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Green Brick Partners Inc (GRBK 1.93%)
Q2Â 2019 Earnings Call
Aug 9, 2019, 12:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, everyone, and welcome to Green Brick Partners Earnings Call for the second quarter ended June 30, 2019. [Operator Instructions]. A slideshow supporting today's presentation is available on Green Brick Partners website, www.greenbrickpartners.com. Go to Investors & 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 of 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 8, 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 attributable to Green Brick; pre-tax income attributable to Green Brick as a percentage of total revenues; pre-tax income as a 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 are both contained in the earnings release that Green Brick issued yesterday.
I would now like to turn the conference call over to green Brick's CEO, Jim Brickman. Please go ahead, sir.
James R. Brickman -- Chief Executive Officer and Director
Hi, everybody. With me is Rick Costello, our CFO; and Jed Dolson, the President of our Texas region. Thank you for joining our call. As the operator mentioned, the presentation that accompanies this call can be found on our webpage at www.greenbrickpartners.com. At the top of our webpage, click on Investors & Governance, then click on the option that says reporting, and then scroll down the page until you 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 $0.29, record residential unit revenue of $175 million and a record backlog of $331million. 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's home brand, we expect this entry-level platform for which the company now controls over 1,600 homesites, to significantly contribute to 2020 earnings and beyond. Further, we continue to expect we will grow from 76 communities on January 1, 2019 to 92 communities by 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 30, 2019. Please flip to slide five. Two of the best markets in the country are our core markets of Dallas and Atlanta.
During the last 12 months, Dallas and Atlanta continued to be 2 of the largest markets in terms of generating job growth. On slide six, you can see that Dallas continues to be the #1 new housing market in the nation, adding about 33,100 starts. Atlanta is the fifth largest market, and our Challenger Homes affiliate operates in Colorado Springs, part of the sixth largest market. We are 2% to 5% of the stars in 3 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 of our Dallas and Atlanta Metropolitan areas, where they have designated grades on submarkets as the most desirable, an A market, through the most affordable, an F 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 are very A lots and desirable graded submarkets. What the prior graphs did not tell you is how supply constrained lots in these most prime A locations still are. Green Brick owns and controls almost 5,800 lots in the Dallas Metroplex and over 2,400 lots in Atlanta, primarily in A locations. Over 1,600 of these lots for the Trophy Signature Homes and our new builder entry level and first-time home buyers. 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 either 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 the annual revenues. Over the last 12 months, we've 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 second quarter.
Next, Jed Dolson, our President of the Texas region, will discuss our growth drivers and our diversification efforts. Jed?
Jed Dolson -- President of Texas Region
Thanks, Jim. Green Brick is truly one 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 months total revenues from Q2 of 2017 to Q2 of 2019 is 63% over that 2-year period. But even more impressive is our setup for the future. Over the last two years, our backlog grew 101% to $331 million as of June 30, 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 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 30, 2019. We increased our number of units started by 36% versus the 12 months ended June 30, 2018, with an increase to 1,682 units started. In fact, we have an average starting of over 420 units per quarter from Q3 of 2018 through Q2 of 2019.
As of June 30, 2019, we have 1,214 units under -- sorry, so Green Brick has the backlog, 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% in the 24 months from June 30, 2017 to June 30, 2019, is highlighted by GHO's revenues in the last 12 months of $100 million have a lower ASP with the more affordable H 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% in total. slide 11 visually demonstrates 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 5 distinct consumer segments, which all experienced strong 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 sizes of the various target 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 A submarkets. The additional move to include different consumer segments and products types are part of Green Brick's longer-term strategy to diversify our offerings and limit risk without reliance on consistently growing sales prices or a single group of homebuyers.
Next, Rich Costello, our CFO, will discuss our second quarter results in more detail.
Richard A. Costello -- Chief Financial Officer
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 & Governance page and Reporting, you will see the Second Quarter Investor Call Presentation about halfway down the page under SEC Filings & Reports. I'll give you folks a minute to do that if you're relying on our website. Thank you for joining us today to review our 2019 second quarter financial results. Before moving to the financial results, let's first review slide 13 about our closing yesterday and long-term debt. We're really excited to announce that we've established a relationship with one of the largest and most reputable institutions in the world to help fund our future growth.
On August 8, 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 7-year notes at a fixed rate of 4.00%. This rate is only slightly higher than the long-term rates paid by the lower-leveraged large-cap builders, like NVR and B. Gordon and more attractive than the long-term rates paid by all small-cap and all mid-cap builders. And as you can see in the table provided, our small cap peers have incurred a high cost to stack maturities on the longer-term basis than provided in revolving credit lines.
