GRBK - NYSE

Good afternoon. And welcome to Green Brick Partners Earnings Call for the Second Quarter ended June 30, 2023. Following today’s remarks, we will hold a Q&A session. As a reminder, this call is being recorded and will be available for playback. In addition, a presentation will accompany today’s webcast and also is available on the company website at investors.greenbank -- sorry, investors.greenbrickpartners.com. Joining us on the call today is Jim Brickman, Co-Founder and Chief Executive Officer; Rick Costello, Chief Financial Officer; and Jed Dolson, Chief Operating Officer. Some of the information discussed on this call is forward-looking, including the company’s financial and operational expectations for 2023 and beyond. In yesterday’s press release and SEC filings, the company detailed material risks that may cause its future results to differ from its expectations. The company’s statements are as of today, August 3, 2023, and the company has no obligation to update any forward-looking statements it may make. The comments also include non-GAAP financial metrics. The reconciliation of these metrics and the other information required by Regulation G can be found in the earnings release that the company issued yesterday and in the presentation available on the company website. With that, I turn the call over to Jim Brickman.

Thank you. I am pleased to report that Green Brick delivered another outstanding quarter, highlighted by our 27.2% annualized return on book equity for the second quarter. The level of execution displayed by our teams and reflected in our key performance metrics has been extraordinary. During the second quarter, we delivered 783 homes, generating $454 million in home closing revenues. This is the second highest in company history. Most notably, our homebuilding gross margin increased 370 basis points sequentially to 31.3%, the highest among public homebuilders as shown on slide five. This is only 110 basis points lower than our record high homebuilding gross margin of 32.4% achieved in Q3 2022. Net income during the second quarter was $75 million. Earnings per diluted share was $1.63, which was up 19% sequentially and the second highest diluted EPS in company history. We believe our exceptional results are result of our infill and infill adjacent locations, self-development land strategy and focus on operational efficiency. Additionally, year-to-date, we repurchased 803,000 shares of common stock for $27.7 million, representing 1.7% of our total shares outstanding as of December 31, 2022. Strong sales momentum carried into the second quarter as all of our brands experienced demand that was above normal seasonality. Net new homeowners in the second quarter increased 51% year-over-year to 822 homes, the highest of any second quarter in our company’s history. Year-to-date, our growth in net new homeowners of 65% reflected the highest percentage increase among our public homebuilding peers and this is shown on slide four. Our cancellation rate was down 400 basis points year-over-year to 7.4% and remained the lowest in the industry. There are multiple forces at work fueling the demand for new homes. First, after over a decade of underproduction in housing, our country faces a chronic shortage of approximately 4 million housing units, while at the same time, millennials and Gen

Thank you, Jim. Please turn to slide eight of the presentation. Home deliveries in the second quarter declined 11% year-over-year to 783 units, reflecting the fact that we were lapping an all-time high level of deliveries in Q2 of 2022 and the lower levels of starts during the second half of 2022. The ASP of homes delivered remained constant year-over-year at $580,000. This brought home closings revenue to $454 million for the second quarter, the second highest in company history. Year-to-date, our home closings revenue grew 3.4% to $904 million. SG&A as a percentage of residential units revenue was 10.8% in Q2, up from 8.2% year-over-year, primarily due to an increase in brokerage commissions. Diluted earnings per share for the second quarter was $1.63 per share, up 19% from the first quarter and the second highest in company history. Our cancellation rate for the second quarter remained near a record low level, improving 400 basis points year-over-year to 7.4%. As shown on slide 10, our second quarter cancellation rate was the lowest among the public homebuilders. As Jim mentioned earlier, sales momentum was above normal seasonality throughout the spring selling season. During the second quarter, net new home orders increased 51% year-over-year to 822 homes, our highest order level for any second quarter in company history. As shown on slide four, year-to-date, we continue to lead our public homebuilding peers in year-over-year net orders with a 65% growth rate. Revenues from new home orders in the second quarter was up 38% year to $489 million. Changes in product mix and slightly higher incentives this year as compared to the prior year period have resulted in an 8% decline in ASP of new orders to $596,000 from a year ago. Active selling communities at the end of Q2 were up 10% year-over-year to 86. Our quarterly absorption rate per average active selling community was up 39% year-over-year to 9.9 homes, the third highest in company history. Year-to-date, net orders are now up 65% year-over-year on the heels of two of our three best quarters for absorption rate in our history this year. Sequentially, our absorption rate declined from an unsustainable 13.3 units in the first quarter to 9.9 homes in the second quarter. This was attributable to a smaller inventory pipeline as a result of, one, a record high sales pace in Q1 of 2023, driven by our selling, our finished and finishing spec inventory, and two, lower levels of starts during the second half of 2022 that impacted the number of units under construction, and therefore, available to sell in the second quarter of 2023. Our homebuilding gross margin on homes delivered was 31.3% during the second quarter the highest in the homebuilding industry as shown on slide five. This is 370 basis points higher than Q1 of 2023, with all our brands having experienced higher gross margins in Q2. Jed will provide further detail shortly on what drove our higher margins. The value of our backlog at the end of the second quarter decreased 17% year-over-year to $586 million due to smaller backlog entering the quarter, while ASP increased 1.7% to $664,000. However, ending backlog represented a significant increase of 59% from the beginning of the year. Sequentially, backlog dollars increased 6.4%. Spec units under construction as a percentage of total units under construction was unchanged from the previous quarter at 59% at the end of the second quarter, which is down from 73.4% at 12/31/22. On the backdrop of strong demand and sales momentum, we increased our starts in the second quarter by 25% sequentially to 833 units. With 783 delivered homes in Q2, units under construction increased modestly during the second quarter from 1,759 units to 1,809 units. Lastly, our balance sheet is stronger than ever. As of June 30, 2023, our outstanding debt is 100% fixed rate and 96% long-term. As Jim mentioned, we have $210 million of cash on hand at the end of the second quarter, allowing us to avoid high short-term borrowing costs. Debt to total capital ratio decreased 600 basis points from last year and 90 basis points sequentially to 22.9%. Our net debt to total capital ratio was at a historic low of 10.6%, down 1,450 basis points from last year and down 270 basis points from last quarter. With that, I will now turn it over to Jed. Jed?

