Green Brick Partners, Inc. (GRBK) Earnings Call Transcript & Summary

Good morning. My name is Mike Rehaut. I'm the senior analyst for Homebuilding and Building Products Group within the Equity Research Department at JPMorgan. We're thrilled to continue with our 13th Annual Homebuilding and Building Products Conference in our new virtual format. We're pleased to have with us Green Brick Partners. On with me today is Jim Brickman, CEO; and Rick Costello, CFO. As with our prior sessions, we'll have this for about 35 minutes, so ending around 12:20 Eastern Time. I'm going to turn it over to Jim and Rick, who'll walk through some slides. I'll ask some questions. And then we also have the ability to relay any online questions from our virtual audience as well. So thanks, again, Jim and Rick and the whole Green Brick team for participating. We always appreciate it. And with that, I'll turn it over to you for some of the walk-through of the slides. Great.

Great. Thanks, Mike. Appreciate it. Good being back with you all again. For everyone's information, our slide deck has been posted to our website, greenbrickpartners.com. So it's going to be available on the Investors page there. You can refer to it after our session today. If you want to go ahead and move to Slide 5, we'll start it off. Jim and I will go back and forth on this, and we'll do all the questions at the end. If you're not familiar with Green Brick Partners, you should be. We are a very high-achieving, smaller company in the public builder space, obviously. If you look on Slide 5, you see the states and markets that we are participating in, some of the best markets in the country. And we have some of the best locations within those markets. As you can see, if you include our unconsolidated investment in Challenger Homes in Colorado Springs, that adds almost 500 units to take us to almost 2,200 homes last year. Last year, we closed 1,719 homes with consolidated revenues, total revenues of $752 million. If you flip to Page 6, you'll see that we actually have 8 brands in those 4 markets. Our ASP is in the $420,000s, give or take, which is actually down over the last 2 years because of some factors that you'll see later, where we've -- when we entered the Florida market with GHO Homes, that's a adult buyer and age-targeted buyer with a lower price point because they are not in one of the more expensive counties in Florida. We've also had a significant introduction by Trophy Signature Homes in our Dallas market. Additionally, our townhome builder, CB JENI Homes, offers townhomes from the low 2s. So we do have a very diverse presence in some of the best markets with different price points and customer segments targeted. We have a good selection of move-up buyers, second-time move-up buyers, some urban presence as well as the suburban townhome, which is a large portion of what we do. So we'd like the fact that we are in the sun markets and the very job growth-dominated markets, and we feel like that is a factor that you don't see in the numbers but is important to our long-term growth.

Rick, let me chime in one other thing about this is that we view a homebuilding in the real estate business a little bit differently than some of the giant companies. As you can see in the slide, we have a very broad product and geographic and price point stratification and diversification. And one of the things we don't do is what typical builders would do, is The Providence Group is a really good example. We believe that real estate is a local business. We believe that profit starts with making proper land acquisitions or if you're even a lot option buyer, a lot opting person, those local relationships are very important. So in the case of The Providence Group, if you take a look at their logo as The Providence Group/a Green Brick Partner, but the last thing we want to do is come in, operate, purchase -- we own controlling interest of the Providence Group -- is to rebrand that Green Brick Partners, Green Brick Homes, Green Brick's something or other, because The Providence Group has been in business basically since the '70s. They've been working with 12 to 14 municipalities for 30-plus years. And we think it's a huge advantage, keeping local teams, local branding and the local realtors, vendors and all those relationships in place. And that's a very different strategy in our business than many other businesses. At the same time, we recognize that going forward, it's very difficult to scale businesses that are isolated bucket-type businesses. So moving forward, I think our Trophy brand, which is an entry-level builder, first-time move-up builder, very standardized selection process, homebuying experience, that's how we're going to really grow our business. But to date, we really like having the differentiated brands and price points. Go ahead, Rick.

