Q3 2023 Green Brick Partners Inc Earnings Call
Thank you for standing by my name is Eric and I will be your conference operator today.
At this time I would like to welcome everyone to the Green brick partners incorporated third quarter 2023 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
To withdraw your question Press Star one again.
Thank you.
I'd like to turn the call over to Rick Costello, Chief Financial Officer. Please go ahead.
Good afternoon, and welcome to Green brick partners earnings call for the third quarter ended September 32023.
Following today's remarks, we will hold the Q&A answer 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 Dot Green brick partners Dot com.
Joining us on the call today is Jim Brickman, co founder and Chief Executive Officer.
Jed Dolson, President and Chief operating Officer, and Rick Costello, Chief Financial Officer.
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 future results to differ from its expectations.
The Companys statements are as of today November one 2023, and the company has no obligation to update any forward looking statements. It may make.
The comments also include non-GAAP financial metrics. The reconciliation 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 available on the company's website.
With that I'll turn the call over to Jim Berkman, Jim. Thanks.
Yeah.
Before we start I would like to congratulate Jed dolson on his promotion to President and Chief operating officer of Green brick.
Jeff It's been an integral part of our leadership team for almost 14 years and has consistently demonstrated exceptional leadership and a deep commitment to the company's mission and values Jed has and will continue to play a critical role in driving the company's success.
Now moving onto our performance I am extremely pleased to report another exceptional quarter for green bricks financial and operating performance.
Led by our industry, leading percentage increase of net new sales orders and record gross margins. We continued to defy the pressure on housing affordability and sales velocity created by the elevated level of mortgage rates during <unk>.
Our performance continued to lead the homebuilding industry.
Highlighted by homebuilding gross margins of 33, 3%, which are both hit record high for green brick and the best among public homebuilding peers as shown on slide four.
Strong orders and improved cycle times that are 120 days shorter than peak cycle times in 2022, bolstered our home revenue deliveries and <unk> by 16% year over year to 750 foreclosed homes.
As a result, homebuilding revenue increased five 3% $416 million.
We continued to generate over 80% of our revenues more infill and Intel adjacent communities.
Net income for the third quarter was $72 million or $1.56 per diluted share, which resulted in a return on average book equity of 25, 3% year to date.
We believe our exceptional results stem from our superior locations are.
Our self development land strategy.
Operational and process improvements.
And most importantly, the hard work dedication and.
Operational excellence of our team.
Net new orders remained robust during the third quarter, increasing 95% year over year to 788 homes.
Year to date, our net new orders grew 73% year over year, the best rate of increase among public homebuilding peers as shown on slide five.
Our cancellation rate decreased 130 basis points sequentially to six 1%.
Which was the second lowest cancellation rate in company history, and the lowest cancellation rate among peers.
Jen will provide more color on our sales environment shortly.
According to the National Association of Realtors with higher interest rates, and then already constrained supply of homes national affordability fell over the summer to the lowest level since $19 85.
As shown on slide six existing home inventory has dropped to near historical lows with most of our markets, having three or fewer months of supply.
Existing homeowners continue to state to state put rather than lose the low rate mortgages and this is particularly true in infill locations.
As shown on slide seven over 60% bought standing mortgages have an interest rate below 4% and.
And more than 80% you have an interest rate below 5%.
Green brick has been able to maintain a strong sales pace because a significant portion of our homes are in desirable infill locations with fewer selling owners selling existing homes and less competition from other builders.
<unk> has continued to grow at 3 million additional millennial and Gen Z potential homebuyers have begun to enter the market and are expected to continue to impact demand over the next decade as shown on slide eight.
Most importantly, Dallas and Atlanta are two largest markets are attracting more of this demographic compared to the U S average largely due to growing employment and relative affordability.
We expect this will continue to create opportunity for green brick to offer new home construction in desirable locations.
And to gain market share in the face of lower available inventory.
According to John Burns, New homes at 30% of total home sales in Dallas for the trailing 12 months through August.
This compares to 18% for the top 32 markets in the U S and 10% to 15% historically.
To position us to capture this long term demand, we continue to prioritize our search for prime land opportunities.
Yes, the availability and cost of capital reaches an unsustainable level for many small builders and developers we have begun to observe more pockets of opportunity.
Overall land prices remain sticky, we believe our strong balance sheet and industry, leading gross margins will continue to provide us with opportunities.
We expect that our close knit relationships with local landowners and our entitlement and development expertise will allow us to source and act quickly on deals that are strategically aligned with our business.
For one example, our recent acquisition of 78 home sites in Vero Beach for our subsidiary builder G. H O homes represents the last remaining new home opportunities and our long standing desirable high end Master planned community due to low existing home inventory and limited competition from Edinburgh.
Homebuilders, we expect to generate attractive returns and gross margins in this community.
In the face of uncertainty in rates, we remain resilient and adaptable.
We pride ourselves on our ability to navigate the president turbulent environment while.
While maintaining focus on our long term objectives.
I do believe we're in a different dynamic than we were in a year ago.
Higher mortgage rates buyers had been adjusting to the more challenging rate environment as we have seen more than twice as many cash deals year over year, but consistently strong FICO scores FICO scores averaged 748, and our Q3 closings.
We have reduced the use of mortgage rate buy downs since the beginning of 2023, but it is still available tool in our tool kit as required.
And because of our industry, leading gross margins, we will have more flexibility in adjusting home prices as needed.
Our team will continue to monitor and evaluate each community and optimized pricing and sales pace.
With our operational efficiency and strong understanding of our local markets. We have the ability to modify square footage floor plans and options to help address affordability issues and buyers needs.
I'll now turn it over to Rick to provide more detail regarding our financial results.
Rick.
Thank you Jim.
Please turn to slide nine of the presentation.
Home closings revenue for the third quarter grew five 3% to $416 million driven by our 16% year over year increase in home closing units to 754 homes delivered.
This was partially offset by a 9% decline in our ASP to $551000. The decline in ASP was predominantly driven by a year over year increase in the percentage of trophy signature homes closed.
As well as by a change in product mix within trophy in that regard trophy has bolts shifted to offerings smaller square footage homes and transitioned from their most expensive houses as they close out their most prime locations.
