Q3 2019 Earnings Call
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Following today's remarks, we'll have a question and answer session.
A reminder, this call is being recorded and will be available for playback.
Slide show supporting today's presentation is available on green brick partners website.
Www Dot green brick partners dotcom.
Go to investors and governed then click on the option. This has reporting and then scroll down the page until you see the third quarter investor call presentation.
The company reminds you that during this conference call. It will make various forward looking statements within the meaning of the safe Harbor provisions of the United States private security registration and form of 1995.
Investors are cautioned that such forward looking statements with respect to revenues earnings performance strategy.
Prospects and other aspects of the business of Green brick partners are based on current expectation and are subject to risks and uncertainties.
A few factors could cause actual results or outcomes to differ materially from those indicated by such forward looking statements.
Please read the cautionary statement regarding forward looking statements contained in the company's press release, which was just released on Thursday November seven and the risk factors described in the company's most recent annual and quarterly filings.
With the Securities and Exchange Commission.
Green brick partners undertakes no duty to update any forward looking statements that are made during this call.
Today, the company will be referring to pretax income attributable to green brick pre tax income attributed to green brick as a percentage of total revenues pretax income as a percentage of average invested capital EBITDA.
Net income return on average equity and adjusted.
Homebuilding gross margins, which are non-GAAP financial measures.
The reconciliation of adjusted homebuilding gross margin to homebuilding gross margin and the reconciliation of net income attributable to green brick to adjusted pre tax income attributed.
To green brick are both contained in the earnings release that Green brick issued yesterday I would now like to turn the conference over to Greenberg CEO Jim Burke. Please go ahead Sir.
Okay. Thank you hi, everybody with me as Rick Costello, our CFO .
And just dolsten the prison in North Texas region.
Thanks again for joining our call it's always great to share some good results with you.
As the operator mentioned a presentation that accompanies this earnings call can be found on our web page at Green brick partners dotcom.
The top the web page click on investors and governance.
Then click on the option that says reporting and that's called on the page until you see the third quarter Investor call presentation.
I'll give everybody a few seconds to get this stuff.
Okay, we had a record setting third quarter with the P.S. at its highest level at 31 cents. This is up 29% and with home closing revenue is at a record over 97 million up 44%, both compared to the third quarter 2018.
Sales pace to split it's typically a bit slower when opening new neighborhoods, even though we increased our community count by 13% during the third quarter of 2019, we increased our quarterly sales absorption pace per community by 34% year over year.
We continue to believe that are selling community count will grow by 21% this year compared to January 1st 2019.
Our first time move up an entry level builder trophy signatures homes is off to a wonderful stark.
As a result, we were stayed for continued earnings growth and 2020.
I want to remind investors that earnings are not created equally.
Our earnings growth is possible, despite having one of the least leveraged balance sheet in the industry.
We enjoy not only lower levels of debt.
But our debt is at a lower cost in almost every small and mid cap here.
This was evidenced by the $75 million, 4% seven years senior unsecured note that closed in the third quarter with Prudential private capital.
Our interest coverage is over eight times our interest incurred.
Which is nearly double that of the next small kept builder and about five times that at the typical small kept Peter.
Please flip to slide five.
Two of the best markets in the country, our core markets of Dallas and Atlanta.
During the last 12 months, Dallas and Atlanta continues to be two of the largest markets in terms of generating job growth.
On slide six you can see the Dallas continues to be the number one new housing market in the nation, adding about 33600 starts.
Atlanta is the fifth largest markets and our challenge or homes affiliates in Colorado Springs is part of the sixth largest markets.
We are 2% to 5% of the starts in three of the largest marks and at this stage, giving us significant opportunity for growth.
Slide seven demonstrates what we need mean by a rated Submarkets John Burns real estate consultant, just published maps of our Dallas and Atlanta Metropolitan areas, where they have next designated grades of Cybergage, most desirable and a bargain through the most affordable enough market based on <unk>.
Variety of subjective factors, such as quality of schools proximity of jobs and the existence of infrastructure and quality of life.
We have taken those maps and the overlay the locations of our green brick communities with green dots.
