Green Brick Partners Inc. Q1 2023 Earnings Call
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Good afternoon and.
And welcome to Green brick partners earnings call for the first quarter ended March 31 2023.
Following today's remarks, we'll hold a Q&A session. As a reminder, this call is being recorded and will be available for playback.
In addition, our presentation will accompany today's webcast and is also available on the company's website at investors Dark Green brick partners dotcom.
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.
Some of the information discussed on this call is forward looking including the company's financial and operational expectations for 2023 and beyond.
Yesterday's press release, and SEC filings the company detailed material risks that may cause future results to differ from its expectations.
The company's statements are as of today may 4th 2023, and the company has no obligation to update any forward looking statements. It may make.
Our comments also include non-GAAP financial metrics, a reconciliation of these metrics and the other information required by regulation G can be found in their earnings release, the company issued yesterday and in the presentation are available on the company's website.
With that I'll turn the call over to Jim Brickman.
Thank you I'm extremely pleased to report that Green brick started 2023 with the best first quarter results in our history.
During the first quarter of 2023, we delivered 761 homes.
Which was a record number for any first quarter and led to a 24% year over year growth in home closing revenues of $449 million.
This revenue level was also a record for any first quarter.
As opposed to margin degradation seen among many of the public homebuilders Green brick was able to sustain our homebuilding gross margin of 27, 6% one of the highest among homebuilders and up 140 basis points sequentially from Q4 2022.
Net income during the first quarter was 64 million and earnings per diluted share grew 14% year over year to $1.47.
Again, both in terms of measures were records for any first quarter.
Our strong land and lot position and operational execution yielded an annualized return on equity of 24, 4%.
Additionally, we returned $15 4 billion back to shareholders during the quarter through our stock buyback repurchase program.
Sales momentum was exceptionally strong during the first quarter net orders accelerated across all builders brands and at 1067 homes were up 78% year over year and 152% sequentially. The second highest number of net orders of any quarter.
In our company history.
Furthermore, our cancellation rate improved significantly dropping 14 percentage points from Q Corp, Q4, 2022 to six 2% in the first quarter the lowest in the industry.
Jeff will provide more color on sales activity shortly.
While we are encouraged by the strength in sales pace to volatility and interest rates remains the biggest moving target in the homebuilding industry. However.
However, we believe green brick possesses multiple strategic advantages that position us for industry, leading performance as summarized on slide four of the presentation.
Yeah.
Our first advantage is there a significant footprint in markets with some of the biggest job growth and best demographics in the nation DSW, our biggest market has been leading the way and job creation by creating 212000, new jobs during the last 12 months.
Bundling job market lower cost of living no state income taxes, and a warmer climate make DFW, an appealing destination for young professionals, resulting at a younger demographics or in their prime home buying years as compared to the U S average.
We believe these favorable trends will continue to drive more housing demand over a long time horizon.
Our second advantage is our superior land and lot pipeline and the disciplined approach, we have undertaken to underwriting and acquiring our land deals.
Similarly, 80% of our total revenues were generated from infill locations in Q1 as.
As we have previously disclosed at the end of 2023, approximately 75% of our finished lots in DFW and Atlanta are expected to be in and bill and adjacent desirable areas ethylene and slides 11 and slides 12.
Our infill submarkets are typically supply constrained with less competition and require greater expertise and local knowledge to develop creating a barrier.
Our third advantage is a high level of control over our finished lot cost and lot delivery schedules because of our emphasis on self development and our land business.
This also has allowed us to maintain exceptional homebuilding gross margin that had been consistently among the highest our bulk peers as shown on slide five.
We also enjoyed great flexibility in terms of our ability to control a lot delivery cadence as market conditions change, enabling us to start the construction of more homes. What is now an outlay of cash to purchase finished lots.
Sales momentum continues to be strong throughout the spring selling season. We believe we will have the ability to quickly ramp up home construction and future phases of land development.
