Green Brick Partners, Inc. (GRBK) on Q1 2021 Results - Earnings Call Transcript
Operator: Yes, you may begin.
Rick Costello: Thank you. Good to do the operator's part. We apologize for the delay in commencement. The operator had connection issues. Good afternoon, everyone, and welcome to Green Brick's Partners Earnings Call for the First Quarter ended March 31, 2021. Following today's remarks, we will hold a question-and-answer session. As a reminder, this call is being recorded and will be available for playback. A slide show supporting today's presentation is available on Green Brick Partners website, greenbrickpartners.com. Go to Investors & Governance, then click on the option that says Reporting, and then scroll down the page until you see the First Quarter Investor Call Presentation.
Jim Brickman: Okay. Hi, everyone. With me is Rick, our CFO; Jed Dolson, COO. Thanks for joining the call. As the Operator mentioned, Rick, a presentation that accompanies this earnings call can be found on our webpage at greenbrickpartners.com. At the top of our web page click on Investors & Governance, then click on the option that says Reporting, and scroll down the page until you see the First Quarter Investor Call Presentation. I'll give everybody a quick second to do this. I'm happy to report that the tremendous demand that we saw last year accelerated throughout the first quarter of 2021. For years, we have planned diligently to have the best lots and the best housing markets in the nation with a best-in-class operating structure. And last quarter, thanks to that positioning, combined with the strong fundamentals in today's housing market, Green Brick has achieved its strongest first quarter results in the Company's history. By design, we were ready to capitalize on favorable market conditions of positive demographic trends, a persistent deficit in for-sale housing inventories and sustained low-interest rates to continue to accomplish record results. Highlighting that point, net income attributable to Green Brick over the last 12 months reached $123.7 million. This is a 100% increase over the prior 12-month period. I want to thank all of the Green Brick team and the hard work involved in doubling an already strong net income.
Jed Dolson: Thanks, Jim. On Slide 7, we demonstrate how our investment in land has translated into an increased capacity to generate top line growth. As you can see from the chart on this slide, a key driver behind our strong financial and operational results has been our ability to convert investments in land to future growth in revenue.
Rick Costello: Thanks, Jed, and thank you for joining us. Again, thank you for joining us today to review our 2021 first quarter financial results. Look at Slide 11 of our presentation, which shows the year-over-year growth in our home closings and home closings revenue for both the quarter in the last 12 months basis. On the last 12 months basis, our closings grew 27%, while related revenues grew 22% year-over-year. The gap between unit revenue growth is primarily due to our shift to the entry level price point during this period. However, as seen in the quarterly comparison, our year-over-year growth in units revenue have narrowed to 15% versus 14%, respectively, demonstrating the impact of strong price increases starting in Q4 2020. In fact, and this is interesting, we have instituted base house price increases that averaged 19% for our three large Team Builders in DFW, and 9% average in Atlanta on an unweighted basis from the end of November through today. So over that five-month period, base prices have increased strongly, and at Trophy Signature Homes, our largest builder, it's up by a remarkable 25% on an unweighted average over that period.
Jim Brickman: Okay. Thanks, Rick. Thanks, everyone. As we move forward in 2021, we expect that our revenues, margins and profitability to all improve significantly beginning next quarter, as the record sales order growth we saw last year and again during Q1 converts into higher closing volumes. At the same time, we have continued increasing prices across all price points to better match our sales pace with our construction cycle. Beginning in March 2021, we began limiting our for-sale inventory to units that have been completed framing in most of our communities. By limiting sales until framing is completed, we will reduce our risk by shortening the time between contract and completion, where we expose to uncertain and rising input costs. Further, delaying sales will enable us to capture more price increases as pricing continues to steadily rise. Over the past five years, Green Brick has established itself as a billion-dollar company that can achieve strong risk-adjusted returns. Today, we are announcing that we will have our Inaugural Virtual Investor Day on August 6th, 2021. At that event, we will provide additional insights into our growth plans, operating strategy and our efforts to achieve environmental and social goals over a multi-year period. I'll now turn the call back to the operator for questions. Thank you.
Operator: Our first question is from Michael Rehaut of JP Morgan.
Maggie Wellborn: Hi. Congrats on the quarter. This is Maggie Wellborn on for Mike. My first question is just around how to think about ASP for the year? You pointed to some solid -- like very solid price increases across all of the segments, but at the same time, there is the ongoing faster growth at the entry-level segment. So how or where do you think ASP could end up and also separately, how much more pricing power do you think you have at the Trophy brand, while being mindful of maintaining the affordability there?
Jim Brickman: I'll chime in the first part and Rick, you can finish parts of it. But one of the things that some of our ASP, if you take a look at the backlog numbers, it's distorted a little bit on the high-end because GHO Homes for example, almost builds exclusively as a backlog builder in Florida, they have a higher price point. And so the backlog ASP may be higher than the actual closing ASP, which is just kind of an anomaly the way our business operates. But Rick, you want to take the rest of the question about ASP?