Our homebuilding gross margin was not affected by a lower ASP.
On the contrary it has climbed to each quarter since <unk> of 'twenty, two and reached a record high of 33, 3% during the third quarter.
This Q3 level was 90 basis points higher than our previous record set in <unk> of 'twenty two.
Homebuilding gross margins have consistently been among the highest in the homebuilding industry as shown on slide four.
SG&A as a percentage of residential unit revenue for the third quarter was up 40 basis points year over year to 11, 3%.
Primarily due to an increase in brokerage commissions that have returned to historic norms for co broker deals.
For the quarter pre tax income increased 5% to $98 million.
Net income attributable to green brick and diluted earnings per share were slightly down to $72 million and $1 56 per share respectively. Due.
Due to a higher tax rate in connection with the timing and stricter eligibility for 45 hour energy efficiency home credits.
We expect fewer homes to be eligible for tax credits this year compared to 2022 due to the change in qualification requirements.
However, we are building more energy star certified homes to increase our future ability to capture available tax credits.
Our book value per share was $26 39 at the end of the quarter up 26% year over year.
In the face of higher mortgage rates, we continue to lead our public homebuilding peers and year to date, new order growth as shown on slide five.
During the third quarter net new home orders increased 95% year over year to 788 units.
Revenue from new home orders was up 80% year over year to $452 million.
Active selling communities at the end of Q3 increased 16% year over year to 86.
Leading to a 74% increase in our quarterly absorption rate to $9 two homes per average active selling community.
Our cancellation rate for the third quarter continued to decline dropping 1100, 50 basis points year over year, and 130 basis points sequentially to six 1% the second lowest in company history.
And as shown on slide 11, this third quarter cancellation rate was also the lowest among public homebuilding peers.
We believe the strong demand we experienced is a function of our quality locations demographic growth and in migration in our core markets.
Our Intel and Intel adjacent community space limited competition from existing home supply as existing home owners are reluctant to forfeit their low interest rate mortgages.
There are also fewer new home competitors in those areas due to the lack of land availability. The higher total finished lot costs and the more complicated entitlement and development processes required for these desirable locations.
Fueled by strong demand, we have been able to gradually increase our backlog closer to our desired level.
Backlog value at the end of the third quarter increased 10% year over year and has now increased 69% from the end of last year to $623 million.
Backlog Asps slightly increased one 3% to $680000 now unlike our decline in ASP unclosed homes, our backlog ASP did not decline as trophy sold a larger portion of finishing homes that closed during the same quarter in which they were sold this.
Compared to our other builders, who sold a greater number of homes at earlier stages of construction.
Trophy, a spec home builder now represents a smaller portion of overall backlog value as fires at lower price points are more comfortable with quick delivery hubs.
Spec units under construction as a percentage of total units under construction was 61% at the end of the third quarter down from 73% at the end of 2022.
Additionally, during Q3, we ramped up starts by 79% year over year to 879 homes started for the quarter against the backdrop of continued strong demand.
Year to date starts now total 2379, averaging 793 per quarter.
This level of starts is roughly in line with our deliberate pace for the year through September 30th.
And over 700 of those starts have occurred last two quarters, indicating the accelerated pace of starts since the beginning of the year.
Subject to the movements of mortgage rates, we anticipate continuing to start homes at a robust pace to meet demand and our high performing markets in Texas, Georgia and Florida.
Finally, our balance sheet is stronger than ever.
At the end of the third quarter, 100% of our debt was fixed rate with an average pay rate of three 3%.
We have $223 million of cash on hand at the end of the third quarter that is ready to deploy opportunistically.
We also have no amounts drawn on $360 million of lines of credit, providing ample liquidity and flexibility.
Our debt to total capital ratio as at $930 23 decreased 620 basis points from last year, and 110 basis points sequentially to 21, 8%.
Our net debt to total capital ratio was 9.0% acid the quarters and down 1600, 50 basis points from last year, and 160 basis points from last quarter.
We will continue to improve the strength of our balance sheet, while we carefully evaluate growth opportunities.
With that I'll now turn it over to Jed Jed.
Thank you Rick despite higher mortgage rates sales orders were stronger than typical seasonal trends across our brands during the third quarter.
Net orders in Q3 were up 95% year over year and year to date net orders are now 73% higher.
This was not a surprise to us as demand continued to outweigh supply and our infill and infill adjacent locations.
While demand is robust affordability became more challenging as mortgage rates increased during the third quarter.
As a result incentives on new orders ticked up in September to five 1% for the quarter incentives averaged at four 4% of sales price up from $3 nine in the previous quarter, our perimeter neighborhoods required the most incentives.
We are carefully managing our sales pace on a community by community basis, while sales orders will remain strong year over year and eight an 8% plus mortgage rates may cause a negative impact on buyer psychology and create affordability concerns.
Buyers decisions.
On how much house, they can purchase where they can afford to purchase a home.
And whether to purchase a home.
In October we increased incentives and restored offering limited rate buy downs <unk> closing costs credits and selective neighborhoods. We will continue to monitor the market carefully to adjust our pricing as needed as well as use our market intelligence to drive decisions on exactly what type of floor plan.
And to build and options to provide.
Providing when prudent more affordable options for our buyers and broadening our base of potential buyers.
As Jim mentioned earlier, our industry, leading gross margins should afford us to be more aggressive in pricing our homes, if the market slows down.
Our supply chain remains stable.
With improvements in the availability of labor and materials, our overall cycle times for homes closed in the third quarter decreased by another 40 days sequentially to approximately $6 one months on average.
Eric: Thank you for standing by. My name is Eric and I will be a conference operator today.
Operator: At this time, I would like to welcome everyone to the Green Brick Partners Inc, third quarter, 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you.
This is a total of more than 120 days of improvement from peak cycle times in 2022.
Perfect cycle time declined to $4 four months, along trophy to bring more inventory to market, which is critical to homebuyers facing heightened uncertainty on rates.
This is also aligned trophy to turn inventory more frequently during the year.
Rick Costello: I would now like to turn the call over to Rick Costello, Chief Financial Officer. Please go ahead.