Our fourth advantage is the diversity of our product lines. We are one of the few public homebuilders and offer a range of various price points lot sizes and product types that serves a wide range of customer segments and needs.
This is possible through our subsidiary ready and affiliate builder brands, each of whom has its own strategic end market niche advantages.
Our fifth advantage is our people and culture, which are essential for our growth and success story.
Our experienced teams bring a wealth of knowledge skills and expertise to drive innovation efficiency and operational excellence.
Real estate is a local business.
All of our builders, who have deep roots in the communities they serve and decades long relationships with local landowners and political subcontractor and realtor networks.
Take pride in the history and the culture of our brands, while each of our homebuilders is locally branded and manage all of them are United by a common set of values, we call home, which stands for honesty objectively maturity inefficiency.
Are supportive and collaborative work culture continues to help us retain and attract top talent in the industry.
Finally, we possess a strong balance sheet. It was one of the lowest debt to total capital ratios among our peers and 23, 8% at the end of the first quarter as shown on slide four.
And at the end of Q1, our net debt to total capital ratio was only 13, 3%.
Our strong balance sheet low cost fixed rate debt structure, and our ability to react quickly will provide us extraordinary flexibility to take advantage of market opportunities.
We remain positive about the long term housing supply and demand fundamentals, we have an approximately 4 million housing units deficit in the country.
Shown on slide six an estimated $3 million of additional millennials and Gen Z.
We will age into the optimal homebuyer age over the next decade, our largest market of DSW in Atlanta will likely get a greater share of these population segments compared to other cities as both markets boost a lower overall average age than the national average and are desirable to lower cost of living.
And in very healthy job markets.
We believe we are well positioned to capture that pent up demand.
In the meantime housing supply remains lower than demand, especially in the infill locations, where green brick has a competitive advantage.
High interest rates are kept existing homeowners on the sidelines as many are unwilling to give up their low rate mortgages.
This led to a tight resale market as shown on slide seven.
Existing home sales, which make up most of the housing market fell two 4% in March from the prior months and 22% from a year earlier.
New homes have gained a larger portion of the homebuyer pie from buyers with limited options to purchase an existing home.
In March about one third of single family homes for sale for new homes.
Versus existing homes up from the historical norm, which is run north of 10% New homes, we expect the lack of competition from existing homes to continue as approximately 70% of all mortgage.
Mortgages bear an interest cost at less than 4%, making the cost of a new mortgage through this segment comparatively unappealing.
We believe all of the strategic advantages discussed above will give us an edge to continue to grab market share from the resale market.
With that I'll turn it over to Rick to provide more detail regarding our financial results Rick.
Rick.
Thank you Jim.
Please turn to slide eight of the presentation.
Home deliveries in the first quarter grew 16% year over year to a Q1 record of 761 units with ASP growing 7% year over year to $591000.
Home closings revenue broke our record for any first quarter climbed 24% year over year to $449 million.
SG&A as a percentage of residential unit revenue was 10, 2% up from nine 4% year over year due to an increase in brokerage commissions.
Net income attributable to green brick and diluted earnings per share were up 4% and 14% year over year growing to $64 million and $1 37 per share respectively. Again, both were records for any first quarter.
Our cancellation rate improved 180 basis points year over year to six 2%, which was a significant improvement from 20% last quarter.
As shown on slide nine our Q1 cancellation rate was the lowest among the public homebuilders as we are the sole builder with a single digit cancellation rate in Q1.
As Jim mentioned earlier demand for our homes has remained remarkably strong since November net new home orders in the first quarter rose, 78% year over year to 1067.
As shown on slide four we are one of the two public homebuilders that reported a positive year over year change in net orders in fact as seen on slide four.
The other public homebuilders had an average decline of 21% and year over year net orders.
Sequentially net new orders were up 152% over Q4 2022.
Revenue from net new home orders was up 75% over Q1 2022 to a record $631 million.
Active selling communities at the end of Q1 were up 4% year over year to <unk> 79, our quarterly absorption rate per average active selling community increase to a record level for any quarter of $13 three hubs.