Rick Costello: Sure. I guess Maggie, one of the things that limits your -- our ability to raise it as fast as might be reflected in the price increases that have averaged 19% in Dallas and 7% or 9% in Atlanta, is the fact that we entered the year with almost $700 million of backlog. Now, all that backlog is certainly under construction by now and most of it is going to close this year. So the price increases over this five-month period that we've talked about are definitely going to raise that faster than the increase in the first-time homebuyer segment. So I wouldn't be surprised to see our ASP go up $30,000 to $40,000 from where it was at the end of last year.
Maggie Wellborn: Got it. Thank you. And next on community count, I mean obviously, you're shifting toward the higher density Trophy communities, so maybe fewer larger communities, but you're also, with the strong demand probably selling out faster. So can you give us any sense of where you see community count? I mean where you see it going this year and kind of how to think about that number?
Jim Brickman: Jed? Rick, you want to take the community count?
Rick Costello: Yeah. I think we intimated, outright said, started saying during last quarter's call that we really are focused more now on the larger, longer-lasting higher absorption communities Trophy. So we really don't expect to see much in the way at all of community growth, but none of it is a limiting factor on our sales growth because we are in larger communities where we do not have to replenish them. I mean, if you really were able to dive into the details, you will see that a lot of our older communities had really a low community count in them and those are being replaced with communities that have several hundred lots in them and that serves to give us the staying power where we also don't have these -- those situations of having to grow into sales absorption, but rather to continue the momentum that you have there in the sales floor.
Maggie Wellborn: Got it. Thanks. And if I can just sneak one more in, and I apologize if I missed this, but did you break down orders by -- order growth by buyer segment this quarter?
Rick Costello: We did not.
Maggie Wellborn: Okay. Thank you.
Rick Costello: Thanks, Maggie.
Operator: Your next question is from Carl Reichardt of BTIG.
Carl Reichardt: Thanks. Hey, guys. How are you?
Jim Brickman: Hi, Carl.
Rick Costello: Great.
Carl Reichardt: Good. Looking at our model and thinking about cash flow, operating cash flow this year and I think if we've got it right, it's going to be pretty substantial relative to what we've seen in the path and given that you think or it seems like you're pretty happy with your leverage ratio. Can you talk a little bit about what your intentions are for the cash you will generate in terms of reinvestment in the business shares or whatever else?
Rick Costello: Sure. Hey, Carl. Thanks for joining in and thanks for the questions. We will produce substantial cash flow because of the significant investment that we have made in prior years, however, because of our growth, we're continuing to reinvest in land, lots and development in a major way. Our spend in that regard could approach $500 million to $600 million depending on what deal is actually close and what we underwrite over the balance of the year. So we may take our leverage up slightly because of those acquisitions, but it's still going to be in our comfort range where we really don't want to go much past on a gross basis of 32% to 35%.
Carl Reichardt: Okay. So the right way of thinking about this is cash goes back into land. So that kind of leads me to my second question, which is based on the comments you made on the new deal, which we had heard about and some other hints you've given, my sense is that the reinvestment, as you look at it is likely to be in the markets where you already got a reasonable presence, some size, some scale. And I'm interested in your -- the potential for you to begin to start to look outside these core markets or additional growth opportunities, given the cash you're generating and given that your concentration level is pretty high in Dallas and Atlanta among other places.
Jim Brickman: Yeah. We typically don't announce our plans, but I think it's going to be fairly well known. We have a 49% interest in Challenger Homes. It's just been a wonderful investment and a relationship with everybody at Challenger Homes. They are the second largest builder in the Colorado Springs area. Challenger expanded to Denver, recently, this year in some small communities and we hope to expand Trophy into Denver where Green Brick Partners would be a land developer for both Challenger and Trophy Homes in 2022. So that would be a very synergistic relationship with a guy that is the CEO of Challenger Homes, ran a large mid-cap builder in Denver for 12 years. He has great land relationships there, we have good local engineering and other entitlement teams in place there and we're going to start sniffing around that market very diligently this summer.
Carl Reichardt: Great, Jim. I appreciate that. Thanks for letting us know. And then just last question, can you talk if you have -- I may have missed it about how trends have looked in April and into early May in terms of traffic in particular and also just orders? Thanks.
Jim Brickman: Jed?
Jed Dolson: Yeah. Carl, the traffic has been great. We, like most builders, are limiting our sales so that we don't outpace production. So we're still seeing very strong traffic and sales in April and the pricing to go along with it.
Carl Reichardt: Okay. Thanks, Jed. Thanks, Jim. Thanks, Rick.
Rick Costello: Thanks, Carl.
