Good afternoon. Welcome to Green Brick Partners earnings call for the first quarter ended March 31st, 2023. Following today's remarks, we'll 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 is also available on the company's website at 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, May 4th, 2023, and the company has no obligation to update any forward-looking statement 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's website. With that, I'll turn the call over to Jim Brickman.
Thank you. I'm extremely pleased to report that Green Brick started 2023 with the best first quarter results in our history. During the first quarter of 2023, we delivered 761 homes, which was a record number for any first quarter and led to a 24% year-over-year growth in home closing revenues of $449 million. This revenue level was also a record for any first quarter. As opposed to margin degradation seen among many of the public homebuilders, Green Brick was able to sustain a homebuilding gross margin of 27.6%, one of the highest among homebuilders, and up 140 basis points sequentially from Q4 2022. Net income during the first quarter was $64 million, and earnings per diluted share grew 14% year-over-year to $1.37.
Both income measures were records for any first quarter. Our strong land and lot position and operational execution yielded an annualized return on equity of 24.4%. Additionally, we returned $15.4 million back to shareholders during the quarter through our stock buyback repurchase program. Sales momentum was exceptionally strong during the first quarter. Net orders accelerated across all builders brands, and at 1,067 homes were up 78% year-over-year and 152% sequentially. The second-highest number of net orders of any quarter in our company history. Our cancellation rate improved significantly, dropping 14 percentage points from Q4 2022 to 6.2% in the first quarter, the lowest in the industry. Jed will provide more color on sales activity shortly.
While we are encouraged by the strength in sales pace, the volatility in interest rates remains the biggest moving target in the home building industry. We believe Green Brick possesses multiple strategic advantages that position us for industry-leading performance as summarized on slide four of the presentation. Our first advantage is a significant footprint in markets with some of the biggest job growth and best demographics in the nation. DFW, our biggest market, has been leading the way in job creation by creating 212,000 new jobs during the last 12 months. A booming job market, lower cost of living, no state income taxes, and a warmer climate make DFW an appealing destination for young professionals, resulting in a younger demographic who are in their prime home buying years as compared to the U.S. average.
We believe these favorable trends will continue to drive more housing demand over a long time horizon. Our second advantage is our superior land and lot pipeline and the disciplined approach we have undertaken underwriting and acquiring our land deals. Approximately 80% of our total revenues were generated from infill locations in Q1. As we have previously disclosed, at the end of 2023, approximately 75% of our finished lots in DFW and Atlanta are expected to be in infill and adjacent desirable areas as seen in slides 11 and slides 12. Our infill submarkets are typically supply-constrained with less competition and require greater expertise and local knowledge to develop, creating a barrier to entry. Our third advantage is the high level of control over our finished lot cost and lot delivery schedules because of our emphasis on self-development in our land business.
This also has allowed us to maintain exceptional homebuilding gross margin that have been consistently among the highest of our peers, as shown on slide 5. We also enjoy great flexibility in terms of our ability to control lot delivery cadence as market conditions change, enabling us to start the construction of more homes without an outlay of cash to purchase finished lots. If sales momentum continues to be strong throughout the spring selling season, we believe we will have the ability to quickly ramp up home construction and future phases of land development. Our fourth advantage is the diversity of our product lines. We are one of the few public homebuilders that offer a range of various price points, lot sizes, and product types that serve a wide range of customer segments and needs.
This is possible through our subsidiary and affiliate builder brands, each of whom has its own strategic and market niche advantages. Our fifth advantage is our people and culture, which are essential for our growth and success story. Our experienced teams bring a wealth of knowledge, skills, and expertise that drive innovation, efficiency, and operational excellence. Real estate is a local business. All of our builders have deep roots in the communities they serve and decades-long relationships with local landowners and political, subcontractor, and realtor networks. We take pride in the history and the culture of our brands. While each of our home builders is locally branded and managed, all of them are united by our common set of values we call HOME, which stands for Honesty, Objectivity, Maturity, and Efficiency. Our supportive and collaborative work culture continues to help us retain and attract top talent in the industry.
Finally, we possess a strong balance sheet with one of the lowest debt-to-total capital ratios among our peers at 23.8% at the end of the first quarter, as shown on slide four. At the end of Q1, our net debt to total capital ratio was only 13.3%. Our strong balance sheet, low-cost fixed-rate debt structure, and our ability to react quickly will provide us extraordinary flexibility to take advantage of market opportunities. We remain positive about the long-term housing supply and demand fundamentals. We have an approximately 4 billion housing unit deficit in the country. As shown on slide six, an estimated 3 million of additional millennials and Gen Zs will age into the optimal homebuyer age over the next decade.
