Q3 2020 Green Brick Partners Inc Earnings Call
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Following today's remarks, we will hold a question and answer session as.
As 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 at Www Dot Green brick partners Dot Com go to investors and governance, then click on the option that says 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 Securities Litigation Reform Act of 1995, including its financial and operational expectations for 2020 in the future.
Best years are cautioned that such forward looking statements with respect to revenues earnings performance strategies, including but not limited to comments related to the anticipated impact of COVID-19 on our future operations prospects and other aspects of the business of Green brick partners are based on current expectations and are subject to.
The risks and uncertainties.
Those factors could cause actual results or outcomes to differ materially from those expected.
Are set forth in our press.
Release, which was released on Thursday October 29, 2020, 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.
In addition, our comments will include non-GAAP financial metrics.
Reconciliation of these metrics and other information required by regulation G. Regarding these metrics can be found in the earnings release that green brick issued yesterday and in the presentation available on the company's website.
I would now like to turn the conference over to Green brick CEO Jim Brickman. Please go ahead Sir.
Thank you operator, hi, everybody I hope this call find you well with.
With me as Rick Castello, our CFO and Jed Dolson, our CLL, thanks for joining the call.
As the operator mentioned a presentation that accompanies this earnings call can be found on our web page at Green brick partners Dot com.
At the top of the web page click on investors and governance.
Click on the option that says reporting and then scroll down the page until you see the second quarter Investor call presentation. All go.
Give everybody a second to do this.
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The inflection that started more than a year ago accelerated this quarter, we are seeing unprecedented demand for our homes as many people adapt to a post covert lifestyle.
People want to own their own spaces.
The home office and drilling for their family and friends in their own backyard.
Our neighborhoods our neighborhoods offer these homes at reasonable price points in some of the best and most diversified growth markets in the country.
We are benefiting from rapid growth and successful expansion of our Probeam signature homes ran in the DFW market.
Our net new home orders this quarter were up 89% year over year and 41% sequentially from Q2 2020.
This was driven by order growth in every place point from entry level. The second time move up homebuyers.
With demand for new quality homes at the highest levels in more than a decade green brick has successfully continued to expand its community count growing 18% from the prior year.
At the same time green brick has grown profitably managing pace and price is we increased our Q3 2020 sales absorption by 58% and gross margins by 370 basis points year over year to 24.8%.
We have leveraged or a much higher volumes with only moderate growth in operating expenses to drive earnings per share to a record quarterly basically P.S. of 69 cents up a 123% over Q3 2019.
Over the past three months, our company has grown owned and controlled lots over 31% to an all time record of $12 and 66 lots, which is net of starts during the quarter, which also set a record of over 700 homes started to the during the third quarter.
Thanks to the hard work of our land team and our strong relationships with land sellers and municipalities in our core markets Green brick has been able to quickly and efficiently invest in strong operating cash flow into investments in land to fund our future plans girl.
It is important to note this record growth and land and lots was achieved while actually decreasing our debt to capital ratio by 250 basis points from Q2 20, 20% to 25.3%. This is one of the lowest of all public builders.
The combination of work of our consistently strong growth and profitability with our conservative balance sheet has been critically important in building a relationship with Prudential private capital, resulting in our second issuance of senior notes. This August.
There's 37.5 million senior unsecured note was issued.
Due in 2027 at a fixed rate of 3.35% a rate comparable with that of long term rates paid by lower leveraged large cap peers.
The low cost of our debt clearly distinguishes green brick from our small cap and mid cap peers, and we believe will allow for further expansion in our core markets and 2021.
Please flip to slide four of our presentation.
We are a diversified builder with eight brands in four major markets with a wide array of product types and price ranges.
We believe the stratification of products will continue to appeal to a broad base of homebuyers and expect that our entry level segment will continue to rapidly expand through growth in our trophy signature and CPG any plans.
As we discussed during our Q2 2020 earnings call Green brick now operates under a much simpler owner structure has been seen in the past for the nine months ending September Thirtyth 2020 over 66% of our total revenues were generated through wholly owned subsidiaries compared to only 5% more than.
Nine months ended September Thirtyth 2019.
Driven by increased ownership in our South gate Ciena living CB, JENI enormity brands as well as the expansion of trophy signature homes. This increased control has a lot of green brick to adapt quickly to the booming demand for our new homes and rapidly respond to new challenges as they arise.
Slide five announces green bricks second consecutive recognition and fortune magazine's 100 fastest growing companies.
This year showed green brick jumping 38 spots to defeat this place and is an excellent acknowledgement of green bricks tremendous growth.
On slide six we highlight the resilience of our key markets of Dallas Fort worth in Atlanta.
Like every other economy in the country. The COVID-19 pandemic created a major disruption in commercial activity and led to significant rise in unemployment earlier in the year. However.
However, as shown on the graph in this page or DFW and Atlanta markets ended the quarter with the lowest and second lowest unemployment rates out of the second out of the 10 largest metropolitan area in the United States. Additionally.
