Q4 2022 Green Brick Partners Inc Earnings Call
Speaker 1: The.
Speaker 2: Following today's remarks, we will hold a Q&A session. As a reminder, this call is being recorded and will be available for playback. In addition, a presentation will accompany today's webcast and is also available on the company's website at investors.greenbrickpartners.com.
Speaker 2: Joining us on the call today is Jim Brickman, co-founder and chief executive officer, Rick Costello, chief financial officer, and Jed Dolson, chief operating officer.
Speaker 2: Some of the information discussed on this call is forward-looking, including the company's financial and operational expectations for 2023 and beyond. In yesterday's press release and SEC filings, the company detailed material risks that may cause its future results to differ from the expectations. The company's statements are as of today, February 28, 2023.
Speaker 2: available on the company's website.
Speaker 2: With that, I will now turn the call over to Jim Brickman.
Speaker 3: Thank you. I am extremely proud that Greenbrick finished the year with a record number delivery of over 29 hundred homes.
Speaker 3: Total revenues grew 25% year over year to $1.76 billion with an industry-leading gross margin of 29.8%.
Speaker 3: Our full year earnings per share increased 62% to $6.02 and return on equity was up 550 basis points from last year to 31.4%.
Speaker 3: Both measures are the highest in company history.
Speaker 3: Despite a record breaking year, demand was negatively impacted by rising interest rates and consistently high inflation in the second half of the year. However, sales momentum started to pick up in December during a seasonally slower period. December sales were up 43 percent.
Speaker 3: over the average of the prior six months. Sales activity in the first two months of 2023 continued to be very strong.
Speaker 3: We believe our sales success is based upon our geographic footprint with desirable lots in supply constrained locations in Dallas, Atlanta, and Florida.
Speaker 3: last year and signal their determination to keep raising interest rates this year, possibly in a less aggressive way until inflation is down to their desirable level.
Speaker 3: Fortunately, there are several leading indicators that suggest this housing cycle is far different than the back pattern around the 2008 global financial crisis.
Speaker 3: First, the mortgage market isn't a much stronger footing this time.
Speaker 3: Banks and financial institutions have maintained strict lending standards. Since 2020, borrowers with high credits go up to 70% of our originations on average versus 25% in 2006 and 2007.
Speaker 3: Our home buyers in the fourth quarter had an average credit score of 742 and a debt to income ratio of 39.7%.
Speaker 3: Second, the supply of single family homes today remains low compared to the historical norm.
Speaker 3: The scene on slide 4, existing home inventory remains tight.
Speaker 3: We actually want third of homeowners are mortgage free and the remaining homeowners are approximately two thirds to have an interest rate below four percent.
Speaker 3: Existing homeowners are greatly disincentivized from entering the resale market because of the resulting need to then trade up from their existing residents to a mortgage with much higher interest drains. This is particularly meaningful to Greenbrick where 80% of our closing revenues and 75% of our finished and finishing lives are in infill local.
Speaker 3: when new home sales are only about 10 to 12% of total home sales.
Speaker 3: Our share of the potential home buyer pie we think is getting much bigger.
Speaker 3: Third, job growth in our markets is the best in the nation. Dallas added 235,000 jobs in 2022.
Speaker 3: Atlanta added 126,000 jobs. As shown on slide five, an estimated 3 million additional millennials and Gen Z will age into the prime home buying age in the next decade. We believe this will indicate there are significant spent pet up demand from ready buyers who purchase as mortgage rates stabilize.
Speaker 3: Greenbrick is well positioned for a market rebound with a high quality land pipeline.
Speaker 3: We expect to have approximately 6,000 finished slots at the end of 2023 with 75% of these slots located in Intel locations.
Speaker 3: I would also like to share the success story of Challenger Homes in which we own a 49.9% on consolidated interest?
Speaker 3: Many builders operating in Denver and Colorado Springs had a rough year end.
Speaker 3: Challenger Holmes has been sustaining sales momentum without sacrificing much of its high margin and has been successfully taking market share from both public and private home builders.
Speaker 3: During the last quarter of the year, they have the number one home builder in Colorado Springs by volume of new orders with approximately 40% market share.
Speaker 3: There are a perfect example of how a well-managed business that if a strong culture, great lot position and capital structure can do great even in a more challenging environment. Hats off to Brian Barr and his full challenger team. Like challenger.