Our largest market of DFW and Atlanta will likely get a greater share of these population segments compared to other cities as both markets boast a lower overall average age than the national average and are desirable to lower cost of living and very healthy job markets. We believe we are well-positioned to capture that pent-up demand. In the meantime, housing supply remains lower than demand, especially in the infill locations where Green Brick has a competitive advantage. High interest rates have kept existing homeowners on the sidelines as many are unwilling to give up their low-rate mortgages. This has led to a tight resale market as shown on slide seven. Existing home sales, which make up most of the housing market, fell 2.4% in March from the prior month and 22% from a year earlier.
New homes have gained a larger portion of the homebuyer pie from buyers with limited options to purchase an existing home. In March, about 1/3 of single-family homes for sale were new homes versus existing homes, up from the historical norm, which has run north of 10% new homes. We expect the lack of competition from existing homes to continue as approximately 70% of all mortgages bear an interest cost of less than 4%, making the cost of a new mortgage to this segment comparatively unappealing. We believe all of the strategic advantages discussed above will give us an edge to continue to grab market share from the resale market. With that, I'll turn it over to Rick to provide more detail regarding the financial results. Rick?
Thank you, Jim. Please turn to slide eight of the presentation. Home deliveries in the first quarter grew 16% year-over-year to a Q1 record of 761 units, with ASP growing 7% year-over-year to $591,000. Home closings revenue broke our record for any first quarter and climbed 24% year-over-year to $449 million. SG&A as a percentage of residential unit revenue was 10.2%, up from 9.4% year-over-year due to an increase in brokerage commissions. Net income attributable to Green Brick and diluted earnings per share were up 4% and 14% year-over-year, growing to $64 million and $1.37 per share, respectively. Again, both were records for any first quarter.
Our cancellation rate improved 180 basis points year-over-year to 6.2%, which was a significant improvement from 20% last quarter. As shown on slide nine, our Q1 cancellation rate was the lowest among the public home builders as we are the sole builder with a single-digit cancellation rate in Q1. As Jim mentioned earlier, demand for our homes has remained remarkably strong since November. Net new home orders in the first quarter rose 78% year-over-year to 1,067. As shown on slide four, we are one of the two public home builders that reported a positive year-over-year change in net orders. In fact, as seen on slide four, the other public home builders had an average decline of 21% in year-over-year net orders.
Sequentially, net new orders were up 152% over Q4 2022. Revenue from net new homeowners was up 75% over Q1 2022 to a record $631 million. Active selling communities at the end of Q1 were up 4% year-over-year to 79%. Our quarterly absorption rate per average active selling community increased to a record level for any quarter of 13.3 homes, up 143% from 5.5 homes the last quarter, and up 66% from 8.0 homes last year. Our homebuilding gross margin on homes delivered was 27.6% during the first quarter, one of the highest in the industry, as shown on slide five. This is only 20 basis points lower than the same period last year when demand was still near peak levels.
Sequentially, homebuilding gross margin for deliveries increased by 140 basis points. In fact, our gross margin on new orders increased each month during the quarter. For March, we're up 440 basis points from the December 2022 lows. Looking ahead, based on our experience of lower construction costs on new starts and with demand outpacing supply in our submarkets, we believe that the gross margin bottom is behind us as we expect gross margins to be slightly higher in the near term. Due to our exceptional sales pace and our significantly lower cancellation rate, backlog value at the end of the quarter increased 49% sequentially to $551 million. This was driven by a 57% increase in backlog units.
Spec units under construction as a percentage of total units under construction decreased from 73% at the end of last quarter to a more desirable level of 59% at the end of Q1. A notable trend we are seeing is that not only did we see strong demand in move-in-ready homes, but we also experienced an uptick in demand for both build jobs and homes in the early construction stages. While we are excited about our sales performance and our delivery pace, we would like to remind everyone that our recent cadence in closings could be bumpier for the rest of the year. As shown on slide nine, for each of the past five quarters, our trailing 12 months closings averaged approximately 3,000 units, ranging from 2,900 units-3,100 units.
Even though we ramped up our starts in the first quarter of 2023 to 667 homes, more than double sequentially from 304 starts in Q4 of 2022, our starts over the trailing twelve months are now down 29% year-over-year. This decline is due to a drop in year-over-year starts over the past three quarters. As a result, our units under construction have declined to 1,759 homes as of March 31, 2023, a drop of 30% from 2,516 homes a year earlier. With the decreased demand, we have increased starts significantly at the end of Q1 and now into Q2.