Additionally, the Dallas Plano Irving sub Mark Mark if you had the lowest year over year increase in its unemployment rate of the 30 metropolitan.
Subdivisions in the nation.
With 85% of our ending active selling communities in these core markets of DFW and Atlanta, We believe the green brick is fully prepared to capture more new home buyers in these markets as demonstrated by a robust 89% year over year sales growth from Q3 2019, the Q3 20.
Good morning.
We believe the strong bounce back from the low we're seeing it in April is further proof that our focus on business friendly pro growth markets is the correct and best choice that we'll continue to refrain to differentiate us from peers.
Thanks to the superior and economically diversified markets, where we operate.
The brick is poised to capitalize on what we believe our long term positive shifts in homeownership.
As seen on slide seven the national home ownership participation rate has risen since the fed began reducing interest rates in August 2019.
As of September 32020, the National Homeownership rate now sits at 67.4%.
Sustain homeownership rates above 67% I've not been seen in over a decade.
Indicated there was a clear secular shift taking place to towards homeownership.
With interest rates expected to remain low for the foreseeable future and an increased appreciation and demand for larger and refused energy efficient threshold.
Fresh looking homes with dedicated work from home spaces, we fully expect this.
This positive trend to continue.
Strikingly this quarter saw the homeownership rate or buyers under 35 increased 270 basis points from the third quarter of 20, 19% to 40.2% and decreased only 40 basis points from the 40.6% seen in Q2 2020.
This quarter represents the first time, the homeownership rate has exceeded 40% for two consecutive quarters since 2008.
Millennials currently represents the fastest growing ownership segment and we believe this age group will continue to drive future increases in overall homeownership.
While this trend will be constrained by the available supply of housing we believed that this higher ownership rate, especially related to younger homebuyers should at a minimum be considered the new normal.
With homeownership of buyers under 35 still 340 basis points below its peak in the mid two thousands we feel to shift represents a true secular change an old building marketplace and that green brick partners is fully prepared to address this growing market.
Jed Dolson, our Chief operating officer, and Executive Vice President will now speak in greater detail to the gross stripers in our land position Jeff. Thanks.
Thanks, Jim take a look at slide eight titled growth drivers, which demonstrate the green brick still has a long pathway towards future growth.
On a last 12 month basis total revenues from Q3 28 team to Q3 of 2020, they've grown 65% over that two year period.
Additionally, our backlog grew 79%.
To 553 million as of September Thirtyth 2020.
These improvements indicate the Greenberg is positioned to capitalize on the booming demand of new homes and is already capturing waves of the new buyers.
During these last 24 months, we also increased our lots owned and controlled by 49% and grew the average number of selling communities by 51%.
In fact in the last quarter alone Greenberg added 3600 lots to our inventory of lots owned and controlled.
While trophy signature homes opened 12, new selling communities.
With our dramatic growth in lots owned and controlled and record starts of over 700 units. This quarter. We're confident that we have the necessary levels of sold on spec inventory.
Just it.
Significant growth and 2021 and beyond.
On slide nine we establish the relationship between total lots owned and controlled and our total topline revenues as you can see from the chart on the slide each investment we made in the land has been highly correlated to a future growth and revenue.
For the last 12 months ending September Thirtyth 2020, our revenues have already grown 20%, 27% over the 12 months ending September Thirtyth 2019.
With our massive investment and land and lots. This quarter. We believe we can continue to maintain maintain significant growth well into 2022.
Slide 10 further details our Q3 20, 2020 land investment, which resulted in a 31.5% sequential growth and total loss for the company as.
As the slide details roughly two thirds of this land.
Growth was spread across three DSW communities. These communities represent significant long term investments in our Texas market.
And we'll be a dependable source of new laws as our trophy signature homes and CB Jenny brands continuing to expand across the metroplex.
Slide 11 details the growth we've already seen in our trophy brand over the past 12 months.
When picking a new location for one of our builders were diligently.
Target, a minimum under and 21% unleveraged internal rate of return for new properties.
That in turn drugs are industry, leading gross margins.
As you can see from our community map on the slide we were able to more than double trophies active selling communities over the past year and have been thrilled to see trophy perform at both entry level and move up buyers.
What the total annual housing starts in DFW expected to exceed the.
35000.
We believe trophy can continue to expand its footprint across the entire DFW metroplex for years to come.
[noise]. Please move to slide 12, John Burns Real estate consulting is published maps, the park, Dallas and Atlanta Metropolitan areas, where they have designated grades on submarkets. So most desirable being an a location.
Through most affordable being an f. location.
Based on a variety of subjective factors such as schools proximity of jobs and the existence of infrastructure for for quality of life. We.
We have overlaid the locations of our Greenbrier communities with Green dots.
ER preponderance of our communities are in the sub markets rated most desirable.
And the current market environment, we believe that our superior market positioning will be key differentiating our results from our peers. This positioning is further strengthened by the lot supply shortages and both.
