Q2 2023 Green Brick Partners Inc Earnings Call
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Good afternoon, and welcome to Green brick partners earnings call for the second quarter ended June 30th 2023.
During 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, our presentation will accompany today's webcast and also is available on the company website at investors Dark Green Bank, sorry, investors that green brick partners Dot com joining us on the call today.
It is Jim Brickman, co founder and Chief Executive Officer, Rick Costello, Chief Financial Officer.
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 and 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 August <unk> 2023, and the company has no obligation to update any forward looking statements. It may make.
The comment you also include a non-GAAP financial metrics the.
We can sell the issue of these metrics and the other information required by regulation G can be found in the earnings release that the company issued yesterday and in the presentation are available in the company website with that I turn the call over to Jim Brickman.
Thank you I am pleased to report the Green brick delivered another outstanding quarter highlighted by our 27, 2% annualized return on book equity would be the second quarter.
The level of execution displayed by our teams and reflected in our key performance metrics has been extraordinary.
During the second quarter, we delivered 793 homes generating $454 million at home closing revenues. This is the second highest in company history, most notably our homebuilding gross margin increased 370 basis points sequentially to 31, 3%.
Highest among public homebuilders as shown on slide five.
This is only a 110 basis points lower than our record high homebuilding gross margin of 32, 4% achieved in Q3 2022.
Net income during the second quarter was 75 million earnings per diluted share was $1 63, which was up 19% sequentially and the second highest alluded EPS in company history.
We believe our exceptional results as a result of bringing Joe and infill adjacent locations self development land strategy and focus on operational efficiency.
Additionally year to date, we've repurchased 803000 shares of common stock for $27 7 billion, representing one 7% of our total shares outstanding as of December 31, 2022.
Strong sales momentum carried into the second quarter as all of our brands experienced a man that was above normal seasonality.
Net new home orders in the second quarter increased 51% year over year to 822 homes, the highest of any second quarter in our company's history year to date, our growth in net new home orders of 65% reflected the highest percentage increase among our public homebuilding peers.
And this is shown on slide four.
Our cancellation rate was down 400 basis points year over year to seven 4%.
And remained the lowest in the industry.
There are multiple forces at work and the demand for new homes.
First after over a decade of underproduction in house, our country faces a chronic shortage of approximately 4 million housing units, while at the same time millennials and Gen Z are rendering into stages of life.
Propelling them to be a fast growing segment of the home buying market as shown on slide six most.
Most significantly our markets are among the best in the country with significant in migration and a much younger population who are their prime home buying years.
The fact that existing homeowners, a reluctant seller homes and forfeit their low interest rate loans is driven existing home inventory in may to a near all time record low level as seen on slide seven.
Current inventory of existing homes has the lowest for the month of May going back to 1999, many homebuyers surprisingly found themselves, yet again and getting worse for existing housing inventory.
And in jail locations, while we have a strong presence. These factors are pushing more buyers toward new home construction as an attractive alternative.
The Wall Street Journal reported that new single family homes as a share of all new homes for sale reached as high as 35%. This year up from single digits, a decade ago and historic levels in the teens.
We believe one of our strategic long term advantages is our entitlement and development expertise and as a result, our significant land and lot holdings, and Intel and Intel adjacent Submarkets, where competition from other builders and the existing inventories limited.
Approximately 80% of our total revenues year to date were generated from self developed infill and infill adjacent locations.
Approximately 75% of our lots finished and to be finished DSW in Atlanta. This year are expected to be infill and infill adjacent desirable areas shown on slides 12, and 13 as a result of this demand incentives.
Communities peaked in December 2022.
Have declined steadily through the first two quarters of 2023.
Land acquisition plays a pivotal role in our overall success and is based upon a disciplined approach and site selection and underwriting.
We believe our abundant cash reserves and liquidity will continue to open up a wider array of possibilities for us to capitalize on land and lot of opportunities in this marketplace.
Thanks are typically requires 50% or more equity from only their best customers to find lot development with the remaining 50% of capital as that which does at a cost of about 10%.
Most private builders do not have the balance sheet to self develop.