Thereby increasing our effective return on investment we expect our scale is the third largest homebuilder in DFW, along with a better operational efficiencies will allow us to continue to improve our cycle time performance.
Rick Costello: Good afternoon and welcome to Green Brick Partners earnings call for the third quarter ended September 30th, 2023. Following today's remarks, we will hold Q&A answer. As a reminder, this call is being recorded and will be available for playback. In addition, a presentation will accompany today's webcast, and it's also available on the company's website at investors.greenbrickpartners.com. Joining us on the call today is Jim Berkman, co-founder and Chief Executive Officer, Jed Dolson, President and Chief Operating Officer, and Rick Costello, Chief Financial Officer.
Our focus remains on managing our capital efficiently as we continue sourcing closing and developed a new land opportunities under disciplined underwriting that we believe will be accretive for our growth story.
On the land development side, we continue to expect to have approximately 6000 finished lots as of the end of the year with 80% of those lots and infill and infill adjacent locations as shown on slides 12, 13 and 14.
Rick Costello: 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 its expectations. The company's statements are as of today, November 1, 2023, and the company has no obligation to update any forward looking statements it may make. The comments also include non-gap financial metrics.
Based on our exceptional gross margin and operating margin performance, we have been allocating more resources toward land acquisition opportunities.
During the third quarter and in October we closed on several opportunistic land deals.
One notable transaction was our second land acquisition in Austin.
The new community breaker Valley is conveniently located near downtown Austin.
Two residents will enjoy quick access to Ut Austin employment hubs like the Samsung Austin semiconductor plant and popular recreation activities.
Rick Costello: The reconciliation 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 available on the company's website.
At the end of the quarter, we hold ample high quality land positions across our markets.
Over 26200 lots owned and controlled.
Rick Costello: With that, I'll turn the call over to Jim Berkman. Jim, thank you.
With a solid pipeline.
Jim Berkman: Before we start, I would like to congratulate Jed Dolson on his promotion to President and Chief Operating Officer, Greenbrick. Jed has been an integral part of our leadership team for almost 14 years and has consistently demonstrated exceptional leadership and a deep commitment to the company's mission and value. Jed has and will continue to play a critical role in driving the company's success.
Well positioned to grow our market share and supply constrained infill and infill adjacent submarkets.
I would also like to provide an update on our first community in Austin Trinity Ranch that open for sale at the end of July.
We are very encouraged by the amount of interest in traffic terminated range since opening at the end of October.
We have sold 18 homes in the first three months the asps on the new homes are turning wrenches around $325000. The Austin area continues to experience population growth driven by our resilient job market and excellent quality of life, creating an influx of new families.
Jim Berkman: Now, moving on to our performance, I am extremely pleased to report another exceptional quarter for Greenbrick's financial and operating performance. Led by our industry-leading percentage increase of debt-new sales orders and record gross margins, we continued to defy the pressure on housing affordability and sales velocity created by the elevated level of mortgage rates during three periods. Our performance continued to lead the home building industry, highlighted by home building gross margins of 33.3%, which were both a record hyper-Greenbrick and the best among public home building peers, as shown on slide 4.
We're excited to expand the footprint of trophy signature homes through our value rich homes.
With that I'll turn it over to Jim for closing remarks.
Thank you Jed.
To conclude our call today.
I want to express my appreciation to our employees.
We believe that a company is only as extraordinary as its people.
We're proud to have a team that embodies the company's vision and mission and this worked tirelessly to achieve industry, leading performance time and again.
I would also like to congratulate jet again, and as well earned promotion and thank him for his leadership and contributions.
Jim Berkman: Strong orders and improved cycle times that are 120 days shorter than Pete's cycle times in 2022, both are at our home revenue deliveries in 3Q by 16% year over year to 754 closed homes. As a result, home building revenue increased 5.3% to 416 million. We continue to generate over 80% of our revenues from infill and infill adjacent communities. Net income for the third quarter was 72 million, or $1.56 per deleted share, which resulted in a return on average book equity of 25.3% year to date.
Jeb strategic and disciplined approach to our operations.
Led to green brick success and growth.
We remain committed to executing our strategic goals and capitalizing on the long term demand for housing.
We pride ourselves on building exceptional homes at industry, leading gross margins and expanding our market share while maintaining a strong balance sheet.
We are well equipped to continue to create value for our shareholders.
Thank you once again for your participation and support.
This concludes our prepared remarks, we will now open the line for questions.
Thank you.
Jim Berkman: We believe our exceptional results dim from our superior locations, our self-development land strategy, operational and process improvements, and most importantly, the hard work, dedication, and operational excellence of our team. Net new orders remain robust during the third quarter, increasing 95% year over year to 788 homes. Year to date, our net new orders grew 73% year over year. The best rate of increase among public home building peers is shown on slide 5. Our cancellation rate decreased 130 basis points sequentially to 6.1%, which was the second lowest cancellation rate in company history, and the lowest cancellation rate among peers.
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.
We will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Jay Mccanless with Wedbush. Please go ahead.
Hey, good afternoon, everyone. So the first question I had.
I'm talking about the price shift and trophy signature.
Any color you could give us on where asps are running for that brand now versus where maybe they had been a quarter or two ago.
Yes. This is jed.
Jay we we've seen a dip from say 480 8-K down too.
Approximately 450000.
Over the past two quarters.
Jim Berkman: Shed will provide more color on our sales environment shortly. According to the National Association of Realfers, with higher interest rates and an already constrained supply of homes, national affordability fell over the summer to the lowest level since 1985. As shown on slide 6, existing home inventory has dropped to near historical lows, with most of our markets having three or fewer months of supply. Existing homeowners continues to stay put rather than lose the low rate mortgages, and this is particularly true and into locations.
And do you think thats going to be the kind of the run rate going forward with that brand.
Probably.
It's hard to figure out mix right now and I think we just mentioned that Austin is averaging about 325000, we build smaller homes down there so.
The consumers are gravitating towards the smaller homes or possibly could go down.
Below $4 50.
And then the other question I had with the smaller homes are we still talking the same gross margin percentage or how is that going to trend.
