Q2 2022 Green Brick Partners Inc Earnings Call
We believe the build to rent sector will provide more stability and future buyers for the housing market.
Next.
The housing supply chart on slide five the inventory of new and existing homes today remains near historical lows and is a fraction of the supply compared to the great financial crisis or even the inventory adjustments seen in 2018 and 2019.
For Green brick specifically, we ended the second quarter with only 10 finished spec homes, while the supply of homes for sale will increase over the coming months, we believe that the recent decline in expected future reductions in single family starts should mitigate a buildup of housing inventory in 2023.
Lastly, as seen on slide six due to the limited housing supply rental prices in major U S cities are seeing double digit growth while occupancy remains at high levels. This further complicates the buy versus rent decision. Among first time homebuyers, whose urgency to purchase the first house will only grow.
H Mary and form families.
In addition to those long term <unk>, we believe that green brick is strategically positioned to navigate in this evolving environment as shown on slide seven.
Yes.
To begin with we operate in some of the best markets in the country.
Demographic shift and migration will continue translating into housing needs over the long haul.
DFW, our biggest market has experienced tremendous big business activity over the last 18 months. According to the Dallas Chamber of Commerce over 120 companies have announced office relocations or expansions into the DFW area in 2021 and 2022.
We believe our markets will exhibit more resilience in a weak economy and a higher growth rate in a booming economy.
Second within our strong broker markets, we primarily built in infill locations over 80% of our year to date 2022 revenues were generated from those infill submarkets.
Those submarkets are typically land and lot constrained and face limited competition.
Development in those Submarkets requires a recognized expertise and local knowledge to address more complicated entitlement regulatory and development processes.
The mixed use neighborhood of retail multifamily units and a 450 unit residential lot neighborhood, which we closed in the north Atlanta suburbs upcoming is an excellent demonstration of our ability to successfully manage and navigate a complicated development pipeline and very supply constrained locations.
Third since we went public in 2014, we've been focused on maintaining a strong balance sheet, despite significant business growth and aggressive stock purchases.
Among our peers, we are one of the lowest debt to total capital ratios at 28, 9%, despite purchasing $102 million of stock year to date through July at an average price of under $21 per share.
Our repurchases represents almost 10% of total shares outstanding at the end of 2021.
Further 87% of our debt outstanding as of June 32022 is long term and fixed rate.
At the end of the second quarter, our weighted average interest rate was only three 4%.
Fourth we believe we've always had one of the best lot positions that will support our future growth together with a strong balance sheet. We are in a position to stay up artistic about growth and manage our business in a way that's accretive to shareholder value.
Lastly, since inception, we have incrementally improved our back office and homebuilding operations over time, and we'll continue to look for ways to increase our efficiency.
With that I'll now turn it over to Rick Rick Thank you Jim.
Please turn to slide eight of the presentation.
Our total revenues in Q2, 2022 increased 40% year over year to $525 million.
Our residential units revenue increased 54% year over year to $513 million driven by record closing volume and ASP.
During the quarter, we delivered 881 homes for a 16% year over year increase in Asps declined 32% year over year to $579000.
We continue to make good strides on operating efficiency.
Our SG&A leverage ratio improved by 200 basis points year over year to a record low of eight 2% during the second quarter and.
And higher residential units revenue led to a 550 basis points improvement in homebuilding gross margin year over year to 32, 3% the highest in our company history.
Sequentially, our gross margin increased 450 basis points.
As demonstrated on the comparative Bar chart on slide nine we have consistently demonstrated superior margin versus our mid cap and small cap peers in the second quarter, our gross margin performance drops the chart.
EPS was up 104% year over year to $2 eight during the second quarter as a result of growth in revenue and improvement in both gross margin and SG&A leverage.
Sequentially EPS grew 73% on a 33% growth in total revenues.
Our year to date annualized return on equity was 37, 4% as compared to 23% last year.
As Jim mentioned earlier, we started to see a slowdown in traffic, which accelerated in June and continued into July .
Record breaking heat has also discouraged buyers from visiting our model homes in DFW.
As a result, net new orders for east nine 8% year over year. However.
