Green Brick Partners, Inc.

Good afternoon, everyone, and welcome to GreenBrick Partners' earnings call for the third quarter ended September 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 GreenBrick Partners' website at www.greenbrickpartners.com. Go to Investors and Governance, then click on the option that says Reporting, and then scroll down the page until you see the third quarter investor call presentation. The company reminds you that during this conference call, it will make various forward-looking statements within the meanings 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 GreenBrick partners are based on current expectations and are subject to risks and uncertainties. Those factors could cause actual results or outcomes to differ materially from those expected are set forth in our press release which was released on Thursday, October 29, 2020, and the risk factors described in the company's most recent annual and quarterly filings with the Securities and Exchange Commission. Green Break 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 Greenbrick issued yesterday and in the presentation available on the company's website. I would now like to turn the conference over to Greenbrick CEO, Jim Brickman. Please go ahead, sir.

Thank you, operator. Hi, everybody. I hope this call finds you well. With me is Rick Costello, our CFO, and Jed Dolson, our COO. Thanks for joining the 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 everybody a second to do this. The inflection that started more than a year ago accelerated this quarter. We are seeing unprecedented demand for our homes as many people adapt to a post-COVID lifestyle. People want to own their own spaces, have a home office, and grill for their family and friends in their own backyard. Our neighborhoods offer these homes at reasonable price points in some of the best and most diversified growth markets in the country. We are benefiting from rapid growth and successful expansion of our trophy signature homes brand in the DFW market. Our net new home orders this quarter were up 89% year over year and 41% sequentially from Q2 2020. This was driven by order growth at every price point from entry level to second time move up home buyers. With demand for new quality homes at the highest levels in more than a decade, GreenBrick has successfully continued to expand its community count, growing 18% from the prior year. At the same time, GreenBrick has grown profitably, managing pace and price as we increased our Q3 2020 sales absorption by 58% and gross margins by 370 basis points year over year to 24.8%. We have leveraged our much higher volumes with only moderate growth in operating expenses to drive earnings per share to our record quarterly basic EPS of 69 cents, up 123% over Q3 2019. Over the past three months, our company has grown our owned and controlled lots over 31% to an all-time record of 12,066 lots. which is net of starts during the quarter, which also set a record of over 700 homes started during the third quarter. Thanks to the hard work of our land team and our strong relationships with land sellers and municipalities in our core markets, GreenBrick has been able to quickly and efficiently invest its strong operating cash flow into investments in land to fund our future plan growth. It is important to note this record growth in land and lots was achieved while actually decreasing our debt to capital ratio by 250 basis points from Q2 2020 to 25.3%. This is one of the lowest of all public builders. The combination of our consistently strong growth and profitability with our conservative balance sheet has been critically important in building our relationship with Prudential Private Capital. resulting in our second issuance of senior notes this August. This 37.5 million senior unsecured note was issued due in 2027 at a fixed rate of 3.35%, a rate comparable with that of long-term rates paid by lower-leveraged large-cap peers. The low cost of our debt clearly distinguishes Green Brick from our small-cap and mid-cap peers, and we believe will allow for further expansion in our core markets in 2021. Please flip to slide four of our presentation. We are a diversified builder with eight brands in four major markets with a wide array of product types and price ranges. We believe this stratification of products will continue to appeal to a broad base of homebuyers and expect that our entry-level segment will continue to rapidly expand through growth in our trophy signature and CB Jenny plans. As we discussed in our Q2 2020 earnings call, Greenbrick now operates under a much simpler owner structure than seen in the past. For the nine months ending September 30th, 2020, over 66% of our total revenues were generated through wholly owned subsidiaries, compared to only 5% for the nine months ended September 30, 2019. Driven by increased ownership in our Southgate, Center Living, CB Jenny, and Normandy brands, as well as the expansion of Trophy Signature Homes, this increased control has allowed GreenBrick to adapt quickly to the booming demand for our new homes and rapidly respond to new challenges as they arise. Slide five announces Green Brick's second consecutive recognition on Fortune Magazine's 100 fastest growing companies. This year showed Green Brick jumping 38 spots to 55th place and is an excellent acknowledgement of Green Brick's tremendous growth story. On slide six, 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 significant rise in unemployment earlier in the year. However, as shown on the graph in this page, our DFW and Atlanta markets ended the quarter with the lowest and second lowest unemployment rates out of the 10 largest metropolitan areas in the United States. Additionally, the Dallas-Plano-Irving sub-market market had the lowest year-over-year increase in its unemployment rate of the 38 metropolitan subdivisions in the nation. With 85% of our ending active selling communities in these core markets of DFW and Atlanta, we believe that GreenBrick is fully prepared to capture more new homebuyers in these markets as demonstrated by a robust 89% year-over-year sales growth from Q3 2019 to Q3 2020. We believe this strong bounce back from the lowest seen in April is further proof that our focus on business-friendly, pro-growth markets is the correct and best choice that will continue to differentiate us from peers. Thanks to the superior and economically diversified markets where we operate, Greenbrick is poised to capitalize on what we believe are long-term positive shifts in homeownership. As seen on slide seven, the national homeownership participation rate has risen since the Fed began reducing interest rates in August 2019. As of September 30th, 2020, the national homeownership rate now sits at 67.4%. Sustained homeownership rates above 67% have not been seen in over a decade, indicating there's a clear secular shift taking place toward homeownership. With interest rates expected to remain low for the foreseeable future and an increased appreciation and demand for larger, energy-efficient, fresh-looking homes with dedicated work-from-home spaces, we fully expect this positive trend to continue. Strikingly, this quarter saw the homeownership rate of buyers under 35 increase 270 basis points from the third quarter of 2019 to 40.2%. and decreased only 40 basis points from the 40.6% seen in Q2 2020. This quarter represents the first time the home ownership rate has exceeded 40% for two consecutive quarters since 2008. Millennials currently represent the fastest growing ownership segment, and we believe this age group will continue to drive future increases in overall home ownership. While this trend will be constrained by the available supply of housing, we believe that this higher ownership rate, especially related to younger home buyers, should at a minimum be considered the new normal. With home ownership of buyers under 35 still 340 basis points below its peak in the mid-2000s, we feel this shift represents a true secular change in home building marketplace and that Green Brick Partners is fully prepared to address this growing market. Jed Dolson, our Chief Operating Officer and Executive Vice President, will now speak in greater detail to the growth drivers in our land position.