Speaker 3: We believe Griebric has a superior culture and our brands possess a number of strategic advantages that position us for industry leading performance in Texas, Georgia and Florida.
Speaker 3: We believe these advantages are, first, a significant footprint in intel locations and markets with some of the strongest job growth and demographic fundamentals.
Speaker 3: A superior and disciplined land and lot pipeline.
Speaker 3: and discipline land and lot pipeline to support long-term growth.
Speaker 3: A broad spectrum of product types and price points, the capture entry level, move up, move down, and luxury home buyers.
Speaker 3: The highest gross margins among our peers for the currently 12 months are shown on slide 7.
Speaker 3: Development timeline flexibility as a result of our self-development business model.
Speaker 3: A strong balance sheet with one of the lowest net depth to catatotal capital ratios among peers of 25.7%.
Speaker 4: As shown on slide 6.
Speaker 3: And most importantly, an experienced team in place to navigate our business.
Speaker 3: and achieve our long-term goals. Before turning it over to Rick, let me add that we are cautiously optimistic about the spring-selling season based upon the significantly increased demand we are seeing, which is always subject to interest rates.
Speaker 3: Our business playbook remains consistent. We are proactively managing inventory, being capital efficient, maintaining a strong balance of liquidity, and working with our trade network to reduce costs and cycle time. Juddle discuss our sales department and initiatives in depth later at this call.
Speaker 3: With that, I'll turn it over to Rick to provide more detail regarding our financial results. Rick.
Speaker 3: Thank you Jim. Please turn to slide 8 of the presentation.
Speaker 3: And the fourth quarter net income attributable to Greenbrick was $56 million and diluted EPS
Speaker 3: down 4.8% year over year. Home closing revenue broke our record for any fourth quarter and grew 2.3% year over year to 429 million dollars, primarily driven by a 16% increase in average selling prices of closed homes to $590,000.
Speaker 5: Offset by 12% decline in the number of closings to 727 ha.
Speaker 5: As shown on slide 9, 2022 was another record breaking year for us.
Speaker 5: We delivered a record number of 2,916 homes and generated records for total revenues at 1.76 billion dollars in gross margin of 29.8%.
Speaker 5: Deluted earnings per share was also a record at $6.02, representing a caguar of 43% from 2018.
Speaker 5: While the cancellation rate was up sequentially for the fourth quarter to 20% it decreased each month during the quarter. And as shown on slide 10 our Q4 cancel rate was one of the lowest among peers who averaged 35%.
Speaker 5: For the full year, 2022, our cancellation rate was only 14%. Met new home orders in Q4 were up 5% sequentially during a seasonally slower period. The new home orders were up 5% sequentially during a seasonally slower period.
Speaker 5: As shown on slide 10, our year-over-year decline of 11% in net orders was the smallest to decline among peers who averaged at 52% year-over-year decline in Q4.
Speaker 5: Average sales price on new orders for Greenberg increased to 0.6% year over year to $586,000.
Speaker 5: Quarterly absorption rate for average active selling community was 5.5 homes in Q4 up from 5.3 and 3Q. Year end active selling communities were up 8.1% year over year to 80.
Speaker 5: We believe having more communities is the right strategy for green brick for several reasons.
Speaker 5: First, the customers recognize that our new neighborhoods offer a great value and are voting with their pocketbooks by signing contracts.
Speaker 5: Additionally, with significantly lower construction costs and new starts, we expect to maintain our industry leading gross margins even as we price to market.
Speaker 5: Second, we believe we have pricing power because the majority of our new communities are in so locations where supply faces less competition and existing owners are resistant to sell.
Speaker 5: As Jim stated, 80% of our closing revenues and 75% of our finished and finishing lots are in fill locations.
Speaker 5: Third, we have inventory. We expect to be positioned to offer move-in ready homes at appealing prices.
Speaker 5: Both on the gross margin in Q4 was flat year over year at 26.2%.
Speaker 5: Discounts and incentives played a role in our sequential decline from our Q3 record gross margin.
Speaker 5: Another factor in our March and performance was peak lumber prices flowing through this quarter's deliveries.
Speaker 5: As a supply chain and labor market further normalizes, we expect to benefit from cheaper lumber and other cost savings in 2023. Jed will elaborate on cost savings shortly.