One of the things additionally and also in terms of having the local operators is on Slide 7. You can see how the company was constructed. This is a very intentional land strategy that you see our 2 biggest markets, Dallas and Atlanta. The map shown here indicate where our communities are. Those are the green dots. And you can see most of those green dots are in the blue areas and then in some of the light blue areas, which are your very best locations, your desirable locations, as determined by John Burns Research. That is something that was intentional, when Jim started the company out of the shadows of the Great Recession, in which the strategy was, those are the properties that retained their value the best in that downturn and recovered the most quickly. Even though we now have the different strata of different product types and homebuyer segments, we still have, at our core, some of the best properties within our submarkets. Turning to Slide 8. It's a lot of words. We're not going to spend a whole lot of time on that. Basically, it tells you that we have done what probably a lot of the homebuilder participants in today's conference have done in terms of our reaction to COVID-19. Essentially, we immediately pulled back on our acquisitions of land and lots as well as our active development, just expecting that volumes would be coming down. And in reaction to that, we had to, therefore, slow down our pipeline as well in the same regard with this big pause that the economy has put on during certainly the month of April. You cannot expect that the volumes are going to be the same. Therefore, we put a pause on spec construction at safe stages of construction, and we pulled back starts to really only be starts of presold homes. At the same time, we had to go virtual exclusively, pretty much with our sales operations, but still have been successful when we get into some of those details. We turned all of our title closings into drive-by closings. And interestingly, and we don't hear a whole lot about this, and maybe to the chagrin of some of the building products companies, we have been renegotiating with all of our subcontractors for both labor and materials and have seen very good success thus far. Moving on to Slide 9. All markets are not created equal, and you can see that this often-repeated map that you see here or the data behind the map shows that we, in our Dallas-Fort Worth market, are in and near 4 of the top recession-proof cities in the United States. This is measured based on unemployment, housing and social assistance; in other words, dollars available at the state and local level for unemployment. We do not expect the same unemployment rate that is being seen on a national basis to occur in our Dallas markets. And that's significant because 65% of our revenues in Q1 were from Dallas. And we also have seen the same thing reflected in our bounce-back sales that have occurred, particularly over the last couple of weeks, where we're up 25% over sales in May of 2019. We do have good community growth account. Last year, a lot of that community growth happened in the back half of the year. Virtually all of it was split between Q3 and Q4. But again, that was strongly focused on the DFW markets. You can see here that 77% of our active communities in Texas are within or close proximities to these recession-proof cities.

Rick, let me just add one thing real quick. The Dallas is doing about 36,000 starts. That looks like it's going to decline a little bit. But these submarkets that we're talking about, taking a look at our -- at this map, in the DFW area, these submarkets are bigger than the complete markets in most cities after you get to the top 10 or top 15 cities. So these submarkets are very huge. There are thousands of homes being built in Plano and Frisco each. And so these are very big, large markets. And we have still as our growth, there's a tremendous amount of growth potential just within our Dallas market. We did 1,200 homes, I think, about last year in DFW. And now the 36,000 start market, there's a huge runway of growth for us in Dallas, just in Dallas alone. Go ahead, Rick.

On Slide 10, we talk briefly about our other markets. The last bullet, Colorado Springs, is a very resilient market and have done quite well during these pullback times because of their military infrastructure that exists in Colorado Springs, along with a lower price point and a proclivity towards first-time homebuyers. Vero Beach, that is our age-targeted market. And I think one of the best factors that we've got going there is a very high deposit rate on our backlog. Bill Handler with GHO Homes is a very big backlog builder with -- and typically runs with low levels of spec inventory. And he closes those houses because of this 13% deposits on average that he holds for those buyers. Atlanta...

We should probably move on to backlog, I think, because we'll be -- we could get caught up in the presentation.

Yes, you're right. Okay. On backlog, this is Chart 11 -- Slide 11, where you show a 4-year trend. The gray bars are the rising unit closings going back for the last 4 years. So you obviously see a good uptrend there. But even more significant, what we try to do here was fared out. If you focus on the column that says quarter ended 3/31, the 418 -- 448 units are what we closed in Q1. And at the end of Q1, the dark blue, the 970 units are what we have in backlog. We closed the quarter with a record backlog that was 39% up year-over-year and 23% up over Q4. It's right at the perfect time, but when you add that big backlog to what we closed in Q1 and compare it to last year, we already have on the books, if you will, 82.5% of last year's closings. They won't all close, they never do, but we will replace them with other sales. The point is that is up strongly. You see, back in 2017, we were at 62% of the prior year's volume at this point and at the end of Q1 of that year. So that's an even stronger uptrend in that we are selling more of our homes ahead of time.

