JRo’s Notes: Green Brick Q3:2024 Earnings

Green Brick Partners Q3:2024 Earnings:

It’s possible Green Brick Partners is a name you are less familiar with so let’s start with a brief history and company overview. Green Brick Partners is a land developer and home builder operating in fast-growing, supply-constrained markets in Texas (Dallas and Austin), Georgia (in and around Atlanta), and in Florida (mainly along the Treasure Coast). Roughly 92% of its owned/controlled lots are in Texas and 67% of those lots are dedicated for its entry-level, first-time homebuyer, more-affordable Trophy Brand. In 2025 it plans to expand its presence in Austin and start selling homes in Houston.

Its predecessor company was co-founded by legendary hedge fund manager David Einhorn (founder of Greenlight Capital) and real estate investor Jim Brickman (hence the “Green” and “Brick”) in 2008. As opportunistic value investors, their original company bought distressed lots and provided loans to distressed home builders, and they even took controlling equity stakes in some builders during the Global Financial Crisis. By 2013 they owned prime lots in high-demand residential areas in the sunbelt as well as controlling interest in builders that were now profitable, so in 2014 they created Green Brick Partners through a reverse recapitalization. Today Green Brick is a vertically integrated land developer and home builder that also provides mortgage, title, and insurance. It’s wholly-owned mortgage subsidiary is set to launch in Q1:2025. Roughly 70% of its homes under construction are spec as opposed to built-to-order. So Green Brick is “land heavy” and “spec heavy.” Jim Brickman is CEO (and owns 4% of the shares outstanding, equal to about $130 million) and David Einhorn is Chairman of the Board. According to S&P CapIQ David Einhorn personally owns about $60 million (or roughly 2% of the shares outstanding) and Greenlight Capital owns about 21% of the company (or a position equal to about $650 million).

OK, now to the quarter…

Green Brick’s third quarter 2024 home closing revenue increased 25.7% year-over-year. The average selling price of its homes in the quarter was $546,900 (down 80 basis points year-over-year) helping it to generate an industry-leading homebuilding gross margin of 32.7%. The company’s gross margin decreased 60 basis point compared to the third quarter 2023 because of higher discounts and incentives to help customers with affordability challenges (because of low home supply and stubbornly high mortgage rates).

Its gross margin of nearly 33% compared to the industry-average of about 24% in the September quarter. That’s a big difference and a key point of differentiation, especially if home prices remain unaffordable for first-time buyers, because Green Brick has more margin to give towards discounts and incentives (more of the gross margins below)! As the company scales, it is getting more efficient. Its average cycle time to complete a home across its portfolio of brands in Q3:2024 was 5.1 months, which is one month shorter than in Q3:2023. And impressively, Trophy’s cycle time in Dallas was only 3.6 months (these are spec homes). Green Brick’s combination of fast revenue growth, high gross margins, and improved efficiency (with shorter cycle times and SG&A/ homebuilding sales down 30 basis point y-o-y) continues to drive strong per-share value growth and high returns. Green Brick’s diluted EPS increased 27% from the same period in the prior year, and year-to-date its EPS is up 34.5%. The company generated a trailing twelve month return on equity of 27% and return on invested capital of 15%.

Unlike the other builders under my coverage that are pursuing a more “land-light” strategy through the use of land options, Green Brick believes that vertically integrating and self-developing land is one of its competitive advantages and a driver of its industry-high gross margins (because it doesn’t share its land profits with land bankers or third-party developers). Other than obtaining lots at wholesale rather than retail prices, other advantages Green Brick sees in owning land include better access to top lots in the best locations and better ability to control the development timelines. For these reasons it owns 85% of its lots. But its balance sheet is healthy with net debt of $226 million, net debt-to-EBITDA of 0.5x, and a debt-to-capital of 16.4% (down from 25.7% at year-end 2022). 100% of its debt is fixed rate with a weighted average cost of debt of only 3.4%. Green Brick’s CFO did say that for the right land deals they may take the debt-to-capital back up to 20% and may tap into its revolving line of credit. Given that land is illiquid, the capital structure is something I will monitor closely going forward. But at this time (and even at 20% debt/cap) Green Brick’s balance sheet is strong and healthy. Interestingly, despite its land-heavy business model, Green Brick’s Altman Z Score of 5.97 is higher than Lennar (with an Altman Z Score of 5.12) and Pulte (with an Altman Z Score of 5.89).

