Green Brick Partners, Inc.

Good afternoon, everyone, and welcome to Green Brick Partners' earnings call for the second quarter ended June 30th, 2020. Following today's remarks, we will hold a question and answer session. As a reminder, this call is being recorded and will be available for playback. A slideshow supporting today's presentation is available on Green Brick Partners' website, www.greenbrickpartners.com. Go to Investors and Governance, then click on the option that says reporting, and then scroll to the page until you see the second quarter investor call presentation. The company reminds you that during this conference call, it may make various forward looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995, including its financial and operational expectations for 2020 and the future. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, including but not limited to comments related to the anticipated impact of COVID-19 on our future operations, prospects, and other aspects of the business of green brick partners are based on current expectations and are subject to risks and uncertainties. Those factors that could cause actual results or outcomes to differ materially from those expected are set forth in our press release, which was released on Tuesday, August 4th, 2020, and the risk factors described in the company's most recent annual and quarterly filings with the Securities and Exchange Commission. Greenbrick Partners undertakes no duty to update any forward-looking statements that are made during this call. In addition, our comments will include non-GAAP financial metrics, the reconciliation of these metrics, and The other information required by Regulation G regarding these metrics can be found in the earnings release that Green Brick issued yesterday and the presentation available on the company's website. I will now turn the call over to Green Brick CEO, Jim Brickman. Please go ahead, sir.

Thank you. Hi, everyone. I hope this call finds everyone well. With me is Rick Costello, our CFO, and Jed Dolson, our president of the Texas region. Thanks for joining our call. As the operator mentioned, the presentation that accompanies this earnings call can be found on our webpage at greenbrickpartners.com. At the top of the webpage, click on investors and 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 everyone a second to do this. Okay, despite the challenges of operating during the COVID-19 pandemic, our Q2 2020 results are by far the best in the company's history and continue to demonstrate the remarkable growth trajectory of the company. Our Q2 2020 revenues, EPS, and ending backlog were at all-time records, and we could not be more thrilled with our results. The 69% year-over-year growth in pre-tax income is especially noteworthy as these results were achieved while reducing our net debt to total capital to 23.7%. Throughout the current health crisis, we have continued to build and sell and close homes in all of our markets. After recognizing the increased market activity commencing in May and accelerating into June, we reinitiated much of the previously planned capital expenditures that we had placed on hold in March. This activity included construction of unsold units, purchase of lots of land, and development of previously acquired land that we are actively managing in order to keep pace with the current sales progress. As we move into the third quarter, we continue to see strong sales growth as evidenced by July 2020 showing a 29% increase in net sales over July 2019. We have initiated moderate price increases to offset some of the cost input increases like lumber and expect to maintain our industry-leading high margins. We continue to monitor our fixed costs to position our swells to be responsive to changing market conditions and we have delivered this growth without returning to our prior overhead levels. We remain optimistic that the pro-business markets in which we operate and the wide range of quality homes operated by our team builders will continue to drive future success despite the market disruptions caused by COVID-19. This optimism is grounded on the outstanding year-over-year sales growth we witnessed this May and June, where each month exceeded the same month in the prior year by 52% and 82%. Please flip to slide four of our presentation. We are a diversified builder with eight brands in four major markets. Our diversification includes a wide array of product types and price ranges, including homes priced as low as $200,000 to homes priced in excess of $1 million. We believe this stratification of products will continue to appeal to a broad base of homebuyers and expect our entry-level segment to continue expanding through the growth of our Trophy Signature and CB Jenny brands. Beginning in the fourth quarter of 2019, Green Brick made the decision to increase our equity ownership in most of our Texas builders. At the end of Q2 2020, our CB Jenny, Normandy, and Southgate team builders are now all wholly owned by Green Brick Partners, and Centered Living Homes is 90% owned. We believe this increased control will lead to a more adaptable and efficient operation of our Texas region that will empower our experienced management team and local operators to continue to produce superior risk-adjusted returns. In fact, we are already seeing the impact of these trends. Oh, I'm sorry. Sorry, I jumped ahead of there. On slide five, we highlight the resilience of our key markets of Dallas, Fort Worth and Atlanta. Like every other economy in the country, the COVID-19 pandemic created a major disruption in commercial activity and led to a significant rise in unemployment during the second quarter. However, as shown on the graph on this page, Our DFW and Atlanta markets ended the quarter with the lowest and third lowest employment rates out of the 10 largest metro areas in the United States. Additionally, the Dallas, Plano, and Irving sub-market had the second lowest year-over-year increase in its unemployment rate in the nation. With 82% of our ending active selling communities in these core markets of DFW and Atlanta, GreenBrick is fully prepared to capture new home buyers in these markets as demonstrated in our robust sales growth in the latter half of Q2 2020. We believe this strong bounce back from the low seen in April 2020 is further proof that our focus on business-friendly, pro-growth markets is the correct choice and will continue to differentiate us from peers. Thanks to the superior markets in which we operate, Greenbrick is poised to capitalize on what we believe are long-term positive shifts in homeownership. As seen on slide 6, the national homeownership participation rate has risen since the Fed began reducing interest rates in August 2019. As of June 30, 2020, the national ownership rate now sits at 67.9%. This is a rate not seen since September 30th. of 2008. With interest rates expected to remain low for the foreseeable future and an increased appreciation and demand for larger homes with dedicated work-from-home spaces, we fully expect this trend to continue. Strikingly, this quarter saw the ownership rate of buyers under 35 exceeding 40% for the first time since December 31, 2009, with the ownership rate increasing 330 basis points from Q1 2020 to end at 40.6%. Millennials currently represent the fastest growing ownership segment, and we believe this age group will continue to drive further increases in homeownership. While this trend will be constrained by the available supply of housing, we are of the opinion that this higher ownership rate, especially related to younger homebuyers, should at a minimum be considered a new normal. With home ownership of buyers under the age of 35, still 300 basis points below its peak in the mid 2000s, we feel that this shift represents a true secular change in the home building marketplace that Green Brick Partners is fully prepared to address. In fact, we are seeing the impact of these trends in our current operating results as discussed on slide seven. At Center Living Homes, our urban single family and townhouse builder in Dallas, we have seen home sales to buyers moving out of apartments roughly double and have achieved some of the highest sales months in the brand's history. This trend is in line with the one-third of urban residents that have expressed a desire to move out of high density apartments and into less dense single family communities. At the same time, we have seen the average age of our loan applicants through our mortgage joint venture drop by 5% as millennial buyers become more willing to purchase a home. This shift to a younger buyer has resulted from 188% growth in our revenues generated by our trophy signature and CB Jenny brains measured by year or year for the second quarter of 2020. These team builders have grown to represent 40% of our home closing revenues in the current quarter and are well established to capture future demand in the DFW market. With the median age of the Dallas and Atlanta populations well under the national average, we believe GreenBrick is well positioned to meet the expanding needs of younger homebuyers. Further, as working from home becomes more prevalent among employers, we believe commute times will become a much smaller consideration for many home buyers. As such, we expect buyers to find the larger floor plans, dedicated office spaces, and minimal maintenance requirements offered in our suburban communities to be in much higher demand. Jed Dolson, the president of the Texas region, will now speak in greater detail to our land position and our gross margins. Jed?