Speaker 5: Our SGNA leverage ratio increased slightly year over year to 10.4% during the fourth quarter. The ratio improved 70 basis points to 9.6% for the full year.
Speaker 5: We adjusted our overhead during the second half of 2022 with headcount at year end reduced 7% from the peak earlier in the year.
Speaker 5: We will remain flexible to align our S.G.A. with revenues as we monitor market conditions.
Speaker 5: Backlog value at the end of the quarter declined 58 percent year over year to $369 million. This was due to a 64 percent drop in backlog units partially offset by a 17 percent increase in ASP.
Speaker 5: The drop-in backlog unit is a function of slower sales and a higher cancellation rate.
Speaker 5: As consumer preferences evolve in a volatile interest rate environment.
Speaker 5: We have shifted our focus on selling more homes at later construction stages.
Speaker 5: Spec units under construction as a percentage of total units under construction stood at 73% at the end of fourth quarter.
Speaker 5: During the fourth quarter, we reduced our total death to total capital ratio by 230 basis points.
Speaker 5: from the third quarter to 25.7%.
Speaker 5: As of December 31, 2022, our weighted average cost of debt was 3.5 percent, and over 90 percent of the outstanding debt was long term at fixed rates. As previously announced in December 2022,
Speaker 5: We amended our unsecured revolving credit agreement to update total commitments.
Speaker 5: by $25 million to $325 million. Additionally, maturity of all the commitments under the revolver have been extended to December 14, 2025. With that, I'll now turn it over to Jen. Jen? Thank you, Rick.
Speaker 5: Sales volume increased as we enter the holiday season, with interest rates dropping to the low 6s, sales activity picked up in November with sequential increases of net orders by 15% in November and 46% in December . Net sales continued to be very strong in the first two months of 2023.
Speaker 5: across all eight building brands.
Speaker 5: We are pleased to see that this positive momentum carried into 2023.
Speaker 5: Trophy signature homes, in particular, are better in terms of sales during the fourth quarter.
Speaker 5: Shares of total green-rig net sales from trophy increased to 49% by volume in the fourth quarter from 39% at the end of the second quarter when mortgage rates started to take off. We believe this is ascribed to three reasons. First.
Speaker 5: Trophy's business is designed to be efficient and spec heavy and many home buyers today favor moving ready-downs with a streamlined home buying process.
Speaker 5: Second, Trophy offers more affordable products that cater to entry level on first time move-up buyers. We believe these home buyers represent a deeper pool of potential customers. Third, Trophy's homes come with...
Speaker 5: design features that are appealing to the younger generation at affordable prices. For example, all of Trophy's homes includes spray foam insulation, which produces an air tight envelope that insulates homes better. This encapsulation brings greener and more efficient homes to homeowners.
Speaker 5: at a low cost that will continue to generate energy savings for years to come.
Speaker 5: We believe that through this product's desirability, operational efficiency and scalability, Trophy will continue to capture unmet demand from entry level and first time move up home buyers and fuel green bricks growth strategy.
Speaker 5: Overall, discounts and incentives for new net orders during the fourth quarter were approximately 7.5% on average.
Speaker 5: up from the previous quarter of 4.2 percentage.
Speaker 5: During the fourth quarter, approximately 80% of revenues were again generated in fill locations.
Speaker 5: We believe our geographic footprint is one of the main drivers of our sales and gross margin out performance.
Speaker 5: Incentives are assessed and approved on community by community and house by house spaces.
Speaker 5: During the fourth quarter, we started 38% fewer homes sequentially in line with the industry. We will continue to adjust starts to match sales pace on a community by community basis to respond quickly to the market.
Speaker 5: Next, we have made capital allocation another top priority. During the fourth quarter, we made no new land acquisition and renegotiate terms on a number of lot purchased contracts.
Speaker 5: As shown on slides 12 and 13, approximately 75% of our 2023 Finnish locks in Atlanta and DFW will be concentrated in infill and adjacent desirable locations.
Speaker 5: We believe an ample lot supply in high quality locations will give us an edge in taking market share.
Speaker 5: As we stress during past earnings calls, the self-developing nature of our land business gives us tremendous flexibility to control delivery schedule and costs.