Jed? Thanks, Jim. Take a look at slide 8, titled Growth Drivers, which demonstrate that Greenbrook still has a long pathway toward future growth. On a last 12-month basis, total revenues from Q3 of 2018 to Q3 of 2020 have grown 65% over that two-year period. Additionally, our backlog grew 79% to $553 million as of September 30, 2020. These improvements indicate that Greenberg is positioned to capitalize on the booming demand of new homes and is already capturing waves of the new buyers. During these last 24 months, we also increased our lots owned and controlled by 49% and grew the average number of selling communities by 51%. In fact, in the last quarter alone, GreenBrick added 3,600 lots to our inventory of lots owned and controlled, while Trophy Signature Homes opened 12 new selling communities. With our dramatic growth in lots owned and controlled and record starts of over 700 units this quarter, We are confident that we have the necessary levels of sold and spec inventory to hit significant growth in 2021 and beyond. On slide 9, we established the relationship between total lots owned and controlled and our total top line revenues. As you can see from the chart on this slide, each investment we made in land has been highly correlated to a future growth in revenue. For the last 12 months, ending September 30th, 2020, our revenues have already grown 27% over the 12 months ending September 30th, 2019. With our massive investment in land and lots this quarter, we believe we can continue to maintain significant growth well into 2022. Slide 10 further details our Q3 2020 land investment, which resulted in a 31.5% sequential growth in total lots for the company. As the slide details, roughly two-thirds of this land growth was spread across three DFW communities. These communities represent significant long-term investments in our Texas market, and will be a dependable source of new lots as our trophy signature homes and CB Jenny brands continue to expand across the Metroplex. Slide 11 details the growth we have already seen in our trophy brand over the past 12 months. When picking a new location for one of our builders, we are diligent to target a minimum under 21% unleveraged internal rate of return for new properties that in turn drives our industry-leading gross margins. As you can see from our community map on this slide, we were able to more than double Trophy's active selling communities over the past year and have been thrilled to see Trophy perform with both entry-level and move-up buyers. With the total annual housing starts in DFW expected to exceed $35,000, We believe Trophy can continue to expand its footprint across the entire DFW Metroplex for years to come. Please move to slide 12. John Burns Real Estate Consulting has published maps of our Dallas and Atlanta metropolitan areas where they have designated grades on some markets of most desirable being an A location through most affordable being an F location. Based on a variety of subjective factors such as 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 sub-markets rated most desirable. In the current market environment, we believe that our superior market positioning will be key in differentiating our results from our peers. This positioning is further strengthened by the lot supply shortages in both the northern suburbs of Dallas and Atlanta, which we believe will be a strategic advantage for us, as we expect land development activity for other builders will slow in the coming months. Our community count grew 18% from Q3 2019 to 100 active communities as of September 30, 2020, as we continue to open more communities geared toward the first-time buyer. However, this increased focus on affordability has not been at the cost of increased risk. Based on our Q3 2020 home closings with our unconsolidated mortgage venture, Greenbrook saw an average FICO score of 760, with 89% of the fundings exceeding a FICO score of 700. The creditworthiness of our average buyer profile is a fundamental strength of many of the A markets where we operate, which we believe will continue to mitigate risk for our business. Next, Rick Costello, our CFO, will discuss our third quarter and annual results in more detail.