Moving to our balance sheet, during the first quarter, we paid off the remaining balances of our revolving credit lines, leaving us with 100% fixed rate debt at a weighted average interest rate of 3.3%. Our debt to total capital ratio was further reduced by 500 basis points from last year to 23.8%. Our net debt to total capital ratio was 13.3%, down 1,170 basis points from last year due to accumulation of cash from closings and fewer home starts. We remain committed to maintaining the strength of our balance sheet while evaluating opportunities to deploy our accumulated cash plus access our lines of credit when appropriate. With that, I'll now turn it over to Jed. Jed.
Thank you, Rick. As Jim mentioned earlier, we are extremely pleased with our sales performance, especially given that all our builder brands and all price points have seen strong sales in our supply-constrained infill markets. We are optimistic as we move into the heart of the spring selling season. The disruption from changes in mortgage rates is softening as our home buyers have adapted to a higher interest rate environment as the new norm. We believe our story is unique to our markets and with our business model. We believe unmet demand will continue in our infill locations where there are healthy job markets, favorable demographics, and reduced competition from existing homes for sale. We expect sales to moderate from the record levels we saw at the beginning of the year, as we will have fewer finished and finishing homes available to sell.
We expect the unmet demand to continue to create healthy sales orders for Green Brick in DFW and Atlanta through the remainder of the year. In the first quarter, because of exceptional demand, overall discounts and incentives for new orders moderated sequentially down to 4.4%, an improvement of 330 basis points from 7.5% last quarter. Additionally, we selectively raised prices and started metering sales in a few communities where we were selling faster than we could build. While we made no new land acquisitions during the first quarter, we are constantly on the hunt for good land deals that hit our return thresholds.
We currently own and control 25,000 lots with 84% of them on our balance sheet. We remain confident with the quality and expected returns of those lots, and believe our land philosophy and underwriting process is poised to continue to generate higher margins and returns than many of our peers, particularly with our low cost of debt. As lenders become more conservative, particularly in the A&D lending, we're optimistic that we will find new land opportunities, whether in existing or new markets. As summarized on slide 10 and as mapped on slides 11 and 12, most of our expected 2023 lot deliveries in DFW and Atlanta will be concentrated in infill and infill-adjacent desirable locations. These lots have favorable cost basis that we believe should continue to help us generate industry-leading gross margins.
Due to the fallout from the banking sector stresses, smaller and private builders are squeezed by rising costs and capital and tightening financing terms. In an environment with persistently low existing home inventory, we believe we are well suited to take market share with a strong balance sheet and ample high-quality finished lots and infill locations. With our recent pause on land acquisition and reduction in home starts, our liquidity was up significantly to more than half a billion dollars, including $177 million in unrestricted cash and $360 million in undrawn line of credit availability. To return capital to shareholders, we repurchased 468,000 shares of common stock for a total of $15.4 million in the quarter, with $33 million remaining under our existing stock buyback program.
In April, the board approved an authorization of another $100 million stock buyback, bringing our total availability to $133 million. We will continue to evaluate all options to use our cash in the most efficient way with a focus on generating industry-leading returns on equity. We continue to see incremental improvement each month during the quarter on our construction cycle time, particularly with Trophy Signature Homes, which has seen significant improvement in cycle times for homes started in the second half of last year. Homes started at Trophy in the third quarter of 2022 that are now complete had an average cycle time below 200 days. Cycle times for some homes started in Q4 of 2022 are now complete improved to about 150 days. We believe that we will see greater overall improvement in coming quarters.
We are extremely excited about our entry into the Austin market. The Austin market has been under a chronic shortage of affordable housing for a long period of time. We believe Trophy's product desirability and affordability can capture the unmet demand from entry-level and first-time move-up homebuyers by selling homes starting under $300,000. We expect new Trophy community in Austin will open for pre-sale in June of 2023. We look forward to sharing more details next quarter. I will turn it over to Jim for closing remarks. Jim?
Thank you, Jed. I want to express my gratitude to our employees and staff that are the backbone of our company and the primary reason for our outperformance. My goal is to continue to attract and retain top talent at our business. We continue to evaluate expansion opportunities for Trophy Signature Homes, we'll keep you posted on this progress. We are encouraged by the results of the first quarter, as we look ahead, we may remain confident in our ability to execute on our strategic initiatives to continue to deliver long-term value for our shareholders. We appreciate your continued support and interest in our company, look forward to speaking with you again next quarter. This concludes our prepared remarks. We will now open the line for your questions. Thank you.
Thank you. At this time, I'd like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. We'll take our first question from Jay McCanless with Wedbush.