Yes. So we have a large backlog, as Rick said. And we are pleased that finally, the cancellations on that backlog are getting back to our historical norms of 15%, 16%. So we're feeling much better about the backlog being converted into revenues over the second, third and fourth quarters at a very high rate. Rick, do you want to go into the next slide? I think that's probably the most interesting slide in the deck.

Yes, the most interesting one. It really is because it shows Green Brick's capacity and preparedness for COVID. The -- this shows us in all of the small- and mid-cap peers that we have data on and shows us at the top because of a relative ranking in each of these 4 measures that you see across the top of the page. And if you want to know why we're top in the list, we show you our methodology on Slide 23 in the appendix. But as you can see, the first measure -- first column is the rank, then the builder, then the first real data column is percentage of closed and sold homes versus the prior year closings. That's the stat that we just went over, and that compares extremely favorably in terms of where we stand from an ability to have last year already on the books. The next column is even more dramatic. You see our gross margin percentage there, 23.1%, which was strongly up year-over-year by 230 basis points. That's not adjusted. That's gross margin. Our adjusted gross margin was up 270 or 280 basis points. That's important because we have the profitability implicit in our gross margin to be able to have flexibility. And if we do get into discounting, we got a lot more room than everybody else has. Another huge factor in that flexibility is our financial flexibility, which is the next column that -- of interest coverage. Our interest coverage of EBITDA to interest incurred is 8.5x. That's magnificent and gives us plenty of room, again, to have that financial flexibility, to not have that debt overhang, to have lower dollar amounts of maturities. It really puts us in because we are lowly leveraged and because we have low interest rate debts. Last year, we closed a large long-term, 7-year facility with Prudential at a 4% fixed rate. That was before the rates came down dramatically in the first quarter of 2020. The other factor is perhaps not intuitive, but we'll do some explaining on it, which is a percentage of lots owned versus controlled. As you can see, we're again near the top of that list as well. We are typically in excess of 70% on a quarterly and annual basis on lots owned versus lots controlled. What that gives a builder versus a land-light model? In a land-light model, the builder has a small deposit on his lots. Let's say, it's 10%, for argument's sake. Our lots are lots that are already owned. Many of them are finished. Think about 45% of our lots are finished that are owned lots. What that means is, is when we start a house, how much are we paying for the dirt? Nothing. It's on our balance sheet. We're paying for the sticks, bricks and labor, just like the land-light builder is, but that land-light builder also has to pay the other 90% of the lot cost. What that translates into is when we go to complete and close the lot is our cash flow is going to be on a very simple example of $110,000 lot price and 20% margins on our typical ASP, we're getting about $200,000 cash in more than we put out for sticks, bricks and labor. A land-light builder is getting half that. They're getting maybe $100,000, which is just the margin and the monetization of the deposit. We're monetizing our balance sheet of our completed lot inventory, manifest itself in strong cash flows on all new starts going forward. We'll answer any questions you have about that, but it puts us in an enviable position.

Rick, we should probably head towards the Q&A because I think there's only about 10 minutes left in the presentation. I don't know how much time is left exactly, Mike...

So we have about 15 more minutes. So I'm happy to kick off the Q&A, if you like. Or if you have 1 or 2 more points, it's up to you.

I think just balance -- the balance, the low -- again, the low debt balance sheet strength on Slide 15. As Rick said, we are about 28%. That's in the very good side of the leverage equation for builders. As he mentioned, if we want to, right now, we can generate a lot of cash flow because we own the land to pay down debt. That's an interesting analysis that we're going through right now. We've seen things really picked up, and we're not as pessimistic. We're getting much more optimistic about respending money. And I think, really, that -- I think we'd like to go into Q&A, Mike. We're good.

