Hi, good afternoon, everybody, and thank you for coming to the Midwest IDEAS Conference, hosted by Three Part Advisors. Up next, we have Green Brick Partners, traded on the New York Stock Exchange under symbol GRBK. Presenting on behalf of the company is Rick Costello, CFO. Take it away, Rick.
Thank you. Big Texas hello to everybody. We are based in Dallas, Texas. We are a home builder and lot and land developer, which could be one of the differences that I'm sure I'll be talking about here. The company did a reverse acquisition in late two thousand and fourteen. It's been a public company since then. I joined the company ten years ago, in early two thousand and fifteen, back when we were doing about $250 million in revenue, and this year will be around $2 billion. So pretty good growth. We have an exceptional story. I'm not gonna bury the lead. We always compare ourselves to our peers, and as you can see, there's reason for it.
We have the highest gross, home building gross margins in the industry, and there's a story behind that we'll go over here. There is a lot of energy out there being consumed by folks that like the land -light model in the home building industry. Every quarter when we issue our earnings release, in the earnings release and in the 10-Q, we will tell you the percentage of our lots that are self-developed, and that number is always running greater than 90%. So we are just the opposite of land light. We put them on our balance sheet. I think we've got some numbers here. We're not broadcasting, so I don't have to stay there. Return on assets, it's a little confusing, these green lights, lines are debt-to-capital.
Actually, we are broadcasting.
We are broadcasting? I didn't think we were. Okay. Our attorneys don't like that. The green lines are the debt -to -capital, which you see has slowly declined over this particular time period, but we have been a low debt -to -capital company since the outset. Our CEO, Jim Brickman, and that's the brick in Green Brick, always was gonna have one disconnect from our chairman, and our chairman's David Einhorn, Greenlight Capital, and that's the green in the Green Brick. They are the co-founders, so we are a founder-led company. When Jim went to David and said that, "Hey, we've been doing great, but we can't do hedge fund capital any longer," they had known each other since two thousand and two, and this was like two thousand and thirteen.
They started putting money to work together in the shadows of the Great Recession and investing in land that banks had plenty of and didn't want to put incremental capital into. It was Jim's background. He and David met on other conditions and became friends and had worked together on a few deals. But then they started putting their money to work, and it was in and out, in and out, like a hedge fund would do. It was all cash, no debt. David's solution was to take a shell company that was gonna be delisted that had $175 million of net operating losses, and to have that entity buy the assets that they had been developing for four or five years. Jim said, "Well, that's a great idea.
sounds, sounds like a winning plan to me because we do need the permanent capital." He said, "The one disconnect that you and I have, David, is that as a hedge fund manager, you can have nine out of ten deals work and one not, and this one cannot be the deal that doesn't work, so we need to be low leveraged." Jim learned a long, long time ago that you don't want to have a lot of debt in home building and land development. And certainly, since day one, we have always aspired to have more of our most fungible asset, which is your houses under construction, your WIP, to be greater than your debt. At this point, it's a multiple, it's been a multiple for a while. All of our debt right now happens to be long-term debt. It's...
We started doing some note purchase agreements back in two thousand and eighteen, two thousand and nineteen, and we did the majority of them in two thousand and twenty-one. As a smaller cap builder, we can't get an investment grade rating from somebody like Moody's or S&P or Fitch, but the insurance companies rated us themselves and said that we are investment grade. So our average pay rate on our long-term debt of some $300 million is 3.4%. So with variable rate lines of credit being at closer to 8%, it's a pretty good deal. But being low debt has worked for us since day one, but the genesis was always to not have that risk. There are a lot of companies that will do land light deals, and they operate very differently.
One of the drawbacks to putting your assets on your balance sheet is, well, what are your Return on Assets gonna be? I think, at the end of last year, we were at, is that 16.9%?
18.9.
18.9%. Wow. We're up there with Pulte, and pretty much every other builder. Return on total assets is gonna be in the single digits. So obviously, we got past that point in the life of our company that we had plenty of producing assets on our balance sheet after growing very quickly over the years. The land light model, which a lot of builders wanna do, they wanna be like NVR. NVR is kind of a snowflake. There's only one NVR. They exist in some of the Rust Belt markets. They have a huge market share in a place like Washington, D.C. They have a land light model because they tell everybody else in their markets that you're gonna develop these lots for me.
