Nov 8, 2016
Executives
Jim Brickman - Chief Executive Officer Rick Costello - Chief Financial Officer Jed Dolson - Head of Land Development and Acquisition
Analysts
Will Randall - Citigroup Jackson Gillette - Raymond James
Operator
Good afternoon everyone and welcome to Green Brick Partners Earnings Call for the Third Quarter ended September 30, 2016. Following today's remarks, we will hold a question-and-answer session.
As a reminder, this call is being recorded and will be available for playback; details for accessing the replay will be made available at the end of the call. A slide show supporting today's presentation is available on Green Brick Partners website, www.greenbrickpartners.com.
Go to the Investor Presentations tab and click on presentations and webcast. The company reminds you that during this conference call it will make various forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements with respect to revenue, 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 number of 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 Monday, November 7, and the risks 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 the course of this call.
Today, the company will be referring to adjusted EPS and adjusted homebuilding gross margin which are non-GAAP financial measures. The reconciliation of adjusted EPS to net income attributable to Green Brick and adjusted homebuilding gross margin are contained in the earnings release that Green Brick issued yesterday.
I would like to now turn the conference call over to Green Brick's CEO, Jim Brickman. Please go ahead sir.
Jim Brickman
Hi, everyone. Thank you for joining us today.
With me today are Rick Costello, our CFO; and Jed Dolson, our Head of Land Development and Acquisition. I will ask everybody to open up the Investor Presentation which we will refer to during the call.
Please open up to slide three. We are very excited to announce that our third quarter pretax income attributable to Green Brick was $9.9 million, which was up 112% from the third quarter of 2015.
As Rick will get into later, quarter and year-to-date home sale revenues and total revenues were all up significantly. We increased our units and backlog to a record 315 homes.
The dollar volume of our backlog now sits at approximately 139 million, up 57% from year end. Backlog increased strongly due to a 40% increase in net new orders during the first three quarters of 2016 compared to the same prior year period.
And this is after closing of 248 million in homes of the three quarters. In other words, both selling and closing have been at very strong levels.
Most builders are experiencing significant reduction in margins because they sold their best lots and are now replacing these with less desirable and more expensive lots. Our 2016 adjusted gross margin of 23.7% year-to-date is among the highest in the industry.
Our adjusted gross margin for the third quarter of 24.5% compares to the same prior period margin of 22.1%. While we see the potential for some future minor compression, we believe that we can maintain our superior profit margins relative to our peers in the future quarters because of our desirable markets, superior infill lot positions, development expertise and a business model where we receive lot profit and construction interest before our control builders receive any profit.
In total, we now own and control over 5,000 lots, almost 80% of those lots are owned. Every cycle some builders radically change modeling assumptions used in buying land to make deals work.
I want to emphasize we will not and do not need to chase low-margin development deals to grow our revenues. If you would please flip to slide four, you will see that Dallas and Atlanta are two of the top six growth markets in the United States.
We believe housing demand is highly correlated to job growth. During the 12 months ending September 30, 2016 Dallas added 122,300 jobs and Atlanta added 74,800 jobs.
The level of corporate relocation activity remains at all-time highs. Most of our neighborhoods are near the major new corporate campuses being constructed for companies like Toyota, JPMorgan, Liberty Mutual, and Raytheon in Dallas as well as Mercedes and others in Atlanta.
On slide five, you will see that Dallas now has surpassed Houston as the number one housing market in the country. Atlanta is the third best.
Slide six shows that Dallas has continued a five year expansion in starts and closing but still remain 40% below peak activity. Slide seven highlights the Dallas lot supply as measured by inventory versus starts has continued moving favorably as it has over the past seven years.
Green Brick owns and controls over the 3,400 lots in this dynamic job driven market. Slide eight underscores Atlanta’s double-digit growth in both starts and closings.
Despite the strong performance, the market remains 65% below prior peak. A majority of this growth is in North Atlanta where all of Green Bricks communities are located.
We expect that Dallas and Atlanta to remain two of the best housing markets in the nation in 2016 and beyond as measured by home constructions starts. We had a really great quarter and a concrete system while maintaining a net debt to capital ratio where net debt excludes cash of under 16% as of September 30.
This compares to an average of 40% ratio for the public builder sector as we show on Slide 9. And you should note that Green Brick has no off-balance-sheet debt embedded in unconsolidated data joint ventures unlike many of our peers.
We plan on prudently increasing our debt to capital ratio to a still conservative leverage to cost effectively grow our builders and/or make acquisitions. Increasing our financial leverage should allow us to lower our average cost of capital and increase both our earnings per share as well as our return on equity.
Our September 13, 2016 financial statement show a large balance in restricted cash. We funded these dollars into escrow at the end of the third quarter to close a land purchase in Frisco, Texas for the development of over 350 home sites.
