Green Brick Partners, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing; fourth-quarter results are noted separately. Green Brick is a homebuilding and land-development company, primarily active in Dallas, Texas, and Atlanta, Georgia, with a 49.9% noncontrolling investment in Challenger Homes in Colorado Springs.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $454.4 million | $380.3 million | +19.5% |
| Gross profit | $98.5 million | $86.4 million | +14.0% |
| Operating profit | $59.4 million | $47.7 million | +24.5% |
| Income before taxes | $64.2 million | $50.6 million | +27.1% |
| Net income | $25.2 million | $35.2 million | −28.3% |
| Net income attributable to Green Brick | $15.0 million; $0.30 per diluted share | $23.8 million; $0.49 per diluted share | −37.0% |
| Cash from operating activities | $(18.8) million | $(5.2) million | Greater cash use |
Revenue growth reflected 990 home deliveries, up 17.3%, and a 1.7% increase in average delivered home price to $440,044. Homebuilding gross margin was 21.5%, versus 22.4% in 2016; overall gross profit increased, while homebuilding margin percentage declined.
- Tax and unusual item: The 2017 income-tax provision was $39.0 million, including $19.0 million of additional expense from remeasuring deferred tax assets following the Tax Act’s federal corporate-rate reduction. The effective tax rate was 60.8%, versus 30.4% in 2016. Fourth-quarter net income attributable to Green Brick was a loss of $8.2 million, or $(0.16) per share, primarily reflecting this tax expense.
- Cash and liquidity: Cash was $36.7 million at year-end, compared with $35.2 million in 2016; restricted cash was $3.6 million. Operating cash use was driven in part by the $95.4 million increase in inventory. Inventory rose 20.8% to $495.7 million.
- Debt: Lines of credit totaled $107.0 million and notes payable were $9.9 million. Debt to total capitalization was approximately 22%. At year-end, disclosed unused capacity was $43.0 million on the secured facility and $55.0 million on the unsecured facility. The company reported covenant compliance. A 1 percentage-point increase in interest rates was estimated to add about $1.1 million of annual interest cost, which may be capitalized.
Material changes and operating position
- Backlog increased to 310 homes valued at $151.5 million, up 30.8% in units and 40.2% in value year over year. Net new home orders rose 20.8% to 1,063; cancellations increased to 188 and the cancellation rate rose to 15.0% from 13.3%.
- Finished-lot sales revenue increased 23.5% to $18.7 million, while lots delivered to third parties rose to 144 from 117. Green Brick owned or controlled 6,219 lots in Dallas and Atlanta, up from 5,189.
- The company issued 1.477 million shares in 2017 for its Challenger investment; 20,000 additional holdback shares were expected to be issued in 2018, subject to indemnification matters. The investment generated $2.7 million of equity-method income in 2017.
Outlook, risks, and contingencies
Management described improving housing conditions in its core markets and cited population, job growth, affordability, and constrained housing supply as supportive factors. It provided no specific earnings or revenue guidance. Management expected the year-end backlog to close during 2018, subject to normal cancellations, and targeted a debt-to-capitalization ratio of approximately 35%–40% to support investment and growth.
- Management reported labor shortages and higher subcontractor costs in Dallas and Atlanta, with resulting project delays and price increases. Material-cost inflation, subcontractor availability, interest rates, mortgage access, homebuyer cancellations, and local housing conditions could affect demand, margins, and delivery timing.
- The business is concentrated in Dallas and Atlanta and carries substantial land and development exposure. Land and lot purchase obligations were approximately $207.0 million, including potential option-contract payments through 2021; the company generally may terminate certain contracts by forfeiting deposits.
- The company reported $67.0 million of federal net operating loss carryforwards and a $1.3 million valuation allowance for Minnesota and Nebraska state losses. Tax-attribute use may be restricted by ownership changes or insufficient future taxable income; the Tax Act may also affect homebuyer demand and deductions.
- Greenlight affiliates held approximately 47.7% and Third Point affiliates approximately 16.2% of voting power, creating significant shareholder concentration. The company did not anticipate paying cash dividends in the foreseeable future.
- Letters of credit outstanding were $0.2 million. Green Brick reported no material litigation and stated that disclosure controls and internal control over financial reporting were effective; the auditor issued unqualified opinions.
Important facts for investors to verify
- Whether inventory growth and operating cash use translate into timely home closings and sustainable cash generation.
- Whether backlog converts as expected, and how cancellations, pricing, labor costs, and homebuilding margins evolve.
- Available borrowing capacity, borrowing-base and covenant headroom, facility maturities, and sensitivity to variable interest rates.
- The realized tax effects of the Tax Act and the future recoverability and potential Section 382 limitations on tax attributes.
- Challenger Homes’ operating results, the value and terms of the noncontrolling investment, and any future share issuance or purchase-option decisions.