143% from five five firms last quarter and up 66% from eight zero homes last year.
Our homebuilding gross margin on homes delivered was 27, 6% during the first quarter one of the highest in the industry as shown on slide five. This is only 20 basis points lower than the same period last year when demand was still near peak levels.
Sequentially homebuilding gross margin for deliveries increased by 140 basis points in fact, our gross margin on new orders increased each month during the quarter and for March were up 440 basis points from the December 2022 lows.
Looking ahead based on our experience of lower construction costs are new starts and with demand outpacing supply in our submarkets.
We believe that the gross margin and bottom is behind us as we expect gross margins to be slightly higher in the near term.
Due to our exceptional sales pace and our significantly lower cancellation rate backlog value at the end of the quarter increased 49% sequentially to $551 million.
This was driven by a 57% increase in backlog.
Spec units under construction as a percentage of total units under construction decreased from 73% at the end of last quarter to a more desirable level of 59% at the end of Q1.
Notable trend we are seeing is that not only did we see strong demand and move in ready homes, but we also experienced an uptick in demand for both build jobs and homes and the early construction stages.
While we are excited about our sales performance and our deliberate pace, we would like to remind everyone that our recent cadence of closings could be bumpy here for the rest of the year as shown on slide nine for each of the past five quarters, our trailing 12 months closings averaged approximately 3000 units ranging from 2900 to 30.
100 units.
Even though we ramped up our starts in the first quarter of 2023 to 667 homes and more than doubled sequentially from 304 starts in Q4 of 2022, our starts over the trailing 12 months are now down 29% year over year.
This decline is due to a drop in year over year starts over the past three quarters.
As a result, our units under construction have declined to 17 159 times as of March 31, 2023, a drop of 30% from 2516 homes a year earlier.
But with decreased demand we have increased started significantly at the end of Q1 and now into Q2.
Moving to our balance sheet during the first quarter, we paid off the remaining balances of our revolving credit lines, leaving us with 100% fixed rate debt at a weighted average interest rate of three 3%.
Therefore, our debt to total capital ratio was further reduced by 500 basis points from last year to 23, 8% and our net debt to total capital ratio was 13, 3% down 1100 70 basis points from last year due to accumulation of cash from closings in fewer one starts we remain.
Committed to maintaining the strength of our balance sheet, while evaluating opportunities to deploy our accumulated cash plus access or lines of credit when appropriate.
With that I'll now turn it over to Jed Jed.
Alright.
Thank you Rick as Jim mentioned earlier, we are extremely pleased with our sales performance, especially given that all our builder brands in all price points, but we've seen strong sales in our supply constrained infill markets.
So we are optimistic as we move into the heart of the spring selling season.
<unk> shown from changes in mortgage rates is softening as our homebuyers have adapted to a higher interest rate environment.
As the new norm, but we believe our story is unique to our markets and with our business model. We believe unmet demand will continue and our infill locations, where there are healthy job markets favorable demographics and reduced competition from existing homes for sale.
We expect sales to moderate from the record levels. We saw at the beginning of the year as we will have fewer finished and finishing homes available to sell.
We expect the unmet demand to continue to create healthy sales orders for Greenberg in DFW in Atlanta through the remainder of the year.
In the first quarter because of exceptional demand overall discounts and incentives for new orders moderated sequentially.
Down to four 4%.
An improvement of 300.
30 bps from seven five last quarter. Additionally.
Additionally, we selectively raise prices.
<unk> metering sales in a few communities where were selling faster than we could build.
We continue to be cautious with purchasing land as prices are proving to be sticky.
While we made no new land acquisitions during the first quarter.
We are constantly on the hunt for good land deals that hit our return thresholds.
We currently own and control 25000 lives with 84% of.
On our balance sheet.
We remain confident with the quality and expected returns of those logs and believe our land philosophy and underwriting process.
Poised to continue to generate.
Higher margins and returns than many of our peers.
Particularly with our low cost of debt.