Jim Berkman: As shown on slide 7, over 60% about standing mortgages have an interest rate below 4%, and more than 80% have an interest rate below 5%. Green brick has been able to maintain a strong sales pace because a significant portion of our homes are in desirable infill locations, with fewer selling owners selling existing homes, and less competition from other builders. Demand has continued to grow at 3 million additional millennial, and Gen Z potential home buyers have begun to enter the market, and are expected to continue to impact demand over the next decade that's shown on slide 8.
As you can go to those smaller footprint.
Yes, great question.
We're seeing consistent margin at trophy across square footage.
Jay This is Greg and Thats all I had.
Yes, Jake this is Jim can add a little bit of color to that as trophy continues to be a greater percentage of our revenue.
I think you are going to see.
Margins on trophy go down but.
We're still optimistic that our return on capital.
He is going to maintain the same because we're going to be able to turn that inventory much faster.
Jim Berkman: Most importantly, Dallas and Atlanta are two largest markets, are attracting more of this demographic compared to US average, largely due to growing employment and relative affordability. We expect this will continue to create opportunity for Green Brick to offer new home construction in desirable locations and to gain market share in the face of a lower available inventory. According to John Burns, new homes are 30% of total home sales in Dallas for the twirling 12 months through August.
That's slightly lower margins so.
We think that the economics are going to be similar to the rest of our brands that are just going to come.
Slightly lower margins sites faster sales pace slower cycle times.
Okay, great. Thank you Jim I appreciate it.
Okay.
Thank you. Your next question comes from the line of Carl Reichardt with <unk>.
Please go ahead.
Hey, everybody congratulations debt.
Jim you talked about land and seeing some pockets of opportunity now one of your peers said yesterday that they are starting to see lot developers, who thought they had a builder on a hook a small builder for a deal is small builders are walking from deals can't put them on balance sheet or whatever so they are seeing some opportunities.
Jim Berkman: This compares to 18% for the top 32 markets in the U.S, and 10 to 15% historically. To position us to capture this long-term demand, we continue to prioritize our search for prime land opportunities. As the availability and cost of capital reaches an unsustainable level for many small builders and developers, we have begun to observe more pockets of opportunity. Overall land prices remain sticky, we believe our strong balance sheet and industry leading gross margins will continue to provide us with opportunities.
Can you talk about the kinds of deals Youre seeing out there is this more related to trophy more related to the traditional business.
What kind of margin you are underwriting to it and what has changed to make those opportunities show up if it's not if it's not price is there something else that's that suddenly made them attractive like they're available and they werent before thanks.
Well I think the main driver of this is capital availability.
Jim Berkman: We expect that our close-knit relationships with local landowners and our entitlement and development expertise will allow us to source and equically on deals that are strategically aligned with our business. For one example, our recent acquisition of 78 home sites in Viral Beach for our subsidiary builder GHO Homes represents the last remaining new home opportunities in a long-standing desirable, high-end, master plan community. Due to low existing home inventory and limited competition from other new home builders, we expect to generate attractive returns and gross margins in this community.
Really not demand that's why we're pretty optimistic about what's going on and we're still seeing.
Very strong demand for housing but.
To get an acquisition development alone at a bank right now is a very difficult process for a developer.
And we.
We have actually cashed out.
Some.
Developers.
Where we were going to option lots in future phases. As you know we were sitting on about $230 million of cash and.
And in three or four neighborhoods. These developers really wanted cash badly and re <unk>.
Jim Berkman: In the face of uncertainty and rates, we remain resilient and adaptable. We provide ourselves in our ability to navigate the present turbulent environment while maintaining focus on our long-term objectives. I do believe we're in a different dynamic than we were in a year ago. To fight higher mortgage rates, buyers have been adjusting to the more challenging rate environment as we have seen more than twice as many cash deals year over year, but consistently strong FICO scores.
Help them with that situation at really favorable economics to our company by.
Testing by basically buying lots that we had options in future phases that we think.
Great because we've been we've been building there for a year or two or three years with great sales and we took we seized on those opportunities.
We think theres going to be more opportunities.
One of the opportunities we really are working on two or three transactions right now that we don't have a lot of competition in us buying larger piece of properties that might have a small commercial component to them or may be even the small multifamily component to them those are very difficult deals to finance right now.
Jim Berkman: FICO scores average 748 on our Q3 closings. We have reduced the use of mortgage rate buy downs since the beginning of 2023, but it is still available too in our toolkit as required. And because of our industry leading close margins, we will have more flexibility in adjusting home prices as needed. Our team will continue to monitor and evaluate with each community an optimized pricing and sales pace. With our operational efficiency and strong understanding of our local markets, we have the ability to modify square footage, floor plans, and options to help address affordability issues and buyers needs.
And.
We will buy a large parcels that have those components, where other builders loans.
Basically we put those parcels in at a very de Minimis value. So if they don't work out we don't have a lot of risk and we're buying it for the residual value of either in the single family for the townhouse land.
Yes, we are seeing.
Kind of the first end of.
Opportunities just because of the capital constrained markets of the lending environment and the higher cost of capital.
That's a very comprehensive answer thanks.
Rick Costello: With that, I'll turn it over to Rick to provide more detail regarding our financial sales. Rick, thank you, Jim. Please turn to slide 9 of the presentation. Home closings revenue for the third quarter grew 5.3 percent to $416 million. Driven by our 16 percent, your over-year increase in home closing units to 754 homes This is partially offset by a 9% decline in our ASP to $551,000. The decline in ASP was predominantly driven by your year-over-year increase in the percentage of trophy signature homes closed, as well as by a change in product mix within trophy.
And then obviously, we talked a lot about trophy, how it's performing.
<unk>. They are seeing can you talk about the business sort of the second move up in some of the segments of the business that you addressed that a lot of the other public builders don't on the higher end and how those communities are performing what your customers are seeing and doing.
Yeah, I'll take that Carl.
As Jed, we're seeing very strong demand for the infill locations in the second and even third time move up.
So we're seeing.
No.
We're seeing far less incentives.
At those price points and very continued.
Strong demand in those houses are not as easy to build.
The lower.
Entry level Trophy homes, so theyre more complex. So we're happy with the sales pace that we're selling those sunset today.