Hey, good morning. I guess wondering about the sales pace during the quarter. Was the order gains driven by a lot of finished homes that you had? Or were you trying to sell maybe at the beginning of the quarter to generate some extra cash flow and then decided to slow things as you started to see traffic and demand get even better?
Jed, why don't you take that? You deal with it every day.
Yeah, sure, Jay. You know, we entered the year with a slightly more finished specs than we would have liked. You know, although we had a good November and December sales, we, you know, wanted to make sure we started the quarter out great. We had a, you know, a little more incentives in the January sale, and then we've tightened those through the remainder of the quarter. You know, the incentives have tightened through the remainder of the quarter, and we continue to see very strong demand.
Okay. 'cause there's a lot of people, a lot of your competitors saying the same thing you guys have said, that potentially tighter lending standards later this year are gonna create some opportunities. I guess, kind of when do you think that's gonna happen, Jim? If it doesn't happen, what's plan B? Do you feel like you have enough land to grow the community count through the rest of this year? Also maybe, you know, do you have enough land in hand to grow it into next year if those bank-driven opportunities don't appear?
Well, first of all, I don't think. This is Jim. I don't think we really need things to improve. We just hope they stay the same. We had a fantastic quarter, and really we're seeing it really even into May, the first few days that it's continuing. Improvement isn't necessary to have a great year. In terms of bank lending out there, I think what you're gonna see is the public builders are generally the least leveraged. They don't rely on banks, and they're gonna benefit, and we continue to gain market share every cycle, and I think you're really gonna see that by all builders, and we think particularly by us because we have the best locations of any of the public builders.
Jay, hey, this is Rick. Thanks for the questions. One of the things from the buyer side is that we're still seeing very consistent credit scores, credit quality from our buyers in the, you know, the 750 range. We are also seeing the buyers who are acknowledging the existence of the higher rate mortgage loans that are available are simply allocating more dollars from a personal standpoint to their the housing component. You know, the backend ratios are obviously still conforming, just higher, and it's because everybody needs a house. That's why it really makes a difference where you're selling.
Like Jed said, we think we have a unique story, not just being in the best markets in the country, but being in the best sub-markets with our infill and infill-adjacent communities.
Got it. Actually, Rick, I was gonna throw a couple at you. I guess the first one I had for you is, with this large amount of closings in the first quarter, should we expect a sequential decline in closings? Also maybe talk about where you think the community count could go this year.
Yeah. Community count is especially challenging right now from the standpoint of it's gonna be very dependent on how robust sales are on a go-forward basis. We're still gonna have the lot count, and we've reiterated that fact on some of the maps that we're showing. From a closing cadence standpoint, you know, we've really done a good job on building our backlog. In that regard, we're happy to enter Q2 with much better backlog than we entered Q1. The answer to your question on a timing basis between quarters is gonna be a function of cycle time and how much improvement we see there. 'Cause if cycle times are improving, you're essentially getting more houses that are available to close in Q2 and Q3.
You know, we're hoping that, you know, some of the houses that we're gonna start in Q4 are able to complete and close by the end of 2023. It's really a TBD. You know, we shall see.
Not Q4, Rick.
Q2.
Q2.
No, I was talking about Q4. We start houses in Q2 that are gonna be ready by the end of the year.
That's correct.
Yeah. Yeah.
Okay. Great. Thanks for taking my questions.
Thanks, Jay.
Okay, next we'll go to Carl Reichardt with BTIG. Your line is open.
Thanks, everybody. Following on Jay's question, I think, Rick, for you. 1,067 orders this quarter, what percentage of those orders also closed this quarter? What percentage of those orders were on to-be-built, i.e., not even trenching, house hasn't started?
Wow. That's a really interesting question.
Carl Reichardt, this is Jed Dolson. I'll take. You know, we may need to get back with you on the exact answers on that. I can tell you on the second part of your question, very few of the homes sold, were to-be builds. Most of them, you know, were either finished or were coming out of the ground already.
Okay. Okay, great.
I would say, you know, if I had to guess, I would say over 50% of the sales sold and closed in the quarter.
Okay. Thank you, Jed. I appreciate that. Because of the unusual nature of the quarter, your cash flow statement looks like we typically see in the fourth quarter. I don't think you've ever generated more operating cash in any quarter than you did in this unusual first quarter. You're sitting with $100 million more in cash than you had. You have a new authorization out there, but at the same time, you sort of talked about starts being, you know, given the strength you've seen, a little behind maybe where you want them. When we're modeling that out for the course of this year, what do we expect you to do with that excess cash?
Would this be back into share repurchase, or would it be more getting dirt ready, WIP, etc. , as you look at the market?
This is Jim, Carl.
Hey, Jim.