As lenders become more conservative, particularly in the A&D lending, we're optimistic that we will find new land opportunities.
Whether in existing or new markets.
As summarized on slide 10.
And as Mats on slides 11, and 12 most of our expected 2023 larger deliveries in DFW and Atlanta will be concentrated in infill.
Infill adjacent desirable locations.
These lots of favorable cost basis.
So we believe should continue to help us generate industry, leading gross margins.
Due to the fallout from the banking sector stresses smaller and private builders for screens by rising costs and capital and tightening and financing terms.
In an environment, where the persistently low existing home inventory.
We believe we are well suited to take market share with a strong balance sheet and ample high quality finished lots in infill locations.
With our recent pause on land acquisition and reduction in home starts our liquidity was up significantly to more than $5 billion, including $177 million in unrestricted cash and $360 million.
An undrawn line of credit availability.
To return capital to shareholders, we repurchased 468.
Shares of common stock for a total of $15 4 million in the quarter were $33 million remaining under our existing stock buyback program.
In April the board approved an authorization of another $100 million stock buyback, bringing our total availability to $133 million. We will continue to evaluate all options to use our cash in the most efficient way with a focus on generating industry, leading returns on equity.
We continue to see incremental improvement each month during the quarter on our construction cycle time, particularly with trophy signature homes.
<unk> seen significant improvement in cycle times for homes started in the second half of last year.
Home started at Troche in the third quarter of 2022.
Our now complete at an average cycle time below 200 days cycled transfer for some home started in Q4 of.
<unk> 2022.
Now complete.
Improved to about 150 days we.
We believe that we will see greater overall improvement in coming quarters.
Lastly, we're extremely excited about our entry into the Austin market.
Aftermarket has been under a chronic shortage of affordable housing for a long period of time.
We believe trophy product desirability and affordability captured the unmet demand from entry level and first time move up homebuyers by selling homes starting under $300000.
We expect New Trophy community Austin will open for pre sale in June of 2023, we look forward to sharing more details next quarter.
With that I will turn it over to Jim for closing remarks, Jim.
Thank you Chad.
Finally, I want to express my gratitude to our employees and staff that are the backbone of our company.
And the primary reason for our outperformance Michael.
My goal is to continue to attract and retain top talent at our business.
We continue to evaluate expansion opportunities for trophy signature homes, and we'll keep you posted on this progress we are encouraged by the results of the first quarter and as we look ahead, we remain confident in our ability to execute on our strategic initiatives to continue to deliver long term value.
For our shareholders.
We appreciate your continued support and interest in our company and look forward to speaking with you again next quarter.
This concludes our prepared remarks, we will now open the line for your questions. Thank you.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad will pause for a moment to compile the Q&A roster.
We will take our first question from Jay Mccanless with Wedbush.
Hey, good morning.
Wondering about the sales pace during the quarter was the order gains driven by.
A lot of finished homes that you had or were you trying to sell maybe at the beginning of the quarter to generate some extra cash flow and then decided to slow things as you started to see traffic and demand get even better.
Jeff why don't you take that you can do with it every day.
Yes sure Jay.
No.
We entered the year with a slightly more finished specs than we would have liked and although we had a good November and December sales.
I wanted to make sure we started the quarter out great. So we had a day.
A little more incentives in the January sale, and then we've tightened those through the remainder of the quarter end.
Yes on the incentives have tightened through the remainder of the quarter and we continue to see very strong demand.
Okay.
And then I guess.
What because theres a lot of people one of your competitors.
I'm, saying the same thing you guys have said that potentially tighter lending standards. Later this year are going to create some opportunities but.
I guess kind of when do you think that's going to happen, Jim and if it doesn't happen what's plan B do you feel like you have enough land to.
Grow the community count through the rest of this year.
And then also maybe do you have enough land in hand to grow it into next year, if those bank driven opportunities don't appear.
Well first of all I don't think this is Jim and I don't think we really need things to improve we just hope they stay the same we had a fantastic quarter.