As you can see the preponderance of our communities around the very best Hey are most desirable rate in submarkets.
What the prior graphs did not tell you this higher how supply constrained lots in these most price a locations still are.
Green brick owns or controls were 5700 lots in the Dallas Metroplex and over 2400 lots in Atlanta, primarily in a locations.
Over 16, hundreds a lots are for trophy signature Holmes, our new builder entry level and first time move up homebuilder at the bottom of slide seven you'll see that we have 36 communities under development as I've mentioned in the last two quarters. We will continue to expect that we broke community count by 21%.
92 communities. So by the end of this year or the first quarter of 2020.
Slide eight takes a closer look at our goal story of the annual revenue and the related investments in land and land development.
I look at the chart you can see it that the direct correlation to the growth in total lots owned and controlled with the resulting drugs in the annual revenues.
Over the last 12 month Weve corner, <unk> Robin just by 30% and our total lots owned and controlled by 14%.
I want to take thank the entire green brick team for their hard work and really great results this quarter.
Next to just Dolsten, our president of the Texas region will discuss our growth driver and our diversification.
Thanks, Jim Green brick is truly one of the best growth stories in the public homebuilder space take a look at slide seven label growth drivers.
On a last 12 month basis total revenues from Q3 2017 to Q3 at 29 team have grown 69% over the two year period.
But even more impressive is our set up for the future.
Over the last two years or backlog grew 94% to 320 million as of September Thirtyth 29 team.
Which was almost a doubling of our 2017 backlog.
During these last 24 months, we also increased our lots owned and controlled by 63%.
Group grew the average number of selling communities by 53%.
Now, let's focus on just the last 12 months ending September Thirtyth 2019.
Over the last 12 months.
And then September Thirtyth 2019, we started.
1781 units.
Which represents a 24% increase versus the 12 months ending September Thirtyth 2018.
Notably after starting an average of 420 units per quarter from Q2 of 18 through Q2 of 19.
We saw spike of 535 units during Q3 of 29 team.
As of September Thirtyth, 29 team with 1360 units under construction.
An increase of 17% year over year from the end.
2018.
So green brick has the backlog the construction starts the level of units under construction and the lot inventory to sustain further dynamic growth.
On slide 10, we highlight the diversification of our product offerings and 28 team. We significantly increased are focused on townhome communities. Thanks, two years of playing named land acquisition and development.
In fact, we've grown or townhome revenues, 41% over the last 24 months.
Our robust single family group of 80%, 88% in the past.
24 months is highlighted by GHS revenues of 110 million over the last 12 months, which were at a lower average sales price what they're more affordable age targeted product.
Over this period. This has helped us maintain affordability, while offering a high quality product.
Over the last two years or average sales price has risen by only 2.2% in total.
Slide 11, visually demonstrates that our range of homes and diversified.
Homebuyer mix have grown or revenues and provide stable earnings by not concentrating on any one homebuyers segment.
We now address five distinct consumer segments, which which all experienced strong revenue growth into Q3 2019.
Looking at the right side of the page you can easily see the improved diversification.
Aboard.
Product types versus even last year at this time.
31% year over year growth has an important balancing and to burst application of our target consumer mix.
And please remember what you saw back on slide seven most of our communities are located in desirable aid submarket locations. The additional move to include different consumer segments and prototypes.
Our part a great bricks longer term strategy.
To diversify our offerings eliminate risk without reliance on constantly growing sales prices or a single group of homebuyers.
Next Rick Costello, our CFO will discuss our third quarter results in more detail.
Thanks, Chad Hello, everyone. Thank you for joining us today to review, our 2019 third quarter financial results.
Please move to slide 13, first before getting into our financial results, we need to reiterate the key Q3 event that we disclosed in August when we reported Q2 results and that's the closing of our senior unsecured notes with Prudential private capital or $75 million.
Long term notes sort of fixed rate of 4.0%.
At this rate is only slightly higher than the long term rates paid by the lower leverage large cap builders light and B.R. and D.R. Horton.
More attractive than the long term rates paid by all small cap in mid cap builders.
As you can see in the table provided on slide 13, our small cap peers have incurred a high cost to stack maturities on a longer term basis than provided in revolving credit lines.