Operator: Your next question is from Alex Rygiel of B. Riley.
Alex Rygiel: Thank you. A follow-up on that last question, so since you are limiting your sales, are you suggesting that a new order activity in the second quarter could be down a little bit from the first quarter?
Rick Costello: Yes, that would be a good takeaway. And we've got $1 billion of backlog and we've started a ton of houses. So we really have to pace down. We had a lot of price increases that we were able to get while we were doing all those sales in Q1, but we are definitely wanting to catch-up to our...
Jim Brickman: And the first quarter was in terms of a comp, it was really kind of an outrageously high comp. It was over 1,000 home sales and we intentionally could never maintain that on a consistent basis. I think it was 1,082 actually in the first quarter. So the second quarter is going to be down sequentially from that on purpose.
Alex Rygiel: Understandable. And then how has your build cycle time changed over the past three months, and what -- where is it at today?
Jim Brickman: It's extended about a month. Jed, why don't you kind of -- and it varies little bit by product type, but, Jed, you're our operating guy, why don't you answer that?
Jed Dolson: Yeah. If you look companywide where it's about seven months right now, we are seeing Trophy build significantly faster, we're seeing our -- and as you see Trophy become more of our, a larger share of our closings that that cycle time should be going down. So we -- it really hasn't gotten that much worse in the past three months. We had a little hiccup like everybody did with the Texas weather storms in February where we had snow for quite some time, but it hasn't changed measurably from January 1.
Alex Rygiel: Very helpful. Thank you.
Jim Brickman: Thanks, Alex.
Operator: Your next question is from Alex Barron of Housing Research Center.
Alex Barron: Yeah. Thanks, gentlemen. Yeah, I guess my question was similar to the last one. Just wanted to confirm that the cycle time hadn't changed that much and that the deliveries were mainly impacted because of Texas. Are you guys pretty much caught up on delivering any of those homes and are supply chain issues back to normal, or are you guys still kind of feeling the effects of that?
Jim Brickman: Supply chain issues are not back to normal. I think we're just getting more accustomed to managing that process where we really now expect to have some bottleneck occur in our business and it's a different bottleneck at any different point in time. But in the aggregate, as we said, it's extending our cycle time about a month and we think that's what the foreseeable future looks like.
Alex Barron: Got it. And...
Jed Dolson: Yeah. We still have some manufacturers that are dealing with material shortages and/or ramping back some of the Texas suppliers from the winter freezes, but for the most part, we are just doing a better job of ordering our materials way in advance and so, like Jim said, it's about 30 days, so it's not catastrophic.
Alex Barron: Okay. And then second question, when you guys were talking about 20% price increases, was that meant versus a year ago, right, it wasn't versus last quarter? And then part two is, are you guys as a result expecting margins to continue trending higher in the back half of the year because of those price increases?
Rick Costello: The price increase -- the relative price increases were from price lists as of November 30 to today. So basically a five-month period is covered by that price increase. So it is quite recent. And the second question, we refer to that, we do expect to see increasing gross margins based on the fact that we've been able to increase prices, which is on 100% including land cost, which is fixed and the gross margin versus the cost increases, which are occurring on sticks and bricks being about 50% of your house price. So it's -- our crystal ball is only as good as it can be. But what we're seeing so far suggests that we should be able to maintain and increase gross margin.
Alex Barron: Got it. If I could ask one last one, what should we model in for tax rate as you guys see it for the remainder of the year?
Jim Brickman: Well, that's a really great question. I don't know really what's between Washington DC and the other things I would model right now. Just like we are until we know different, but obviously, there is the potential to have higher corporate taxes, but I don't know whether it's going to be retroactive or how that's -- what that's going to look like?
Rick Costello: The tax rates that we experienced in Q1 is representative of what we should have because it's after the benefit of the energy tax credits which were extended into this year, but it's obviously, like Jim's saying, it's on current federal rates.
Alex Barron: Okay. Thank you, gentlemen. Best of luck.
Rick Costello: Thank you.
Operator: Your next question is from Tom Bishop of BI Research.
Tom Bishop: You mentioned a couple of times that the growth would accelerate next quarter. And do I take that to mean Q3?
Rick Costello: Q2.
Tom Bishop: So that's this quarter, you meant to say?
Rick Costello: Well, we are reporting on Q1, so it would, yeah.
Jim Brickman: It's semantical, but, yes, we're in the period ending June 30th.
Tom Bishop: Good. I just wanted to clarify that. Also the -- this -- I'm amazed that the stock is off 11% today. And I'm wondering if you have, I'm sure you've thought of it, wondered, why and if you have any thoughts on that and what investors are getting wrong? I see a good year and good prospects and I'm really confused by that.
