Green Brick Partners, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Dollar amounts below are in millions unless stated otherwise. Green Brick combines land development and homebuilding, primarily in the Dallas and Atlanta markets.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $91.7 | $75.2 | $260.6 | $205.6 |
| Gross profit | $22.3 | $15.7 | $61.5 | $49.1 |
| Gross margin | 24.3% | 20.9% | 23.6% | 23.9% |
| Operating profit | $11.3 | $7.3 | $29.2 | $24.8 |
| Net income attributable to Green Brick | $6.2 | $2.8 | $16.1 | $10.6 |
| Diluted earnings per share | $0.13 | $0.06 | $0.33 | $0.29 |
- Q3 revenue rose 21.9% and attributable net income more than doubled. Nine-month revenue increased 26.7% and attributable net income rose 51.2%.
- Homebuilding drove growth: Q3 deliveries increased 27.3% to 196 homes, while home sales revenue grew 27.0% to $87.8 million. Nine-month deliveries rose 23.4% to 569 and home sales revenue increased 38.5% to $248.2 million.
- Q3 homebuilding gross margin improved to 24.0% from 20.1%; nine-month homebuilding margin was essentially flat at 23.2% versus 23.3%. Q3 improvement reflected new communities and lower capitalized-interest amortization, among other factors.
- Land and lot revenue declined 36.3% in Q3 and 53.2% for the nine months. Management attributed the nine-month decline mainly to fewer third-party lot sales as more lots were sold internally to controlled builders; revenue on internal lot sales is recognized when the home closes.
- Cash and cash equivalents were $19.8 million at September 30, versus $21.2 million at year-end 2015; restricted cash was $24.8 million. Inventory increased to $415.2 million from $344.1 million.
- Nine-month operating cash flow was negative $28.5 million, compared with negative $22.0 million in 2015, primarily reflecting working-capital changes, including inventory investment. Financing provided $27.3 million; cash declined $1.5 million over the period.
- Lines of credit totaled $81.5 million and notes payable were $9.7 million at quarter-end. Management reported debt to total capitalization below 20%, against a stated target of approximately 35%–40%. The company said it complied with credit-facility covenants.
Material changes and operating indicators
- Q3 net new home orders rose 45.7% to 204; the cancellation rate fell to 13.2% from 16.2%. Backlog increased 34.0% to 315 homes, valued at $138.7 million, up 41.1% year over year.
- For the nine months, net orders increased 40.2% to 683 and the cancellation rate declined to 12.3% from 15.2%. Management cautioned that the nine-month cancellation rate was atypically low.
- At September 30, the company owned or controlled 5,069 lots, up from 4,734 at year-end 2015.
- Q3 and nine-month effective tax rates were 30.9% and 29.7%, respectively, above the corresponding 2015 rates of 26.0% and 25.2%.
- In August, Green Brick added Flagstar Bank to its unsecured revolving facility, increasing commitments from $40 million to $60 million, with a potential increase to $110 million subject to conditions. Its secured Inwood facility was amended, including extension of maturity to May 2019.
Outlook, risks, and notable items
- No numerical earnings or revenue guidance is provided. Management said it viewed Dallas and Atlanta housing conditions favorably, citing demand, supply constraints, affordability, and employment trends, and intended to continue acquiring and developing lots.
- Management noted homebuilding seasonality: orders are typically strongest in spring and summer, with more deliveries and cash receipts in the second half. Results and cash flows may therefore vary by quarter.
- Key disclosed risks include housing and land-market cyclicality, mortgage-rate increases or reduced financing availability, land and construction-cost inflation, labor and material availability, development and regulatory delays, weather, cancellations, and geographic concentration in Dallas and Atlanta. Variable-rate borrowings also expose the company to higher interest costs.
- Disclosure controls and procedures were reported ineffective as of September 30, 2016, due to previously identified material weaknesses in internal control over financial reporting. Remediation efforts were underway but the weaknesses had not been fully remediated; management gave no assurance remediation would be completed during 2016.
- A $22.6 million amount held in escrow for a transaction closed through Green Brick Title in September was funded in October after receipt of wiring instructions; this contributed to the quarter’s restricted-cash and accounts-payable movements.
- The company reported no material litigation and no accruals for asserted or unasserted legal matters. Warranty accruals were $0.9 million at quarter-end. Related-party dealings include land transactions with entities affiliated with a controlled-builder executive and a homebuilding contract involving the CEO’s son.
Important facts for investors to verify
- Whether backlog converts to closings and cash receipts, given that contracts can be canceled and backlog is not assured revenue.
- Whether inventory growth, land development spending, and negative operating cash flow produce adequate returns and liquidity.
- Available borrowing capacity under the facilities after borrowing-base limits, covenant requirements, and the $22.6 million escrow movement.
- Progress in remediating the disclosed material weaknesses and the effect on reporting reliability.
- Margin sustainability as product mix, community openings, capitalized interest, and land-sale timing change.
- Terms, approvals, and ongoing governance of related-party transactions and controlled-builder arrangements.