Rick Costello: Our home building gross margin was not affected by a lower ASP. On the contrary, it has climbed each quarter since 4Q of 22 and reached a record high of 33.3% during the third quarter. This Q3 level was 90 basis points higher than our previous record cent in 3Q of 22. Home building gross margins have consistently been among the highest in the home building industry as shown on slide 4. SGNA has a percentage of residential unit revenue for the third quarter was up 40 basis points year-over-year to 11.3%.
And Carl Interestingly, our this is Rick interestingly, our assets are still real strong there.
We're seeing probably twice as many cash deals as we did before as buyers are recognizing hey, this is like getting a 30 year, 8% CD.
So they are they have the capability of <unk>.
Selling assets or already in cash.
Yes that makes sense alright, thanks, Rick Thanks, everybody.
Okay.
Thank you. Your next question comes from the line of Alex Rygiel with B Riley Securities. Please go ahead.
Rick Costello: Primarily due to an increase in brokerage commissions that have returned to historic norms for co-broker deals. For the quarter, pre-tax income increased 0.5% to $98 million. Net income attributable to Green Brick and deluded earnings per share were slightly down to $72 million and $1.56 per share respectively due to a higher tax rate in connection with the timing and stricter eligibility for 45L energy efficiency home credits. We expect fewer homes to be eligible for tax credits this year compared to 2022 due to the change in qualification requirements.
Thank you and nice quarter gentlemen, a couple of quick questions. Here first can you talk a little bit about sort of the net new community openings planned for the next four quarters.
We're not.
Disclosing any kind of range of percentages and new community growth.
But with.
6000 finished lots on the ground at the end of the year, we're going to have plenty of start opportunities.
Including new.
New communities obviously.
Rick Costello: However, we are building more energy star certified homes to increase our future ability to capture available tax credits. Our book value per share was 26,039 cents at the end of the quarter of 26% year-over-year. In the face of higher mortgage rates, we continued to lead our public home building peers in year-to-date new order growth, shown on slide 5. During the third quarter, net new home orders increased 95% year-over-year to 788 units.
Yes from an operational standpoint, I would just add that we're excited about the 6000 lots we feel like we will not be bumping up against sales limitations and R gap out situations like we previously.
The fact of the matters.
It takes a long time to get these lots on the ground in today's environment.
We like we really like the basis, where we'll really loved the locations.
We're excited too.
Rick Costello: Revenue from new home orders was up 80% year-over-year to $452 million. Active selling communities at the end of Q3 increased 16% year-over-year to 86, leading to a 74% increase in our quarterly absorption rates to 9.2 homes per average active selling community. Our cancellation rate for the third quarter continued to decline, dropping 1150 basis points year-over-year and 130 basis points sequentially to 6.1%. The second lowest in company history. And as shown on slide 11, this third quarter cancellation rate was also the lowest among public home building peers.
Just build homes and not have to worry about land development so much.
Okay.
And then new home or a home starts outpaced new orders a bit.
Starts were I think three four per community is your target absorption three or higher now.
Instead of sort of a safe number to assume.
Okay.
That's the <unk>.
<unk> that we've been on the.
Topside up now for the entire year.
Sure.
Actually for the entire year, we're more like three six but.
Three works great.
And we Havent right in that neighborhood is would be wonderful.
Rick Costello: We believe the strong demand we experienced is a function of our quality locations, demographic growth, and in migration in our core markets. Our infill and infill adjacent communities faced limited competition from existing home supply as existing homeowners are reluctant to forfeit their low interest rate mortgages. There are also fewer new home competitors in those areas due to lack of land availability, the higher total finished lock costs, and the more complicated entitlement and development processes required for these desirable locations.
And as a trophy expands at lower price points obviously.
We're expecting a lot more sales per neighborhood.
We were thrilled in Austin, and we just had our grand opening there what do you make 12 sales or this month.
We did.
So I hope, we do that next month no promise, but.
As trophy expands in the $350000 price point, and we expect a lot more sales per neighborhood.
Very helpful. Thank you.
Thank you as a reminder, if you wish to ask a question. Please press star one on your telephone keypad.
Rick Costello: Filled by strong demand, we have been able to gradually increase our backlogs closer to our desired level. Backlog value at the end of the third quarter increased 10% year over year, and has now increased 69% from the end of last year to $623 million. Backlog ASP slightly increased 1.3% to $680,000. Now unlike our decline in ASP on closed homes, our backlog ASP did not decline, as trophy sold a larger portion of finishing homes that closed during the same quarter in which they were sold.
Your next question comes from the line of Alex Barron with housing Research Center. Please go ahead.
Okay.
Good morning, gentlemen, and great job on the quarter.
Sorry, I had to step out for a couple of minutes I don't know if somebody asked this already but on your margins.
Obviously, a new high here I was just kind of curious how much in.
In the way of incentives is embedded in those margins and how sustainable you guys foresee those.
Rick Costello: This is compared to our other builders who sold a greater number of homes at earlier stages of construction. Trophy, a spec home builder, now represents a smaller portion of overall backlog value, as buyers at lower price points are more comfortable with quick delivery homes. Spec units under construction as a percentage of total units under construction was 61% at the end of the third quarter, down from 73% at the end of 2022.
Being into the.
Next year or so.
Well.
We answered partly aleksey the margins in our.
AAA locations.
I like the Providence group in Georgia, only builds in totally in fill locations.
They're totally to the minimum de Minimis.
And a C location for trophy, where we're going to be down the street from other large public builders Jed what are our incentives are going to be competitive with Horton and what youre seeing with pulte and other guys could range up to 8%.
Rick Costello: Additionally, during Q3, we ramped up starts by 79% year over year to 879 homes started for the quarter. Against the backdrop of continued strong demand. Year-to-date starts, now total 2,379, averaging 793 per quarter. This level of starts is roughly in line with our delivery pace for the year through September 30th. In over 1,700 of those starts have occurred in the last two quarters, indicating the accelerated pace of starts since the beginning of the year.
Well.
And it really is.
Alex it's very much going to vary by community on a blended basis.
We went from three 9% to four 4% total incentives during the quarter from Q3 to Q4.