The northern suburbs of Dallas, and Atlanta, which we will believe which we believe will be a strategic advantage for us.
As we expect land development activity for other builders will slow in the coming months.
Our community Count grew 18% from Q3 2019 to 100 active communities as of September Thirtyth 2020, as we continue to open more communities geared toward the first time buyer.
However, this increased focus on affordability has not been at the cost of increased risk based on our Q3 2020 home closings with our unconsolidated mortgage venture.
Remember, it's on average FICO score of 760 with 89% of the fundings exceeding.
A FICO score of 700, the credit worthiness of our average buyer profile is a fundamental strength of many of the AG markets, where we operate.
Which we will which we believe will continue to mitigate risk for our business.
Next Rick Costello, our CFO will discuss our third quarter and annual results in more detail.
Thanks, Chad and thank you everybody for joining us today to review, our 2020 Q3 financial results.
Flip to slide 13, please which compares our year to date Q3, 2020 gross margins with available pure data.
Our gross margin reported for the nine months ended September Thirtyth 2020.
It was 23.8% as shown here this was up 250 basis points over the year to date results for Q3 2019.
But for quarter to quarter alone for 2020 gross margins in Q3 were up 370 basis points over our margins reported in Q3 of 2019.
This chart clearly demonstrates that our performance is among the very best in the industry. We believe our superior margin experience is evidenced that our conservative land underwriting and prudent planning, but you had mentioned earlier, our winning strategy that has left the company well prepared to manage pace and price.
During the remainder of 2020 and beyond.
Slide 14.
Visually demonstrates that we've grown our revenues and provided stable earnings by not concentrating on any one homebuyer segment.
At this 0.2 years ago in 2018, two segments accounted for about three quarters of our ret revenues.
Fast forward two years, and we now address six distinct individually significant customer segments, which all experienced strong revenue growth and sales volume.
Through September Thirtyth 2020. This revenue growth is in line with our 53% year over year growth in year to date net new orders and demonstrates the health of our markets. Our net new order growth breaks down as follows.
Net new orders of entry level single family homes and town homes were up 258% in Q3 2020 versus Q3 2019, thanks to the terrific profitable expansion highly profitable expansion and our trophy signature brand and growth in entry level town.
Home sales and our CB JENI brand.
Likewise, our net orders of first time move up and second time move up single family homes.
Up 41%.
And 177% year over year, that's 41% quarter over quarter.
Respectively due to the strong reception in or DFW market to trapeze value oriented homes and the continued performance of our Southgate brand and highly desirable suburbs of North Dallas.
Our sales for age targeted segment at Ghl homes in Florida were up 68% year over year as we have seen improved demand for product as lockdown restrictions have lifted and homebuyers continued to migrate out of large urban centers in the northeast as well as from South Florida.
Finally urban home sales in Q3 2020 were up 175% over Q3 2019. This growth is driven by the move of urban millennials away from dense apartment living as well as the demand for larger more intentional living spaces as Jim mentioned earlier.
So to recap at every price point is seeing great improvement.
Please move to slide 15 related to our financial highlights.
For Q3 versus 20 versus Q3 of 19 and year to date comparisons here are some key operational metrics.
Net new orders increased by 89% for the quarter and this increase was a function of a.
58% increase in the absorption rate of net orders per community as well as be a 19% increase in average selling communities for the nine months ended September Thirtyth 2020, our 53% order growth is driven by a 21% increase in average selling communities and the 26 per.
Recent improvement in absorption.
Home deliveries increased by 40%.
With residential revenues up 32% for the quarter.
For year to date residential revenues improved by 27% due to a 35% increase in homes closed.
Our average sales price of homes delivered declined by 5.3% for the core quarter and 4.8% year to date versus the comparable periods in 2019.
These declines in the SPR attributable to the increasing contribution of trophy signature homes, and CB JENI homes town home Division to our total revenues both.
Both of these builders sell homes at average sales price at or below the average sales price for the company as emphasized earlier, we believe this improved affordability will serve to preserve and improve our market share.
Our year over year homes under construction or up 4% with home started on a last 12 month basis up by 23%.
Well, we did start over 700 homes this quarter, which was another record we expect to expand starts in Q4 to even higher levels.
The dollar value of units in backlog increased by 73% year over year and 24% sequentially.
With sales continuing into Q4 at an accelerated pace, we expect our year to date growth in backlog and expanded community count to drive closing growth next year.
As I highlighted earlier homebuilding gross margins was up about was up exactly 370 basis points over Q3, 2019, and adjusted homebuilding gross margins was up 380 basis points quarter over quarter.
From Q2 Q2 to Q3 of this year adjusted gross margins were up 160 basis points sequentially.
For the nine months ended September Thirtyth 2020, our year to date homebuilding consolidated margin and adjusted homebuilding gross margins were up 250 basis points and 260 basis points respectively.
Turning to operating leverage green brick experienced a 140 basis point improvement in quarterly SGN a expense as a percentage of total revenues as a ratio dropped from 10.6% in Q3 of 2020 from 12.0% in Q3 2019.