However, our absorption rate during the second quarter was up four 4% year over year to 7.1 homes sold per average active selling community our cancellation rate ticked up each month during the quarter and the overall second quarter cancellation rate increased to 11, 4%, which is still lower than many of our peers.
Ours.
During the last eight quarters, our cancellation rate has varied between 6.0% and 12, 3%.
We believe our lower cancellation rate is based on higher buyer quality and the larger amount of earnest money that we require.
You put the topic perspective, we have consistently stated that our cancellation rate in the range of 15% to 20% is appropriate in a normal environment for the industry prior to Covid.
As of the end of June we had 1087 homes in backlog with an ASP of $653000 compared to 1876 homes at an ASP of $519000 at the end of June last year.
Backlog units decreased 42% year over year due to one closing a record number of homes during the second quarter and.
Two moderation of demand in the second half of the second quarter.
The decline in backlog units was partially offset by a 25, 8% increase in the ASP backlog units, resulting in.
And a total backlog of $710 million.
We expect the majority of our current backlog to close by the end of 2022 or Q1 2023.
Spec units under construction rose from 45% of total units under construction last year.
57% as of the end of Q2 2022.
While this level or slightly higher than our historic range. Our trophy brand now represents a higher portion of our units under construction.
We believe many first time home buyers are willing to forego the selection process to buy a spec home that can be delivered within two months after contract where the buyers mortgage interest rate and delivery date can be now.
As a result trophies business model contemplates a higher proportion of spec units than our other brands.
One of our many priorities for the remainder of the year is to find a good balance between our backlog and spec units as well as to manage sales pace home prices and start pace, which Jeff will expand on shortly.
With that I'll turn it over to Jeff.
Thank you Rick with high inflation volatile and lumpy demand, we are closely monitoring our operation and our laser focus on several key priorities that we believe will drive better performance for Green brick. These priorities are summarized on slide 10.
First we will continue to manage closings in our backlog during the second quarter, our buyers through mortgage company partners and an average credit score of 750 and a debt to income ratio of 34, 9%.
Approximately 30% of our buyers year to date or first time homebuyers we.
We expect our buyer quality to remain consistently high when necessary, we are assisting our buyers and secured financing with our mortgage company through rate locks are rate buy downs currently over 50% of our buyers who are utilizing our mortgage companies and are scheduled to.
Close on the third quarter.
Lock their rates as.
As Rick mentioned earlier, our cancellation rate went up to 11, 4% during the second quarter, primarily due to more mortgage disqualification.
Some instances, where we're able to transfer the bars to other more affordable homes, featuring less square footage in order for them to secure financing and close.
Second we will continue to manage our sales pace and starts as we seek to get an even flow.
To counter a slowdown in foot traffic, we offered incentives on a community by community basis for New orders signed in June and July which average approximately 2%.
These incentives included a combination of moderate priced.
Credits towards closing costs and rate buy downs.
Actually in some communities, we're selling at earlier stages of construction to allow personalization of optional features.
Given our industry, leading gross margin position, we believe we have the flexibility to be more aggressive on incentives of our markets required that said, we do not intend to lead the market down or <unk>.
Third we continue to focus on managing capital allocation prudently. We are fortunate to have a great land book today that allows us to be opportunistic. We believe it will also give us some edge on margin due to attractive cost basis relative to the current market.
Additionally, we self develop most of our law, which has provided us some advantage in achieving an exceptional level of margins versus peers and controlling our own destiny and delivery days.
We have been conservative with underwriting and where you are being even more diligent and cautious when we looked at land opportunities now.
We want to ensure we are capital efficient and only invest capital that we believe will generate long term value for the company and shareholders. Our expansion in Austin has been an excellent example.
We remain bullish about the long term fundamental backdrops and are on track to start construction in early 2023.
Last we intend to continue strengthening our balance sheet we have.
Our strong balance sheet today, providing more flexibility to manage our business in a changing environment.
Let's switch gears to the labor markets on supply chain.
As new starts slowdown we are seeing some signs of relief and the labor and trade markets.
For example, during the last several weeks, we have seen an increased number of inquiries from sub contractors for more work as they.
More available crews.