Thank you, Rick. Because of our infill location, we are not surprised to see the continuing high levels of demand for our homes during the second quarter. Supply is constrained in these locations and competition from both other builders and resale inventory is limited. Additionally, our heavy geographic footprint in DFW and Atlanta, two of the leading cities in job and population growth also contributed to our sales success. Sales performance exceeded seasonal expectations across all areas and we are exceptionally pleased with the 51% year-over-year net order growth during the second quarter. High interest rates seem to have limited impact in slowing housing demand in most of our communities. With fewer finished and finishing homes available to sell, sales in the second quarter moderated from the record levels in Q1. However, unmet demand continued to create healthy sales orders for Green Brick, which enabled us to further decrease incentives from 4.4% of selling price the previous quarter to 3.9% in Q2. We were able to reduce incentives or increase prices in approximately 70% to 80% of our communities in Dallas, Fort Worth across different products and brands. Reduced incentives and favorable cost basis due to our strategic land buys drove our homebuilding gross margins for new orders higher in the second quarter. For homes closed in the second quarter, our construction cycle times decreased across all brands by an average of 47 days from the end of 2022. We are pleased to see the stabilization in pricing and general availability of labor and materials across the supply chain. We believe our scale as the third largest homebuilder in DFW, along with ongoing operational improvements, should continue to give us an edge in negotiating competitive pricing with our trades, reducing construction cycle times, identifying and seizing on land and lot opportunities and maintaining our industry-leading margins. With continuing strong sales, we are working diligently to bring our lots in development to the finish line. As seen on slide 12 and 13, most of our expected 2023 lot deliveries in DFW and Atlanta will be concentrated in infill and infill adjacent desirable areas. As of the end of the second quarter, we delivered approximately 2,000 finished lots and expect to have approximately 6,100 finished lots on our balance sheet as of December 31, 2023, as shown on slide 10. For context, we had approximately 2,900 finished lots as of the beginning of the year after averaging about 2,850 starts per year for 2020 through 2022. These lots of a favorable cost basis that we believe should continue to help us generate industry-leading gross margins. In an environment with persistently low existing home inventory, we also believe that we are well suited to take market share with a strong balance sheet and ample high quality finished lots in infill locations. This could be particularly true due to the follow-up from the banking sector stresses, which may impact smaller and private builders with higher cost of capital and more stringent financing terms. Lastly, we had a soft opening for sales at Trinity Ranch in Austin at the end of July. We believe there is unmet demand for entry level homes in Austin and Trophy is well positioned to establish a strong presence in the desirable and growing Austin market. We are excited to share our results of our newest market in coming quarters. With that, I will turn it over to Jim for closing remarks. Jim?

Thank you, Jed. To draw close to our call today, I want to extend my appreciation to our employees. Our model is to not talk about getting it done, but to really get it done and our teams did that. I am immensely proud of what we have achieved together and I am confident that our collective efforts should continue to provide superior risk adjusted returns. Looking ahead, we remain excited about the opportunities and possibilities before us. The housing market continues to show resilience and strength and we are well positioned to meet the large demand for single-family homes that persist even in a high interest rate environment. The results we share today demonstrate our ability to constantly achieve industry leading performance and deliver value to our shareholders. It’s been a pleasure to share our accomplishments with you again today and we look forward to speaking with you next quarter. Thank you. We now open the line for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Carl Reichardt of BTIG. Please go ahead.

Thanks. Good morning, guys. Good afternoon or good morning. Not sure what time it is. So all three of you talked about above seasonal norm activity for sales in the second quarter. I am curious if July is also showing similar above normal trends or if we started to see sort of some more normal seasonality creeping in?