Year to date, our SGN a expense dropped a similar 130 basis points from 12.6% in 2019 211, 3% for the nine months ended September Thirtyth 2020.
In addition to strong revenue growth in both the quarter and year to date of 32% and 27% respectively. We also benefited from the large reduction in overhead that we implemented at the end of the first quarter.
A good portion of the 80% reduction in employee head count, which we enacted as effective April one is still in place and as we have methodically increased headcount from those readers deuce levels by only 12% despite record volumes and start sales and closings this quarter.
Our interest coverage of 24.2, that's not a typo to 24.2 for Q3 2020 represents a 203% growth over third quarter 2019, and clearly demonstrates our capacity to generate positive cash flow well above our needs year.
To date, our interest coverage of 14.7 represents a 101% improvement year over year.
As we left off our earnings release, our Q3 2020 basic EPS set a new all time record of 69 cents for the quarter, which is an increase of 123% over Q3 2019.
Likewise on a year to date basis, our basic EPS of $1.67 is 90 cents, 97% higher than the same period, a year to date period last year.
And our final metric on slide 15 is our net income return on average book equity, which grew from 12.5% in Q3 2019 to an annualized 23.5% during Q3 2020 an increase.
1100 basis points.
Combined with our low debt leverage our risk adjusted returns are remarkable.
Please turn to slide 16 here, we compared our performance versus our small and mid cap here is to show that our risk adjusted growth and returns are uniquely strong we've provided five measures in the previous slide we already discussed our remarkable 27.4% growth in residential units revenue during the call.
Quarter, which as Jim mentioned earlier was primarily driven by organic growth at both CV, Jenny and trophy signature brands and you can see how that ranks against our peers with both team builders focused on increasing our offerings of affordable product. This.
This growth is expected to bring further diversification and reduction in our overall average sales price.
That we're showing year to date that's.
That dynamic growth rate can be seen in the first data column or our growth rate ranks very high amongst our peers.
And as we demonstrated again this quarter our industry, leading gross margins drove excellent returns on revenues again this quarter.
Also included on Slide 15 is our year to date interest coverage of 14.7 times EBITDA, which is a function of great earnings combined with conservative lower levels of financial leverage and lower priced debt.
This lower leverage is reflected in our low net.
Debt to capital metric.
Which is the fourth metric here, which indicates our reliance on organic growth rather than financial leverage to maintain strong operating cash flows fine.
Finally, we've included pre tax return on average invested capital to measure each builders return just regarding differences and leverage and tax rates.
The last slide I'm going to have you look at his slide 17, which focuses on our lower leverage which I just discussed.
And as Jim stressed at the start of the call we were able to achieve our record setting Q3 results for 2020, while also decreasing our debt to capital by 660 basis points year over year, and 250 basis points sequentially.
Our debt to capital ratio remains one of the lowest in the industry. On this chart is the lowest which positions green brick to continue limiting risk while generating industry, leading return on equity of 23.5% during Q3 as shown on the previous slide.
Also as mentioned in Jims opening remarks, we are once again thrilled to expand our partnership with Prudential private capital this quarter with $37.5 million of senior unsecured notes issued this quarter, which are due in 2027 at a fixed rate of 3.35%, we believe our lower relative interest costs.
This will be a positive tailwind for gross margins and profitability as the company continues to grow and scale through 2021 to 2022.
I will now turn the call back over to Jim who will wrap up our part of the call prior to opening up things for today Jim Okay.
Okay. Thanks, Rick.
When I co founded this company more than 10 years ago.
We had no revenue, but I was confident that a conservative landfill focused and local strategy would be a winning course to build green brick partners into access into a successful public homebuilding company.
Looking at our success this year I'm elated with the accomplishments we have achieved to date and I believe we can continue to improve upon green bricks superior risk adjusted returns for years to come.
Our continued growth relies heavily on our capacity to acquire and untitled great land positions.
A 31.5% sequential growth in lots owned and controlled in one quarter I believe we have clearly proven that we that we can meet this challenge going forward.
In fact, as many of our peer set on large cash balances at the end of the quarter I am encouraged by the fact that green brick has been able to quickly pivot and redeploy capital to invest in our future growth. Despite historic levels of competition for the best land and lots.
With our deep roots in our core markets and strong local operators that are well connected to the land sellers and municipalities, where we operate I believe green brick can continue to lay the groundwork for significant future growth and profitability.
Our success this quarter would not have been possible without the hard work are our employees and team build across United States I would like to thank each of you for your effort and I am confident our dedicated team will continue to achieve great results for our investors going forward. Indeed October has already.
Started out very strong I will now turn the call back to the operator for questions. Thank you.
Thank you the floor is now open for questions. If you wish to ask a question at this time simply press Star then the number one on your telephone keypad.
If at any point. Your question has been answered and you wish to remove yourself from the queue press the pound key.
Our first question comes from the line of Michael Vale of JP Morgan.