And they can do that because they have, like, 50%-60% market share in some of these markets. That doesn't exist in the rest of the country. There are no lot developers in the rest of the country. I have a good friend who went to work for NVR in Florida, and he quit after nine months because they will not buy dirt from somebody else and allow self-development. They've been trying to come to Dallas for the last five years, and they're not in Dallas because there are no lot developers. So then, how's everybody land light? How do they do these off-balance sheet deals, where you put a lot deposit on your books and then have somebody else develop? Well, somebody else is developing in ownership only.
If you're the builder, they put that finds the piece of dirt, you're actually, as the builder, gonna develop that piece of dirt into finished lots. You're gonna go through the entitlement underwriting and entitlement process. You're gonna hire the subcontractors to do the infrastructure work, the mass grading, the underground utilities, the roads, the common areas, the entry, et cetera. Then you're gonna get substantial completion and get the plat executed, then you go buy your lots from the financing company that was paying all the bills and closed on the dirt. That financing company gets a 20% deposit from you, let's say, and you're gonna say, "Okay, if the costs go up, our lot price is gonna go up," to make sure that you earn your 15% internal rate of return.
So effectively, what you're doing is you're putting a big deposit on your balance sheet. You can do more deals because you didn't put the whole asset on your balance sheet, but what you're doing is you're paying a mezzanine level of financing costs of some 15%. So, it's taking an asset that you can develop yourself on a wholesale basis and converting it to full-on retail. Now, back in the era from two thousand and fifteen to two thousand and nineteen, we had more lot inventory that we could than we could consume from the building side of our business. So we were selling finished lots to other home builders, either some of the nationals or some of the big regionals.
In that time period, you can go look at our P&Ls and see that our gross margins that we were earning when we were selling fully developed lots was 25%-30%. Okay, pretty good business. That is the largest cost any home builder has on their P&L. When you look at the cost of sales of, of a home, the cost of the finished lot is gonna be your biggest cost, and let's say that's 20%-25%. So take the low end of both of those numbers, 20% of your sales price, and you could be making, as a developer, a 25% margin. If you're buying it from somebody who's charging you a 15% internal rate of return, you're gonna have gross margins that are at least 500 basis points worse.
Kind of proves out, part of that equation right here. But our story is a little more complex. We're about 70% in Dallas, 20% in Atlanta, and 10% in Florida. Our Florida builder that we bought 80% of in 2018 operates in the Treasure Coast, which is basically Vero Beach, Florida, which is one of the prettiest beach communities in the state. With that kind of diversion in only good markets, Dallas and Atlanta, throughout the last 10 to 15 years since the Great Recession, have been two of the best home building markets in the country. They're in the South. They have good tax structures. Texas, there's no income tax for individuals, so come on down. It's the fastest-growing, economically based, economically charged.
Both those cities of Dallas and Atlanta are younger than the national average, about five or six years. has probably the largest alumni clubs for every Texas university and the entire SEC as well. that vibrancy, the emptying of California and New York into Dallas has created. It's not just the people that are moving, it's the companies that are moving. we have in a year in excess of 180,000 jobs moving to Dallas. the top five SMSAs that contribute people to Dallas are in California. So thank you, Governor Newsom. It's a winning formula for us. not only are we in the best markets, not only are we self-developing the preponderance of what we do, but also we are in infill locations, okay?
Infill locations, this is a map, two maps, one of Dallas, one of Atlanta, that John Burns Real Estate Consulting provides. They're consultants to banks and money managers and provide a lot of national information. They color-coded a map where the dark green, and this one in particular is in Dallas. The dark green are the best markets. They're the A markets, and we call them the infill markets because they're substantially developed. They have properties that are kinda like what's left is holes in the donut. They have great access to jobs. They have great schools. You don't have to worry about the surrounding uses in your community when you're buying because they're there. It's pretty much all the retail is there, the businesses are there, et cetera.
The best example is, you know, our corporate offices are in the northwest corner of Plano, which is right next to the intersection of two tollways, the Dallas North Tollway and the Sam Rayburn Tollway. It's the Legacy Business District. Four or five years ago, if you had stopped in the middle of that intersection and didn't get run over, you would have counted 23 cranes building office buildings. This is where Toyota moved to. This is where Frito-Lay is, FedEx, JP Morgan, everybody coming out of California, everybody who had started operating in there, you know, either recently or even going back some time. This makes this center of the world why you have the dark green shown there.