Thanks, Jed, and thank you, everybody, for joining us today to review our 2020 Q3 financial results. Flip to slide 13, please, which compares our year-to-date Q3 2020 gross margins with available peer data. Our gross margin reported for the nine months ended September 30th, 2020, was 23.8%, as shown here. This was up 250 basis points over the year-to-date results for Q3 2019. But for quarter-to-quarter alone, for 2020, gross margins in Q3 were up 370 basis points over our margins reported in Q3 of 2019. This chart clearly demonstrates that our performance is among the very best in the industry. We believe our superior margin experience is evidence that our conservative land underwriting and prudent planning that Jen mentioned earlier are a winning strategy that has left the company well prepared to manage pace and price during the remainder of 2020 and beyond. Slide 14. visually demonstrates that we've grown our revenues and provided stable earnings by not concentrating on any one home buyer segment. At this point, two years ago in 2018, two segments accounted for about three quarters of our revenues. Fast forward two years and we now address six distinct and individually significant customer segments, which all experience strong revenue growth and sales volume through September 30th, 2020. This revenue growth is in line with our 53% year-over-year growth in year-to-date net new orders and demonstrates the health of our markets. Our net new order growth breaks down as follows. Net new orders of entry-level single-family homes and townhomes were up 258% in Q3 2020 versus Q3 2019, thanks to the terrific profitable expansion, highly profitable expansion, and our Trophy Signature brand, and growth in entry-level townhome sales in our CB Jenny brand. Likewise, our net orders of first-time move-up and second-time move-up single-family homes were up 41% and 177% year-over-year. That's 41% quarter-over-quarter, respectively due to the strong reception in our DFW market to Trophy's value-oriented homes and the continued performance of our Southgate brand in highly desirable suburbs of North Dallas. Our sales for age-targeted segment at GHO Homes in Florida were up 68% year-over-year as we have seen improved demand for product as lockdown restrictions have lifted and homebuyers continue to migrate out of large urban centers in the Northeast as well as from South Florida. Finally, urban home sales in Q3 2020 were up 175% over Q3 2019. This growth is driven by the move of urban millennials away from dense apartment living, as well as the demand for larger, more intentional living spaces, as Jim mentioned earlier. So to recap, every price point is seeing great improvement. Please move to slide 15, related to our financial highlights. For Q3 of 20 versus Q3 of 19 and year-to-date comparisons, here are some key operational metrics. Net new orders increased by 89% for the quarter, and this increase was a function of A, a 58% increase in the absorption rate of net orders per community, as well as B, a 19% increase in average selling communities. For the nine months ended September 30th, 2020, our 53 percent order growth is driven by a 21 percent increase in average selling communities and a 26 percent improvement in absorption. Home deliveries increased by 40 percent with residential revenues up 32 percent for the quarter. For year to date, Residential revenues improved by 27% due to a 35% increase in homes closed. Our average sales price of homes delivered declined by 5.3% for the quarter and 4.8% year-to-date versus the comparable periods in 2019. These declines in ASP are attributable to the increasing contribution of Trophy Signature Homes and CB Jenny Homes Town Home Division to our total revenues. Both of these builders sell homes at average sales price that are below the average sales price for the company. As emphasized earlier, we believe this improved affordability will serve to preserve and improve our market share. Year over year, homes under construction are up 4%, with homes started on the last 12 months basis up by 23%. While we did start over 700 homes this quarter, which was another record, we expect to expand starts in Q4 to even higher levels. The dollar value of units in backlog increased by 73% year over year and 24% sequentially. With sales continuing into Q4 at an accelerated pace, we expect our year-to-date growth in backlog and expanding community count to drive closing growth next year. As I highlighted earlier, home building gross margins was up exactly 370 basis points over Q3 2019, and adjusted home building gross margins was up 380 basis points quarter over quarter. From Q2 to Q3 of this year, adjusted gross margins were up 160 basis points sequentially. For the nine months ended September 30th, 2020, Our year-to-date home building consolidated margin and adjusted home building gross margins were up 250 basis points and 260 basis points, respectively. Turning to operating leverage, GreenBrick experienced a 140 basis point improvement in quarterly SG&A expense as a percentage of total revenues as the ratio dropped from 10.6% in Q3 of 2020 from 12.0% in Q3 2019. Year-to-date, our SG&A expense dropped a similar 130 basis points from 12.6% in 2019 to 11.3% for the nine months ended September 30th, 2020. In addition to strong revenue growth in both the quarter and year-to-date of 32% and 27% respectively, we also benefited from the large reduction in overhead that we implemented at the end of the first quarter. A good portion of the 18% reduction in employee headcount, which we enacted effective April 1, is still in place, as we have methodically increased headcount from those reduced levels by only 12%, despite record volumes in starts, sales, and closings this quarter. Our interest coverage of 24.2, that's not a typo, it's 24.2 for Q3 2020, represents a 203% growth over third quarter of 2019 and clearly demonstrates our capacity to generate positive cash flow well above our needs. Year-to-date, our interest coverage of 14.7 represents a 101% improvement year-over-year. As we let off our earnings release, our Q3 2020 basic EPS set a new all-time record of 69 cents for the quarter, which is an increase of 123% over Q3 2019. Likewise, on a year-to-date basis, our basic EPS of $1.67 is 97% higher than the same year-to-date period last year. And our final metric on slide 15 is our net income return on average book equity. which grew from 12.5% in Q3 2019 to an annualized 23.5% during Q3 2020, an increase of 1,100 basis points. Combined with our low debt leverage, our risk-adjusted returns are remarkable. Please turn to slide 16. Here we've compared our performance versus our small and mid-cap peers to show that our risk-adjusted growth and returns are uniquely strong. We've provided five measures. In the previous slide, we already discussed our remarkable 27.4% growth in residential units revenue during the quarter, which, as Jim mentioned earlier, was primarily driven by organic growth at both CB Jenny and Trophy Signature brands. And you can see how that ranks against our peers. With both team builders focused on increasing our offerings of affordable product, This growth is expected to bring further diversification and reduction in our overall average sales price that we're showing here today. That dynamic growth rate can be seen in the first data column where our growth rate ranks very high amongst our peers. And as we demonstrated again this quarter, our industry-leading gross margins drove excellent returns on revenues again this quarter. Also included on slide 15 is our year-to-date interest coverage of 14.7 times EBITDA, which is a function of great earnings combined with conservative lower levels of financial leverage and lower price debt. This lower leverage is reflected in our low debt-to-capital metric, which is the fourth metric here, which indicates our reliance on organic growth rather than financial leverage to maintain strong operating cash flows. Finally, we've included pre-tax return on average invested capital to measure each builder's return, disregarding differences in leverage and tax rates. The last slide I'm going to have you look at is slide 17, which focuses on our lower leverage, which I just discussed. And as Jim stressed at the start of the call, we were able to achieve our record-setting Q3 results for 2020 while also decreasing our debt-to-capital by 660 basis points year-over-year and 250 basis points sequentially. Our debt-to-capital ratio remains one of the lowest in the industry. On this chart, it is the lowest, which positions GreenBrick to continue limiting risk while generating industry-leading return on equity of 23.5% during Q3, as shown on the previous slide. Also, as mentioned in Jim's opening remarks, we are once again thrilled to expand our partnership with Prudential Private Capital this quarter with 37.5 million of senior unsecured notes issued this quarter, which are due in 2027 at a fixed rate of 3.35%. We believe our lower relative interest costs will be a positive tailwind for gross margins and profitability as the company continues to grow and scale through 2021 and 2022. I will now turn the call back over to Jim, who will wrap up our part of the call prior to opening up things for Q&A. Jim? Okay, thanks, Rick.