Thanks, Jim. Please move to slide eight. John Burns Real Estate Consulting has published maps of our Atlanta and Dallas metropolitan areas where they have designated grades on submarkets of most desirable being an A market through most affordable being an F market based on the variety of subjective factors such as quality of schools, proximity of jobs, and the existence of infrastructure for quality of life. We have overlaid the locations of our green brick communities with green dots. The preponderance of our communities are in the submarkets rated as most desirable. In the current market environment, we believe that our superior market positioning will be key in differentiating our results from peers. This positioning is further strengthened by the lot supply shortage in both northern suburbs of Dallas and Atlanta which we believe will be a strategic advantage for us, as we expect land development activity will slow in the coming months. Our community count grew 20% from Q2 2019 to 90 active selling communities as of June 30, 2020, as we continue to open more communities geared toward first-time homebuyers. However, this increased focus on affordability has not been at the cost of increased risk. Based on our Q2 2020 home closings with our unconsolidated mortgage venture, Greenbrick saw an average FICO score of 758, with 85% of fundings exceeding a FICO score of 700. The creditworthiness of our average buyer profile is a fundamental strength of many of the A submarkets where we operate, which we believe will continue to mitigate risk for our business. Slide 9 of our presentation compares our year-to-date Q2 2020 gross margins with available peer data. Our gross margin reported for the six months ending June 30, 2020, was 23.1%. This was 170 basis points over the year-to-date results for Q2 of 2019, and with the second quarter gross margins up 10 basis points over our strong margins reported in Q1 of 2020. We believe our superior margin experience is evidence that our conservative land underwriting and prudent planning are a winning strategy that has left the company well prepared to manage pace and price during the remainder of 2020. The next two slides demonstrate the significant improvements GreenBrick has made in diversifying our product lines over the past two years. Let's first look at slide 10. As Jim mentioned earlier, with the addition of GHO Homes in 2018 and Trophy Signature Homes in 2019, we now offer eight unique brands. A robust single-family growth in year-to-date revenues of 108% from Q2 2018 to Q2 2020 is highlighted by GHO's net revenue growth of $36.8 million and Trophies additional revenues of $71.5 million in the current year. GHOs and Trophies homes sell at lower average sales prices with more affordable age-targeted products and affordable products respectively. As a result of this product diversification, our ASP has decreased 7% since the end of the second quarter of 2018, all while maintaining higher than average industry risk margins and profitability. This improved affordability will be crucial in preserving and hopefully improving our market share under the current economic conditions. Slide 11 visually demonstrates we have grown our revenues and provided stable earnings by not concentrating on any one home buyer segment. We now address six distinct customer segments, which all experience strong revenue growth and sales volumes through June 30, 2020. This revenue growth is in line with our 35% year-over-year growth in year-to-date net new orders and demonstrates the health of our markets despite the COVID-19 pandemic. Our net new orders new order growth breaks down as follows. Net new orders of entry-level single-family homes and townhomes were up 341% in Q2 2020 versus Q2 2019, thanks to the terrific expansion of our Trophy Signature brand and the successful migration of our CB Jenny townhome product to lower average sales prices. Likewise, our net orders for first time move up of single family homes were up 96% year over year due to the strong reception in our DFW market to Trophy's value oriented homes in highly desirable suburbs of North Dallas. Finally, our second time move up of single family homes and urban homes in Q2 2020 was up 11% and 77% respectively. over Q2 2019. This growth is driven by the move of urban millennials away from dense apartment living, as well as a demand for larger, more intentional living spaces, as Jim mentioned earlier. Our expectation is for the entry-level segment, those homes priced under $300,000, to grow in size in terms of community count, sales orders, and closings. In that regard, During the rest of the calendar year 2020, Trophy Signature Homes is expected to open eight additional entry-level communities, up from the current 11 active entry-level communities across all Greenberg brands. In total, Trophy expects to open 15 new selling communities by the end of 2020, with most of these openings occurring in the third quarter of 2020. Next, Rick Costello, our CFO, will discuss our first quarter and annual results in more detail.