Hey. I probably should have added, we had five strategic advantages that I mentioned when we went through the first part of the earnings call. I think we really have a sixth, and that's when it becomes really how we look at evaluating stock purchases. Repurchases of our stock versus investing in land deals or other opportunities, David Einhorn is our chairman, and he's also our biggest shareholder. I've known David for 21 years. We have a really nice, tight financial team here. David is very helpful to us as we evaluate looking at stock repurchases versus internal rates of return on whether it's buying a land deal or investing more in WIP. It's really a very fluid process. I don't have an answer to that.
All I can tell you is that David is very involved in this, and I think he makes some really great decisions for our business when it comes to this.
Uh, great.
Hey, Carl, this is Rick. I'll add on to that. Certainly one of the things that we're gonna be doing with this kind of sales pace is increasing starts, and I said as much during the prepared remarks. We have had a drawdown in WIP on our balance sheet.
Yes.
That's fairly obvious with the decline in the units under construction. I mean, hopefully we can keep the units under construction low because our cycle times are improving. We certainly expect to then be building and spending more quickly on the WIP side and getting our rate of starts up higher to hopefully where we have seen it in the past. Certainly you'll see that on the WIP side. On the land side, it's a TBD.
Okay. Thank you, Rick. If I can squeeze one more in just on what I sometimes ask on new markets, Jim. Again, you've built a lot of share in Dallas now. Share in Atlanta is pretty good. You've got Austin coming online. Is it still the way I should think about this is the incremental dollar of investment for Green Brick is more likely to go into existing markets than it is to go into new markets? Is that still the right way to think about things?
No, no.
Good. I'm glad I asked then.
Well, first of all, you know, Trophy, they do 1,200 houses a year in Dallas. Dallas is pretty consistently a 40,000 start market. Obviously, most of those are the bell curves that Trophy's in, so there's a big runway for Trophy. We're looking at a number of land deals right now. We think it's an opportunistic time just because A&D lending is gonna get cut back due to the regulatory problems and other lending problems that have nothing to do with single family homes that banks are incurring. The other thing we're kind of excited about is that the cost of capital for land bankers has gone up basically twofold from a year ago. You know, they're looking at a 10% debt component in their cost of capital typically right now.
They're gonna be much more conservative on how they look at deals. We think there are gonna be land opportunities in Dallas. We're already looking at some in Austin. We're looking at one deal with an experienced partner in another new market that I hope, you know, fingers crossed, maybe I'll be giving you positive news. Don't count on it next call.
All right. I appreciate that. Thanks for the clarity, and thanks a lot, guys. Thanks for the time today.
Thanks, Carl.
Okay. As a reminder, ladies and gentlemen, if you have a question, it's star one on your telephone keypad. Next, we'll go to Alex Rygiel with B. Riley. Your line's open.
Thank you. great quarter, gentlemen. A couple of quick questions here. First, how many communities are you actually metering right now?
Yeah. This is Jed, Alex. I'll take that. We're metering probably less than 10% right now.
Okay. As it relates to incentives, sort of April, May, what does the incentives look like compared to the first quarter?
We're not gonna give forward guidance, but I can tell you know, that we have fewer and fewer finished specs right now, and so we're seeing a lot of our sales happen early to mid-cycle in the home building process. Just coming out of the ground at slab or, you know, just finishing mechanical. We don't want. You know, we're gonna be not in a hurry to incentivize sales as quickly as we would or our competitors would if the homes were finished.
Are you seeing building material costs other than framing decline at all yet?
Sorry, are we seeing building material prices?
Are you seeing them decline at all other than the framing?
Well, I think if you look at the spot market for framing, it's kind of been oscillating month to month in a, you know, + 5%, - 5%, market this year. You know, I think framing costs really bottomed in February, and they've kind of been bouncing along the bottom the past couple of months. The other materials.
Sorry, my question was. Yeah.
Go ahead.
My question was more about the other materials.
Yeah. The other materials, I mean, we're in a different situation than we were a year ago. We're thankful to have materials now, so we can build our homes, which is evidenced by our reduced cycle times. We see that getting better and better. We are seeing slight reductions in the cost of those materials because a lot of them were foreign bought and had shipping container surcharges, and those have gone away. We can, you know, a lot of that, suppliers have relocated the supplies either domestically or to Mexico, and we're getting the products cheaper than we were a year ago.
Thank you very much.
Yep.
Okay. Showing no further questions, I'd now like to turn the call back over to our presenters for any additional or closing remarks.
Well, thank you for joining the call. Thank you for your investment support. We will continue to try to do the best we can from a return standpoint. Have a good day.
This concludes today's conference call. You may now disconnect.