Paying higher rates green brick has reduced our cost of borrowing and therefore, our overall cost of capital.
Now I'm going to move into the financial highlights. So please move to slide 14.
For Q3 is 19 versus Q3 of the 18 and per year to year comparisons here are some key operational metrics.
Net new orders increased by 47% for the quarter and 19% year to date.
Hum deliveries increased by 42% with residential units revenues up by 43% for the quarter.
For year to date home deliveries increased by 33% with residential units revenues up by 32%.
Year over year homes under construction or up 17% with home started on the last 12 month basis up by 24%.
Dollar value of units in backlog increased by 3.5% year over year and finally, our EPS was a record for any quarter of 29% versus Q3.
18.
Year over year to three quarters EPS is now 12% higher in 2019 the 2018.
All right now for the details for the third quarter. The number of net new home orders was 436 homes it increase of 47% compared to third quarter of 2018.
For year to date 2019 versus 2018, our net new home orders have grown by 19% from 11 18 to 13 34, we saw a huge improvement in Q3 relative to the prior year with absorption per active selling community that was 34% that Q3.
2018.
Greenberg delivered 443 homes for the quarter, 42% more than the third quarter of 2018.
For year to date 2019 versus 2018, great brick deliberate 1200, five homes at 33% increase over 2018.
Residential units revenues were 199.9 million for the quarter.
An increase of 43% over the third quarter of 2018 and year to date greenbacks residential units revenues grew to 536.6 million up 32%.
Over the first three quarters of 2018.
The average sales price of homes delivered was about 445300 for the quarter and 439000 year to date.
Up 1% from Q3 of 18, but down year to date versus the first three quarters of 2018 like jet set before it's hardly moved over the last 24 months.
At September Thirtyth, 2019, or builder operations segment had a backlog of 710 sold but unclosed homes.
With a total value of approximately 319.7 million an increase of 3.5% from September 32018 at September Thirtyth. The average sales price of homes in backlog was approximately $450300 a decrease of just a 0.2% comparative to the prior.
We're flat.
Lets introducing review some of our key growth metrics on a last 12 months basis.
Regarding sales net new orders for the last 12 months stand at 16 13 homes.
Up 17% from 1383 homes as of the end of the Q3 of 18.
Regarding closings units close for the last 12 months totaled 15, 87 homes up 33% for the 12 months ended September Thirtyth 2018.
Residential units revenues was similarly up 31% over this period on the last 12 month basis.
For Q3, 2019 Green brick had an average of 88 active selling communities the year over year increase of 11%.
For the nine months ended September Thirtyth 2019, our average selling community count represented an increase of 25% on a year over year basis.
Regarding watch inventory the number of lots owned and controlled has grown to just over 9200 lots up from about 8100 lots from the year ago period for an increase of 14% has a nice thirtyth 19, and this was accomplished despite starting almost 1800 homes in the last 12 months.
Homes under construction increased 17% to 1306 units as of September Thirtyth compared to 1100 1113 units as of September 32018, and finally in the last 12 months, we've started 1700 and and 81 homes versus 1400 41 homes.
As of September 32018, an increase of 24%.
As Jeff mentioned in this is really important to our future prospects for revenue growth.
After starting an average of 420 units per quarter for five quarters from Q2 2018 through Q2 2019.
During Q3 of 2019, we started 535 units an increase in our starts rate of 27%.
During Q3, our adjusted homebuilding gross margin declined to 22.2% for the third quarter of 2019 from 25.6% for Q3 of 2018 due to initial prices on new communities opened and to increase sales incentives to customers to promote sales pace.
But importantly, our Q3 adjusted margin gross margin of 22.2% is consistent with our year to date margin of 22.4%.
Let's take a look at slide 15, it demonstrates our performance as measured against our peers.
The chart because on the left with two critical measures of pre tax income performance pre tax income takes into consideration building margins as well as operating expenses as you can see.
Pre tax income as a percentage of revenues or our pre tax margin stands at 10.0% for the last 12 months that puts us far above our small cap and mid cap peers, who at 5.6 and 8.3% medians of return on revenues respectively much much lower.