Hi, This is Maggie on for Mike Congrats on the quarter.
Thanks, Matt.
My first question is.
On that last comment about strength continuing into October.
Was wondering if you could give us an idea of.
Oh, how orders have trended so far in October may be versus the exit rate coming out of September.
Have you seen any seasonality start to kick in there.
This is Jim.
The type of growth that we saw in the third quarter, which was really huge over same prior periods. We've.
We've seen continue.
Right and into October so we have not seen any deceleration in demand Maggie.
Maggie the data point, we don't we haven't quite finished the month, yet, but we're at 269 net sales for the month, we expect to be higher than that by the end of the month. So on a year over year basis were up.
It's going to be an 80 something percent handle.
So it's.
It's obviously a very strong.
Great. Thank you and second I was wondering if you could talk about the pricing backdrop that you're seeing right now.
Obviously, we've been hearing about price.
Price increases across the industry. So could you talk about it.
If you raise prices across.
Across your communities during the quarter and if so maybe give us an idea of the magnitude and timing of those increases and finally, how are you thinking of those increases in terms of.
Offsetting or more than offsetting increased input costs, such as lumber recently.
Jed why don't you talk about lumber it because we're seeing that finally, starting to decelerate and talk about pricing strategy, yes, Maggie so weve been raising prices very steadily since August.
We're seeing this.
The price increases for October be.
Smaller than they were in.
In September so, but we're also seeing the price increases for input materials go down as Jim mentioned, so we're we're finally seeing lumber.
Go the other direction, which is helpful for me.
Gross margin standpoint.
Thank you our goal is to try to price and continue to maintain the pace versus price strategy. That's really been effective for US you know, we can maintain 24, 25% margins and we're still pretty confident that thats looking good you know as we as we add option.
We introduced the margins a little bit lower than they are and where we own the land, but we're seeing we're not seeing market margin.
Declines.
Got it thanks guys.
Thanks Maggie.
Our next question comes from the line of Ryan Gilbert of BTI G.
Hey, Thanks, Good morning, guys on first question for me on.
Sure really nice ramp.
On going from 20 communities going to 20 communities from seven a year ago.
Looking out to 21 based on your lot count. It seems like we should expect continued community count growth and I'm, just wondering what that how that mix of trophy signature should look in 21 versus where it now at around 20%.
Well, Jeff can handle that trophy is continuing to really grow at a very fast pace.
I think the only negative thing I can tell you about trophy is that it now takes we two full days just to drive their sites and see everything that we have going on and plan for the future, but those are an exciting two days because really we are driving to communities that are just opening right now and their pre selling homes without even having a.
Model I visited for on Tuesday.
So Jed why don't you talk a little bit more about kind of were trophy fits in to our.
Yes sure.
We are as Jim mentioned, we have delivered a lot of new communities I think we reported 20 for trophy.
Opened stores.
The really good news that we're very excited about is a lot of these communities have.
Very long runways of loss in many cases the phases, we've just put on the ground to exceed 200 law. So.
No we don't for the first time in a while we think we are going to be able to sell 10 or more out of these communities per month without having to ration. Our sales are cap our sales as weve previously been driven so we expect further community count.
Increases would trophy over next year.
We're like I said these are these will be very big communities, where we should see absorption.
More than double and I had this is Jim I don't want to get hyper technical on this call about internal rates return and that type of analysis, but I think it's important for the analysts to know that when we have these gross margins. We're looking at right now we're not putting big lot inflators, rather thing in or assumptions were buying some of these properties. So.
If we keep getting the tailwinds that we're happy that those lots should be very attractive going forward in terms of price.
Got it and can you share the absorption differential between trophy signature it.
More traditional brands to move up product.
It really varies.
By what price point, because trophy can sell up to 650000 dollar house, but at the lower price points, we're seeing at two X multiple compared to our other brands.
And really because sales accelerated so quickly in what two or three neighborhoods for trophy, we had to cut off sales we could it actually had more sales, but the next phase of lots or the next development that was in the same municipality wouldn't be ready. So we didn't do that we were managing pace over price and actually.
Slowed down sales and a few neighborhoods.
Okay got it and then as you go out and buy land for Trophy are you noticing any competition for other builders are healthy availability of land for entry level.
Communities.
Yeah, you know we have a green brick has a proven track record are performing in our core markets.
And so we're seeing increased competition, but.
Sellers are looking at our track record of closing and oftentimes selecting us.
Well, let me give you a case study of that that we're working on right now and I can't tell you. This is going to close I wouldn't tell you where it is because we're still working on it but we had a land seller that came to us.
Very concerned that if he doesnt sell.
And closed his property.
This year and it's a fairly large transactions that he is going to pay a lot more in capital gains. So he came to US and said Hey can you guys close this rather large property before December he knows us he's dealt with this for a long time and we're very optimistic that we can get that closed and thats not something that a typically.
Public builder could react to and get done and that kind of timetable.
Okay got it that makes sense on last question for me is just on.