So if interest rates would remain high they're going to be a little bit higher.
So it really will depend on.
Rick Costello: Subject to the movements of mortgage rates. We anticipate continuing to start homes at a robust pace to meet demand in our high-performing markets in Texas, Georgia and Florida. Finally, our balance sheet is stronger than ever. At the end of the third quarter, 100% of our debt was fixed rate with an average pay rate of 3.3%. We have 223 million dollars of cash on hand at the end of the third quarter that is ready to deploy opportunistically.
Whats your forecast is for interest rates.
And in terms of.
I was wondering if you guys have any kind of average statistics for your average consuming of what's their household income.
Their average FICO, what's the average down payment that they are putting down those types of things.
The average FICO was 743.
Obviously that varies.
As you move out and the perimeter it goes down and as you move into a AAA location. It goes up as does the down payment.
Rick Costello: We also have no amounts drawn on 360 million dollars of lines of credit providing ample liquidity and flexibility. Our debt to total capital ratio as of 930-23 decreased 620 basis points from last year and 110 basis points sequentially to 21.8%. Our net debt to total capital ratio was 9.0% as of the quarters end. Downed 1,650 basis points from last year and 160 basis points from last quarter.
Downpayments with our Florida builder DHL are over $100000, our cancellation rate I think was one.
As a result when.
When we go into a CLO occasion, we will experienced probably the more typical 15% to 16% cancellation rate.
And in the infill locations that are still single digit.
What about the household income 70 days, we are seeing.
Rick Costello: We will continue to improve the strength of our balance sheet while we carefully evaluate growth opportunities.
There they range so wildly just even within trophy that I hate to give an exact number on that.
Jed Dolson: With that, I'll now turn it over to Jed. Jed, thank you, Rick. Despite higher mortgage rates, sales orders were stronger than typical seasonal trends across our brands during the third quarter. Net orders in Q3 were up 95 percent year over year and year-to-date net orders are now 73 percent higher. This was not a surprise to us as demand continued to outweigh supply in our infill and infill adjacent locations. While demand is robust, affordability became more challenging as mortgage rates increased during the third quarter.
It's really community by community.
I guess, what I'm just trying to get at is.
This wide perception that 8% is liked.
For people to qualify but.
Obviously that depends what people are looking at the homes, so thats, what im trying to.
To get at.
Well, our mortgage joint venture tells us, they're still wiggle room and incomes, but we're pushing on a C location is the most of the buyer can pay and that answers your question.
Yes, I would add that in.
And the perimeter locations, we're seeing the debt to income ratios.
And the low forties.
Jed Dolson: As a result, incentives on new orders ticked up in September to 5.1 percent. For the quarter, incentives averaged at 4.4 percent of sales price up from 3.9 in the previous quarter. Our perimeter neighborhoods required the most incentives. We are carefully managing our sales pace on a community-by-community basis.
Yes.
Yeah.
Yes, it's not uncommon for <unk>.
Average household income for in those foreign perimeter locations.
8% to 10000, a month, Alex let me touch on one other things that I don't think we communicate enough to analysts and investors Our trophy brand Jed, what's the smallest downpayment earnest money deposit we get into the trophy.
Jed Dolson: While 8 percent plus mortgage rates may cause a negative impact on buyer psychology and create affordability concerns that affect buyer's decisions on how much house they can purchase, where they can afford to purchase a home, and whether to purchase a home. In October, we increased incentives and restored offering limited rate buy downs and or closing cost credits in selective neighborhoods. We will continue to monitor the market carefully to adjust our pricing as well as use our market intelligence to drive decisions on exactly what type of floor plans to build and options to provide.
Yes, typically $5000. Okay. So, let's say, it's four to $5000 of trophy many of our peers. When you take a look at their backlog and they are accepting contracts with a $500.
Earnest money deposit is basically a free our option for buyers. That's another reason why our cancellation rate is so much lower because.
We're not a credit repair shop, we actually expect people when they give us earnest money to buy a house and close.
And where we're seeing most buyers transact.
First of all it's a trophy Brian were seeing them buy finished homes, where they can contract and closed within 30 days. So what I'm trying to say is all backlogs are not created equally we have a higher quality backlog.
Jed Dolson: Providing win-present more affordable options for our buyers and broadening our base of potential buyers. As Jim mentioned earlier, our industry leading gross margins should afford us to be more aggressive in pricing our homes if the market slows down. Our supply chain remains stable. With improvements in the availability of labor and materials for overall cycle times, for homes closed in the third quarter decreased by another 40 days sequentially to approximately 6.1 months on average.
Got it and then if.
If I could ask one more you think using forward commitments to lower the rates are just standard bygone points standard.
Okay.
We are using.
We're using some forward commitments, but we are typical incentive package the consumers using it to partially pay down rates.
And partially pay for closing costs were our mortgage JV tells us that.
Yes.
Jed Dolson: This is a total of more than 120 days of improvement from peak cycle times in 2022. Trophy cycle time declined to 4.4 months allowing trophy to bring more inventory to market, which is critical to home buyers facing heightened uncertainty on rates. This is also allowing trophy to turn inventory more frequently during the years. Thereby, increasing our effective return on investment. We expect our scale as the third largest home builder in DFW, along with our better operational efficiencies, will allow us to continue to improve our cycle time performance.
For the for this quarter, our average rate for.
Mortgage close was about 100, bips underneath what market rate was that day.
During that time period so.
They are using some of that incentive to buy down the rate.
Got it alright.
Alright.
Hey, good and best of luck for the rest of the year.
Thank you.
Thank you ladies and gentlemen, if there are any follow up questions. Please press star one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Jed Dolson: Our focus remains on managing our capital efficiently as we continue sourcing closing and developing new land opportunities under disciplined underwriting that we believe will be creative for our gross story. On the land development side, we continue to expect to have approximately 6,000 finish lots as of the end of the year, with 80% of those lots in infill and infill adjacent locations as shown on flights 12, 13 and 4, based on our exceptional gross margin and operating margin performance we have been allocated more resources toward planned acquisition opportunities.
Ladies and gentlemen at this time there are no further questions. This concludes today's call. Thank you all for Joy.