Over 200 of these lots have already been contracted by us to sell to several public builders. The balance of the lots will be sold to our control builder CB JENI Homes, Southgate Homes.
We believe this transaction will be accretive to earnings in 2018 and beyond. Next, Rick Costello, our CFO, will discuss our third quarter 2016 results in more detail.
A summary of those results are on Slide 10. Rick?
Rick Costello
Thanks, Jim. Hello, everyone.
Thank you for joining us today to review our 2016 third quarter and year-to-date financial results. I’m going to start by going through some highlights for the quarter and year-to-date which I will go into in more detail in just a moment.
Some key operational metrics for the quarter ended September 30, 2016 versus the same period of 2015 are: net new orders increased by 46%, home deliveries increased by 27%, home sales revenues increased by 27%, and the dollar value of units in backlog increased by 41%. In highlights for the year-to-date versus the same period of 2015, net new orders increased by 40% year-to-date, home deliveries increased by 23%, home sales revenues increased by 39% year-to-date, the average sales price of homes delivered increased by 12% and homes under construction increased by 22%.
Now for a little more detail, Green Brick delivered 196 homes for the quarter, a 27% increase over the third quarter of 2015. Year-to-date, Green Brick delivered 569 homes, a 23% increase over the first three quarters of 2015.
The average sales price of homes delivered was $440,000 for the quarter flat versus Q3 of 2015. Home sales revenues were $87.8 million for the quarter, an increase of $27 million compared to the third quarter of 2015.
Year-to-date, Green Brick earned $248.2 million in builder revenues, an increase of 39% over the first three quarter of 2015. For the third quarter, the number of net new home orders was 204 homes, an increase of 46% compared to the third quarter of 2015.
Year-to-date net new home orders were 683, an increase of 40% from the first three quarters of 2015. At the end of the third quarter, Green Brick had a total 49 active selling communities, a year-over-year increase of 17%.
Homes under construction increased 22% to 665 homes as of September 30 compared to 543 as of September 30, 2015. The adjusted homebuilding gross margin percentage increased to 24.5% for the third quarter versus 22.1% for the third quarter of 2015, that’s an increase of 240 basis points.
The quarter’s margins of 24.5% are improved versus our margins for the last 12 months, which now stand at 23.9%. In fact our gross margin percentage has now improved for four consecutive quarters.
Year-over-year there was a decrease in land development revenue and as we’ve mentioned in previous quarterly calls, this is a result of an intentional increase in intercompany lot sales to control builders where we don't recognize revenue until the home is built and closed. We believe these sales are the best use of these assets as we will be rewarded long-term by further investigating in our builders.
Specifically for the third quarter, our land development revenues declined from $6.0 million to $3.8 million. At September 30, 2016, our builder operations segment had a backlog of 315 sold, but unclosed homes as Jim mentioned – that’s a record, with a total value of approximately $138.7 million, an increase of 41% for the prior year.
At September 30, the average sales price of homes in backlog was approximately $440,000, an increase of 5% compared to the prior year. Finally and perhaps most importantly is the bottom line.
Income before taxes attributable to Green Brick was $9.9 million for the third quarter, compared to $4.7 million for the same period in the prior year. Adjusted EPS was $0.20 per share for the third quarter of 2016 versus $0.10 per share for the third quarter of 2015, an increase of 100%, that’s a double.
Year-to-date, income before taxes – this year-to-date for Green Brick was $25.3 million, a 51% increase over $16.8 million in the same year-to-date prior year period. I will now turn the call back to Jim, who will provide some concluding remarks.
Jim?
Jim Brickman
Thanks, Rick. Green Brick has really made significant progress again this quarter in virtually all aspects of our business.
At Green Brick’s corporate level, we believe we can grow our business with very little incremental cost. We continue to look for the best way to grow our top and bottom line, which includes but is not limited to purchasing builders in other markets.
During the quarter, Rick, Jed, and I, met with a number of new and prospective investors. We had a great quarter, but I'm especially pleased that we are addressing a shareholder base focused on superior long-term risk-adjusted returns.
We have the lot position, balance sheet and culture in place to provide those returns in future quarters. Thank you for your help and support.
I will now turn the call back to the operator for questions.
Operator
[Operator Instructions] And your first question comes from the line of Will Randall with Citigroup. Your line is open.
Will Randall
Hi, guys. Congrats on the progress.
Jim Brickman
Thanks, Will.
Rick Costello
Thanks, Will.
Will Randall
I guess in terms of looking forward your comments on Dallas in particular, it’s one of the stronger markets now, most homebuilders know that – how does that impacted kind of current land pricing meaning for new deals and how do you feel about your gross margins over the next year or two relative to the strong one you just posted in light of that?
Jim Brickman
Well, we just finished putting our business plan together with our builders for 2017 and we fortunately just because of the land acquisitions we made and mostly these deals we’ve been working on for a long time before now we don't see decreasing pressure on margins really much in 2017 on the deals we are putting together. The deals we typically chase are a little more complicated than most builders do.