Our accumulation of $210 million in cash has also allowed us to avoid the high cost of financing in today's much higher interest rate environment and act quickly if we find an attractive investment.
At the end of the quarter as shown on slide four our debt to total capital ratio decreased to 22, 9% are primarily long term and all fixed rate debt with an average cost of about three 3% further our net debt to total capital was that a historical low of only 10, 6%.
This gives us significant dry powder as we continue to identify strategic opportunities for growth or expansion that we believe will provide excellent returns for green brick and our shareholders with that I'll now turn this over to Rick to provide more detail regarding our financials.
Thank you Jim Please turn to slide eight of the presentation home deliveries in the second quarter declined 11% year over year to 783 units, reflecting the fact that we were lapping an all time high level of deliveries in Q2 of 2022 and the lower levels of starts during the second half of 2000.
'twenty two.
The ASP of homes delivered remained constant year over year at $580000.
This brought home closings revenue to $454 million for the second quarter, the second highest in company history year.
Year to date, our home closings revenue grew three 4% to $904 million.
SG&A as a percentage of residential units revenue was 10, 8% in Q2 up from eight 2% year over year, primarily due to an increase in brokerage commissions.
Diluted earnings per share for the second quarter was $1 63 per share up 19% from the first quarter and the second highest in company history.
Our cancellation rate for the second quarter remained near a record low level, improving 400 basis points year over year to seven 4%.
As shown on slide 10, our second quarter cancellation rate was the lowest among the public homebuilders.
As Jim mentioned earlier, our sales momentum was above normal seasonality throughout the spring selling season.
During the second quarter net new home orders increased 51% year over year to 822 homes, our highest order level for any second quarter in company history.
As shown on slide four year to date, we continue to lead our public homebuilding peers in year over year net orders with a 65% growth rate.
Revenues from new home orders in the second quarter was up 38% year over year to $489 million changes in product mix and slightly higher incentives this year as compared to the prior year period have resulted in the 8% decline in the ASP of new orders to 596.
Dollars from a year ago.
Active selling communities at the end of Q2 were up 10% year over year to 86 a.
Our quarterly absorption rate per average active selling community was up 39% year over year to $9 nine hubs the third highest in company history.
Year to date net orders are now up 65% year over year on the heels of two.
Two of our three best quarters for absorption rate in our history. This year.
Our absorption rate declined from an unsustainable 13, three units in the first quarter to $9 nine homes in the second quarter.
This was attributable to a smaller inventory pipeline as a result of.
One a record high sales pace in Q1 of 'twenty, three driven by our selling our finished and finishing spec inventory.
And to lower levels of starts during the second half of 2022 that impacted the number of units under construction and therefore available to sell in the second quarter of 2023.
Our homebuilding gross margins on homes delivered was 31, 3% during the second quarter.
Highest in the homebuilding industry as shown on slide five.
This is 370 basis points higher than Q1 of 'twenty three with all of our brands, having experienced higher gross margins in Q2.
Jeff will provide further details shortly on what drove a higher margins.
The value of our backlog at the end of the second quarter decreased 17% year over year to $586 million due to a smaller backlog entering the quarter, while ASP increased one 7% to $664000.
However, ending backlog represented a significant increase of 59% from the beginning of the year.
Sequentially backlog dollars increased six 4%.
Spec units under construction as a percentage of total units under construction was unchanged from the previous quarter at 59% at the end of the second quarter, which is down from 73, 4% at 12 31 22.
On the backdrop of strong demand and sales momentum we increased our starts in the second quarter by 25% sequentially to 833 units.
With 783 delivered homes in Q2 units under construction increased modestly during the second quarter from <unk> hundred 59% to 1800 nine units.
Lastly, our balance sheet is stronger than ever.
As of June 32023, our outstanding debt is 100% fixed rate at 96% long term.
Jim mentioned, we have $210 million of cash on hand at the end of the second quarter, allowing us to avoid high short term borrowing costs.
Debt to total capital ratio decreased 600 basis points from last year, and 90 basis points sequentially to 22, 9%.
Our net debt to total capital ratio was at historic low of 10, 6% down 1400, 50 basis points from last year and down 270 basis points from last quarter.
With that I'll now turn it over to Jed Jed.
