Q2 2019 Earnings Call
<unk> playback.
Slide show supporting today's presentation is available on the Green brick partners website, Www Dot green brick partners Dot com.
Go to investors and governance, then click on the option that says reporting.
Then scroll down the page until you see the second quarter Investor call presentation.
The company reminds you that during this conference call. It will make various forward looking statements within the meaning of the safe Harbor provisions.
The United States Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward looking statements with respect to revenues earnings performance strategies prospects and other aspects of the business of Green brick partners are based on current expectations and are subject to risks and uncertainties.
A few factors could cause actual results or outcomes to differ materially from those indicated by such forward looking statements.
Please read the cautionary statement regarding forward looking statements contained in the company's press release.
Which was released on Thursday August eight and the risk factors described in the company's most recent annual and quarterly filings with the Securities and Exchange Commission.
Green brick partners undertakes no duty to update any forward looking statements that are made during this call.
Today, the company will be referring to pre tax income attributed attributable to green brick pretax income attributable to green brick.
As a percentage of total revenues pretax income as a per 10 percentage of average invested capital EBITDA net income return on average equity and adjusted homebuilding gross margin, which are non-GAAP financial measures.
The reconciliation of adjusted homebuilding gross margin to homebuilding gross margin and the reconciliation of net income attributable to green brick to adjusted pre tax income attributable to green brick or both contained in the earnings release that green brick issued yesterday.
I would now like to turn the conference call over to Green bricks CEO Jim Brickman. Please go ahead Sir.
Hi, everybody with me is Rick Castello our CFO .
And Jed Dolson President of our Texas region. Thank you for joining our call.
As the operator mentioned a presentation that accompanies this call can be found on our web page at Green brick partners dotcom at the top of our web page click on investors and governments then click on the option that says reporting.
And then scroll down the page, you'll see the second quarter Investor call presentation.
I'll give everybody a few seconds to get this done.
Starting off the call we had a great second quarter with record tying earnings of 29 cents record residential unit revenue of $175 million and a record backlog of $331 million.
Our adjusted homebuilding gross margin increased 180 basis points to 23.3% in the second quarter of 2019 from 21.5% in the first quarter of 2019.
We expect earnings growth to inflect positively starting in the third quarter of 2019 on a year over year basis.
Due to great progress with our trophy signature is home brand. We expect this entry level platform for which the company now controls over 1600 home sites to significantly contribute to 2020 earnings and beyond.
Further we continue to expect that we will grow from 76 communities on January Onest 2019 to 92 communities by the either the end of this year or the first quarter of 2020, depending on weather.
This 21% community growth is being accomplished while maintaining a very conservative balance sheet with net debt to total capital of only 28.7% as of June Thirtyth 2019.
Please flip to slide five.
Two of the best markets in the country, our core markets of Dallas and Atlanta.
During the last 12 months, Dallas and Atlanta continued to be two of the largest markets in terms of generating job growth.
On slide six you can see the Dallas continues to be the number one new housing market in the nation, adding about 33100 starts.
Atlanta is the fifth largest market and our challenger home affiliate operates in Colorado Springs part of the six largest market.
We are 2% to 5% of the starts in three of the largest markets in the United States, giving us significant opportunity for growth in each one of these markets.
Slide seven demonstrates what we mean by a rated submarkets.
John Burns real estate consulting has published maps on our Dallas and Atlanta Metropolitan areas, where they have designated grades and sub markets as the most desirable and a market through the most affordable and ETF market based on a variety of subjective factors such as quality of schools proximity of jobs and the existence of infrastructure for quality of life.
We have taken those maps and overlaid the locations of our green brick communities with green dots.
As you can see the preponderance of our communities is in the best or very a lots and desirable rated submarkets what the progress did not tell you is how supply constrained lots and these most prime a location still are.
Green brick owns or controls almost 5800 lots in the Dallas Metroplex and over 2400 lots in Atlanta, primarily in a locations.
Over 1600 of these lots for the trophy signature homes, and our new build or entry level and first time homebuyers.
As the bottom of slide seven shows you'll also see that we have 35 communities under new under development as I mentioned at the opening we continue to expect that we will grow community count by 21% to 92 communities by the end of the year or the first quarter of 2020.