It's you no longer have to commute to downtown, and Frisco just north of that intersection has 13 A-rated high schools. It's voted the safest city in the country. It's very close to all these job markets. The neat thing about this, and we've done a lot of deals in Frisco, and next door in McKinney, and next door to that now, and all in those green areas. Over the last three years where we've been coming out with this information, 80% of what we closed in each of the last three years and every quarter has been in infill communities or infill-adjacent communities, and that difference is... What's interesting is that it, the lines grow.
They move as things get filled in, and the donut is no longer anywhere that you can build a new home. You have to move on to the next stop on the interstate, let's say. So in Frisco, the next stop is Prosper, and now it's Celina. I'd never heard of Celina as of a couple of years ago, and then we started closing on the dirt and developing it, and now we're selling $750,000 houses at incredible gross margins. It has moved from being a B-minus to an A, a solid A, and we have a lot of land position in that submarket.
So if you're watching the path of development and watching what's going on in the marketplace, and you're ahead of it, you can make these bets and buy these pieces of dirts, and that's exactly what we've done. So where this started out was talking about being in the best markets, and sometimes it's being in the best market within the best market. So we're in Atlanta. We're in the northeastern suburbs. Alpharetta, you walk, you drive around there, and our builder partner there can point out all the deals that we've done there, and it is just like every stoplight there is another one or two communities that we've done. So we have made our business servicing the, pretty much the move-up buyer. We started Trophy Signature Homes in 2018. They started closing houses then. It was, you know, from scratch, greenfield.
They've closed over 1,400 houses last year, and right now, they are the seventh largest builder on a standalone basis in DFW. We started them because we wanted a scalable operation and scale we have. They have a very straightforward method of pre-planning communities, not allowing changes, but all the standard features are exactly what you would want in a house. So it's kind of like buying a used home that's brand new. Used because you didn't get to make the selections, but it's brand new, so it's got a warranty on it, and it doesn't have the problems of a 10- or 20- or 30-year-old home, and it's been very successful.
They've been able to sell to first-time home buyers at $300,000, move-up buyers at $500,000-$600,000, and even we're selling communities that we picked up for them in 2019, the last time we had a inventory correction in our markets. We're able to buy a lot of lots in the neighborhoods of Frisco. They're selling houses at $1.12-$1.2 million, and these are houses that based on the velocity that we're building them and selling them, you'd think they were easy to do.
So it's been a march of finding a way to grow, and I do focus a lot on DFW, and I do understand that because it has been, over the last 10, 12 years, the very largest home building market in the country. And on a combined basis with all of our five brands that operate in DFW, we are the third largest builder behind Horton and Lennar, but serving a very different client base, and that's something that really happened. And what's different about this gross margin chart is really what happened to everybody else because the margins that we're making are the margins that we were making a couple of years ago. You see down there at the bottom, we're showing the... Is that the gross margin? That's the gross margins.
We had to start discounting when nobody was buying houses at the tail end of 2022. But then all of a sudden, we found that our buyers came back. Our buyers are different. Our buyers are mostly move-up buyers. They have more financial savvy. They have assets that they can sell. They can still qualify for larger loans, but a lot of them were taking lesser loans or paying cash. Our buyers have good FICO scores. They have good debt-to-income ratios that are necessary to place conforming loans. The interesting thing is that they no longer had other options. I mean, you've heard the story about the golden handcuffs and all the low-rate mortgages out there, and hopefully, all of you have one. What it's meant is folks are not selling their houses unless they have to.
It's gone. We've had huge transition that is more acute in our markets, in Dallas in particular. Historically, new homes account for, like, one out of seven, one out of eight homes. Most of the homes that get sold are in the existing stock of inventory, but in this market, we're seeing that new homes account for 30%-40% of sales in DFW, so it makes a huge difference. There is no competition out there. Everybody is going to the new housing market if they move into town or if they get married. Your homeownership rate doubles, by the way, when you get married. You have kids, you need more rooms, you wanna have a couple offices in the house, or you wanna get the toddlers into the right school district.
Whatever the reasons are, there are lots of reasons, and a lot of people have deferred it. They're still renting. They can't afford it, or they do not want to put their house on the market. So interestingly, while everybody else is doing mortgage rate buydowns for thirty years, you know, Horton and Lennar are doing it because they are volume fixated and have to show Wall Street a certain growth rate. So they are doing thirty-year buydowns. Their buyers are different than ours. Our buyers, including our first-time home buyers, can qualify for the loans. We're not doing mortgage rate buydowns. If we are incentivizing... And what were our incentives in Q2? 4.5? 4.5%.