Thank you Rick because of our infill location, we're not surprised to see the continuing high levels of demand for our homes during the second quarter.
Apply is constrained in these locations and competition from both other builders and resale inventory is limited. Additionally, our heavy geographic footprint in DFW and Atlanta, two of the leading cities in job and population growth also contributed to our sales.
Success.
Sales performance exceeded seasonal expectations across all areas.
We're exceptionally pleased with the 51% year over year net order growth during the second quarter.
High interest rates seem to have limited impact in slowing housing demand in most of our communities.
With fewer finished and finishing homes available wholesale sales in the second quarter moderated from the record levels in Q1.
However, unmet demand continue to create healthy sales orders for green brick, which enabled us to further decrease incentives from four 4% a selling price of the previous quarter to three 9% in Q2.
We were able to reduce incentives or increased prices and approximately 70% to 80% of our communities in Dallas Fort worth across different products and brands reduced incentives and favorable cost basis due to our strategic land Baas drove our homebuilding gross margins for new orders.
Higher in the second quarter.
For homes closed in the second quarter, our construction cycle times decreased across all brands by an average of 47 days from the end of 2022, we are pleased to see the stabilization in pricing and general availability of labor and materials across the supply chain.
Believe our scale as the third largest homebuilder in DFW, along with ongoing operational improvements should continue to give us an edge in negotiating competitive pricing with our trades.
Loosing construction cycle times identify them and seizing on landed a lot of opportunities and maintaining our industry leading margins with.
With continuing strong sales, we are working diligently to bring our lots in development to the finish line as seen on slide 12, and 13 most of our expected 2023 lot deliveries in DFW and Atlanta will be concentrated in infill and infill adjacent desirable.
Areas.
As of the end of the second quarter. We delivered approximately 2000 finished lots and expect to have approximately 6100 finished lots on our balance sheet.
December 31, 2023 as shown on slide 10.
For context, we had approximately 2900 finished lots as of the beginning of the year after averaging about 2850 starts per year for 2020 through 2022. These lots of our favorable cost basis that we believe should continue to help us generate industry.
Believe there's unmet demand for entry level homes in Austin and trophy is well positioned to establish a strong presence in the desirable and growing Austin market.
We're excited to share our results of our newest market in coming quarters.
I'll turn it over to Jim for closing remarks, Jim.
Thank you Jed to draw close to our call today I want to extend my appreciation to our employees.
Our motto is to not talk about getting it done but to really get it done and our teams did that.
I am immensely proud of what we've achieved together and I am confident that our collective efforts should continue to provide superior risk adjusted returns.
Looking ahead, we remain excited about the opportunities and possibilities before us.
Housing market continues to show resilience and strength.
And we are well positioned to meet the large demand for single family homes that persists, even in high interest rate environment.
The results, we shared today demonstrate our ability to constantly achieve industry, leading performance and deliver value to our shareholders.
It's been a pleasure to share our accomplishments with you again today and we look forward to speaking with you next quarter. Thank you. We will now open the line for questions.
Thank you if you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue again press the star one one moment. Please for your first question.
Okay.
Your first question comes from the line of Carlos.
Record of BTG. Please go ahead.
Thanks, Good morning, guys or afternoon or morning.
I'm not sure what time it is.
So all three of you talked about above seasonal norm activity for sales in the second quarter I am curious if July is also showing similar above a normal trends or if.
If we started to see sort of some more normal seasonality creeping in.
July continued really tracking June pretty closely Carl.
But we didn't see.
Any radical change or much change at all from June .
Sure.
We didn't see any margin degradation on our sales that we refer to users.
Okay, great. Thank you for that.
And then.
Sure.
Your mix of product is fairly wide, ranging especially relative to some of your peers. I am curious if you can talk about the performance I mean, I think Jed you mentioned that all brands are doing well can you talk about the performance in absorptions and pricing for the mid to high end homes versus.
Trophy signature type product.
Yeah. Carl this is Jed I'll take that.
What we've seen is the high end, it's so supply constrained that the demand is very very high there.
More entry level first time move up there just more optionality for the buyers. So it's a little more competitive but.