So instead 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 year-to-date comparisons, 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 home started on a last 12-months 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 $0.29. And that's a record for any quarter during any of our years. Q2 '18, we also had $0.29 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 2018. And for year-to-date 2019 versus 2018, our net new home orders have grown by 5% from 821 to 898. We saw a large improvement in Q2 relative to the prior year with absorption per 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 2 quarters of 2018. The average sales price of homes delivered was about $437,800 for the quarter and $435,300 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 30, 2019, our Builder Operations segment had a backlog of 717 sold but unclosed homes with a total value of approximately $331 million, an increase of 5% from June 30, 2018.
At June 30, the average sales price in backlog was approximately $462,000, an increase of 3% compared to the prior year, again, this is a record level of backlog. Now let's 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 1,474 homes, up 11% from 1,327 homes as of the end of Q2 of '18. Regarding closings, units closed for the last 12 months totaled 1,455, up 30% from the 12 months ended June 30, 2018. And therefore, residential units revenues are up 27% over this period on a 12-month basis -- last 12-month basis. For Q2 2019, 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 9,200 lots, up from about 7,650 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 1,700 homes in the last 12 months.
Homes under construction increased 23% to 1,214 homes as of June 30 compared to 988 homes as of June 30, '18, again, it's 23% up in homes under construction. In the last 12 months, we started 1,682 homes versus 1,241 homes as of June 30, 2018, 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 in prior calls, it's critical to understand the corresponding decrease in income allocated to our noncontrolling builder partners, our NCI.
From Q2 of '18 to Q2 of '19, our noncontrolling 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 Green Brick earns lot profits and a high rate of return on our capital invested in each builder. When there is operating margin compression, bottom line operating margin compression, which impacts the profitability of one of our builders, net builder shares in 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 2 critical measures of pre-tax income performance.
Pretax 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 stands head and shoulders above our small cap peers as reflected in pre-tax ROIC and comfortably higher than our mid-cap peers. Of course, most important is the bottom line. Our EPS of $0.29 per share for Q2, flat from Q2 of '19, that translates into return on equity, which stands at 11.2% for the 12 months ended June 30, 2019, 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, expect for GR quote 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 that's going to be also through our lower cost on long-term capital debt. As of June 30, 2019, we've continued that gradually increase to the point where our net debt to capital ratio, where net debt is debt minus cash, has increased to 28.7%. Note that other peer builders have leveraged to an average of 42%. But if you look more closely, the slide shows that the 7 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 there 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 leverage than as Green Brick. Now one final note on something that we've been talking about our expected increasing committee 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 begin building toward another market increase in annual revenues in 2020.
I'll now turn the call back over to Jim, who'll wrap up this part of the call prior to opening things up for Q&A.
James R. Brickman -- Chief Executive Officer and Director
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 Brick's history. Unlike most peers, our neighborhood count is accelerating. We will grow from 76 communities on January 1, 2019 to 92 communities by either 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, where our net debt to capital is only 28.7%. And one other metric Rick didn't mention is that we also don't do any out off balance sheet land banking, which many peers do, that's kind of disguised leverage.
As we discussed, our superior credit metrics allowed us to fund our growth to the new 4%, $75 million senior term loan with Prudential. This low cost to capital is a huge advantage over our peers. We now also have the most homes under construction in our history. Operationally, we are seeing house margins improve and the benefits of our standardization in operating system utilized by all of our builders. Our business is now scaled to where our title and mortgage business are rapidly expanding with little profit -- with great profitability and 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?
Questions and Answers:
Operator
[Operator Instructions] The first question comes from the line of Michael Rehaut with JPMorgan. Your line is open.
Analyst
Hi, This is Maggie on for Mike. My first question I have is on your community count guidance, where you reiterated the expectation to get to 92 by the end of the year or at the end of the first quarter of next year. I think, last quarter, you had said that expected that growth to happen kind of linearly, but we actually saw community count dipped down a little bit these most recent quarters, are you seeing more of a jump in the third quarter? Or are you expecting it to be kind of a consistent piece of growth across the next 2 or 3 quarters?
James R. Brickman -- Chief Executive Officer and Director
This is Jim Brickman. Jed can chime in. We expected -- we hoped it would be linear because it's difficult opening and closing communities unless you are trying to approach in a linear manner, but one of the challenges that we get into right now is acceptance of community. Cities are very demanding and understaffed. So our plan is to make it as linear as possible and we hope the cities cooperate with us as well as the weather. Do you have anything to add to that Jed?