We're seeing this primarily with the subcontractors used at the front end of the construction process. The labor market remains tight for finding well trained professionals, but we believe we will see more pricing power shifts in the coming months. If housing starts decelerate as we expect the supply chain remains.
<unk> and lumpy, but we believe we are also at or close to an inflection point where cycle times.
As to lumber costs, we will start to see a tailwind from decreased prices reflected in our margin late this year and into 2023.
Lower prices path for those future home closings.
With our position as the third largest builder in Dallas Fort worth and the improved technology and processes in place. We believe that we're in a great position to manage costs on cycle time with.
That I will turn it over to Jim for closing remarks, Jim. Thank you Jed in closing, we believe our infill location disciplined capital allocation strong balance sheet superior land positions and efficient operations will allow us to be defensive and offensive and a normalizing marketplace.
<unk>.
I would like to thank our entire green brick team going forward. We believe green brick is in a position of strength to manage our business and an evolving housing landscape.
We remain focused on creating shareholder value and to continue looking for ways to build a better company.
This concludes our prepared remarks, we will now open the line for questions.
Thank you.
I would like to ask a question. Please press star plus the number one on your telephone keypad.
We will now pause for a moment to compile the Q&A roster.
Your first question comes from the line of Alex Rygiel with B Riley. Your line is now open.
Thank you good morning, gentlemen.
Very nice quarter.
You've got a very large number of homes under construction at a time when new orders are softening a bit here can you discuss your flexibility in altering those plans to possibly accommodate.
A buyer that is in need for a lower average selling price.
Yeah.
Yes, Alex this is Jim Brickman, and Jed you can chime in after.
I talked a little bit about this.
Alex right now everybody is trying to really figure out how.
Elastic or how.
Pricing is going to really impact demand that that first time buyer.
<unk> is our entry level and first time move up builder.
And there is more dependent on that first time buyer than our other brands, but as we noted in the call about 80% of our revenues are still being generated from.
Less competitive.
<unk> constrained infill markets. So we feel really good about those markets and we really don't have a lot of visibility right now into what is going to be taking place in that first time entry level buyer.
It's very spotty right now and we think it's going to improve but we're just not sure Jed do you have anything you want to add to that.
I would just echo what Jim said, the a locations we.
We don't have a ton of lots in the a locations per neighborhood. So we will adjust sales velocity accordingly.
Oftentimes those lots are very hard to or near impossible to replace and then in the entry level community we're seeing.
Some green shoots of the.
The first time buyer at low prices.
And we're opening up a bunch of new neighborhoods in the coming months.
We think the Asps will be at.
At or below possibly below 400000, so we feel good about being able to bring affordable product.
Going forward.
Excellent.
The challenges that we have.
Is to try to model and forecast.
What kind of pressure if any could be on gross margins.
From some of these incentives some price discounts and so on and so forth.
If we look back into clean.
Clean breaks history back in 2018.
Gross margins did decline from sort of a 26% level to a 21% level.
When demand moderated.
I didn't follow the company back then so I'm looking to you for.
Better understanding of maybe some of the dynamics that played out in 2018 that caused that gross margin erosion and how in the next 12 months could be different.
Yeah.
Good question there are a lot of differences. This time around first of all in 2018, one of the reasons. The margins went down was we had purchased.
A whole chunk of <unk>.
Very inexpensive locked in.
In 2013, 2014, and those very high margin lots were burned off of our business and we will replace those lots with most of our self developed lots. So that was part of the reason for margin erosion.
The second Big component is since 2018 in those four years, we have worked very hard on our back office operations. This is purchasing national accounts, and just really running our business better.
And I don't think youre going to see a margin degradation to 21% or anything like that.
Like we experienced in 2018, because we have really a great lot book going forward.
And we were just running the company so much better today than we were four years ago.
Excellent. Thank you very much.
Your next question comes from the line of Carl Reichardt with D. T. E. Your line is now open thanks everybody.
You've talked a little bit to.
To add about that slowing starts we're hearing that from others can you talk a little bit about how current conditions might impact your decision to open new communities is is it still full speed ahead with your ramps or are you starting to think about holding some of those back.
No. We're full steam ahead, we're excited about the new communities many of them will come.