We're still getting our underwriting paid paces in those places as well.
Thank you. Your next question comes from the line of Alex.
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Please go ahead.
Okay.
Okay.
Alex perhaps your line is on mute.
Sorry about that thank you very much the finished lot inventory of 6000 seems notable as it's a high number relative to prior year.
And your sales rate. So I guess the question here is should we expect an acceleration of community count growth, where should we expect an acceleration in <unk> sales.
Yes, we're gonna have Jed can chime in on this we're going to have community count growth.
In absolute numbers and not only are there more communities, but the number of lots in some of these meetings thrombotic contain a lot more lots of jetblue.
Yeah, we're really excited because.
Alex we're getting community or sorry phase deliveries that are say 300 lots a piece and we're excited about not having the gap out issues that we've had with all of these land development delays that are kind of.
<unk> a whole lot.
The whole industry for the past 12 months to 18 months.
And a follow on to that question as the size of the community grows would you expect your absorption rate in those communities to accelerate as well.
Yes, we are.
Again, we're really excited about some new communities that were really bought kind of just coming out of COVID-19 that are now delivering them.
You know three months of track record on them, we're seeing some communities.
It really produce high double digit per month.
Yes sales absorptions.
We think that.
We like our land basis, and we think we're under the general market.
<unk> so.
Absorptions should go up.
Thank you again, if you would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from the line of.
Jay.
Analyst of Wedbush. Please go ahead.
Hey, Good morning, everyone. First question I had I think you've already kind of answered this in the script and in the deck, but it seems like the locked in effect of existing homeowners not wanting to move.
Probably has benefited green brick a little bit more just because of your infill locations does that a correct assumption.
Yes, I think Thats, a correct assumption assumption, we really see it.
In Atlanta, where the only challenge.
Kind of a AAA locations.
You are at higher price points.
And we don't have any other builders, where we self develop all of those lots and we are the only builder in most locations.
Great.
I guess in the.
What is it 20% to 30% of communities, where you are not raising prices.
Are you at least dialing back incentives and what are what are the factors that are causing you to raise prices in those communities.
Just more competition from other competitors.
And then one of the things that we're seeing is we're really not having to.
For the long term rate buy downs, either and Thats a very.
A very big number so not having to do that is.
Kind of like a price increase.
Kind of in the most this is Jim in the most simplistic way to look at some of our locations is that.
We.
Our very very and dealer in Costco locations.
And those are just.
Experiencing pretty.
Great margins and sales philosophy, we can sell them pretty much what we want.
Let me kind of go to a super Wal Mart location to BB plus locations those are very very strong.
And then when we go to the C. Dollar general type location Theres a lot more competition.
Directive interest rate side, we're going to have to be buying down mortgages.
2030% of our business.
Okay.
Yes.
Some of it can be attributed no doubt to going from a Bristol location.
Princeton location for instance.
Like Jeff said the altra.
Hi.
Is not.
And not only its performance, but it's also curious at much higher price tag. Carl This is Jed, let me try to answer or add this to that.
<unk>.
In our <unk> locations are on.
Mortgage and closing costs incentive is usually half of what it is in the periphery locations on the absolute dollar amount, even though it's probably double the price on the home price does that makes sense, yes, yes, okay. I got it the mix is variable for you guys. In particular, so that's why I asked.
And then actually I have one follow up for Jim too so.
Jim you talked about the private builders struggled to put a lot of equity in and high cost of debt.
So from an acquisition standpoint are we starting to see any movement at all of the privates as they look at the future cost of funds type banks and thinking about maybe maybe selling on is are you seeing more activity cross the transom, whether you're interested in it or not thanks guys.
Well I chuckled, I saw one or two builders closed and our new <unk>.
<unk>.
Investment bankers slash brokers that did the deals.
We never saw them.
Spect us because they know the way we buy things in our buying criteria. So it's a yes or no answer if there are some transactions taking place out there.
But.
We actually didn't see him and I'm sure we didn't see them because.
We're talking to the brokers and bankers involved they wouldn't meet our hurdle rates.
Thank you there are no further questions at this time. So this concludes today's conference call you may now disconnect.
Yes.
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Yeah.
Yes.