July continued and really tracking June pretty closely, Carl. But we didn’t see any radical change or much change at all from June and we didn’t see any margin degradation on the sales that we rolled either.

Okay. Great, Jim. Thank you for that. And then your mix of product is fairly wide ranging, especially relative to some of your peers. I am curious if you can talk about the performance, I mean, I think, Jed, you mentioned that all brands are doing well. Can you talk about the performance and absorptions and pricing for, say, mid-to-high end homes versus the Trophy Signature type product?

Yeah. Carl, this is Jed. I will take that. What we have seen is the high end is so supply constrained that the demand is very, very high there. The more entry level to first time move up. They are just more optionality for the buyers. So it’s a little more competitive, but we are still getting our underwriting paces in those places as well.

Thank you. Your next question comes from the line of Alex Rygiel of B. Riley [ph]. Please go ahead. Alex, perhaps, your line is on mute.

Sorry about that. Thank you very much. The finished lot inventory of 6,000 seems notable as it’s a high number relative to prior year in your sales rate. So I guess the question here is, should we expect an acceleration in community count growth or should we expect an acceleration in lost sales?

Yeah. We are going to have Jed chime in on this. We are going to have our community count growth in absolute numbers and not only are there more communities, but the number of lots in some of these communities do contain a lot more lots. So, Jed, what do you think?

Yeah. We are really excited, because, Alex, we are getting community, oh, sorry, phase deliveries that are, say, 300 lots of piece and we are excited about not having the gap out issues that we have had with all these land development delays that have kind of besiege the whole industry the past 12 months to 18 months.

And a follow-on to that question. As the size of the community grows, would you expect your absorption rates in those communities to accelerate as well?

Yeah. We are excited -- again, we are really excited about some new communities that we really bought kind of just coming out of COVID that are now delivering and we had three months of track record on them. We are seeing some communities really produce high double-digit per month sales absorptions and we think that we like our land basis and we think we are under the general market significantly and so the absorption should go up.

Thank you. [Operator Instructions] Your next question comes from the line of Jay McCanless of Wedbush. Please go ahead.

Thanks. Good morning, everyone. First question I had, I think, you have already kind of answered this in the script and in the deck, but it seems like the locked in effect of existing homeowners not wanting to move probably has benefited Green Brick a little bit more just because of your infill locations. Is that a correct assumption?

Yeah. I think that’s a correct assumption. We really see it in Atlanta where they only have kind of AAA locations. They are in higher price points and we don’t have any of the builders. We self-develop all those lots and we are the only builder in those locations.

Right. So, I guess, in the -- what is it 20% to 30% of communities where you are not raising price, are you at least dialing back incentives and what are the factors that are causing you not to raise prices in those communities?

Just more competition from other competitors.

And Jay, one of the things that we are seeing is we are really not having to offer long-term rate buy-downs either and that’s a very big number. So not having to do that is in effect kind of like a price increase.

Kind of in the most -- this is Jim. The most simplistic way to look at some of our locations is that, we kind of are very, very in tailor in Costco locations and those are just experiencing pretty great margins and sales velocity. We could sell pretty much what we want. Then we kind of go to a super Walmart location, the BB+ locations. Those are very, very strong. And then when we go to a C dollar general type location, there’s a lot more competition, expected interest rate’s high, we are going to have to be buying down mortgages on that 20%, 30% of our business and it’s a lot more competitive, because you have other public builders right down the corner.

Thank you. Your next question comes from the line of Carl Reichardt of BTIG. Please go ahead.

Thanks. Just one follow-up for you guys. Rick, I think, you mentioned, average order price is down 8% year-on-year and you talked about incentives plus mix. Can you break that 8% out between the two, between incentives and mix? Thanks.

All right. No. That’s probably too deep of a dive. It -- and it -- some of it can be attributed no doubt to going from a Frisco location to a Princeton location, for instance. And like-for-like, as Jed said, the ultra-high end is not only is performing well, but it also carries a much higher price tag.

Carl, this is Jed. Let me try to answer or add this to that. In our A locations our mortgage and closing cost incentive is usually half of what it is in the periphery locations on an absolute dollar amount, even though it’s probably double the high price on the home price. Does that make sense?

Yeah. Yeah. Okay. I got it. The mix is variable for you guys in particular. So that’s why I asked. And then actually, I have one follow-up for Jim, too. So, Jim, you talked about the private builders are strong, you put a lot of equity in and a high cost of debt. So from an acquisition standpoint, are we starting to see any movement at all of the privates as they look at the future cost of funds type banks and thinking about maybe selling on, are you seeing more activity across the transom, whether you are interested in it or not? Thanks, guys.

Well, I chuckled. I saw one or two builders closed and I knew both of the investment bankers/brokers that did the deals. We never saw them and I expect that, because they know the way we buy things in our buying criteria. So it’s a yes and no answer. There are some transactions taking place out there. But we actually didn’t see them and I am sure we didn’t see them, because after talking to the brokers and bankers involved, they wouldn’t meet our hurdle rate.