Green Brick Partners, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Green Brick is a homebuilder and land developer operating primarily in Central and Southeast markets. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $209.4 | $152.1 | $561.5 | $438.5 |
| Gross profit | $44.7 | $36.7 | $120.4 | $110.4 |
| Net income | $19.1 | $15.4 | $46.8 | $47.6 |
| Net income attributable to Green Brick | $15.7 | $12.2 | $42.7 | $38.3 |
| Diluted EPS | $0.31 | $0.24 | $0.84 | $0.75 |
- Q3 residential revenue rose 43.4%, with 443 homes delivered, up 42.0%; average delivered home price increased 1.1% to $445,300. Nine-month residential revenue increased 31.9% and deliveries rose 33.1% to 1,205, while average delivered price decreased 1.1% to $439,000.
- Residential gross margin declined to 21.3% in Q3 from 24.8%, and to 21.4% for nine months from 25.6%. Management attributed the declines principally to lower initial prices in new communities and higher sales incentives. The company reclassified sales commissions from cost of residential units to SG&A beginning in 2019; comparative periods were reclassified and net income was unaffected.
- Q3 net income attributable to Green Brick increased 28.5%; nine-month net income attributable to Green Brick increased 11.7%, despite a decline in total consolidated net income.
- For the nine months, net cash used in operating activities was $21.2 million, versus $38.3 million used in 2018. Inventory increased $71.4 million during the period. Investing activities used $1.8 million, compared with $29.4 million in 2018, which included the GHO acquisition. Financing activities provided $22.6 million.
- At September 30, cash was $35.1 million and restricted cash $6.1 million. Inventory was $740.8 million, up from $669.0 million at year-end 2018.
- Lines of credit, net of issuance costs, totaled $164.8 million; senior unsecured notes, net, were $73.4 million. The company reported debt-to-total-capitalization of 31.9% and net debt-to-total-capitalization of 28.5%.
Material changes, outlook, and risks
- Net new home orders rose 46.8% in Q3 to 436; the cancellation rate fell to 12.6% from 16.8%. Nine-month orders increased 19.3%, while the cancellation rate edged up to 13.7% from 12.9%. Period-end backlog was 710 homes valued at $319.7 million, up 3.6% in units and 3.5% in value year over year.
- Other income was $3.8 million in Q3, versus $0.4 million a year earlier; the increase included a $2.4 million forfeited customer deposit and increased title and settlement services. A $1.5 million Q3 charge for the change in fair value of contingent consideration also affected results. Nine-month other income was $6.7 million.
- In August, Green Brick issued $75 million of 4.00% senior unsecured notes due 2026 and used the proceeds to repay revolving credit borrowings. The notes include financial covenants; revolving facilities also expose the company to variable-rate risk. Management estimated that a 1 percentage-point rate increase would add about $1.7 million of annual interest on then-outstanding credit lines.
- Management cited its Dallas and Atlanta markets, demand, and supply constraints as supportive of growth, and targets a debt-to-capitalization ratio of approximately 30%–35%. The filing provides no specific revenue or earnings guidance and cautions that interim results may not predict full-year results.
- Key risks include housing-market cyclicality, mortgage-rate and financing availability, land and inventory values, construction labor and material costs, development timing and approvals, cancellations, weather, competition, and legal, regulatory, and warranty exposures. Management reported no material litigation and no material change in previously disclosed risk factors.
- Potential commitments include $224.4 million of payments if all land and lot options outstanding at quarter-end were exercised; these contracts generally permit termination by forfeiting deposits. Letters of credit were $3.3 million and performance bonds $5.2 million; management did not expect material claims. Watchlist communities with $10.7 million of carrying value received further impairment review; the filing recorded no Q3 inventory impairment and $0.1 million for the nine-month period.
Important facts for investors to verify
- Whether higher deliveries and orders can be sustained and convert into backlog closings, considering cancellation rates and seasonality.
- Whether residential margins stabilize despite pricing and incentive pressure, and how much reported other income depends on non-recurring items.
- Cash generation and inventory requirements as the company expands land positions; operating cash flow remained negative for the first nine months.
- Debt capacity, covenant compliance, variable-rate exposure, and the timing and cost of land-option commitments.
- Contingent consideration tied to the GHO acquisition: estimated undiscounted potential payouts were $3.0 million–$3.9 million through April 2021.