And they're never zero, so that's not a long stretch from 2%-3%, which you just do as a matter of course, because, you know, some people like to get a deal, and sometimes you have to incentivize certain houses to close. What our buyers is, we tell them, "Hey, you know, if you get a 30-year rate buydown, and it's, let's say, 2 percentage points, the builder's gonna have to pay 800 or 900 basis points for that, and you're not getting the benefit of years 7 through 30 or years 5 through 30, 'cause you're not gonna be in the house that long.
So if you really wanna do this right, if you can qualify for the rate that you're gonna be underwritten at, do a three-two-one buydown, where you buy down the rate 3% the first year, 2% the second, and 1% the third, and then take the rest of the little pot of money that we're gonna give you to incentivize this house and pay for some closing costs." And that works for them. And on average, all of this works out to about 4.5% last quarter. The folks who had done a complete migration of their battleship carrier home-building operation rightfully decided between 2009 and the late, like, 2018, 2019, to move into first-time home buyers. Why? Demographics. On the left of this chart is the boomers, me. On the right of the chart are the millennials.
This gap in between is what was after the boomers. Now, what you don't see is the production of housing, which was way below the levels. These are people entering their peak home-building years of 35 to 45. During this cup in the middle, you had even fewer houses being built. There's anywhere from 4 to 7 million housing units that were not built in the United States during that time period. So we have this huge backlog of unsatisfied demand, which is why when it started going crazy with low interest rates during the pandemic, you had a shortage of housing stock, and the supply chains just froze up. That still is not satisfied. Those buyers are still out there. They are not homeowners yet. So you have this unmet demand out there that needs to be satisfied.
Looking at this chart, everybody in the green over there on the right-hand side. Well, there's no relief after them because the next generation is almost as big. I think it's seventy-two million millennials and sixty-eight million Gen Zs, something like that. So this is gonna continue on, which is really a big vote for housing, 'cause the demographics of the United States are not the demographics of the rest of the world. We don't have to compete in foreign markets where the demographics aren't as good. This, this is our environment, and you certainly can understand why the big builders said, "Hey, this is who we have to sell to." They just didn't expect the interest rate rise that we had to stratospheric levels to really curtail their business, and that's why you see the volumes in the market down.
A lot of the companies on this bottom chart here, on, from a debt-to-capital standpoint, have a very different operating philosophy than we do, and unfortunately, some of those companies are trying to do land light as well. It's kind of dangerous, because if you've got a 20% deposit, the only recourse that you have if you don't want to close on that third-party lot closing, is to walk away from the deal. Because the developer, this financing company, they're real smart guys, generally, you know, from the Northeast or Midwest, and they're gonna say: "Why would I give you a discount?
I'm gonna default you, keep your 20%, and go call Green Brick, and they'll buy the lots." And that's what we did in two thousand and nineteen, a small measure when there was an inventory adjustment, and that's how we got some extra inventory to start Trophy Signature Homes. Because we were able to go in and say, "Hey, we'll take that 20% lower price, and we won't just close on the lots that they're supposed to close on this quarter. We'll buy all of your finished lots and all the rest of your dirt, and for phases, for future phases, and here's your price, and you get to walk away with a higher profit than you, when you thought on a IRR or net present value basis." And we were able to do a multiple of those deals in that timeframe.
The best thing that you can look at for Green Brick. We treat ourselves like we're run like a private company. We don't provide guidance. I think analyst estimates. I think we might have beaten analyst estimates by almost 40% last quarter, so we have been exceptionally profitable. We're sporting not just profitability, but also growth. As you see in the bottom here, where we're tracking starts, we had a dip in starts in 2022 when interest rates went way up, but since that time, we're tracking to consistent levels that are gonna take us to new highs.
A lot of people look at community count, and we look at our starts because by the time you have an active selling community, we've already started the houses because we're selling them on a spec basis. We build them, and when they're getting close to close, that's when we release them for sale. Generally, that happens for our town home communities that we sell. One of our Dallas builders is the largest suburban town home builder in DFW. They sell in the nicer infill markets. It ends up being the lowest price point in those markets. Town home builders put four buildings up at a time. The first two buildings are...