And.
We're seeing really even into may the first few days and it's continuing so.
Improvement is necessary that you guys had a great year in terms of bank.
Lending out there I think what youre going to see is the public builders are generally the least leveraged they don't rely on banks.
And theyre going to benefit and we continue to gain market share every cycle and I think youre really going to see that.
They all builders.
We think particularly by us because we have the best locations of any of the public builders.
And say Hey, this is Rick thanks for the questions one of the things from the buyer side is that we're still seeing very consistent.
Credit scores credit quality from our buyers and the.
750 range.
But we are also seeing the buyers who are acknowledging the existence of the higher rate mortgage loans that are available.
Or simply allocating more dollars from a personal standpoint to there.
<unk> component the backend ratios are obviously still conforming just higher and thats because everybody needs a house and that's why it really makes a difference where were your salad likes like Ted said, we think we have a unique story.
And not just being in the best markets in the country, but being in the best Submarkets with our infill and infill adjacent communities.
Got it.
Rick I was going to throw a couple of you I guess the first one I had for you is with this large amount of closings in the first quarter should we expect a sequential decline in closings.
And then also maybe talk about where you think the community count could go this year.
Yes, as the community count is especially challenging right now from the standpoint of it's going to be very dependent on how robust sales are.
On a go forward basis.
We're still going to have the lot count and we've reiterated that fact on some of the maps that we're showing.
From a.
Closing cadence standpoint.
We've really done a good job in building our backlog so in that regard.
We are happy to enter Q2 with much better backlog than we entered Q1.
It's really the answer to your question on a timing basis between quarters. It can be a function of cycle time and how much improvement. We see there is a cycle times are improving you're essentially getting more houses that are available to close in Q2 and Q3.
And we're hoping that some of the houses that we're going to start in Q4 are able to complete and close by the end of 2023, So it's really a TBD.
We shall say that tidewater equity Q to Q2.
Talking about Q4, it will restart houses in Q2 that are to be ready by the end of the year.
Okay, great. Thanks for taking my questions.
Thanks Jay.
Okay next we'll go to Karl recharge with <unk>. Your line is open thanks, everybody. So.
Following on Dave's question I think Rick. Please so 1067 orders this quarter what percentage of those orders also closed this quarter and then what percentage of that.
Those orders were on to be Delta I E not even trenching house hasn't started.
Wow.
Really all question Carl This is Jed I'll take.
We may need to get back with you on the exact answers on that I can tell you on the second part of your question very few of the homes sold.
To be builds most of them.
We're either finished or we're coming out of the ground already.
Okay.
Great.
If I had to guess I would say over 50% of the sales.
Old and closed in the quarter.
Okay. Thank you Dan I appreciate that.
And then so because of the unusual nature of third quarter.
Your cash flow statement looks it looks like we typically see in the <unk> average generated more operating cash in any quarter than you did in this unusual first quarter, so you're sitting with 100 million more on cash and you add.
The new authorization out there, but at the same time, we sort of talked about starts mean.
Given the strength you've seen little behind maybe where you want them. So when we're modeling that out for the course of this year what should we expect you to do with that excess cash would this be back into share repurchase or would be more getting dirt ready with et cetera. As you as you look at the market.
This is Jim Hey, gentlemen.
Okay.
I, probably should've added we have five strategic advantages that I've mentioned and when we went through the first part of the earnings call. I think we really have a six and that's when it becomes really.
Really how we look at evaluating stock purchases.
And repurchases of our stock versus investing in land deals or other opportunities.
David Einhorn, who is our chairman who is also our biggest shareholder.
I've known David for 21 years, we haven't really.
Nice tight financial team here, but David is very helpful to us as we evaluate looking at stock repurchases versus internal rates of return and whether it's buying land deal or investing more in width and its really a very fluid process. So I don't have an answer to that all I can tell you is that.
David is very involved in this and I think he makes some really great decisions for our business when it comes to this.
