Green Brick Partners, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited results; dollar amounts below are in millions unless otherwise noted.
Business context
Green Brick is a homebuilding and land-development company operating principally in Dallas, Atlanta and Vero Beach, Florida, with an equity-method investment in Colorado Springs. It reported builder operations in Central and Southeast, plus land development. During 2018 it acquired an 80% controlling interest in GHO Homes in Florida, formed title and mortgage joint ventures, and launched Trophy Signature Homes in Dallas to serve a lower price point. Management said the GHO acquisition expanded the company into a new market.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $150.0 | $113.7 | $433.3 | $318.0 |
| Gross profit | $30.7 | $25.4 | $92.4 | $69.6 |
| Operating profit | $16.7 | $15.9 | $51.6 | $40.9 |
| Income before taxes | $20.1 | $17.3 | $60.9 | $43.2 |
| Net income attributable to Green Brick | $12.2 | $9.3 | $38.3 | $23.2 |
| Diluted EPS | $0.24 | $0.19 | $0.75 | $0.47 |
- Revenue rose 32.0% in Q3 and 36.3% for the nine-month period. Residential-unit revenue increased 26.7% and 32.9%, respectively; land-and-lot revenue increased 139.1% and 100.0%.
- Consolidated gross margin was approximately 20.4% in Q3 (22.4% in 2017) and 21.3% for nine months (21.9% in 2017). Q3 homebuilding gross margin fell to 20.8% from 21.8%, reflecting acquired-inventory purchase-accounting adjustments and fewer homes sold on company-developed lots. Nine-month homebuilding gross margin was essentially flat at 21.4% versus 21.5%.
- SG&A increased to $14.0 million in Q3 from $9.5 million and to $40.8 million for nine months from $28.7 million. Management cited business growth, the GHO acquisition, higher salaries and technology spending; model-home furnishing depreciation was also reclassified to SG&A.
- Equity income from unconsolidated entities rose to $2.7 million in Q3 and $6.5 million for nine months, primarily reflecting Challenger Homes. The effective tax rate declined to 23.5% in Q3 and 21.9% for nine months, versus 31.0% and 31.5%, respectively, largely due to the Tax Act and other items.
Cash flow, balance sheet and debt
- At September 30, cash was $33.1 million and restricted cash $11.9 million. Inventory was $648.2 million, up from $496.1 million at December 31, 2017. Total assets were $771.0 million and total liabilities $293.0 million.
- For the first nine months, operating cash flow was negative $38.3 million (negative $23.2 million in 2017), with the principal use being a $108.6 million inventory increase. Investing cash flow was negative $29.4 million, mainly due to the GHO acquisition. Financing cash flow was positive $72.4 million, including $133.0 million of line-of-credit borrowings, partly offset by repayments, noncontrolling-interest distributions and repayment of notes.
- Lines of credit, net of issuance costs, totaled $199.0 million, compared with $105.8 million at year-end; notes payable were $1.0 million, down from $9.9 million. Management reported a 30.6% debt-to-total-capitalization ratio and a target range of approximately 30%–35%. The company was in compliance with debt covenants at quarter-end.
- Outstanding borrowings had variable rates: 5.25% on the secured revolving facility and 4.56%–4.58% on the unsecured facility. The filing estimates a 1 percentage-point rate increase would add about $2.0 million of annual interest expense at quarter-end debt levels; interest costs were capitalized during the periods presented.
Operating trends and changes
- Q3 home deliveries increased 32.8% to 312; average delivered price declined 4.6% to $440,382, substantially reflecting GHO’s lower-priced product mix. Nine-month deliveries increased 29.7% to 905 and average delivered price increased 2.5% to $443,804.
- Net new home orders rose 23.2% in Q3 to 297 and 40.1% for nine months to 1,118. Q3 cancellation rate increased to 16.8% from 14.2%; the nine-month rate improved to 12.9% from 14.7%.
- Backlog at quarter-end was 685 homes valued at $309.0 million, up 103.3% in units and 87.7% in value year over year. GHO contributed 200 backlog homes. Average backlog price fell 7.7% to $451,057, largely because of product mix. The filing cautions that backlog can be canceled and may not predict future revenue.
- Land-and-lot revenue benefited from more lot deliveries and 2018 land-parcel sales: $3.5 million in Q3 and $7.3 million for nine months, compared with none in the prior-year periods. The company owned or controlled 8,101 lots, up from 6,219 at year-end.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management described housing demand and supply constraints in target markets as favorable and cited employment growth, consumer confidence and relatively low historical mortgage rates. It expects normal homebuilding seasonality: stronger spring and summer orders, with deliveries and cash receipts generally weighted to the second half.
- GHO was acquired April 26 for final total consideration of $44.6 million; Green Brick’s consideration for its 80% interest was $35.8 million. GHO contributed $29.8 million of homebuilding revenue and $3.0 million of pretax income from acquisition through September 30. The transaction included $0.5 million of contingent consideration and a minority-owner put/call arrangement; redeemable noncontrolling interest was $7.8 million at quarter-end.
- Land and lot option contracts covered 2,672 lots and entailed potential purchase payments of $237.9 million if exercised. The company generally may terminate these contracts by forfeiting deposits, subject to contract terms. Outstanding performance bonds were $5.8 million and letters of credit $0.2 million; management did not expect material claims in the foreseeable future.
- Risks highlighted include housing-market and mortgage-rate sensitivity, construction labor and material availability and costs, land acquisition and development timing, cancellations, regulation, weather, financing availability, and litigation or warranty claims. The company reported no material litigation and no material changes to previously disclosed risk factors.
- Subsequent events: the secured facility was amended October 26, extending maturity to May 1, 2022 and lowering its floating rate to the index less 0.25%. The unsecured facility was expanded and extended in October and November; the November amendment increased available commitments to $215 million, maximum facility size to $275 million, and extended termination to December 14, 2021. A share-repurchase program of up to $30 million was authorized for October 2018–October 2020; no assurance was given that shares would be repurchased.
Most important facts for investors to verify
- Whether order growth and the enlarged backlog convert into closings and cash, particularly given the higher Q3 cancellation rate and lower average backlog price.
- How much growth and margin performance reflects organic operations versus GHO, and the continuing effects of acquired-inventory purchase accounting and product mix.
- Whether inventory expansion, land-option commitments and negative operating cash flow remain manageable without materially increasing leverage or borrowing costs.
- Facility availability, borrowing-base capacity, covenant headroom and variable-rate exposure, including the terms and impact of post-quarter amendments.
- Potential cash requirements from the GHO minority put/call, land options, performance bonds, warranty obligations and any share repurchases.