Great. Thank you for all those slides. Very helpful, obviously. I think to kick it off, maybe, kind of start with the bigger picture question about your overall positioning and strategy. Obviously, you mentioned earlier on in your slides, your footprint and that you're a little bit more focused in certain key markets. You've made some acquisitions and partnerships or targeted investments over the last few years. That's kind of how you built your portfolio. How do you think about that for Green Brick over the next few years? And has the current disruption in the marketplace, which may or may not be short-lived, we'll see, has that altered any of the opportunities that you may or may not be looking at today?

I think that our business -- to scale and grow our business, the Trophy Signature Homes brand is where we're really going to grow the business. It's a simpler process. It's a more efficient decision-making process. It produces high margins. And it's the first-time buyer and first-time move-up buyer. So because the process is simpler, the plans are much more standardized. We think they're slightly better than 2 of the really giant builders because they're fresh. And at the same time, we know for competing across the street from Pulte or a Horton, that we're going to have to be in -- we can only stretch the price point so much. But we think that Trophy is going to be our real growth vehicle going forward. We'd love to bring Trophy, for example, to Atlanta. And we were planning on doing that until recently, and we will probably reconsider that again very quickly. Atlanta is a 25,000 start market, and Trophy would fit into our strategy right there and into other cities. And that's really our growth strategy is through Trophy. We are still looking at buying other builders. The premium that other builders were requesting, we thought, was unrealistic. We haven't made an investment in builder for almost 3 years. And we are return on capital-driven buyer, and we haven't seen those hurdles. So Trophy is really our platform that we really want to grow Green Brick with. Do you have anything you want to add to that, Rick?

Yes. I think one of the things that will probably happen is that our cash flow, with its strength, will put us in a position of having dry powder if there are opportunities from a land standpoint. Obviously, there are a lot of private builders who are very highly leveraged, who are really going to get hurt by this downturn. Not sure what's going to happen in the land markets. There's not a lot of debt out there in the land markets. It's generally fairly strong hands. And you're not going to see pain from that until closings don't occur when these land developers expect closing. So it's going to take multiple quarters, if not longer, for there to be an adjustment there. So -- but that's how you make money in our business is buying when there's blood in the streets. So it's really not happened in a major way yet. But we were intentionally financially engineered to be low debt to capital, so that we had great coverage, great opportunities with our existing portfolio to carry our own weight. But it also gives us those opportunities when there are land or builder or whatever opportunities there may be as a result of the downturn.

Right. Great. I wanted to also kind of hit on some of the recent results that you just reported, most interestingly around what you're seeing so far in May. I believe you pointed to May orders, so far, up about 25% year-over-year. Coming off of a 20%-ish type of growth in community count, it would point to sales pace, I would presume, being plus or minus flattish, which is still a huge feat in today's current backdrop with all the volatility. I was curious if you could give us or peel back a little more granularity in terms of how you're seeing demand in your different markets today, particularly as it relates to the strength in May, and if that growth was led by any of those markets. And I'm focused here a bit more on sales pace versus community count growth.

The only builder that really has experienced in May still sluggish sales pace is GHO with their age-targeted buyer in Florida just because the people couldn't get there physically. And we missed the selling season a little bit there. We've been very surprised at Southgate Homes, which is a $650,000 price point builder. Everybody reads about how soft that is and the problems that they had. They just had a fantastic quarter, and they've had a fantastic May. And I think one of the reasons for that is the market has shrunk at the higher price point, but really well-run participants or the people in that space have shrunk faster than the market. So we're seeing opportunities there, but it's kind of counterintuitive because of the private builders that effectively can't compete in that market and some of the larger builders that are experiencing such good sales in the low end. They don't want to be in that market. So we've been real pleased with Southgate, and CB JENI has just been a standout in the townhouse business. We're trying to figure out whether that's -- how deep that is or whether it's like the first-time buyer, where there are buyers that just want to get out of high-end apartments into a townhouse that has a small yard, a garage and privacy, but that business has been very, very strong for the last 2 or 3 weeks.