Jed Dolson -- President of Texas Region
No, it will be linear.
James R. Brickman -- Chief Executive Officer and Director
Okay.
Analyst
And, yes, I guess, on the incentives, you said that they were so up -- up year-on-year, but that they were down sequentially. So I was wondering if you could quantify that for us? And then also, have the homes that were ordered when incentives were the highest last quarter, had those already hit your P&L? Or should we expect those to continue flowing through in the third quarter?
James R. Brickman -- Chief Executive Officer and Director
Talking about margins, we think that -- we don't provide, whether it's $10,000, $15,000 or $20,000 whatever the number is, in 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 degradation and really improvement throughout the rest of the year.
Operator
Thank you. [Operator Instructions] The next question comes from the line of Carl Reichardt with BTIG. Your line is open.
Carl Reichardt -- BTIG -- Analyst
Thanks guys. In the queue, you talked about the gross margin change from last year being a function of both the incentives -- the sales incentives, but also higher material costs and obviously lumber has been coming in, can you just talk a little bit about that impact? And you didn't note labor as an issue. So I'm just trying to get a little bit more color on the year-over-year change in margins?
James R. Brickman -- Chief Executive Officer and Director
Well, we've had a -- obviously, lumber has been a tailwind for margins for our builders and it varies market by market. In Dallas, we're seeing benefits pretty well across the board in all of our purchasing and it has been interesting to follow. I don't care whether cheap rock, concrete or anything else, we're not seeing price pressure and we've been able to lower our unit cost pretty well across the board. In Atlanta, it's been a little bit more difficult. But in Dallas, we are seeing a lot of improvement in our unit cost, pretty much across the board, whether it's concrete, plumbing. And the -- the additional tailwind we are experiencing over prior periods is rebates to our national purchasing program, that's helping with lower cost significantly as well as value engineering decisions we've made.
Richard A. Costello -- Chief Financial Officer
Hey, Carl, this is Rick. Thanks for joining the call and then also thanks for that heads up on our website, too. Appreciate that. One other things that's active, let's say, over the last years, we've been pretty consistent in terms of having like 1,100 to 1,200 homes under construction. And on the started homes, the costs, as the units were started, had contracts in place and had purchase orders in place, but our builders are experiencing a substantial ability to lower those costs on a prospective basis, which is being reflected in the improved margins and as Jim said, our visibility into the future.
Carl Reichardt -- BTIG -- Analyst
Rick, is your expectation -- I guess, I can ask about this quarter, too. Incentives are coming off, has pricing power returned in any kind of a meaningful way if you look across your community panoply, do you see the ability to raise basis?
Jed Dolson -- President of Texas Region
I think -- Carl, this is Jed. I think based on pricing, it's increasing a little, but we're getting more bang for the buck by decreasing incentives.
James R. Brickman -- Chief Executive Officer and Director
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. It's increasing margins.
Carl Reichardt -- BTIG -- Analyst
Okay. That make sense. Thanks, Jim. And I have one more as you answered the store count question. Just on the new private placement, the debt deal, going to pay down the secured credit line, is that -- are you intending to 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?
Richard A. Costello -- Chief Financial Officer
No, it's actually, Carl, it's paying down pretty much across the line pro rata all of our revolvers, both the secured and unsecured. We still -- the pay down is essentially going to convert into the ability to continue to borrow up on our revolvers to fund growth.
James R. Brickman -- Chief Executive Officer and Director
Carl -- sorry to interrupt you, Rick. Here's a -- probably a very simple way for analysts and investors to today take a look at how we're going to fund our growth through our really attractively priced capital. We had approximately $240 million of debt out at the end of second quarter. I think it was actually $234 million, but let's say, it is $240 million. With the Prudential line, we have $365 million of capacity in all of our facilities, unsecured and other facilities. So there's about $125 million of available capacity that we haven't drawn down at. We want to maintain our business at about 33% debt to total capital, which implies that we've just about $250 million of retained earnings that we can fund using this low cost of capital over the next few years. And we think that's really a great growth story. It's something most peers can't do and we're really excited about it.
Carl Reichardt -- BTIG -- Analyst
Thanks Jim I appreciate that. Thank you guys.
Operator
[Operator Closing Remarks]
Duration: 33 minutes
Call participants:
James R. Brickman -- Chief Executive Officer and Director
Jed Dolson -- President of Texas Region
Richard A. Costello -- Chief Financial Officer
Analyst
Carl Reichardt -- BTIG -- Analyst