Slide eight takes a closer look at our growth story of annual revenue and the related investment in land and land development.
And look at the chart you can see the direct correlation between our growth and total lots owned and controlled with resulting growth in annual revenues.
Over the last 12 months, we have grown our revenues by 28% and our total lots owned and controlled by 20%.
I want to thank the entire green brick team for their hard work and great results in the second quarter.
Next Jed Dolson, our president of the Texas region will discuss our growth drivers and our diversification efforts Jen.
Thanks, Jim Greenberg is truly one of the best growth stories in the public homebuilder space.
Take a look at slide nine titled growth drivers.
The chart shows the growth in the last 12 month total revenues from Q2.
Of 27 team to Q2 2019 is 63%.
Over that two year period, but even more impressive is are set up for the future over the over the last two years, our backlog grew 101% to 331 million as of June Thirtyth 2019.
Which was both a doubling of our 2017 backlog and a record.
For any quarter in our existence.
During these last 24 months, we also increases increased our lots owned and controlled by 70%.
We grew the total number of selling communities by 67%.
Now, let's focus on just the 12 months ending June Thirtyth 2019.
We increased our number of units started by 36% versus the 12 months ended June Thirtyth 2018, with an increase due to 1682 units started.
In fact, we have an average starting over 420 units per quarter from Q3 of 2018 third Q2 of 2019.
As of June Thirtyth 2019, we have over 1214 units under Conns Sir.
So Greenberg has the backlog of the construction starts the level of units under construction and the lot inventory to sustain further dynamic growth.
On slide 10, we highlight the diversification of our product offerings from 2018, we significantly increased our focus on townhome communities. Thanks to years of planning land acquisition and development.
In fact, we have grown our townhome revenues, 53% over the last 24 months.
Our robust single family growth of 66% and and the 24 months from June Thirtyth 2017 to June Thirtyth 2019 is highlighted.
Vijay chose revenues.
In the last 12 months of $100 million at a lower ASP with the more affordable age targeted product.
Over this period.
This has helped us maintain affordability, while offering a high quality product.
Over the last two years, our average sales price has risen by only 2.8% and total.
Slide 11 visually demonstrates that or.
That our range of homes and diversified.
Homebuyer mix have grown our revenues and provided stable earnings.
By not concentrating on any one homebuyer segment.
We now have five distinct.
Consumer segments, which are all experienced strong revenue revenue growth into Q2 of 2019.
You can easily see in the Pie chart on the right side of the page.
The more even the size of the various targets segments versus last year at this time.
Our 26% year over year growth has been an important balancing and diversification of our target consumer mix.
And please remember.
What you saw back on slide eight most of our communities are located in desirable submarkets. The additional move to include different consumer segments and product types, our partner green bricks longer term strategy to diversify our offerings and eliminate risk without reliance on constantly growing sales prices or a single group of homebuyers.
Next Rick Costello, our CFO will discuss our second quarter results in more detail.
Thanks Jed.
First everybody.
I was notified that there was an issue with our website if you hit refresh.
On our website and go to the investors and governance page and reporting you will see the second quarter Investor call presentation about halfway down the page under SEC filings and reports I'll give you folks amended to do that if you were relying on our web site.
Thank you for joining us today to review, our 2019 second quarter financial results.
Before moving to the financial results lets first review slide 13 about our closing yesterday of long term debt. We are really excited to announce that we have established a relationship with one of the largest and most reputable institutions in the world to help fund our future growth.
On August 8th yesterday, we issued $75 million of senior unsecured notes with Prudential private capital in a private placement.
Our superior credit metrics allowed us to price seven year notes at a fixed rate of 4.00%.
This rate is only slightly higher than the long term rates paid by the lower leverage large cap builders like envy R&D, R. Horton and more attractive than the long term rates paid by all small cap and all make cap builders.
And as you can see in the table provided our small cap peers have been incurred a high cost to stack maturities on a longer term basis than provided in revolving credit lines. So instead of paying higher rates, we have reduced our cost of borrowing and therefore, our overall cost of capital pretty exciting stuff.
I'm now going to move into the financial highlights. So please move to slide 14.