Carl This is Rick I'll add on to that certainly one of the things that we're going to be doing with this kind of sales paces, increasing starts and I said as much.
During the prepared remarks remarks, we have had a drawdown and web on our balance sheet is fairly obvious with the decline in units under construction I mean, hopefully we can keep the units under construction low because our cycle times are improving but we certainly expect to then be building and spending more quickly.
On the on the website and getting our.
<unk> starts up higher too.
<unk>, where we have seen it in the past so certainly youll see that on the website on the land side is TBD okay.
Thank you Rick and then if I can squeeze one more in just on <unk>.
Sometimes ask on new markets, Jim and again, you've built a lot of share in Dallas now Sharon Atlanta's pretty good you've got Austin coming online is it still the way I should think about this as the incremental dollar of investment for Green brick is more likely to go into existing markets than it is to go into new markets is that still the right way to think about things.
No no no.
Again, I am glad I asked then.
Well first of all in our trophy is they do 1200 houses a year in Dallas and Dallas is pretty consistently have already start market. Obviously most of those of the bell curve that trowbridge in so there's a big runway for trophy.
We're looking at a number of land deals right now we think it's an opportunistic time just because.
Lending is going to get cut back due.
Due to the regulatory problems in leather lending problems have nothing to do with single family homes of banks are enduring.
The other thing that we're kind of excited about is that.
The cost of capital for land bankers has gone up.
Simply two fold from a year ago.
They're looking at a 10% debt component in the cost of capital typically right now theyre going to be much more conservative on how they look at deals and we think there are going to be land opportunities in Dallas, We're already looking at some in Austin and we're looking at one deal with an experienced partner in another new market.
Fingers crossed maybe I'll be giving you positive news, but don't count on our next call.
Alright, I appreciate that thanks for the clarity and thanks, a lot guys. Thanks again for the time today.
Thanks Carl.
Kind of as a.
Reminder, ladies and gentlemen, if you have a question Thats star one on your telephone Keypad next we'll go to Alex Rygiel with B Riley Your line is open.
Thank you great quarter gentlemen, a couple of quick questions here first.
How many communities you actually metering right now.
Yes. This is Jed Alex I'll take that we're metering probably less than 10% right now.
Okay, and then as it relates to incentives.
April may.
Wouldn't be incentive look like compared to the first quarter.
Well, we're not going to give forward guidance, but I can tell you.
That we are selling we are fewer and fewer finished specs right now and so we're seeing a lot of our sales happen early to mid cycle in the homebuilding process. So just coming out of the ground at slaver, just finishing mechanical so.
We don't want.
We're going to be.
Not in a hurry to incentivize sales as quickly as we would or our competitors would if the homes were finished.
And then are you seeing building material cost other than the premium decline at all yet.
Yes.
Sorry, or we've been building material prices.
Yes are you seeing them decline at all other than the framing.
Well I think if you look at the spot market for framing it.
Kind of been oscillating month to month.
Plus five minus 5%.
Market this year so yes.
Sure I think.
Framing costs really bottomed in February and they've kind of been bouncing along the bottom in the past couple of months.
Yes My question was.
Yes go ahead.
Yes. My question was more about the other materials.
Yes, so the other materials.
We're in a different situation than we were a year ago are thankful to have materials now so.
So we can build our homes, which is evidenced by our reduced cycle times, we see that getting better and better a lot of the materials had.
We are seeing slight reductions in the cost of those materials because they were a lot of them were foreign bought and had shipping container surcharges and those have gone away.
And we can.
Out of the suppliers.
Relocated the suppliers, either domestically or to Mexico and.
We're seeing so we're giving them the products cheaper than we were a year ago.
Thank you very much.
Yes.
Okay.
Showing no further questions I'd now like to turn the call back over to our presenters for any additional or closing remarks.
Well. Thank you for joining the call. Thank you for your investment support.
We will continue to try to do the best we can from a return standpoint.
Have a good day.
And this concludes today's conference call you may now disconnect.
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Okay.
Yes.
Yes.