Speaker 5: It sells momentum continues to build up during the spring selling season.
Speaker 5: We have the capability to quickly wrap up home construction and have 90 to 100 Indian selling communities as of Q4 2023 or Q1 2024. With the de-celleration and land acquisition.
Speaker 5: and development spending. We expect to generate additional cash flow as we close back log and clear our spec inventory.
Speaker 5: We will evaluate all options for the use of cash, which include that are not limited to opportunistic acquisitions or stock buyback.
Speaker 5: We stand by our commitment to continue generating industry leading returns on equity.
Speaker 5: On the cost side, our teams continue to make good strides in reducing construction costs. We have successfully reduced construction costs for homes in DFW that started in December or later, so far, by an average of approximately $40,000 per home.
Speaker 5: compared to homes that started in the second and third quarters of 2022. We have expanded our efforts in negotiating with vendors and trade partners and we believe we will further reduce our construction costs.
Speaker 5: Additionally, Psycho-Timer in the second half of 2022 was down with Dallas-Builders leading the improvement. Overall, our Psycho-Timer reduced by 30 days from the peak earlier in the year and is expected to continue to improve.
Speaker 5: Lastly, with our extension into office, and I am pleased to announce the construction of homes began in February .
Speaker 5: Our tourney to ranch community is going to have beautiful open spaces of variety of amenities and convenient proximity to downtown Austin. Most importantly, we are focused on keeping home ownership attainable, especially for first-time home buyers.
Speaker 5: Trophy plans to begin selling homes from the high 200s in May of 2023.
Speaker 5: We are excited about entering the market and look forward to sharing more details in the following quarters. With that, I will turn it over to Jim for closing remarks. Jim?
Speaker 3: Thank you, Jed, in closing a result speak for the operational excellence.
Speaker 3: Thank you, Jed, in closing a result speak for the operational excellence and the backbone behind it, our people.
Speaker 3: Our like to thank our entire Green Brook team for their continued hard work.
Speaker 3: Looking ahead, we derive confidence from our people and products, our strategic advantages in land and our strong balance sheet.
Speaker 3: We have all hands on deck at Greenbrick to ensure we calibrate our moves and utilize our capital in the most efficient way.
Speaker 3: We will always proceed with caution while navigating and pursuing opportunities that may arise during this housing cycle.
Speaker 3: This concludes our prepared remarks when we'll open the line for questions.
Speaker 2: Thank you. If you would like to ask a question on the phone lines today that is star one on your telephone keypad. If you would like to remove yourself from the queue that is star one as well. But once again everyone, if you would like to ask a question please queue up at this time. We'll take our first question from Michael Realt with Chase.
Speaker 3: had to think about 2023 from both the closings and a gross margin standpoint. You know, on the closing front, obviously, you know, you've had your orders.
Speaker 3: You know, stay blind a little bit, I guess, you know, down only 11% in the fourth quarter and you pointed to strength in the first
Speaker 3: You know, so far this year, but obviously you're dealing with a significantly lower backlog at the same time going into the year. So just any thoughts around, you know, how closings might progress.
Speaker 3: And any type of quantification for the full year would be really helpful. And then secondly, on the gross margin side, you're able to maintain a strong gross margin in the fourth quarter, but obviously down from the third.
Speaker 3: and he plot it on the first quarter. This year might be helpful as well on that and maybe had a thing left and he's going forward from there. If Malout on the affirmative request did it.
Speaker 3: Okay, yeah, thanks Mike, this is Jim Bricklet.
Speaker 3: Okay, yeah, thanks Mike, this is Jim Brickman. Um, we can...
Speaker 3: I try to pick apart a lot of your questions and invites, but we don't generally provide, as you know, earnings guidance. But we can share with you that our sales pace has picked up considerably since December into January . It's continued into February .
Speaker 3: But what we're most pleased with is that because 75 to 80% of our lots are in fill.
Speaker 3: locations we've maintained our pricing power so we talk to our peers you know most of our peers are not an A and B lot locations there
Speaker 3: serving a bell curve of buyer in the sea locations and it's a little more challenging in the sea locations. We have some of those so we know that.
Speaker 3: But with 75-80% of our lives in the infill locations, we're not seeing margin and degradation at all right now.
Speaker 3: Really, that's one of the highlights I'd like to everybody take away from this call.