When I co-founded this company more than 10 years ago, we had no revenue, but I was confident that a conservative, land-focused, and local strategy would be a winning course to build Green Brick Partners into a successful public home building company. Looking at our success this year, I'm elated with the accomplishments we have achieved to date, and I believe we can continue to improve upon GreenBrick's superior risk-adjusted return for years to come. Our continued growth relies heavily on our capacity to acquire and entitle great land positions. With a 31.5% sequential growth in lots owned and controlled in one quarter, I believe we have clearly proven that we can meet this challenge going forward. In fact, as many of our peers said on large cash balances at the end of the quarter, I am encouraged by the fact that GreenBrick has been able to quickly pivot and redeploy capital to invest in our future growth, despite historic levels of competition for the best land and lots. With our deep roots in our core markets and strong local operators that are well connected to the land sellers and municipalities where we operate, I believe GreenBrick can continue to lay the groundwork for significant future growth and profitability. Our success this quarter would not have been possible without the hard work of our employees and team builders across the United States. I would like to thank each of you for your effort, and I am confident our dedicated team will continue to achieve great results for our investors going forward. Indeed, October has already started out very strong. I'll now turn the call back to the operator for questions. Thank you.

Thank you. The floor is now open for questions. If you wish to ask a question at this time, simply press star, then the number 1 on your telephone keypad. If at any point your question has been answered and you wish to remove yourself from the queue, press the pound key. Our first question comes from the line of Michael Rio of JP Morgan.

Hi, this is Maggie on for Mike. Congrats on the quarter.

