Green Brick Partners, Inc. — Q3 2020 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2020, compared with the same 2019 periods. Green Brick operates homebuilding and land-development businesses, primarily in its Central and Southeast markets. Amounts below are in millions except per-share and operating data.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $275.8 | $209.4 | $721.9 | $561.5 |
| Gross profit | $67.9 | $44.7 | $170.8 | $120.4 |
| Gross margin | 24.6% | 21.4% | 23.7% | 21.4% |
| Income before taxes | $45.9 | $25.0 | $104.9 | $61.7 |
| Net income attributable to Green Brick | $34.8 | $15.7 | $84.4 | $42.7 |
| Diluted EPS | $0.68 | $0.31 | $1.66 | $0.84 |
- Q3 home deliveries rose 40.4% to 622; home-closing revenue increased 33.0% to $262.3 million. Average delivered-home price fell 5.3% to $421,700, reflecting greater contribution from lower-priced Trophy Signature and CB JENI homes.
- Q3 net new orders increased 88.8% to 823; cancellation rate was 11.7%, versus 12.6%. Quarter-end backlog was 1,200 homes valued at $553.1 million, up 69.0% by units and 73.0% by value year over year. Backlog may not convert to revenue because contracts can be canceled.
- Nine-month deliveries increased 34.7% to 1,623 and net new orders increased 52.7% to 2,037. The nine-month cancellation rate rose to 14.7% from 13.7%.
- Residential gross margin increased to 24.8% in Q3 from 21.3%, and to 23.8% year to date from 21.4%. Management cited fewer sales incentives, price increases in some communities, and lower land costs on company-developed lots.
- For the first nine months, operating cash flow was $64.1 million, compared with $21.2 million used in 2019. Investing cash outflow was $12.1 million; financing cash outflow was $38.9 million. Operating cash flow benefited partly from a $25.2 million increase in accrued expenses, while inventory and earnest-money deposits increased $25.3 million and $9.1 million, respectively.
- At September 30, cash and cash equivalents were $40.3 million, restricted cash $10.6 million, and inventory $779.4 million. Total debt, including lines, senior notes and notes payable, was approximately $206.6 million net of issuance costs. Debt-to-total-capitalization was 25.3%; net debt-to-capitalization was 21.4%.
- Debt included $93.5 million net borrowings on revolving facilities and $111.0 million net senior unsecured notes. The company issued $37.5 million of 3.35% notes due 2027 during the quarter. It reported compliance with debt covenants and stated it expects cash, available credit and operating cash flows to cover debt service for the next 12 months.
Material changes, outlook and risks
- Management reported record results in three of four key metrics for Q3. It attributed demand growth to the Trophy division, more selling communities, low interest rates, first-time buyers and demand for suburban homes. Sales had slowed in late March and April amid COVID-19 uncertainty, then rebounded and accelerated during Q3.
- Management resumed construction, land purchases and development after curtailing activity in March. It cited continued price increases to offset some input-cost increases, intended to maintain strong margins, and a focus on controlling fixed costs. No specific earnings or revenue guidance was provided; management’s outlook remains subject to market conditions.
- COVID-19 risks include renewed restrictions, economic weakness, unemployment, mortgage availability, higher cancellations and lower demand. The company also reported appliance supply-chain issues and higher lumber costs, which could delay closings or reduce margins. Seasonality and construction timing may affect quarterly results.
- The company had $24.6 million of earnest money deposits at risk on contracts for 4,156 lots with an aggregate purchase price of about $273.9 million. It generally may terminate such contracts by forfeiting deposits, but land-market conditions and entitlement requirements affect execution.
- The 2020 effective tax rate benefited from a $7.4 million tax benefit, net of basis adjustment, from reinstatement of federal energy-efficient home credits. Q3 other income was lower than the prior year, partly because 2019 included forfeited customer deposits; year-to-date other income also reflected $1.5 million of allowances for option deposits and pre-acquisition costs associated with COVID-19 considerations.
- CB JENI became wholly owned in April 2020. The company also formed or invested in joint ventures, including BHome Mortgage and GBTM Sendera; its maximum exposure to loss from GBTM Sendera was reported as $9.8 million.
- Management said no material claims were expected under outstanding letters of credit and performance bonds. It stated that pending legal matters were not expected to have a material adverse effect. Inventory impairment recorded in 2020 was de minimis year to date.
Important facts for investors to verify
- Whether the strong order pace and backlog convert into closings, and whether cancellations or financing constraints increase.
- Whether labor, lumber, appliance availability and other costs affect delivery schedules and homebuilding margins.
- Liquidity and debt capacity under changing conditions, including revolving-facility availability, maturities, covenants and the planned use of leverage.
- Exposure to land-option deposits and purchase commitments, plus the carrying value and impairment outlook for inventory.
- The sustainability of reported margins and earnings, including the contribution of tax credits, unconsolidated ventures and other income items.