |
| Operating profit | $14.4 million | $11.6 million |
| Net income | $13.2 million | $8.2 million |
| Net income attributable to Green Brick | $11.2 million; $0.22 per diluted share | $6.2 million; $0.13 per diluted share |
| Operating cash flow | $(20.4) million | $16.6 million |
- Revenue increased 29.1%; residential-unit sales were $120.4 million and land-and-lot sales were $7.9 million.
- Homebuilding gross margin improved to 21.5% from 21.0%. Total gross margin was 21.1%, versus 21.4%.
- Deliveries rose 18.1% to 267 homes; average delivered-home price increased 9.1% to $450,809. Net new orders increased 51.2% to 434.
- Backlog grew 60.1% to 477 homes, valued at $226.5 million, while average backlog price declined 2.5% to $474,876, attributed to product mix.
- Land development revenue fell 32.7% to $4.0 million, as lot deliveries declined to 24 from 47; one $1.2 million undeveloped parcel sale partly offset the decline.
- Inventory was $528.5 million, up from $495.7 million at year-end, including $410.6 million of work in process and land under development.
- Cash was $34.4 million and restricted cash $4.4 million at quarter-end. Lines of credit totaled $135.0 million and notes payable $9.9 million; debt to total capitalization was 25.3%.
Material changes and liquidity
- Operating cash flow swung to a $20.4 million use, primarily reflecting a $33.9 million increase in inventory and other working-capital movements. Financing provided $19.5 million, including $28.0 million of net line-of-credit borrowings; cash and restricted cash declined $1.4 million during the quarter.
- Unrestricted cash declined from $36.7 million at December 31, 2017. Total assets were $643.2 million and stockholders’ equity $439.1 million at March 31, 2018.
- The company’s secured revolving facility had $45.0 million outstanding at 4.75% and a $75 million commitment. Its unsecured facility had $90.0 million outstanding at 4.32%, with $160 million of commitments after a March lender addition. Borrowings remain subject to borrowing-base limits and covenants; the company reported compliance with covenants.
- Management targets a debt-to-capitalization ratio of approximately 30%–35% to support growth. The stated ratio at quarter-end was 25.3%.
Outlook, commentary, risks, and unusual items
- Management described housing conditions in Dallas and Atlanta as strong, citing demand, supply constraints, consumer confidence, and affordability. It intends to continue acquiring and developing lots and may use cash for acquisitions, joint ventures, and other strategic activities. No specific earnings or revenue guidance was provided.
- The filing identifies seasonality: orders are typically strongest in spring and summer, with more deliveries and cash receipts in the second half; Q1 results may not indicate full-year performance.
- Risks include housing-market cyclicality, higher mortgage and borrowing rates, availability and cost of land, labor and materials, construction and development delays, cancellations, regulation, weather, and litigation or warranty claims. A 1% increase in interest rates was estimated to add approximately $1.4 million of annual interest cost on the quarter-end line borrowings, subject to possible capitalization.
- The company adopted ASC 606 on January 1, 2018; adoption had no material effect on income or opening retained earnings. Model-home furnishings are now recorded as property and equipment, with related depreciation in SG&A.
- After quarter-end, on April 26, 2018, Green Brick acquired GHO Homes assets and an 80% controlling interest in a Florida subsidiary for $33.2 million, subject to purchase-price adjustment. Purchase accounting was incomplete at filing, and additional contingent consideration may be payable if performance targets are met.
- The effective tax rate declined to 20.3% from 32.1%, reflecting the Tax Act, discrete items, and earnings mix. The company had not recorded measurement-period adjustments under the Tax Act at quarter-end.
- Management reported no material litigation and no material change in risk factors from the 2017 Form 10-K. It concluded disclosure controls were effective as of March 31, 2018.
Key facts for investors to verify
- Whether the sharp growth in orders and backlog converts into deliveries and revenue, and whether the lower average backlog price affects margins.
- How inventory investment and negative operating cash flow evolve as land development and home construction continue.
- Available borrowing capacity after borrowing-base limits, covenant requirements, and the secured facility’s May 2019 maturity.
- Final GHO Homes purchase accounting, any contingent acquisition payments, and the acquired business’s contribution to results.
- Effects of interest-rate changes, housing affordability, input-cost inflation, and seasonal patterns on demand and profitability.