I should say, the last two buildings are not for sale, because that first building that we started, it needs to get sold first before you're selling units in the second building, which needs to be sold by the time the third building starts selling. So it's a spec-heavy business. We're about 65%, give or take 5% each quarter, and because we have certainty of close date, we know what our costs are. Most importantly, in this environment of volatile interest rates, the buyers know that they can close at where the interest rates are, and if they're 30 days away from close, they can lock their interest rate. Before I go too much further, you all have questions? Sir.
Could you say a little bit about the most recent development around inventory build in these hot markets, just in the last few months, I mean?
I think a lot of folks have the spec model. The interest rate volatility, I think has forced more people into either discounting or trying to play the waiting game. I don't really see much impact from the additional inventory coming from the existing homes, and honestly, when someone puts their home on the market, they become a buyer also, because generally they're not leaving town or they would've put their house on the market previously, so it's not something that's been palpable in our markets. I think national statistics are hard to digest for us. We definitely have a job growth energized couple of markets with Dallas and Atlanta, which are gonna perform much better than the national numbers that you're seeing.
Yes, sir.
You guys run with lower leverage than your peers to sort of take advantage of inventory directions deeply?
Well,
Take a little of that out to buy lots.
We could, and we would. We've been sitting on a lot of cash here lately. We've had a couple of real big monetization events. We've got $360 million worth of lines of credit with nothing drawn. So we always have that to dip into, but we've been running with excess cash for a good year and a half, and that's because when we hit the pause button, when COVID hit, and we weren't starting houses, and we were trying to slow some house construction down, all of our houses that were already sold, we continued on all those. We closed all those. So when you put a pause on starts, and your inventory goes down, you're reducing your balance sheet. You're monetizing your balance sheet.
And then in 2022, which you saw before, how the starts dipped down. Again, when there weren't as many houses being sold until they got the memo that it was okay to go, the same thing happened. Once again, when you reduce your starts, you're reducing the inventory on your balance sheet, and you monetize. And that's something else that's really cool about our business model from a cash flow standpoint. Because we self-develop, we have, at any point in time, around five thousand finished lots. And that means we're always finishing. We're spending $325 million-$350 million a year on land development.
But when we close a house, we collect that real nice gross margin, but also the biggest debit on the P&L is the cost of lots sold. That was not a cash event this year. That was last year. So we're taking the cash that journal entry did not consume, along with the gross margin, and we just have tremendous positive cash flow. That's a long way of saying we always like to be low leverage, but the levels that we're at right now are probably lower than we had been running. I know they're lower than they had been running, but lower than we would necessarily want.
But yeah, we do wanna always retain that financial flexibility of being able to take advantage because you make the most money in our business when during troubled times, when there's blood in the water, and you can be opportunistic and buy something. So if you don't have the dry powder, you're missing out.
A follow-up, if I may. I know you guys are in Atlanta, Florida, and in Austin as well.
We started in Austin. We have one community selling in Austin, and we have another community that we have under development in Houston.
Are you guys open to expanding into new MSAs, or is the runway in your current MSAs pretty sizable for your business?
We have 33,000 lots for a company that's never closed 4,000 homes in a year, so we got a lot of inventory. Now, a good portion of that is in long-term communities, where we bought the raw dirt undeveloped, for less than $10,000. So we've got a lot of runway in those communities that you can't really do that math of this divided by that. But you know, the land is the biggest thing that keeps us from expanding into areas where we don't have knowledge. You know, we bought the builder in Florida, and he's a side-by-side partner with us. He. It's his biggest personal investment. It's the cash that he's got left. It, it's a partnership. It's an LLC.
Yeah, it's a 80-20, 80 us, 20 him, but he, he likes that. We have no financial leverage on it at all, and he really enjoys that. It's taken the debt, the worries away for him.
Yeah. Yes, sir?
I know a few years back, you said that you finished a house, and you had 20 potential buyers on a waiting list to buy the house, so buyer number one had died or left town or whatever, you went to buyer number two.
Uh-huh.
How robust or how healthy is the buyer's market right now?
It's not like that anymore, and that was an environment. I mean, my gosh, in the very beginning of 2021, we raised prices by 30%. That was crazy, and it's not like that any longer. But it's healthy, as you can see by our gross margins. And we're, you know, we're not just selling at the back end in all of our brands. In our more expensive communities, we're generally working with customers more and selling them what they want sometimes, you know, doing options and stuff like that. So there is a lot of differentiation because each brand is a little bit different, and they operate according to what their customer dictates. Sure. We're about at the end of time. I thank you for your participation.
Brick Partners, NYSE: GRBK. Thank you.