Production capacity and we're seeing kind of throughout the industry cycle times are extending that fourth quarter backlog conversion for a lot of builders on has been guiding to a pretty substantial to clients, which I suppose is to be expected just given how strong.
On demand has been so just thinking about green bricks fourth quarter, you started 710.
Homes in the third quarter.
Do you think you can get all those delivered in the fourth quarter or should we just for modeling.
Purposes, you thinking about maybe some.
Cycle times, extending 121 or.
Yeah.
Let me answer that question at a higher level to start with because our business stuff started where we were really and still are I think where our strategic advantages to land entitlement land development side of our business.
And.
Frankly, weve learned from the Giants that are really great.
In the manufacturing and process side of their business to one hours.
The penalties.
And.
We continue to improve our operations learning from these guys.
And so our cycle times are.
Improving but they started at a higher point.
And.
So I think Jeff we're pretty much.
Our cycle times really aren't extending overall Harley.
No. We're you know we're seeing anything that comes from a factory is a little bit of a game of whack a mole. We're you know we can't get Windows, one week, we can't good.
Trust is the next but you know.
These are.
We're working through these issues. The biggest thing is we've gone to all of our suppliers and vendors at our biggest brands like trophy and worked out us an even flow schedule. So they can predict exactly how much material. We are going to be meeting on a weekly basis. So we feel good about start.
Being even more homes than 700 and Q4.
Okay, well I can tell you. It's I mean, it's getting to be unless the cities for some reason just shut down where it can't get building permit three are going to significantly exceed third quarter starts.
Okay, great. Thank you.
Our next question comes from the line of Aaron Hecht of JMP Securities.
Hey, guys great quarter I'm wondering on the subcontractor side are you seeing any constraints are that.
And may limit your ability to push the order growth.
Or is that just not an issue.
This is Jed it's an issue.
Joe we are the fifth green brick has the fifth biggest builder and DFW. So in DFW, we're getting a lot of our units and our revenue we.
We have the ability.
Were important were very important to our vendors and so we're getting top priority compared to some smaller builders.
That being said, it's like I mentioned earlier, it's whack a mole.
I can't tell you what next weeks production problem is going to be but there will be one of the good news is we havent found a production problem that we haven't been able to.
You know relatively quickly solve.
The other thing that's helping us his apartment starts are really decelerating.
No and that was a big component of starts in the DFW market more than 30000.
And is that the seller rates that labor pool is shifting to to single family.
And here in this this is Rick thanks for joining the call and your questions.
Also.
If you look at our Florida builder Ghl homes.
They have a top market share there, which has consistently been 20% to 25% market share. So they got a lot of focus and attention there.
And also also Brian bar in Colorado Springs, with Challenger homes is always amongst the top three in terms of sales closings and starts.
And so.
We get a lot of.
Tension there as well from the subcontractor community, Yeah, two or three public builders for example, or.
Total dip their toe, but a very small building in Colorado Springs.
Seems every eight or 10 years to the guys from Denver, one a dip their toe in that market, but.
The labor and subcontractor markets are really very closely held amongst rebuilders in Colorado Springs.
Gotcha, and then it sounded like.
You started managing your pace a little bit based on.
Community openings or the lot availability.
One and it sounded like I think you said that youre going to expect in the kind of growth next year, which is great.
And you highlighted all the lot be brought on but wondering if you are going to continue to manage that pace to have less volatility in the community count.
So we see kind of consistent growth work there could be some volatility there.
Well this is Jed we can't.
Not every community we take on can be a thousand lots. Unfortunately with a long runway. So it's it really is a balance we have.
A lot of our communities are a 100 lots or less so we do need to ration.
Starts in those communities, where I'd do it based on what our internal capabilities as well as our external vendor capabilities are.
But the good news is we have several.
Big.
Flagship communities were were going to be able to.
Start.
10 to 15 homes, a month every month and we have the long runway lots to do that.
If you look at your loss position today.
And obviously you brought on a lot of lots that are there any hole you guys are going to look to backfill.
Maybe it's 2022 23 does that is there a specific timeframe based on you know the pace that you guys are in now you really have to be focused on.
Well, Rick can talk about the cash flow, we're reinvesting our cash flow heavily into land positions, we have a conservative balance sheet.
But that's you know those investments are going to be making right now and into early 2021 are really for 2023 and 2024 revenues.
And.
No. We're just starting to tee that ball up right now.
Okay.
Last one for me given the growth that you're seeing do you have to start thinking about some new markets or do you have.
No runway to considerably grow within the markets you're participating in currently.
Well, we're in Dallas, which is the largest home in house market. We're it's north of 40000 starts.
So.
And to give you a benchmark.
Korten spilling over 7000 houses here so.
So theres a lot of runway here.
I think when I was doing about 2200 or kind of way behind important but still a big big builder here.
The Atlanta market similar number.
Not quite as Big I think Hortons 3000 starts there.
So theres a lot of runway in both those markets, but at the same time, we could find.