For Q2 of 19 versus Q2 of 18 and for year to date comparison here are some of the high level key operational metrics.
Net new orders increased by 17% for the quarter and 9% year to date.
Home deliveries increased by 20.5% with home closing revenues up by 20% for the quarter and for year to date home deliveries have increased by 28% with home closing revenues up by 26%.
Fantastic growth.
Year over year homes under construction are up 36% with homes started on a last 12 month basis up by 23%.
The dollar value of units in backlog increased by 5% year over year to a record level.
And our EPS tied our record for second quarter of 29 cents.
I think thats a record for any quarter during any of our years Q2 18. We also had 29 cents and that was our toughest comp of the year and as Jim mentioned before we expect earnings growth to inflect positively starting in Q3 of this year on a year over year basis.
Now for more details for the second quarter. The number of net new home orders was 453 homes, an increase of 17% compared to the second quarter of 2008.
And for year to date 2019 versus 2018, our net new home orders have grown by 5% from a 21 to 898.
We saw a large improvement in Q2 relative to the prior year with absorption per cell active selling community just 4.8% lower than the rapid pace of Q2, 2018, but 13.5% greater than absorption per community in Q2 of 2017, so 13.5% on an absorption basis greater than 17.
Green brick delivered 394 homes for the quarter, 20% more than the second quarter of 2018.
For year to date 2019 versus 2018 Green brick delivered 762 homes, a 28% increase over last year.
Residential units revenues were $175 million for the quarter, an increase of 20% over the second quarter of 2018.
Year to date residential units revenue grew to $337 million up 26% over the first two quarters of 2018.
The average sales price of homes delivered was about $437800 for the quarter and 435300 year to date down just 2% for both Q2 of 18 and year to date 2018.
Most of the decline is a function of mix.
At June 32019, our builder operations segment had a backlog of 700, Seventeens sold but unclosed homes with a total value of approximately $331 million an increase of 5% from June 32018.
At June 30 day average sales price in backlog was approximately 462000, an increase of 3% compared to the prior year again. This is a record level of backlog.
Now, let me introduce and review some of our key growth metrics on the last 12 months basis.
Regarding sales net new orders for the last 12 months stand at 14, 74 homes up 11% from 13 to 27 homes as of the end of Q2 of 18.
Regarding closings.
Units closed for the last 12 months total 14 55 of 30%.
From the 12 months ended June 32018.
And therefore unit residential units revenues are up 27% over this period on a 12 month basis last 12 month basis.
For Q2, 2019 to Green brick had an average of 77 active selling communities a year over year increase of 24%.
Regarding lots inventory the number of lots owned and controlled has grown to just under 9200 loss up from about 7650 lots from the year ago period for an increase of 21% as of the middle of this year and this was accomplished despite starting almost 1700 homes in the last 12 months.
Homes under construction increased 23% to 1200 14 homes as of June Thirtyth compared to 988 homes as of June Thirtyth 18, again, it's 23% up in homes under construction.
In the last 12 months, we started 1600 82 homes versus 1200 41 homes as of June 32018, an increase of 36%.
During Q2, our adjusted homebuilding gross margin declined to 23.3% for the second quarter of 2019 from 26.7% from Q2 of 2018 due to increased sales incentives to customers to promote sales pace.
But importantly, adjusted margin improved 180 basis points sequentially from Q1 of 19% to Q2 of 19 and this improvement is attributable primarily to a decline in that level of those sales incentives to customers.
Again and as reiterated on prior calls it's critical to understand the corresponding decrease in income allocated to our non controlling builder partners our NCR.
From Q2 of 18 to Q2 of 19, our non controlling income declined. So this expense in effect declined by 1.8% and also declined 2.1% year to date.
Our business model was established to incentivize our builders by sharing income after Greenberg green brick earns lock profits and the high rate of return on our capital invested in each builder.
When there is an operating margin compression bottom line operating margin compression, which impacts the profitability of one of our builders that builder shares and the bottom line operating margin decline to the extent of their last in the waterfall interest of typically 50%.
So our business model is working as demonstrated with these strong results.
Now move to slide 15, which demonstrates our performance as measured against our peers.
The chart begins on the left with two critical measures of pre tax income performance.