Speaker 6: So, you know, well.
Speaker 3: I don't know, Rick, I don't know if you have anything to add in terms of the questions on closings or margins, but Jim, I guess to that point about margin degradation. So obviously your margins are made very strong, but they were down a little over 500 basis points sequentially in the fourth quarter.
Speaker 3: And I assume that was in part driven by higher incentives in the marketplace. So, love to get your thoughts around, you know, if that 26.9 or 26.2 after interest.
Speaker 3: is kind of the new number going forward. Would it go a little lower in the first quarter? Many builders have talked about a little bit of a further slip.
Speaker 3: I just given how tough the last three months of 4Q was. Trying to get a sense of directionally how we should think about first half close margins versus 4Q.
Speaker 3: Well, we'd like to have you look at the adjusted growth bargain because one of the things that we've influenced our margins Going down in the fourth quarter of the West we took a six million dollar impairment
Speaker 3: And that impairment, that's why we're very cautiously looking at what's going on in the marketplace overall. But those were on sea-lact locations that we decided not to proceed with development on. So when you're looking at our margins, you really need to adjust it by that $6 million that pushes it up.
Speaker 3: quite a bit more than what you're thinking in that 500 basis point decline. What does it adjust to? 28.3. 28.3. So you're getting back up to where we're used to be. And we're really seeing that type of margin sustainable in our business right now. As soon as any interest rates don't totally go bonkers. But we're real pleased with what we're seeing in margins in our January . live in our country and a strong freedom and justice allow poverty and more respect are added to a
Speaker 3: release. We're seeing the next generation cost of our starts being $40,000 less in drug construction costs. So that's eventually going to be felt as a positive in Q4. Certainly, we did see as I referred in my discussion.
Speaker 3: some discounts and incentives working their way into their results in Q4. The incentives that Jet talked about went from 4.2% to 7.5%. But we are seeing the incentives and discounts in Q1 at a lower level. So we will have some downside from what happened in Q4 and then some other.
Speaker 7: to our sales. And given the improvement that we've seen in cycle time, the more that we can start early in the year, the better chance we're going to have to close more houses. So if you can tell us exactly what's going to happen to interest rates, we can probably be more precise, but that's probably a challenge.
Speaker 8: You gave some color around the man trans from December . Would you be able to quantify the improved men in January and February ?
Speaker 3: No, we don't provide because that we would basically be providing monthly sales and overs.
Speaker 3: We don't want to go there. We went back and forth on how much optimism we really thought was appropriate to share With the market we didn't want to leave them thinking that things hadn't improved But they have improved pretty significantly. I think that you know, we were close to 73% specumentary at one point in time in the forest quarter
Speaker 8: you and then you guys are pretty active and sharey purchase in 2022. So how do you guys think about repurchases and your other capital allocation priorities in 2023? If you can maybe rank or do those priorities that would be really helpful.
Speaker 3: Well, I wish we could rank him better right now. We're playing all ends against the middle. Like we always try to do.
Speaker 3: We're evaluating share repurchases.
Speaker 3: sharing such care re-processes.
Speaker 3: We're actually looking at an acquisition for the first time we ever looked at an acquisition in a long time. And then we're also looking at expanding into a new market with a large land purchase. So I guess you should stay tuned. We're going to have to report those things after the occurred not before they occurred, but we're aggressively pursuing all three of those options. Awesome. Thank you guys.
Speaker 3: for the first time we ever looked in an acquisition in a long time. And then we're also looking at expanding into a new market with a large land purchase. So I guess you should stay tuned if we don't have to report those things after the occurred not before they occur, but we're aggressively pursuing all three of those options. Awesome. Thank you. Thank you.
Speaker 2: I'm sorry, everyone, that is star one to ask a question.
Speaker 2: We do have a question from Alex Rijl would be Riley.
Speaker 5: Thank you, Jim, and very nice quarter. A couple of questions here. Within S-GNA, what is the mix between fixed and variable?
Speaker 7: Yeah, certainly is a mix. Everything is variable in the long run. But really where we land is going to be based on what are starts and what are ups and downs are going to be in the employment levels, number of employees. So it remains to be seen given what the market...
Speaker 5: understanding there's probably going to continue to be a mixed shift towards trophy product.