Unlike its larger peers, Green Brick does not pay a dividend, but it does allocate some cash flow to share repurchase and the diluted share count is down 12% since year-end 2021. In Q3:2024 it repurchased $5.4 million of shares at an average price of $55.19. This compares to buybacks of $38 million in Q2:2024 and $3.7 million in Q1:2024.

Green Brick stock is covered by six sell-side firms (many of which are smaller, more boutique shops) and there were only three sell-side analysts on the Q3:2024 earnings call. Like most homebuilders, Green Brick’s P/E multiple has re-rated much higher since 2022 when it traded as low as 4x forward earnings. Today Green Brick trades at a NTM P/E of 9x, but I think that’s still too low for an owner-operated company with a differentiated business model operating in an industry with attractive supply/demand imbalances, generating ROEs of 20%-30% with a moderately-leveraged balance sheet (100% fixed rate, low-cost debt and an untouched revolver), and that I think can compound EPS at a mid-teens rate.

Some quotes from Green Brick management on the earnings call…

“This week marks the tenth anniversary since Green Brick became a public company. Over the past decade, we have prided ourselves on our ability to navigate turbulent environments while maintaining a focus on our long-term growth objectives. 10 years ago, in 2014, we had fewer than 600 closings and $246 million in total revenues. In 2021, we achieved total revenues above $1 billion for the first time, and now we expect to surpass the $2 billion mark in revenue in fiscal 2024. Our compounded annual growth rate in pretax income from fiscal year 2015 to the last 12 months ending 9/30/24 is an amazing 34%. We also believe that our ability to grow with one of the least leveraged balance sheets and one of the lowest cost of debt among our small and mid-cap peers demonstrates our team’s operational excellence and positions us well for future growth. At the end of the third quarter, our net debt to total capital ratio was only 12.5%, and our total debt to total capital ratio was 16.4% with a weighted average interest rate of 3.4%. Finally, of the 16 public homebuilding peers that we track, Green Brick was the top performer since we went public based on share price appreciation including the impact of any dividends.”

“We differentiate ourselves from the prevalent land-light model by strategically acquiring high-quality land and self-developing lots on our balance sheet. This approach enables us to avoid the rising costs often associated with the land-light model, particularly in today’s demand environment for land and lot inventory. As a result, we anticipate our lot cost as a percentage of average sales price for a full year 2024 and 2025 to be flat compared to 2023 in contrast to the industry trend where land and lot costs are continually growing as a percentage of the ASP. We believe the ability to self-develop land at wholesale prices positions us favorably to control the entire land development life cycle, including giving us the ability to moderate pacing and timing as market shift, which in turn enables us to manage costs more effectively. Self-development also widens our access to land deals in a competitive land market, especially in coveted infill and infill adjacent submarkets. Despite the misconception that land-heavy leads to lower returns, Green Brick has consistently generated industry-leading return on assets and equity.”

“We believe we have one of the best land and lot positions in our industry and are well positioned to maximize the value of our land assets and generate sustainable growth for the years to come. We believe our land approach in key markets are also beneficial when analyzing market fundamentals. We have not yet seen a significant increase in competition from existing homes in our key submarkets where we have acquired land primarily in infill and infill adjacent locations.”

“approximately 75% of outstanding mortgages have an interest rate below 5%. We believe that under current economic conditions and the high interest rate environment, the primary challenges limiting demand continued to be buyer’s psychology and affordability. Many prospective homebuyers remain cautious even if they could qualify current mortgage rates. We continue to provide our buyers the flexibility to allocate their spend out of our incentive dollars toward rate reduction buydowns and closing costs to mitigate affordability concerns. Over the long term, we continue to believe that favorable demographic shifts will serve as a strong backdrop for the homebuilding industry… a wave of millennials and Gen Z are entering into prime home buying years fueling demand for the next decade. The housing market has been underbuilt for years following the financial crisis creating a significant shortage estimated between 4 million and 7 million units.”

“The sequential increase in incentives and discounts contributed to the decline in homebuilding gross margins as we adjusted to seasonality and elevated mortgage rates during the quarter.”