Coming right right after Covid.
And so they were bought at very attractive cost basis as the land development costs were much lower for the majority of those communities. So.
We are most of them are geared toward entry level buyers were extremely excited about the new communities.
Okay. Thanks, Tien and then.
Jim you and I have talked a number of times about.
Your own lot position is 84% of your lots are owned versus option and I'm interested in sort of how youre seeing with the potential change in the market here, how youre seeing that that position knowing that you've got relatively low basis.
We work hard on.
On the pricing in the process of getting this to market. How do you contrast, your position versus the folks who are more focused on an option lots and where their risk profile fits compare to yours.
Interesting question, it's going to be really interesting to watch this play out.
I think that Wall Street really has over simplified this land light model.
In that.
First of all the land bankers that ops that provide financing for this land model or some of the smartest people in the room and they're not allowing builders just as all of a sudden magically make money at the expense so.
Any builder that goes land light has a very high cost of capital that is paying a land banker that's number one.
Number two is these lots on a takedown.
Requirement, where these builders have to buy lots and theyre paying retail prices for lots not our wholesale prices for lots so an economic slowdown.
Builders that said, Oh, where land light are now going to be taking down lots and putting retail priced lots on their balance sheet.
Number three is I don't think investors understand that.
Many of these lots in a slowing economy have 6% price escalators and there are lot. So lots that land like builders are taking down today.
Going to be 6% more expensive at this same point in time next year.
Fourth is gosh, they can walk away from the options well they can but that's a very expensive proposition most really good lot deals through putting 15%.
The retail price of a lot as a first loss lot earnest money deposit that they would have to walk away from so I don't have.
Real Crystal ball about how this is going to work out over the next year, but I can say that.
<unk>.
I think we're in a really strong position relative to some guys that bought land light lots at a very high price it and be putting them on their balance sheet.
Thanks, Tim you didn't have that Steve's prepared or anything did it sounded like you might have.
If you don't mind.
I've been wanting to talk about this for about 10 conference call.
Well I have one more for you. If you don't mind me squeezing one more in which was on share repurchase and obviously the substantial amount of stock you bought back over the last this quarter in particular was a surprise at least to US you have $57 million left on the authorization.
Can I assume that even though the price is substantially higher than the 21. Your average debt that youll continue to look at buybacks and then sort of how once you're through that will you think about buybacks compared to other potential uses of capital, particularly getting investing more dollars in developing those lots that you do have.
Well first of all we look at everything all the time in a way.
The.
Opportunities of growing the business buying land buying stock.
And really one of the things.
Excited about more than I ever have been in the past is that.
Yes.
Builders are not going to be aggressively probably growing revenues over the next 12 months.
If we're going to see opportunities in the private acquisitions sector that we haven't seen really since we bought <unk>.
Five years ago and.
We may want to have capital reserved for that potential going into 2023 because.
I just don't see.
The builders that sold last year and the year before the private builders, probably did a great job but.
I think.
It's going to be a much more competitive landscape in a more attractive.
Buying market, possibly next year.
Great. Thank you so much Jim I appreciate it guys.
Your next question comes from Jay Mccanless with Wedbush Securities. Your line is now open.
Hey, good morning, Thanks for taking my questions. So John .
Encouraged to hear your comment about an inflection in the supply chain could you may be dialed down on that.
Yes, sure I mean, its wide ranging it goes from on the land development side being able to get eight inch water line pipe as needed.
It's still very expensive, we think that as inventories.
Increase I'm just using that as an example.
The prices will eventually come down because there comes a point, where the suppliers yards aren't big enough to hold all the excess water lines being manufactured so.
I'm just using that as again, one case study, but we're seeing that time and time again right now so there.
There are still some items that are hard to get.
But we're seeing much better.
Much better supply chain.
That.
Okay.
And Linda vertical constraint and Berta, yes, I mean, the same thing can be.
Except for HVAC coils could be said for any of it.
I mean, we're seeing some.
Instances, where like smart locks that use chips those are the ones that you punch in your.
Door code to enter those are still hard to get so it's not.
Not everything has been cured, but we're in much much better shape than we were this time last year or even at the start of this year.