Thanks, Maggie.

My first question is on that last comment about strength continuing into October. I was wondering if you could give us an idea of how orders have trended so far in October, maybe versus the exit rate coming out of September. Have you seen any seasonality start to kick in there?

This is Jim. The type of growth that we saw in the third quarter, which was really huge over same prior periods, we've seen continue right into October. So we have not seen any deceleration in demand.

Yeah, Maggie, the data point, we haven't quite finished the month yet, but we're at 269 net sales for the month. We expect to be higher than that by the end of the month. So on a year-over-year basis, we're up 1%. It's going to be an 80-something percent handle. So it's obviously very strong.

Great. Thank you. And second, I was wondering if you could talk about the pricing backdrop that you're seeing right now. Obviously, we've been hearing about price increases across the industry. So could you talk about – If you raised prices across your communities during the quarter, and if so, maybe give us an idea of the magnitude and timing of those increases. And finally, how are you thinking of those increases in terms of offsetting or more than offsetting increased input costs such as lumber recently?

Jed, why don't you talk about lumber because we're seeing that finally starting to decelerate.

talk about pricing strategy yeah Maggie so we've been raising prices very steadily since August we're seeing this the price increases for October be smaller than they were in September so but we're also seeing the price increases for our input materials go down as Jim mentioned so we're we're finally seeing lumber go the other direction which is helpful from a gross margin standpoint.

Maggie, our goal is to try to price and continue to maintain the pace versus price strategy that's really been effective for us, you know, where we can maintain 24%, 25% margins, and we're still pretty confident that that's looking good. You know, as we add option communities, the margin's a little bit lower than they are on where we own the land, but we're seeing... We're not seeing margin that declines.

Got it. Thanks, guys.

Thanks, Maggie.

Our next question comes from the line of Ryan Gilbert of BTIG.

Hey, thanks. Good morning, guys. First question for me on trophy signature, really nice ramp. You know, going to 20 communities from seven a year ago, I guess, you know, looking out to 21, based on your lock count, it seems like we should expect continued community count growth. And I'm just wondering how that mix of trophy signatures should look in 21 versus where it's at now at around 20%.

Well, Jeff can handle that. Trophy is continuing to really grow at a very fast pace. I think the only negative thing I can tell you about Trophy is that it now takes me two full days just to drive their sites and see everything that we have going on and plan for the future. But those are an exciting two days because really we're driving the communities that are just opening right now and they're pre-selling homes without even having a model. I visited four on Tuesday. So Jed, why don't you talk a little bit more about kind of where Trophy fits in to our... Yeah, sure.

We are, as Jim mentioned, we have delivered a lot of new communities. I think we reported 20 per trophy open stores. The really good news that we're very excited about is a lot of these communities have very long runways of lots. In many cases, the phases we've just put on the ground exceed 200 lots. So not only, you know, we don't, For the first time in a while, we think we're going to be able to sell 10 or more out of these communities per month without having to ration our sales or cap our sales as we've previously been doing. So we expect further community count increases with Trophy over next year. Like I said, these will be very big communities where we should see absorption more than double.

And this is Jim. I don't want to get hyper-technical in this call about internal rates of return and that type of analysis, but I think it's important for the analysts to know that when we have these gross margins we're looking at right now, we're not putting big lot inflators or other things or assumptions when we're buying some of these properties. So if we keep getting the tailwinds that we're having, those lots should be very attractive going forward in terms of price.

Got it. And can you share the absorption differential between Trophy Signature and your more traditional brands and move-up products?

It really varies by what price point, because Trophy can sell up to a $650,000 house, but at the lower price points, we're seeing a 2x multiple compared to our other brands.

And really, because sales accelerated so quickly in what, two or three neighborhoods for Trophy, we had to cut off sales. We could have actually had more sales, but the next phase of lots or the next development that was in the same municipality wouldn't be ready, so we didn't do that. We were managing pace over price and actually slowed down sales in a few neighborhoods.

Okay, got it. And then as you go out and buy land for Trophy, are you noticing any competition for other builders or how's the availability of land? for entry-level communities.

Yeah, you know, we have a – Greenberg has a proven track record of performing in our core markets, and so we're seeing increased competition, but sellers are looking at our track record of closing and oftentimes selecting us.

Well, let me give you a case study of that that we're working on right now, and I can't tell you this is going to close, and I wouldn't tell you where it is. because we're still working on it. But we had a land seller that came to us very concerned that if he doesn't sell and close his property this year, and it's a fairly large transaction, that he's going to pay a lot more in capital gains. So he came to us and said, can you guys close this rather large property before December? He knows us. He's dealt with us for a long time. And we're very optimistic that we can get that closed. and that's not something that a typically public builder could react to and get done in that kind of timetable.