A market that we thought made sense and I think we're going to start looking that in mid 2021.
Gotcha perceived it just fantastic results. Thanks, guys. Thanks Aaron.
Our next question comes from the line of Alex Bridal of B. Riley.
Thank you really nice quarter gentlemen.
Hey, Alan questions.
Alex I just wanted to welcome you to the call and thank you very much for initiating coverage.
We appreciate that and for your excellent report and in doing so so welcome.
Thank you and excited to be part of the team here.
Couple of quick questions. The closings average selling price was about 422 in the quarter.
With an increasing contribution from trophy Directionally, how should we think about modeling average selling price over the next few quarters.
I think the what we have in.
In Q3 is pretty representative of where we think we're going to be for.
Foreseeable future going through 2021, let's say.
Perfect that is helpful and also over the last couple of quarters, there's been a little bit of a mix shift.
<unk> owned versus controlled.
Can you talk about that.
Sort of longer term.
New strategy, I guess and also kind of expand a little bit upon.
The pressure that could create on your margin.
Hi, it's really not a shift in its really something that lies within the numbers.
Yes, we have noted I think it's in the.
Where we disclose the lots owned and controlled.
We note a couple of other buckets within the controlled category, we don't consolidate.
Any of our joint venture assets or any of our joint venture.
Lots.
And in terms of lots owned and controlled so the lots that we have for East Jones bridge in Atlanta, or sit there, which is a new joint venture with Taylor Morrison in DFW are included in lots controlled but there are lots that we are developing ourselves. So those lots don't represent.
A a change in philosophy, there just show in the controlled the bucket because we don't consolidate them. Okay and then there was another.
Bucket of controlled lots that are deals that we are hard on our inspection period has ended we are moving forward with acquisition, we might have actually closed them in October we count those in control, but those are blanks. Those are lots that we are going to develop and once we close on.
Im saying October they moved from control to alone.
So really when you add this back were over 70, 75% as of Q3. So there really isn't a shift it actually is a great question and that allowed us to disclose that we continue to.
Get lots for our own account not getting option lots.
Let me just add one thing to what Rick was saying I think.
By now.
I think we've proven that we're very disciplined in our approach to buying land and that land is produced high gross margins.
For the analysts on the call we are going to carry forward that discipline on any option land, we buy you're putting up 10% of the.
A lot price, sometimes more in earnest money, if you option lots in our markets and if we're not underwriting those deals to 19% gross margins, which are still greater gross margins than some peers have being semi land heavy we're not going to option the lots.
Very helpful and last question a lot of your public peers have.
Been investing in and talking a lot about virtual sales can.
Can you touch upon that topic, a little bit as to the importance of it as it relates to.
Your company.
Yes. This is jed.
We feel like we have very good web sites.
Very good virtual tours for the buyers we have sold some houses without the buyers actually setting foot in the neighborhood, but that would still be a relatively low percentage.
For most people. This is the home is their biggest investment so I think for most people they want to.
Touch you know the touched.
Touched the house and walk the neighborhood prior to buying.
Thank you very much.
Thanks, Alex.
Our next question comes from the line of Alex Barron of housing research.
Okay.
Good good morning, good afternoon, gentlemen, thanks for taking my question.
Yes, I wanted to understand a little bit better than the mix of the of the homes, how many or what percentage of the orders would you guys consider.
I don't know how you measure you the entry level or affordable and how does that compare versus a year ago.
Rick's getting the data hold on a second.
Ah, Yes that was it was part of my script net orders of entry level single family homes and town homes were up 258% in Q3 20 versus Q3 19.
So from a relative basis, it's obviously a much expanding piece.
Piece of the pie you.
You can see in our other chart, where we reflect the.
Sorry, literally a pie chart that shows our participation of entry level buyers, which is on slide.
Slide 14, and the actual closings at this point.
Our.
13% entry level, so with that kind of dynamic happening with the.
The growth.
On a year over year basis, that's a that's points to next year at this time, it's going to be a bigger piece of the pie and in fact, a lot of the communities that trophy opened in Q3 most of them are entry level.
The other guided revenue.
Yeah. The other benefit that we're seeing that we really didnt anticipate just because I didnt know better when we started trophy three years ago.
Is that the.
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Positive impact the entry level and the.
The entry the lower priced houses haven't these conforming mortgages and the ability to create income through our financial services platform.
We only own 49% of those platforms, but the.
These mortgages that were originating in these platforms are much more profitable than in our other platforms and the capture rates higher.
Okay, and how does the how does the margin outlook on the pricing power look right now at the entry level versus your mobile business I'm, just trying to get a sense of where margins to go next quarter right.
The next year.
I'd say, it's very it's very similar.
Okay, and if I could ask one last one.
I was trying to do I guess a breakdown based.
Based on your filings of your geographic.
Regions and.
It seems like the revenues in Easter down, whereas the central are up significantly so what what's the rationale for that.
The rationale is capital allocation.