Mike, your comments are correct in that we did have year-over-year community count that was strong, but it's on the range of right around 20%. So we actually do have positive year-over-year sales base, May of this year to May of last year in the mid-single digits, 4%, 6%, let's say. And our current week is shaping up the same. It actually ends tonight. We always let that weekend come over into Monday so they can actually execute anything that was signed in the field over the weekend, but it's looking like a third week of continued strong sales and a continuation of that projected mid-20% year-over-year growth in sales year-over-year for the month of May. And like Jim said, it is broad-based.

Great. Thank you. I guess also shifting to the current demand backdrop. What are you seeing in the marketplace around incentives? What we heard almost uniformly from the builders during the past earnings season was that there wasn't much movement in price, particularly in April, just given there probably wasn't a lot of price discovery to begin with by consumers. On the incentive front, you have heard more about relatively modest increases, maybe more concentrated around pockets of spec inventory, if there was some excess back here and there. What are you seeing across your markets today from an incentive trend level? And what are you doing as a company as well?

Well, it's been interesting. The first thing is anybody that wanted to come out under basically a stay-at-home order, you knew it's going to be a very motivated purchaser for whatever reason. So the -- well, obviously, there was no foot traffic, but that buyer wanted to buy a house. So it was a very different negotiating situation than it would be in a typical market. And in that environment, we haven't had to give up big incentives to close that buyer because if they were coming out in this market, they wanted to buy a home. It will be interesting to see how that translates going into a summer that's typically softer anyway. But we've seen our margins stay pretty consistently strong.

Yes. We've seen maybe incentives on the range of 1%, which is very nominal. There -- mind you, coming into this, existing home inventory was pretty much at a historic low in terms of number of months of existing homes. And over the course of the pandemic, you have seen people take their homes off the market. And in response to the fact that they need to stay there, number one, by and large; and number two, they don't want people walking through their houses. So we're going to have to see how that comes out and how consumer behavior changes post pandemic when the economy gets going again. But at this point, the other thing that we have going for us is that a lot of the builders have done the same thing in terms of ratcheting down starts. So there is not going to be an oversupply of spec inventory out there if folks do start putting their homes on the market.

Mike, here's a typical case study that we had a realtor, a big time realtor, had a relocation buyer in town, had to buy this weekend. One of our builders called me up and took me through the story. She visited 3 of his communities. He went through their parameters. She visited all 3 and she made an offer that was $40,000 about less. And we said no, no, no to each one of the requests for significant price reductions because, even during the pandemic, we had sold homes right across the street at decent margins. And we have a strong balance sheet, and we're just not in a panic to work for free. And I think a lot of other builders are feeling the same way.

Right. Right. No, no, no. That's certainly what we're hearing so far. I guess, lastly, maybe just to round it out, another big area of discussion over the last month or 2 has been credit standards on the mortgage side, tightening by some of the bigger banks, overlays, et cetera. What have you seen across your business? Has it impacted any of your buyer segments? And how has it progressed over the last 6 to 8 weeks?

Again, we're very different than large public builder X. Our FICO scores are in the 750 range, 760. Our buyers put down more money. And we have not seen any credit issues that's really affected our business at all.

85% of our buyers have FICO scores in excess of 700.

Okay. And what about at the Trophy Signature level? That's more the entry level.

It is. And we've run it very differently than 2 or 3 of the large peers. Some of them take almost no lot deposit and called a sold home. We take a minimum $5,000 and then we get the upgrades. They frequently have, at an entry-level home, $15,000 invested. So again, we're having a fresher product. Those people are paying slightly more for that product, and it really is an upgraded buyer versus the typical entry level or even a first-time move-up buyer.

Great. Thank you. Well, I think that, that actually does it. We're coming up right at the end. So I'm going to close it off and say thank you again to Jim and Rick and the Green Brick Partners team for participating. It's been a great update. And we will be resuming at 1:30 Eastern time with our afternoon session, beginning with Meritage Homes, followed by M.D.C. Holdings, PGT Innovations and Masonite International. So again, I want to thank Jim and Rick for your time. Appreciate it. And we'll talk, again, soon.

Okay. Thanks, Mike.

Thanks for having us.