Okay, got it. That makes sense. Last question for me is just on production capacity. We're seeing kind of throughout the industry cycle times are extending, and fourth quarter backlog conversion for a lot of builders has been, you know, they're guiding to pretty substantial declines, which I suppose is to be expected just given how strong So just thinking about Greenbrook's fourth quarter, you started 710 homes in the third quarter. Do you think you can get all of those delivered in the fourth quarter? Or should we, just for modeling purposes, be thinking about maybe the cycle times extending into 1 through 21 or 2 through 21?

Let me answer that question at a higher level to start with. Our business started where we were really, and still are, I think, where our strategic advantage is the land entitlement, land development side of our business. And frankly, we've learned from the giants that are really great in the manufacturing and process side of their business, the Lennars, the Pultes, and We continue to improve our operations learning from these guys. And so our cycle times are improving, but they started at a higher point. And so I think, Jed, we're pretty much, our cycle times really aren't extending overall, are they?

No, we're seeing anything that comes from a factory is a little bit of a game of whack-a-mole. We can't get windows one week. We can't get trusses the next. But we're working through these issues. The biggest thing is we've gone to all of our suppliers and vendors at our biggest brands like Trophy and worked out an even flow schedule so they can predict exactly how much material we are going to be needing on a weekly basis. So we feel good about starting even more homes than 700 in Q4. Well, I can tell you something.

It's going to be, unless the city's, for some reason, just shut down, where it can't get building permits, we are going to significantly exceed third quarter starts.

Okay, great. Thank you.

Our next question comes from the line of Aaron Hecht of JMP Securities.

Hey guys, great quarter. I'm wondering on the subcontractor side, are you seeing any constraints there that may limit your ability to push the order growth? Or is that just not an issue?

This is Jed. If an issue, Greenbrick is the fifth biggest builder in DFW. So In DFW, where we're getting a lot of our units and our revenue, we have the ability, you know, we're important. We're very important to our vendors, and so we're getting top priority compared to some smaller builders. That being said, like I mentioned earlier, it's whack-a-mole. I can't tell you what next week's production problem is going to be, but there will be one. The good news is we haven't found a production problem that we haven't been able to relatively quickly solve.

The other thing that's helping us is apartment starts are really decelerating. And that was a big component of starts in the DFW market, more than 30,000. And as that decelerates, that labor pool is shifting to single families.

And hey, Aaron, this is Rick. Thanks for joining the call and your questions. Also, if you look at our Florida builder, GHL Homes, they have a top market share there, which has consistently been 20 to 25 percent market share. So they get a lot of focus and attention there. And also Brian Barr in Colorado Springs with Challenger Homes. is always amongst the top three in terms of sales closings and starts. So we get a lot of attention there as well from the subcontractor community.

Yeah, two or three public builders, for example, are told to dip their toe. I bought a very small builder in Colorado Springs. It seems every eight or ten years the guys from Denver want to dip their toe in that market. But the labor and subcontractor markets are really very closely held among three builders in Colorado Springs. Gotcha.

And it, it sounded like you started managing your pace a little bit based on your community openings or the lot availability. Uh, one, and it sounded like, I think you said that you're going to expect any kind of growth next year, which is great. Um, and you highlighted all the lots that you brought on, but wondering if you're going to continue to manage that pace to have less volatility in the community town so we see kind of consistent growth, or if there could be some volatility there.

Well, this is Jed. We can't, you know, not every community we take on can be a thousand lots unfortunately with a long runway so it's a it really is a balance we have a lot of our communities are 100 lots or less so we do need to ration uh starts in those communities where i do it based on what our internal capabilities as well as our external vendor capabilities are but the good news is we have several you know big uh flagship communities where we're going to be able to, you know, start 10 to 15 homes a month, every month. And we have the long runway lots to do that.

If you look at your lot position today, and obviously you brought on a lot of lots, but are there any holes that you guys are going to look to backfill? Maybe it's 2022, 23. Is there a specific time frame based on the pace that you guys are seeing now that you really have to be focused on?

Well, Rick can talk about the cash flow. We're reinvesting our cash flow heavily into land positions. We have a conservative balance sheet. Those investments we're going to be making right now and into early 2021 are really for 2023 and 2024 revenues. And we're just starting to tee that ball up right now.

And last one for me, given the growth that you're seeing, do you have to start thinking about some new markets or do you have enough runway to considerably grow within the markets you're participating in currently?

Well, we're in Dallas, which is the largest house market. It's north of 40,000 starts. So to give you a benchmark, Horton's building over 7,000 houses here, so there's a lot of runway here. I think Lenar's doing about 2,200. They're kind of way behind Horton, but still a big, big builder here. The Atlanta market's similar. They're not quite as big. I think Horton's 3,000 starts there. So there's a lot of runway in both those markets, but at the same time, you know, if we could find... a market that we thought made sense, and I think we're going to start looking at that in mid-2021.