A second measure of adjusted pre tax income performance is based on return on invested capital and again Greenberg's return of 10.6% for the last 12 months is double the 5.3% median of small cap peers double.
And our 10.6 ROI see us almost 40% higher than the median ROI see of our mid cap peers at 7.6%.
Of course, most important does the bottom line in Green bricks 2019, EPS in Q3 was a record 31 cents per share.
Up 29% over Q3 of 18.
Our net income return on equity is shown on the three bars on the right side The chart 15.
Our our OE stands 11.6% for the last 12 months ended night, Thirtyth 19, which is 26% above the median aro, we have our small cap peers and only 6% below our mid cap peers.
But let's look at that more closely and consider slide 15 for the rest of the story and as shown on slide 15, which is debt to capital return on equity has been accomplished despite keeping one of the lowest net debt to capital ratios of any public builder.
We've been able to grow rapidly, while increasing our financial leverage through low interest rate revolving lines of credit.
As of September 32019, we have continued that gradual increase to the point, where our net debt to capital ratio or net debt is debt minus cash has increased to 28.5%.
Note that other pure builders have leveraged to an average on this chart a 44%, but look more closely the slide shows that all eight of the builders on the left side of the chart for the wrong side of the chart, our small cap in mid cap pure builders.
The net debt to capital ratios of those eight peers range from 43% to 70% for an average of 54%.
In other words, our peers are each accomplishing their rates of return on equity with almost 90% more financial leverage than Greenbriar. The clear conclusion is that on a risk adjusted basis, our ARPO ie is remarkable and a strong performance versus our highly leveraged peers.
One final note on our expected increase in community count to 92 active selling communities. The implication is for a corresponding increase in construction starts which we did start seeing with Q3's increase in our starts rate of 27%. Indeed, we have done building toward another marked increase.
These annual revenues for 2020.
I'll now turn the call back to Jim who will wrap up our part of the call prior to opening things up for today.
Jim.
Thank you Rick.
As everyone can see our team builders did a really great job.
Managing pace versus price to generate the best quarter in our history for net income total revenues.
Residential unit revenue and homes under construction.
We're also very proud that during the third quarter of 2019.
Fortune magazine named Green brick one of the fastest growing companies in the world.
Unlike most peers our neighborhood count is accelerating.
We will grow from 76 communities on January one 2019 to 92 communities by either the ended the year or the first quarter of 2020 subject to weather.
And this 21% of community growth is being accomplished while maintaining a very conservative balance sheet were a net debt to capital is only 28.5%.
As we discussed our superior credit metrics allowed us to fund our growth with a new 4% $75 million senior term loan.
This low cost of capital is a huge advantage over our peers.
Operationally, we are seeing house margins stabilize and the benefits of our standardized operating systems that are utilized by all of our builders.
Our business is now scale to where our title and mortgage business are rapidly expanding and doing this profitably with very little risk.
Our entry level first time move up value builder Trophy signature homes is off to a great Stark and should be a significant part of our earnings growth story that we expect to replicate in other markets.
I want to thank everybody on the green brick team for their really hard work dedication and great results I'll now turn the call back to our operator for questions.
At this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.
Your first question comes from a line of Michael Rehaut from JP Morgan Your line is open.
Hi, This is Maggie on for Mike.
First.
Can you mentioned that.
Sales incentives were up during the quarter.
Wondering if you could talk about how those incentives trended sequentially and also if you could talk about any other trends that you're seeing in pricing power in your markets.
Sure I'll take the first part of this is Jim jet and you might want to.
Add some more color to it.
Bill jobs, our margins were up we had to increase sales incentives on specs, which pushed our.
Gross margin down slightly but as you can see what we gained again and that Delta was picking up a huge block of revenue. So we think it was a great decision for the business.
Inventory levels are very low and all of our markets. So we expect gross margins to really stay about the same and sales incentive to probably decrease going forward.
Everything you on it.
Hi, Yes. This you're building industry was more disciplined on starting specs. So we don't have is.
Surplus like we as we as the industry had last year, we were actually seeing fewer and say although.
Quarter over quarter, we increased our.
Incentives year over year, they're down.