Pre tax income takes into consideration building margins as well as operating expenses as you can see pre tax income as a percentage of revenues or our pre tax margin stands at 10.2% for the last 12 months. This puts us far above our small cap and mid cap peers.
A second measure of pre tax income performance is based on return on invested capital.
Again, our return of 10.5% for the last 12 months stance and shoulders above our small cap peers as reflected in pretax ROI see and comfortably higher than our mid cap peers.
Of course, most important is the bottom line.
Our EPS of 29 cents per share for Q2 flat from Q2 of 19.
That translates into a return on equity which stands at 11.2% for the 12 months ended June Thirtyth 19, which is in line with our mid cap and small cap peers.
But consider slide 16 for the rest of that story.
As shown on that slide our return on equity has been accomplished despite keeping one of the lowest net debt to capital ratios of any public builder, except for D.R. Horton shown on the chart, we've been able to grow rapidly while increasing our financial leverage through low cost revolving lines of credit and now it's going to be also through our lower cost long term capital debt.
As of June 32019, we've continued that gradual increase to the point, where our net debt to capital ratio or net debt is debt minus cash has increased to 28.7%.
Note that other peer builders have add leverage to an average of 42%, but if you look more closely the slide shows that the seven builders on the left slide left side of the slide or the wrong side of the slide.
Are all small cap and mid cap builders now, they're net debt to capital ratios ranges from 36% to 70% for an average of 50%.
So they are accomplishing the same return on equity that we are the similar return on equity, but with almost 75% more financial levers then send us green brick.
Now one final note on.
Something that we've been talking about our expected increase in community count to 92 active selling communities. The implication is a corresponding increase in construction starts which we should see starting with Q3 coming up as we began building toward another market increase in annual revenues in 2020.
I'll now turn the call back to Jim who will wrap up this part of the call prior to opening things up for Q1 day.
Okay. Thanks, Rick.
While we had a great quarter, our team builders did a wonderful job of managing pace versus price to generate the best second quarter of net income.
And the largest backlog in green bricks history.
Unlike most peers our neighborhood count is accelerating we will grow from 76 communities on January Onest 2019 to 92 communities by the end of the year or the first quarter of 2020.
And this 21% community growth is being accomplished as Rick just discussed while maintaining a very conservative balance sheet or a net debt to capital is only 28.
0.7%.
And one other metric grid Didnt mention is that we also don't do any off balance sheet land banking, which many peers do that just kind of disguise leverage.
As we discussed our superior credit metrics allowed us to fund our growth for the new 4% $75 million senior term loan with Prudential. This low cost of capital is a huge advantage over our peers.
We now also have the most homes under construction and our history.
Operationally, we are seeing house margins improve and the benefits of our standardization and operating systems utilized by all of our builders.
Our business is now scaled to where our title and mortgage business, our rapidly expanding with little profit with great profitability a little risk.
Our entry level first time move up value builder Trophy signature homes is off to a great start and should be a significant part of our earnings growth story that we expect to replicate in other markets.
I want to thank the entire green brick team for their hard work and great results I'll now turn the call back to the operator operator.
To ask a question at this time. Please press Star then the number one on your telephone keypad, well pause for just a moment to compile documenting roster.
Again to ask a question press Star then the number one on your telephone keypad.
Your first question comes from the line of Michael Rehaut with JP Morgan Your line is open.
Hi, Jason.
Maggie on for Mike.
First question I had.
On your community count guidance for you reiterated the expectation to get 92 by the end of the year. We ended the first quarter of next year.
I think last quarter, you had said that you expected that growth to happen kind of it.
Lenny linearly.
Right, we actually saw.
Down a little bit.
The most recent quarter. So are you expecting more of a jump in the third quarter were.
Expecting it.
Kind of a consistent pace of growth.
Across the next two or three quarters.
This is Jim break when Jeff can chime in.
We expected, we hope will be linear because.
It's difficult opening and closing communities unless you try to approach in a linear manner, but.
One of the challenges that we get into right now as acceptance of community cities are very demanding and under staffed.
So our plan is to make it as linear as possible and we hope to cities cooperate with us as as well as to whether you have anything to add to that Jeff.