Gotcha. Appreciate it. Just fantastic results. Thanks, guys. Thanks, Harry.

Our next question comes from one of Alex Riegel of B. Reilly.

Thank you. Really nice quarter, gentlemen. Hey, Alex.

alex i just wanted to uh welcome you to the call and uh thank you very much for initiating coverage uh we appreciate that and uh for your excellent uh report in uh in doing so so uh welcome thank you and uh excited to be a part of the team here um a couple quick questions the closing's average selling price was about 422 in the quarter with an increase in contribution from trophy

Directionally, how should we think about modeling average selling price over the next few quarters?

I think what we have in Q3 is pretty representative of where we think we're going to be for the foreseeable future, going through 2021, let's say. Perfect. That is helpful.

And also over the last couple of quarters, there's been a little bit of a mixed shift of owned versus controlled. Can you talk about that sort of longer term as a new strategy, I guess, and also kind of expand a little bit upon the pressure that it could create on your margin?

It's really not a shift, and it's really something that lies within the numbers. We have noted, I think it's in the, where we disclosed the lots owned and controlled, we note a couple of other buckets. Within the controlled category, we don't consolidate any of our joint venture assets or any of our joint venture lots in terms of lots owned and controlled. So the lots that we have for East Jones Bridge in Atlanta or Sendera, which is a new joint venture with Taylor Morrison and DFW, are included in lots controlled, but they're lots that we are developing ourselves. So those lots don't represent a change in philosophy. They just show in the controlled bucket because we don't consolidate them, okay? And then there's another bucket of controlled lots that are deals that we are hard on. Our inspection period has ended. We're moving forward with acquisition. We might have actually closed them in October. We count those in control, but those are blanks. Those are lots that we are going to develop. And once we close on them, say in October, they move from control to owned. So really, when you add this back, we're over 75% as of Q3. So there really isn't a shift. It actually is a great question in that it allowed us to disclose that. We continue to get lots for our own account, not getting auction lots.

Let me just add one thing to what Rick was saying. I think by now, I think we've proven that we're very disciplined in our approach to buying land and that land has produced high gross margins. for the analysts on the call. We are going to carry forward that discipline on any optional land we buy. You're putting up 10% of the lot price, sometimes more, in earnest money if you option lots in our markets. And if we're not underwriting those deals to 19% gross margins, which are still greater gross margins than some peers have, being semi-land heavy, we're not going to option the lots.

Very helpful. And last question. A lot of your public peers have been investing in and talking a lot about virtual sales. Can you touch upon that topic a little bit as to the importance of it as it relates to your company?

Yeah, this is Jed. You know, we feel like we have very good websites, very good virtual tours for the buyers. We have sold some houses without the buyers actually setting foot in the neighborhood but that would still be a relatively low percentage for most people this is you know the home is their biggest investment so i think for most people they want to touch you know the touch the house and walk the neighborhood prior to buying thank you very much thanks alex

Our next question comes from one of Alex Barron of Housing Research.

Good morning, good afternoon, gentlemen. Thanks for taking my questions. Yeah, I wanted to understand a little bit better the mix of the homes. How many or what percentage of the orders would you guys consider? I don't know how you measure either entry level or affordable, and how does that compare versus a year ago?

Rick's getting the data. Hold on a second.

Yeah, it was part of my script. Net orders of entry-level single-family homes and townhomes were up 258 percent in Q320 versus Q319. So, from a relative basis, it's obviously a much expanding piece of the pie. You know, you could see in our other chart where we reflect the It's literally a pie chart that shows our participation of entry-level buyers, which is on slide 14. And the actual closings at this point are 13 percent entry-level. So with that kind of dynamic happening with the growth, you know, on a year-over-year basis, points to next year at this time it's going to be a bigger piece of the pie. And in fact, a lot of the communities that Trophy opened in Q3, most of them are entry level.

The other benefit that we're seeing that we really didn't anticipate, just because I didn't know better when we started Trophy three years ago, is that the positive impact, the entry level, and the lower-priced houses have on these conforming mortgages and the ability to create income for our financial services platform. We only own 49% of those platforms, but these mortgages that were originating in these platforms are much more profitable than in our other platforms, and the capture rate's higher.

Okay, and how does the margin outlook and the pricing power look right now At the entry level versus your move up business. I'm just trying to get a sense of you know where margins could go next quarter or into next year.

I'd say it's very. It's very similar.

OK, and if I could ask one last one, I was trying to do. I guess a breakdown based based on your filings of your geographic. Regions and. It seems like the revenues in the southeast are down, whereas the central are up significantly. So what's the rationale for that?