You may now disconnect.
Okay.
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Yes.
Yes.
Okay.
Jed Dolson: During the third quarter and in October we close on several opportunistic land deals. One notable transaction was our second land acquisition in Austin. The new community Breaker Valley is conveniently located near downtown Austin. Future residents will enjoy quick access to UT Austin employment hubs like the Samsung Austin semiconductor plant and popular recreation activities. At the end of the quarter we hold ample high-quality land positions across our markets with over 26,200 lots owned and controlled. With a solid pipeline we are well positioned to grow a market share in supply constraint, infill, and infill adjacent submarkets.
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Okay.
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Yes.
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Jed Dolson: I would also like to provide an update in our first community in Austin, Trinity Ranch, that opened for sale at the end of July. We are very encouraged by the amount of interest and traffic and turning range since opening. At the end of October we have sold 18 homes in the first three months. ASP on the new homes at Trinity Ranch is around $325,000. The Austin area continues to experience population growth driven by a resilient job market, an excellent quality of life creating an influx of new families. We're excited to expand the footprint of trophy signature homes through our value-rich homes.
Okay.
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Okay.
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Jim Berkman: With that I'll turn it over to Jim for closing remarks. Thank you, Jed.
Jim Berkman: To conclude our call today I want to express my appreciation to our employees. We believe that a company is only as extraordinary as its people. We are proud to have a team that embodies the company's vision and mission in this work tirelessly to achieve industry leading performance time and again. I would also like to congratulate Jed again and his well-learn promotion and thank him for his leadership and contributions. Jed's strategic and disciplined approach to our operations has led to Greenbrick's success and growth.
Jim Berkman: We remain committed to executing our strategic goals and capitalizing on the long-term demand for housing. We pride ourselves in building exceptional homes at industry leading gross margins and expanding our market share while maintaining a strong balance sheet. We are well equipped to continue to create value for our shareholders. Thank you once again for your participation and support.
Unknown Executive: This concludes our prepare remarks.
Operator: We will now open the line for questions. Thank you. At this time I would like to remind everyone in order to ask a question, press star than the number one on the telephone keypad. We'll pause for just a moment to compile the Q&A roster.
Jay Mccanless: Your first question comes from the line of Jamie Canless with Wedbus. Please go ahead. Hey, good afternoon everyone. To the first question I had talking about the price shift and trophy signature. Any color you could give us on where ASPs are running for that brand now versus where maybe they had been a quarter or two ago. Yeah, this is Chad. Jay, we, you know, we've seen a dip from say 488K down to approximately 450,000 over the past two quarters.
Jay Mccanless: And do you think that's going to be the kind of rate going forward with, with that brand? Probably, you know, it's, it's hard to figure out and mix right now. I think we, you know, we just mentioned that Austin is averaging about 325,000. We build smaller homes down there. So if the consumers are gravitating towards the smaller homes, it possibly could go down, you know, below 450. And then the, the other question I had with these smaller homes, are we still talking the same gross margin percentage or how, how is that going to turn as you, as you go to those smaller footprints?
Jay Mccanless: Yeah, great question. We're seeing consistent margin at trophy across square footage. Okay, this is great. That's all ahead. Yes, Jay. This is Jim add a little bit of color to that. As trophy continues to be a greater percentage of our revenue, I think you are going to see margins on trophy go down, but we're still optimistic that our return on capital is going to maintain the same because we're going to be able to turn that into very much faster.
Jay Mccanless: That's slightly lower margin. So, you know, we think that the economics are going to be similar to the rest of our brands, but it's just going to come slightly lower margins, slightly faster sales, pace, lower cycle time. Okay. Great. Thank you, Jim. Appreciate it. Thank you.
Carl Reichardt: Your next question comes from the line of Carl Reichhardt with BTIG. Please go ahead. Thanks, everybody.
Jim Berkman: Congratulations, Jim. Jim, you talked about land and seeing some pockets of opportunity now. One of your peers said yesterday that they're starting to see a lot of developers who thought they had a builder on a hook, a small builder for a deal, the small builders are walking from deals, can't put them on balance sheet or whatever, so they're seeing some opportunities. Can you talk about the kinds of deals you're seeing out there?
Jim Berkman: Is this more related to trophy, more related to the traditional business? What kind of margin you're underwriting to it? And what has changed to make those opportunities show up? It's not price. Is there something else that's suddenly made them attractive? Like they're available and they weren't before. Thanks. Well, I think it's the main driver of this is capital availability. It's really not demand. That's why we're pretty optimistic about what's going on.
Jim Berkman: We're still seeing very strong demand for housing, but to get an acquisition developed and loan at a bank right now is a very difficult process for and we have actually cashed out some developers where we were going to option lots in future phases. You know, as you know, we were sitting on about $230 million a cash. And in three or four neighborhoods, these developers really wanted cash badly. And we helped them with that situation at really favorable economics to our company by basically buying lots that we had optioned in future phases that we think are great, because we've been off who we've been building there for a year or two or three years with great sales.
Jim Berkman: And we seized on those opportunities. We think there's going to be more opportunities. One of the opportunities we really are working on are two or three transactions right now that we don't have a lot of competition in. Is buying larger piece of properties that might have a small commercial component to them, or maybe even a small multi family component to them. Those are very difficult deals to finance right now. And if we will buy large parcels that have those components where other builders won't and basically put those parcels in at a very diminimous value.
Jim Berkman: So if they don't work out, we don't have a lot of risk. And we're buying it for the residual value of either the single family or the townhouse land. So yeah, we're seeing kind of the first end of opportunities just because the capital constrained markets of the lending environment and the higher cost of capital.
Jed Dolson: That's a very comprehensive answer. Thanks. And then obviously we talked a lot about trophy, how it's performing, what the customers there are seeing. Can you talk about the business sort of the second move up and some of the segments of the business that you address that a lot of the other public builders don't on the higher end? And how those communities are performing, what your customers are seeing and doing. Thanks. Yeah, I'll take that Carl.