We're making higher returns on capital in these market and we're reallocating capital into DFW and trophies much easier to scale, our builder and in Atlanta. The provenance group is the best in full builder.
And if you take a look at what they're doing they do a great. They do it better than anybody in Atlanta, an infill.
We're really excited about an 800 home infield equal to <unk> deal that we have under development NOL caused called East Jones bridge, but that platform is more complicated and harder to scale.
But this is very nice returns great business, but thats why trophy expanded into Dallas, because we were here.
Got it okay, well, thank you and great job.
Yes. Thank you. Thank you for being on the call asking questions.
Our next question comes from line of built a zone of Titan capital.
Thank you a couple of questions first of all.
Your average sales price in backlog is up for the first time since I think the second quarter of 2019.
To me that was surprising given the growth in trophy. So would you would you talk about that just in general a number one and then number two what are the implications of this.
I.
This is jed so we're seen as we've previously discussed we're seeing very strong demand across all of our segments. For example, our Southgate luxury line has the average sales price of.
Just under 700000, we're seeing a lot of people move out of 3500 square foot homes that are now offer Singh from home that want to be in a 4200 square foot home with the home office. So that's a little bit of it. The other part is trophy is also selling.
Several home many homes in the fours.
Fours fives, and even six is that our value oriented so the competition, maybe a $100000 higher but you know people are perceiving a.
Much much higher value with our product may be priced at 600 convert to a competitor at 700 and we have several of those communities. So.
So thats also a little bit of it but.
We are you know as I mentioned, we're seeing strong demand across all market segments are our luxury line in Dallas has consistently sold 25 houses a month for the past five or six months.
Thank you and taking that a step further.
Due to a 19 ended up being a bit of a springboard where things started to really a rebound. Since then is there any correlation that we can take from your backlog pricing being up now and what that and the implications that that could have for next year or.
Or or am I reading too much into that.
You're reading too much into it though.
It's it really is a dynamic of.
All of our brands selling.
And im putting homes in backlog and when you think about it.
You're not going to have tremendous backlog growth at.
At CB JENI homes are.
On home builder for instance, with the low price point, but you are going to see a lot of build jobs at a southgate homes.
Where are you where they're building six to 700000 dollar homes. So it really is not reflective of.
About a movement in ASP or movement in revenues for any particular time period.
It's just great to have the sales in backlog and enter 2021.
With knowing that we have a lot of our closings accounted for.
Great. Thanks, Let me switch Uh huh.
Two new form new home orders up 89% in.
In the quarter starts were up what you know normally would be a big number up 32%, but it's still a really big gap a bit.
Tween or your start and your your orders you've talked about increasing your starts.
Yeah, I guess still I'm going to ask how do you close that gap.
Well, we're starting as many homes as we can right now.
And many of our starts fill are sold homes and not spec homes.
We're also closing the gap are you mentioned, 89% growth in orders.
Is that if we had really tried that could have been even higher.
In many cases, we limited sales to give ourselves a chance do you know we didn't want to sell a house today and started three months from now so all the homes that we've been selling we're trying to start within the next 30 to 60 days.
Fantastic and congratulations on a just a.
Blowout quarter.
Thank you.
Our next question comes from the line of David Hicks of David Hicks Company.
Good morning, and congratulations for establishing such a tremendous reputation in the north Texas market over the last 10 years.
Enjoying watching you guys and your success.
Understanding the importance of those land and lot availability for your future.
I'm curious what you have seen from the municipalities were your team seems to have a really good reputation and the irrs work in the ability to.
Down zone right lands is proof previously been commercial lease on but you can turn it into residential land given the.
Times that we're in.
Oh.
Thanks, David.
This is jed.
We I think we're on the early cusp of that wave or we haven't really seen the municipalities that we work in both Dallas and Atlanta be too eager to come converge.
Convert commercial zoning to residential.
And.
I think Oh, all all the municipalities are very busy right now they are facing challenges working under our cobot environment.
And we're seeing things take longer to get done most of the infill.
Projects that we're seeing are less than 100 units oftentimes less than 50 units, whereas if we go out and to the more parameter.
Areas of our municipality or of our markets, we're seeing those projects three.
Three to 400 lots so.
And you know it's a.
It's a little bit easier to work in the fourth quarter.
Number two are you seeing thank you are you seeing lots.
<unk> physicians, becoming available from less well capitalized builders are lot developers that have perhaps gotten over their skis and.
Can't handle things, so you're able to go in and perhaps by some lots of discount.
No no. It for example, Dallas is running in Dallas, a 24 month lots supply is considered equilibrium. We're at 17 months right now so it's more of a a bidding war than a discount and that's on trailing demand yes.
As Jim mentioned that some trailing demand.
Good.
Thank you and again, a great quarter guys.
Thank you. Thank you.
Again, ladies and gentlemen, if you wish to ask a question simply press Star then the number one on your telephone keypad.
I'm showing that there are no final questions at this time with that we will conclude today's conference call. You may now disconnect your lines and have a wonderful day.
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