Okay.
Right.
Then.
When I look at the order decline for this quarter.
Could you talk about.
Geographic differences in that Dallas, and Atlanta are your two core markets.
<unk> of them suffered equally or was it more pronounced in certain areas versus others.
Okay.
Jed I'll take that Rick.
We look at this really on a daily basis, we get our sales report.
On every house in every neighborhood in our foreign markets, So Jed and Rick why don't you take the rest of the question.
We've seen a universal.
Uh huh.
Decline as we pointed out on earnings.
In our release and sales in the second half of the quarter.
<unk>.
When we look at.
The Dallas market within the Texas and we've talked.
Now.
This winter, we'll be opening up in Austin.
So we've talked to are our peers and our mortgage companies that do business in.
Across the state of Texas for example, and I can tell you Dallas is weathering the storm much better than <unk> seen much smaller declines.
In other parts of the.
Other parts of the state and we.
We still see strong demand in Atlanta, and Florida, Florida.
Been a smaller division for us over the years so.
Yes.
Again, as Jim pointed out before we really like where are we.
Book of businesses, and we really like our basis in our land book.
We're excited about the next.
12 to 24 months.
Hey, Jay this is Rick.
One of the things that were.
Keenly aware of is a huge differentiator getting back to the 2018 2019 era.
When there were multiple reasons for what was happening back then, but yes, the interest rate Spike back then.
Yeah.
A low period in terms of.
Sales.
Yeah.
This is a very recent phenomenon for us a couple of months worth of.
Lighter sales going from position of metering sales.
<unk> finished units as of the end of the quarter.
Two months worth of.
Not just lighter sales is not going to create an inventory accumulation.
Because a we have backlog and b.
Because we we're metering sales, there's not that much coming through the pipe on a short term basis.
So it's really an interesting.
Conundrum that we're going to be interested to see how do you have an inventory adjustment when theres no inventory.
So.
We're going to be watching as well.
And just adjusting as we go through it but starting with the very best margins in the industry is certainly a preferred position.
Rick Let me add one thing, though because I think the analysts are correct in that in Dallas. For example, we were running in the first quarter at a 60000 ish annual start rate.
And builders generally did continue to start homes expecting a 60000 start rate. So if we reduced to 45000 or anybody who knows what the number is going to be but there is going to be a reduction in starts and some demand. So yes, there is going to be some of those.
Starts that are going to finish.
Over the next two or three quarters, but at the end of the day, we still are very confident about our markets.
Whether Dallas is a 40000 45000 50000 start market is still probably going to be the largest housing market in the United States and we think we have the best lot position.
In Atlanta, it's a little more unique for US we are totally in very AAA location infill locations.
And interestingly John Burns came out with a report last week that still ranked Atlanta.
<unk> is a higher a better market than Dallas, Florida is just very seasonal.
Our builder that we owned 49, 9% up in Colorado Springs in Denver, Colorado Springs is still just gangbusters and Denver has really slowed down so that's pretty much about how we're looking at the market.
Okay. That's great. Thank you guys appreciate it.
Your next question comes from the line of Alex Barron with housing Research. Your line is now open.
Yes, Thank you gentlemen.
I was just wondering if you guys could comment on your approach to.
Competitive actions by others, whether it be incentives.
Rice cuts and what your general philosophy is.
Do you feel that this slowdown is.
<unk>.
Barry or something that might be more extended.
Jed.
Yes, sure I can take that.
It really varies all over the place and.
Builders with big backlogs are going to be hesitant to incentivize or take price changes because they want it.
I would like to close that backlog at higher margins.
Spec builders that have less backlog are going to be or not going to sit on eventual finished homes. So there'll be more incentivized to discount finished homes. So.
In Dallas Fort Worth you have every public builder, except MDC here.
And sorry in MBR.
And you have a lot of private so there's <unk>.
Everybody is going to have a different strategy. So we're not seeing a universal.
Strategy right now just because of the wide mix of private and public builders that you have and I think that.
I would say that carriers across the country and the markets that we operate in.
Right I understand each have different strategies.
Starting to see several builders.
Resorting cutting prices, which frankly surprised me because I didn't think.