Jim Brickman: Well, I was confused by it too. I think the builders are kind of down 2% overall and seeing your own stock down 11.5%, you figure it well that I say something bad on the earnings call or whatever but yeah, I'm surprised because our backlog is unbelievably strong, our margins are improving and our business has never been better. But the only thing I can figure out is that our stock did go up quite a bit in the last three weeks. And maybe that's just an adjustment, but my job is to run a homebuilding company, if I could figure out stock prices, I would probably have a different job title.
Rick Costello: Well, that's my job and I can't figure it out.
Jim Brickman: Yeah, because really our backlog has never been better. Our prospects have never been better. Our FICO scores are the best they've ever been. Our deposits in terms of risk on the Homes has never been larger. So when we do sell a home, the likelihood of its closing has never been better. And really it's -- everything seems to be good today until I look at the stock chart.
Rick Costello: Tom, that's -- it's an interesting question. I think we would all say that we're a buy right now, a strong buy, but that we're also very prejudiced in that regard, but I think, Jed, really put the story very well when he spoke about, hey, first, we got the lots under contract and then develop them, and then opened a bunch of communities, and then we sold just a ton of houses and built our backlog, and then we started a bunch of houses over $1,000 a quarter for the last two quarters. And you see us with 516 closings in Q1. And it's just not what a lot of other builders showed in their numbers in terms of what they closed in Q1, but just wait till next quarter is really what we can say, and that's what we've been trying to say, that's what we messaged ahead of time. But I guess, sell the news, I guess.
Jim Brickman: Yeah, it's very odd. When you take a look, we have about $1 billion backlog. And the only thing that must be implied is then we say that we don't see degradation in our gross margin that some people are not believing that...
Tom Bishop: What was that?
Jim Brickman: .
Tom Bishop: The thing that I saw also was the -- that the closings were a little soft -- the growth was what, 14%, 15% do I recall.
Jim Brickman: Yes.
Tom Bishop: And that definitely lagged others, but now it's going to accelerate next quarter, so maybe investors should be looking ahead instead of in the rearview mirror.
Rick Costello: I think we'd agree with you.
Jed Dolson: We lost about 40 closings to weather.
Tom Bishop: Yeah. Okay. Well, thank you. Hopefully, we'll bounce back from here.
Rick Costello: Thanks for you're question.
Tom Bishop: Cringing to see the inside of buying as well.
Rick Costello: Yeah.
Operator: Your next question comes from Bill Dezellem of Tieton Capital.
Bill Dezellem: Thank you. I wanted to start with the delayed closings. Would it be the correct math that the 40 delayed closings using the average share price of $400,000-plus gets you roughly $16.5 million of revenue that was pushed into the second quarter, and then we would simply take the average gross margin? Or is there an incremental gross margin that's higher that we should be using so the benefit to the bottom line would have been even greater than...
Jim Brickman: There is an incremental gross margin because a lot of our SG&A costs are fixed. So those incremental sales drop more to the bottom line than typically if you just take a look at our gross margin. And so yeah, there should be more incremental benefit on those additional closings that would have produced more income.
Bill Dezellem: Jim, what do you consider your incremental gross margin to be?
Jim Brickman: Well, we can't say, because we don't know. It's variable depending on what that income level is. If it was $40 million, it would be even more than $20 million, because we have fixed costs that are being spread over a bigger number. So, I'm not trying to avoid the question, but it just gets around operating leverage.
Bill Dezellem: Understood. But either way, there was $0.05 to $0.10, probably closer to $0.10 of earnings that were pushed from the first quarter into the second quarter.
Jed Dolson: Yes, we agree with your assessment.
Bill Dezellem: Great. Thank you. And then, you've talked about the coming quarters seeing, I mean it sounds like a pop in earnings. Do you see that sequential improvement to be larger in the second quarter versus the first quarter? Or is there even a further acceleration in Q3 versus Q2 so you would expect that the sequential increase there to be even larger?
Jim Brickman: Good question. We're hopeful that it will be larger Q3 than Q2. We don't want to go out on a limb and say that. Obviously the risk, as you get further in the time here, as you take more input costs risk in determining that profitability as you stretch the model out, but yes, we think that Q3 can be a quite better than Q2, as long as input costs don't go up more than we're expecting.
Bill Dezellem: And Jim, are you answering that question in the sense of the rate of growth of sequential growth being greater in Q3 or simply the third quarter being absolute better quarter than Q2?
Jed Dolson: Absolute better. So we think we'll do extremely well with our Q2 results and then we think we will exceed those as we march toward the end of the year on an absolute basis.
Bill Dezellem: Great. Thank you. And last question, the share repurchases, did you have any in the first quarter? And if so, what was the level?
Rick Costello: We had none in Q1.
Bill Dezellem: Great. Thank you all. Great quarter.
Rick Costello: Thanks, Bill. Thank you.
Operator: We have no further questions in queue. Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.