They have a lot more moving parts and I think that's why we’re able to maintain our margins.
Will Randall
Got it. And then as a follow-up to that, when you – how much runway do you think you have in terms of current land deals as it get you past 2018 and then similarly how much growth do you think we could have out of the communities as you look into 2017?
Jim Brickman
Jed, why don’t you take that?
Jed Dolson
Hi, Will, this is Jed. In Dallas, we think we have a good runway to get us past 2018, 2019 and really we are already looking at 2020.
Will Randall
And then in terms of how much do you think you can grow active communities in 2017 based on where you are on developed lots as well as potential deals?
Rick Costello
Well, you’ve seen we’ve already accomplished the growth that we thought we would get into community growth, at this point we are really not providing that forward guidance. We don’t have any gaps in 2017 and not till the end of 2018 as Jed was indicating.
So we will continue to grow as the market allows us to grow.
Jim Brickman
And let me just chime in one thing Will, like, some of the community growth – we’ve already caught up in community growth, it’s hard to handicap because, for example, we are just getting ready open and we just started really selling a large 162 home infill of community in Sandy Springs and we think that that community could be better than having three peer-type communities. We have a very similar community called Southgate in Flower Mound.
So I think the quality of the communities we’re opening continues to be really AAA.
Rick Costello
And that’s said – that includes Atlanta as well. We were opening a new – about to open a new community called Academy, East of Main in Atlanta, same kind of deal where we have an exclusive situation there.
Jim Brickman
It’s a very highly controlled historical district. We had to do a lot of work.
We renovated 100-year-old farmhouse into a rec center and we just think it’s going to be a real winner.
Will Randall
Great. Thanks, again, guys.
And congrats again on the progress.
Jim Brickman
Thank you.
Rick Costello
Thanks, Will.
Operator
And your next question comes from the line of Jackson Gillette with Raymond James. Your line is open.
Jackson Gillette
Hi, guys. Congratulations on another good quarter.
Jim Brickman
Thanks. Welcome to our call.
Jackson Gillette
I just want to focus on – I appreciate your comments about – that you are meeting with investors inside the quarter and your plans for growth as far as building up your builders and then also looking at acquisitions at the same time. I want to hear your thoughts on liquidity of your shares and how they’re trading?
And with your shareholder base being about basically half the floor doesn’t trade because it’s owned by couple of big investors or more than half. I just want to get what is your opinion and I understand the focus on long term returns.
But you use to trade 400,000, 300,000 shares a day and now lucky to get 50,000.
Rick Costello
I think the real, it’s been trading around 80,000 but obviously we would like to have more activity rather than less activity and liquidity. But really at the end of the day, I think investors will notice value and they will pay for it, and we can’t control how many people are going to buy our stock.
All we can do is focus on really compounding our cash that we’re generating on a tax free basis right now into future earnings. So we are sensitive of that, we don’t control it and we’re just going to focus on growing our business.
Jackson Gillette
Right, I appreciate it. Just any thoughts on the matter and primarily second question about – do you have any type of timeframe that as far as your business plan about getting to the 35% net debt to capital and kind of your thoughts about way being selective versus getting a better cost of capital.
Rick Costello
I think the obvious biggest trigger is an acquisition. We’ve looked at approximately 12 builders and we don’t want to pay dump test just to please Wall Street and grow revenues, and we have the balance sheet and capital to grow our revolving line of credit.
And if we can find a builder that really fits us strategically we’re going to do that but we just don’t have anything in hand right now to discuss. So obviously the sooner would be the better, but we can’t give guidance on that.
Jackson Gillette
Can I ask one more question about you guys have continued to increase your gross margins, what’s the biggest benefit for Green Brick versus other homebuilders as far as it is mainly your lan purchases and cost or is it more of an operational – what’s the biggest benefit that you guys have.
Rick Costello
I think it’s both as our revenues grow and starting to get better SG&A leverage for one thing. We’re really focused on continuing to lower the SG&A leverage at our builder level in 2017, but I think there is no secret sauce but I think that we go after deals that are a little bit more complex.
There are moving parts to some of my three builder deals and weren't we don't have to compete with this many large line revenue public builders for those deals. Jed, why don’t you tell him about the 300 lot you bought for example in downtown Dallas, the size of those and we really don't have a lot of big builder competition.
I would just say that we try to focus on niche markets when we can and we’ve made – this niche markets produce higher gross margins.
Jackson Gillette
Thank you very much guys. Keep up the good work.
Rick Costello
Thank you.
Operator
[Operator Instructions] And there are no further questions coming through at this time. Ladies and gentlemen, thank you for joining today’s conference call.
This concludes the call for today and you may now disconnect.
Rick Costello
Thank you.