It merits at that dose.
For the reason that you stated that it would scare people in backlog.
I'm just wondering if you guys are doing that or thinking of doing that.
If not.
How do you sustain sales with others doing that.
Well, Alex this is Jim obviously.
We don't set the market we meet the market.
As we said 80% of our revenues are more infill that a little bit insulated from this.
I read a D R Horton investor call with great interest.
As a builder that's doing 80000 or 90000 starts obviously, if we're down the street from Horton in some neighborhoods, we're going to have to be very aware of what our Horton.
Does this.
We think we can sell our homes for incrementally more dollars, but we are not immune and when we get into a very perimeter location to what a competitor like Horton does that said, we havent seen in any neighborhoods, whether we are down the street from major price cutting but.
We're going to watch it very closely day by day.
Okay, great. Thank you very much.
Your next question comes from the line of Michael Rehaut with Jpmorgan. Your line is now open.
Hi, everyone. This is Andrew on for Mike.
Was hoping I can ask about if you guys have been have you seen anything in terms of the cancellation rate have you guys been proactive in making sure customers can still close and if you've seen anything how much of an impact of that.
Yeah, and obviously in our entry level brand Trophy.
The cancellation rate is more elevated than it is in our other brands.
We.
We have no crystal ball really trying to figure out how cancellation rates are going to trend. Our cancellation rate is very low, but we think that with the entry level buyer at trophy, it's just going to be really a battle all the time in terms of keeping people.
Qualified for mortgages.
Jim anything you want to add to that.
Yes, I mean, it's very.
We do stress test the backlog.
<unk>.
But it's.
Most of our cancellations come either.
Right. After a contract is written and the buyer has buyer's remorse or at the closing table when theres been a life some kind of.
Yeah.
Underwriting change.
Or or life change for the buyer so.
It's hard to.
It's hard to predict the ones that.
<unk>.
Cancel at the last second.
What are the other differentiators, we do that I think we are doing is jet and.
Even though our perimeter neighborhoods, whereas some peers will allow a buyer to contract for home for $1000.
Plus or minus earnest money deposit, we're getting a multiple of that.
Even on a round for a lovely buyers because we don't want to have the cancellations and we want to try to maintain and understand our backlog a little bit better. So we arent really going after that bottom bottom pool buyer.
Yes, no that makes a lot of sense of that was really helpful.
I guess just a follow up can you kind of speak the SG&A outlook for the rest of the year I know you guys had a nice improvement there.
Yes, we had a great improvement just because revenues are quarters, a little bit more lumpy we had.
We're able to convert a tremendous amount of backlog.
SG&A if you just take a look on an annualized basis, we think it's going to be pretty consistent. So it all gets down to how many revenues are going to push through the company each quarter.
Yeah.
Okay. That's all for me. Thank you so much for taking my questions Congrats on the quarter. Thank.
Thank you.
Your next question comes from the line of Bill <unk> with Titan Capital. Your line is now open. Thank you.
Couple of questions first of all specifically in your markets. What are you seeing from competitors in terms of their start rates.
Across the board and Jed can take the rest of this judd.
Had dinner with three.
Three or four division Presidents' last week and it's varied.
Some have reduced starts one large.
Builder I think it's the fourth largest builder.
Does that.
Really is an all very perimeter neighborhoods told us they were aggressively cutting starch.
Builders are or.
<unk> not cutting starts very much and we're kind of in between.
Great. Thank you and then.
What are you seeing in terms of buyer behavior in terms of their requesting smaller homes or any other actions that debt buyers may be taking.
To make homes more affordable or reduce the price.
Yes, three months ago, when we opened up communities, we were really surprised in that we had.
Floor plans that ran from <unk> hundred $50, let's say 'twenty 200 square feet.
And we weren't selling any 800 square foot houses low interest rates, we're driving these people to buy a bigger house and Jed on some of these people now for the first time converting to smaller houses.
Yes.
We're seeing people by 16 to 1800 square foot homes.
Nobody wanted it really a year ago.
Great. Thank you both.
Okay.
There are no further questions. This concludes today's conference call. Thank you for attending you may now disconnect.
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