The rationale is capital allocation. We're making higher returns on capital in these markets, and we're reallocating capital into DFW, and Trophy is much easier to scale. Our builder in Atlanta, the Providence Group, is the best info builder. And if you take a look at what they're doing, they do it great. They do it better than anybody in Atlanta, an infill. We're really excited about an 800 home infill deal that we have under development now called East Jones Bridge. But that platform is more complicated and harder to scale. Produces very nice returns, great business. But that's why Trophy expanded into Dallas, because we were here.

Got it. OK, well, thank you and great job.

Yeah, thank you for being on the call and asking questions.

Our next question comes from one of Bill DeZellum of Titan Capital.

Thank you. A couple of questions. First of all, your average sales price in backlog is up for the first time since, I think, the second quarter of 2019. To me, that was surprising given the growth in Trophy. So would you talk about that just in general, number one? And then number two, what are the implications of this?

Go ahead. This is Jed. So we're seeing, as we've previously discussed, we're seeing very strong demand across all of our segments. For example, our Southgate luxury line has an average sales price of just under $700,000. We're seeing a lot of people move out of 3,500 square foot homes that are now officing from home to that want to be in a 4,200 square foot home with a home office. So that's a little bit of it. The other part is Trophy is also selling several homes, many homes in the fours, fives, and even sixes that are value oriented. So the competition may be $100,000 higher, but people are perceiving a much higher value with our product that may be priced at 600 compared to a competitor at 700. And we have several of those communities. So that's also a little bit of it. But we are, you know, as I mentioned, we're seeing strong demand across all market segments. Our luxury line in Dallas has consistently sold 25 houses a month for the past five or six months.

Thank you. And taking that a step further, Q2 of 2019 ended up being a bit of a springboard where things started to really rebound since then. Is there any correlation that we can take from your backlog pricing being up now and the implications that that could have for next year, or am I reading too much into that?

You're reading too much into it, Bill. It really is a dynamic of all of our brands selling and putting homes in backlog. And when you think about it, you're not going to have tremendous backlog growth at CB Jenny Homes or Townhome Builder, for instance, with their low price point. But you are going to see a lot of build jobs out of Southgate Homes, where they're building $600,000 to $700,000 homes. So it really is not reflective of a movement in ASP or a movement in revenues for any particular time period. It's just great to have the sales in backlog and enter 2021 with knowing that we have a lot of our closings accounted for.

Great, thanks. Let me switch to new home orders up 89% in the quarter. Starts were up what normally would be a big number, up 32%, but it's still a really big gap between your starts and your orders. You've talked about increasing your starts. I guess still I'm going to ask, how do you close that gap?

Well, we're starting as many homes as we can right now.

And many of our starts, Bill, are sold homes and not spec homes. We're also closing the gap. You mentioned 89% growth in orders. If we had really tried, that could have been even higher. But in many cases, we limited sales to give ourselves the chance to, you know, we didn't want to sell a house today and start it. three months from now. So all the homes that we've been selling, we're trying to start within the next 30 to 60 days.

Fantastic. And congratulations on just a blowout quarter.

Thank you.

Our next question comes from one of David Hicks of David Hicks Companies.

Good morning and congratulations for establishing such a tremendous reputation in the North Texas market over the last 10 years. I've been enjoying watching you guys and your success. Understanding the importance of land and lot availability for your future, I'm curious as what you have seen from the municipalities where your team seems to have a really good reputation in the areas you work. and the ability to down zone land that has previously been commercially zoned, but you can turn it into residential land given the times that we're in.

Thanks, David. This is Jed. I think we're on the early cusp of that wave. We haven't really seen the municipalities that we work in in both Dallas and Atlanta be too eager to convert commercial zoning to residential. And I think all the municipalities are very busy right now. They're facing challenges working under a COVID environment. And we're seeing things take longer to get done. Most of the infill projects that we're seeing are less than 100 units. oftentimes less than 50 units, whereas if we go out into the more perimeter areas of our municipality or our markets, we're seeing those projects 300 to 400 lots. So, and, you know, it's a little bit easier to work in the perimeter.

Number two, are you seeing lot positions becoming available from less well-capitalized builders or lot developers that have perhaps gotten over their skis and just can't handle things, so you're able to go in and perhaps buy some lots at a discount?

No. For example, in Dallas, a 24-month lot supply is considered equilibrium. We're at 17 months right now. So it's more of a bidding war than a discount.

And that's on trailing demand.

Yes. As Jim mentioned, that's on trailing demand.

Very good.

Thank you, and again, great quarter, guys. Thank you. Thank you.

Again, ladies and gentlemen, if you wish to ask a question, simply press star, then the number one on your telephone keypad. I'm showing that there are no final questions at this time. With that, we will conclude today's conference call. You may now disconnect your lines and have a wonderful day.