No it will be linear.
Okay. Okay.
And I guess.
Okay.
You bet.
They were.
So.
Up year on year, but that they were down sequentially. So im just wondering if you could.
Quantify that for us.
And then also.
The homes that were ordered wouldn't quit their highest.
Last quarter to have those already hit your PML or should we expect them to continue flowing through.
In the third quarter.
Talking about margins, we think that.
We don't.
Provide whether it's 10 15 or $20000 or whatever the number is and incentives, but you can see it reflected in the gross margins.
We have seen.
Gross margin improvement.
We see inventory clearing in our markets pretty significantly we're very encouraged by that.
We think our concessions we can see trending down now for the first time.
And we're very encouraged about.
Not having margin margin degradation and really improvement throughout the rest of the year.
Okay. Thank you.
Again to ask a question press Star then the number one on your telephone keypad. Your next question comes from the line of Carl Reichardt with <unk>. Your line is open.
Thanks, guys or afternoon or whatever it is.
We made Q you talked about the gross margin change from last year being a function of both the incent the sales incentives, but also higher material costs and obviously lumber has been coming in.
Can you just talk a little bit about the.
That impact and you Didnt know labor as an issue. So I'm just trying to get a little more color on the year over year change in margins.
Well we've had up.
Obviously lumber has been a.
A tailwind.
For margins for our builders.
And it varies market by market in Dallas, we are seeing.
Benefits pretty well across the board.
In all of our purchasing and it's been interesting to follow I mean, I don't care, whether cheat rock concrete or anything else we are not seeing.
Price pressure and we've been able to lower our unit costs pretty well across the board.
In Atlanta has been a little bit more difficult, but in Dallas, we're seeing a lot of improvement in our.
Unit costs pretty much across the board whether it's concrete.
Plumbing.
And need as the additional tailwind we're experiencing.
Over prior periods is rebates to our national purchasing program, that's helping lower cost significantly as well as value engineering decisions we've made.
Hey, Carl this is Rick.
Thanks for joining the call and then also thanks for that heads up on our web site to appreciate that Eric.
One of the things that's that's the active let's say over the over the last year as we've been pretty consistent in terms of having our like 11 to 1200 homes under construction and on those started homes.
The costs.
As the units were started had contracts in place and have purchase orders in place.
But our builders are experiencing.
A substantial ability to lower those costs on a prospective basis, which is which is.
Being reflective in a in an improved margins and like Jim said, our visibility into the future.
Yes, Rick is your expectation.
I guess I can ask about this quarter to incentives are coming on has pricing power returned in any kind of the a meaningful way. If you look across your your community Panna. Please do you see the ability to raise basis.
All right I think.
Carl This is Jed I think based home pricing is increasing a little but we're getting more.
Bang for the Buck by decrease in incentives.
Carl the other thing that we did is we were putting things in homes that we have now not included in the base price because we weren't getting paid for it that's increasing margins.
Okay, all right that makes sense, thanks, Jim and I have one more you answered this store count question just on the new on the new.
Private placement debt deal going to pay down the secured credit line is that.
Did you intending then not to use that secured credit line on a go forward basis and this is a replacement for that or will that capacity still exist for you.
No it's actually Carl is paying down.
Pretty much across the line pro rata all of our revolvers, both secured and unsecured.
We still.
The pay down is essentially going to.
Convert into the ability to continue to borrow up on on our revolvers.
To fund growth.
Karl again, sorry to interrupt the retina, here's a problem probably a very simple way for analysts and investors to take a look at how we're going to fund our growth with our really attractively price capital.
We had approximately $240 million of data out at the end of second quarter I think it was actually 234, but let's say it's 240.
With the Prudential line, we have $365 million of capacity in all of our specific cities are unsecured and and other facilities.
So there is about $125 million of available available capacity that we haven't drawn down again.
We want to maintain our business at about a 33%.
Debt to total capital, which implies that where there is about $250 million of retained earnings.
That we can fund using this low cost of capital over the next few years, and we think Thats really a great.
Growth story is something most peers can't do and we're really excited about.
Thanks, Jim I appreciate that thank you guys.
There are no further questions in the queue at this time.
That completes today's conference call you may now disconnect.