Speaker 5: Chad, why don't you handle that one? You're with the other daily. Yeah, so, you know, as Jim mentioned, we'll zoom out and talk about Greenbrick as a whole. You know, the A and B locations are continued to perform very well right now. The C locations we have had to...
Speaker 5: offer more or similar incentives to what we offered in Keefore, but those continue so at high paces. Many of those communities have large number of lots and it's easy to build houses in those communities and so
It's going to be, you know, demand is going to be stronger if that A and B locations, but we will do fine in the C locations given the number of lots in the price point that we can hit. And then lastly, with strong orders in December , January and February , have you seen, has the...
Quantity or the percentage of discounts and incentives has that changed much from the fourth quarter? Actually they've improved
since the fourth quarter. In the C-locations, even we've opened two large new communities and we've reduced incentives in both of those because we were able to offer them at a really favorable price point, still produced really nice margins. And we've reduced incentives there.
You know, I think that the crazy antinetic is still interest rates. We're really surprised that we haven't seen it affect a man more. But I think part of that is that, you know, we're talking about job growth in both of our markets and so many of our buyers. Right now, there's not existing homes for them to purchase.
The inventory is very low and if you're a corporate person it's relocating with a new job and doing a market. It's really not that much of a discretionary purchase and we're still seeing pretty strong demand there.
is very low and if you're a corporate person that's relocating with a new job at doing a market, it's really not that much of a discretionary purchase and we're still seeing pretty strong demand there. Very helpful. Thank you very much.
We'll take our next question from Jay McKenna with Redbush. Thanks for taking my question. Actually, Jim, if you could stand on the topic for a minute, what is your percentage now of buyers coming from out of market into your communities versus maybe where it was a year ago? Get to take part of the act. So I am.
So it's hard they will actually have a Texas address before they end up buying a house from us and we're trying to get a little bit better benchmark on that. Do you have any other colleagues that you can add on that jet because we're...
We're seeing a little bit more this year in state buyers than so a little bit less relocation but that's probably in the you know relocation sound.
I would say 10 to 20% looking at the numbers we're looking at. Our general counsel just came from a Chamber of Commerce seminar for a presentation this morning. They were very optimistic. I think they had 18 companies still looking and moving into the Dallas-Fort Worth area. Thank you.
they tend to 20% looking at the numbers we're looking at. Our general counsel just came from a Chamber of Commerce seminar for a presentation this And they were very optimistic. I think they had 18 companies still looking and moving in the Dallas-Fort Worth area. That's great.
And then for a second on the acquisition you mentioned Jim, you know, we've been hearing.
Thanks potentially pulling back and putting builders, private builders maybe into making them a little more skin in the game. I guess have you seen the potential deal flow pick up? What are you seeing happen with your private competitors and then any color you could give us on this acquisition you might be considering?
and putting builders, private builders, maybe into making them a little more skin in the game. I guess have you seen the potential deal flow pick up? What are you seeing happen with your private competitors and then any color you could give us on this acquisition you might be considering? Well, the...
The three or four kind of Boate brokers really quit showing me transactions two or three years ago because they knew we're going to pay big premiums for businesses. The deal we're looking at is what I would consider as a law probability. It's an off market deal and really I can't speak anymore than that. I wouldn't.
I wouldn't make any investment decisions by a green-beak stock on an acquisition occurring.
I can't tell you that we are aggressively looking expanding into a new market if we can get a good foothold on buying land.
That kind of dovetails to the back end of your question in that banks are being much more restrictive and how they do A&D lending right now.
And we think that's great for our business because the equity requirements are so huge that we think we have a real advantage in going after some larger land acquisitions, not only in Dallas, but potentially in new markets. We just put...
Two nice size deals under contract in Texas one was a $32 million deal the other was a $21 million deal and those just are not the kind of deals You're gonna see large private builders and many public dealers want to take a buy-it-on right now
Great, that's all I have. Thank you. Once again, everyone, that is Star 1 on your telephone to ask a question, and we'll pause for a moment.
company and we hope really some people will come visit us, see what we're doing, see our different price points, our products.
and really see the trophy story because that's going to be really the anchor for our growth strategy going forward. And I appreciate it, we were just interested.
Thank you and that does conclude today's presentation. Thank you for your participation and you may now disconnect.