So I Maggie what I think Jed, saying, we're both saying is that I think the industry is very disciplined inventories are very low and one of the things. While we don't give earnings guidance per se, we want to really highlight the fact that.
At 932019, we had 1300 homes under construction same time in 2018, we only had about 1100 homes under construction. So we're entering into.
Next year with a lot more inventory.
To sell.
Okay. So just to clarify you said that the incentives were up quarter on quarter, but you expect them to kind of trend down going forward.
Thanks, I Didnt realize is a better.
Things are going to maintain about the same where I think on the specs side of the business they'll probably be better.
Okay.
All right and secondly.
Well when talking about trophy, you mentioned that it's off to a wonderful start and I was wondering if you could get a little give a little bit more color there.
Maybe given how many closings trophy contributed this quarter.
Yes, Jeff Jeff can really add a lot to this but.
Let me take a step backward for you because a lot of people don't realize how long it takes to really get where we are we made the decision to bring Stewart Park. It was to really done a wonderful job getting.
Trophy off the ground.
That took place about a year and a half ago, we're just seeing our first closings now.
We're really ramping up that business you know, we about 1600, maybe 1700 lots right now.
We have a 150 homes about under construction, we started about 50 homes last month.
And.
Really when when we started the business.
Our goal was to.
Compete against the Giants and really we're seeing such progress right now I think our goal is to be them next spring so it'd be really Anders interesting.
Yeah that unfolds.
Yes.
We will start at September Thirtyth, we had seven active selling communities that were trophy.
At the end of the year, we think we'll have nine Rick mentioned that we think our.
Community Count will be 92 so.
Trophy will be approximately 10% of that and we see that trending upward significantly next year.
Okay. Thank you.
Yes.
Again, if you like to ask a question. Please press star and number one on your telephone keypad. Your next question comes from a line of rank Gilbert from BTG. Your line is open.
Hey, Thanks, guys just another one on trophy signature what was the contribution from the New Trophy openings drew overall order growth in the quarter.
Okay.
Yeah, we don't we don't give detailed disclosure on that at bed I would tell you that it was modest that our.
Because over all every single.
One of our of our team builders experience monthly absorption growth.
On a year over year basis Providence group in CV Jenny.
We are great contributors.
Trophy is doing a great job because of both of those seven communities. They only have to model homes open.
But in there there above average.
For green brick, but it really was.
Broadly experienced by our builders, what's happening is trophy has about 30 employees right now it's growing rapidly. So we are making an investment that we see really great benefit in 2020 and going forward, but it's not contributing to earnings right now.
Got it and then it sounds like that the community count opening for trip you're going to increase in 2020 is that predominantly in Dallas and are there other markets that you're operating in where you think it makes sense to to expand this type of product offering.
We are looking into other markets right now.
Okay got it and then just on backlog conversion.
Really strong approved in the quarter is that do you think that's kind of a you know at 60% of kind of the new run rate or returning to a new run rate or was there just some inventory clean up that.
That led to that that improvement backlog conversion.
Well.
Ryan we really don't look at it in terms of a conversion rate I mean, youve conversion rate as a calculation. After everything is done but if you look at.
The run rate that we were experiencing around 400 more or less units for five quarters in a row and specifically if you look back at Q4 last year in Q1 of this year. Our average was like 403 starts in each quarter.
What happened this quarter with with 443 closings is we just saw more houses. So we had standing inventory that we will reduce on a on a quarter over quarter basis.
As our builders were getting getting getting rid of some of that overhang of inventory.
Okay got it and then just one last one on the M&A environment.
Hello deal flow looking in what's your appetite for.
In another team builder to green brick versus organically expanding community count.
Well, that's really a great question and.
We've looked at a number of builders I just got through looking at two builders.
And we have definitely concluded that we are much more interested in growing organically for one reason one is culture.
And two is that we're not willing to pay the.
Blue Sky or the premiums that we see competitors trying to enter markets weve reduced were to discipline to do that and we think we can make better returns.
Expanding organically.
Okay, great. Thank you.
There are no further questions at this time. Thank you for joining US today. This concludes today's conference call you may now disconnect.