Jed Dolson: This is Jed. We're seeing very strong demand for the infill locations in the second and even third time move up. So we're seeing, you know, we're seeing far less incentives at those price points and, you know, very continued strong demand. Those houses are not as easy to build as the lower entry level trophy homes, so they're more complex. So we're happy with the sales pace that we're selling those funds that today.
Jed Dolson: And Carl, interestingly, this is Rick. Interestingly, our assets are still real strong there. And we're seeing probably twice as many cash deals as we did before as buyers are recognizing, hey, this is like getting a 30 year 8% CD. You know, so they have the capability of selling assets or are already in cash. That makes sense. All right. Thanks Rick. Thanks everybody.
Unknown Executive: Thank you.
Alex Rigel: Your next question comes from the line of Alex Rigel with Be Riley Securities. Please go ahead. Thank you.
Jed Dolson: A nice quarter, gentlemen. A couple of questions here. First, can you talk a little bit about sort of the net new community openings plan for the next four quarters? We're not disclosing any kind of range of percentages in new community growth, but with 6,000 finished lots on the ground at the end of the year, we're going to have plenty of start opportunities, including new new communities, obviously. From an operational standpoint, I would just add that we're excited about the 6,000 lots.
Jed Dolson: We feel like we will not be bumping up against sales limitations and or gap out situations like we previously have. You know, the fact of the matter is it just takes a long time to get these lots on the ground in today's environment. And we like we really like the basis we're at, we really love the locations and we're excited to, you know, just build homes and not have to worry about land development so much.
Jed Dolson: And then new home or home starts outpace new waters a bit. Starts where I think 3.4 per community. Is your target absorption 3 or higher now, is that a sort of a safe number to assume? That's the neighborhood that we've been on the top side of now for the entire year, actually for the entire year we're more like 3.6. But 3 works great and we have a right in that neighborhood would be wonderful.
Jed Dolson: You know, and as it is trophy expands at lower price points, obviously, we're expecting a lot more sales per neighborhood, you know, we were thrilled in Austin and we just had a grand opening there. Would you make 12 sales for this month yet? We did. So I hope we do that next month, no promise, but as trophy expands in the $350,000 price point, no way expect a lot more sales per neighborhood. Very helpful. Thank you.
Operator: As a reminder, if you wish to ask a question, please press start one on your telephone keypad.
Alex Barron: Your next question comes from the line of Alex Barron with Housing Research Center.
Alex Barron: Please go ahead. Good morning, gentlemen, and great job on the quarter.
Rick Costello: Sorry, I have to step up for a couple minutes. I don't know if somebody asked us already, but on your margins, you know, obviously a new high here, I was kind of curious how much in the way of incentives is embedded in those margins and how sustainable you guys foresee those, you know, being into the next year or so. Well, we answered it partly, Alex. The margins in our triple A locations, particularly like the Providence Group in Georgia, only builds in totally and build locations, incentives there were totally to the minimum, to the minimum, in a sea location for trophy, where we're going to be down the street from other large public builders, Jed and what are our incentives are going to be competitive with Horton and what you're seeing with Poulty and other guys.
Rick Costello: Yeah, they could range up to 8%. Wow. It really, Alex, it's very much good to vary by by community on a blended basis. And we want from 3.9 to 4.4% total incentives during the quarter from Q3 to Q4. You know, so if interest rates could remain high, they're going to be a little bit higher. So it really will depend on what your forecast is for interest rates. And in terms of, I was wondering if you guys have any kind of average statistics for your average consuming or what's their household income?
Rick Costello: What's their average cycle? What's the average down payment that they're putting down those types of things? Well, the average cycle was 743. Obviously, that varies. As you move out in the perimeter, it goes down. And as you move into a triple A location, it goes up as does the down payment. Down payments with our Florida builder, GHO, are over $100,000. Our cancellation rate, I think, was 1 as a result. When you go to a seal location, you know, we will experience probably with the more typical 15 to 16% cancellation rate.
Rick Costello: And, you know, in the info locations, there's still a single digit. What about household incomes that you guys are seeing? They've arranged so widely, just even within trophy that I hate to give an exact number on that. It's really community by community. I guess what I'm just trying to get at is, you know, there's this white perception that 8% is like hard for people to qualify, but obviously that depends what people are looking at.
Rick Costello: At the home, so that's what I'm trying to get at. Well, our mortgage joint venture tells us there's still wiggle room and incomes, but we're pushing on the seal location is the most the buyer can pay an answer to your question. Yeah, I would add that, you know, in the perimeter locations, we're seeing the debt to income ratios in the low 40s. Yeah, and it's, you know, it's not uncommon for, you know, average household income for in those far perimeter locations, you know, eight to 10,000 a month.
Jim Berkman: Now, let me touch on one of the things that I don't think we communicate enough to analysts and investors. Our trophy brand. And what's the smallest down payment or earnest money deposit we get at the trophy? Yeah, typically $5,000. Okay, so let's say it's $45,000 in trophy. Many of our peers, when you take a look at their backlog, they're accepting contracts with a $500. Ernest Marnie deposit. It's basically a free option for buyers.
Jim Berkman: That's another reason why our cancellation rate is so much slower because we're not a credit repair shop. You know, we actually expect people want to give us Ernest Marnie to buy a house and clothes. And we're seeing most buyers trend that, you know, especially with the trophy brand. We're seeing them buy finished homes where they can contract and close within 30 days. So what I'm trying to say is all backlogs are not created equally. We have a higher quality backlog. Got it.
Rick Costello: And if I could ask one more, are you going to be using forward commitments to lower the rates or just stand here, you know, by down the points standard paid by that? We're using, we're using some forward commitments, but we are typical incentive package. The consumers using it to partially pay down rates and partially pay for closing costs. Our mortgage JV tells us that, you know, for the, for this quarter, our average rate for mortgage close was about 100 bips underneath what market rate was that day during that time period. So they're using some of that incentive to buy down the rate. Got it.
Alex Barron: All right. Well, very good and best of luck for the rest of the year. Thanks. Thank you.
Operator: Ladies and gentlemen, if there are any follow-up questions, please press star one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.
Operator: Ladies and gentlemen, at this time, there are no further questions.
Operator: This concludes today's call. Thank you all for joining.
Operator: You may now disconnect.