Green Brick Partners, Inc.

Good afternoon. Thank you for standing by and welcome to the Green Break Partners Inc. fourth quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. I would now like to turn the conference over to Rick Costello, Chief Financial Officer. Please go ahead.

Good afternoon and welcome to Greenberg Partners earnings call for the fourth quarter ended December 31, 2023. Following today's remarks, we will 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. On the call today is Jim Brickman, co-founder and chief executive officer, Jed Dolson, president and chief operating officer, and myself, Rick Costello, chief financial officer. Some of the information discussed on this call is forward-looking, including the company's financial and operational expectations for 2024 and beyond. In yesterday's press release and SEC filings, The company detailed material risks that may cause our future results to differ from its expectations. The company's statements are as of today, March 1st, 2024, 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. Jim? Thank you, Rick. 2023 was an absolutely stellar year for GreenGreek. We closed out 2023 with record results that reflect our strategic advantages, our disciplined approach, and the successful execution of our strategy by our talented and dedicated team members. I want to express my deepest gratitude to every employee who embraced our values set forth in our acronym HOME, which represents honesty, objectivity, maturity, and efficiency. Our year was highlighted by the following record performance that we set in 2023 for the full year. Record home closings revenue for the year of $1.77 billion. Record home building gross margin of 30.9%. and record diluted EPS of $6.14. We also set a record for the number of homes closed for any fourth quarter at 825 units. Significantly, our net new orders for the full year increased over 70% year-over-year to our record 3,356 homes sold. As you can see in slides four, five, and six, our net new order growth rate ranked the highest among our public builder home building peers we also again achieved the highest gross margin of the public home builders in the fourth quarter and experienced the largest home building revenue growth for the full year in 2023 we grew our book value by 26 percent to 27.84 cents per share additionally we achieved a return on average equity of 24.9% despite having low leverage with a net debt to total capital of only 11.4%. Looking ahead, we believe that our ability to source and entitle land, rigorous land underwriting, and continued operational improvements at our division management and land development teams will continue to provide superior risk adjusted returns. Consumer confidence remained resilient in 2023 despite higher mortgage rates. We continue to see healthy demand for new homes in our markets driven by demographic children and the lack of supply of existing homes entering the marketplace. More importantly, DFW, our largest market representing 71% of home building revenues, has continued to be among the nation's leaders in building starts and economic growth. According to U-Haul, based on the rental of one-way U-Haul equipment, Texas netted the largest number of movers in 2023, making the third consecutive year it has finished at the top, including Dallas and Austin ranking in the top 10 cities with new residents. As shown on slide seven, DFW was number one over the nation's 12 largest metropolitan statistical areas in terms of job growth as of November 1st. 2023 with almost 140 000 new non-farm payroll employment added in a trailing 12-month period efw had a 3.3 job gains rate that was almost double the 1.8 national increase being the third largest home builder in one of the biggest home building markets green brick continued to benefit from favorable demographic trends and job growth in the region We also believe there's a large pool of talent, national demand with 3 million additional millennials and Gen Z members entering the home building market over the next decade as reflected on slide 10. We believe that bodes well for DFW, Austin, and the Atlanta metro areas, all of which have a younger population compared to U.S. average. According to U.S. Census, 45% of the U.S. population is under the age of 35. The percentages are 49% for DFW, 48% for Austin, and 47% for Atlanta. Sales of existing homes in 2023 dropped 19% year-over-year and fell to the lowest level in almost 30 years, highlighting the persistent golden handcuff effect on existing homeowners who are locked into low fixed rate mortgages they are unwilling to relinquish, as shown on slide eight. The impact is more prominent in desirable infill and infill adjacent submarkets where we have a strong presence, broadening our industry-relieving results. Over 80% of our revenues in 2023 were generated in these infill submarkets. We believe that GreenBrick is uniquely equipped to take advantage of the current market conditions with our strategic advantages in land position and development entitlement expertise. We consider ourselves to have one of the best land positions through years of consistent strategic land acquisitions in infill and infill adjacent submarkets. Our decentralized approach in sourcing land acquisition and land development has allowed us to unlock more high quality land opportunities and amplify the strength of each builder. Each of our builders is unique and has decades of market niche advantages from deep and extensive connections in their local markets that positions them to source strong land and lot positions. Our builders' extensive local knowledge also enables them to address more complicated entitlement, regulatory and development processes and infill locations. We believe that our ability to self-develop in markets where land developers are scarce gives us an upper hand in generating the highest home building gross margins in the industry, as well as having better control over lot delivery, scheduling, and cost. As a result, approximately 83% of our total lots were owned on our balance sheet at the end of 2023. We believe we can continue to generate better returns than most peers who adopt land-light models that carry a hidden cost, a high capital pay to the providers of off-balance sheet financing. On February 1st, 2024, as previously announced, we sold our 49.9% interest in Challenger Homes back to its founder. We intend to use the proceeds of that approximately $64 million for investment in our other builders or other potential opportunities in larger markets where Greenbrick is the control owner. Our current focus is on the growth and expansion of our trophy signature homes brand into the Austin market and other potential new markets. Our goal is to invest in large markets with strong economic and demographic fundamentals where we can achieve scale and similar operating metrics as we do in our current markets. With this in mind, we are excited to announce that we just closed our first land transaction in Huffman, Texas, 25 miles northeast of downtown Houston. The neighborhood will be co-developed with one of the largest public builders in the country. The 920 home community has excellent access to the newly constructed Grand Parkway, which provides proximity to major employment centers in the oil and gas industries, such as the Exxon corporate headquarters. Kofi's Signature Homes will have 460 home sites, with lot widths ranging from 40 to 50 feet. Construction of the homes is currently stated to start in the second quarter of 2025, and we anticipate opening for sales in the late summer of 2025. This is our first community in the Houston market and is in a location into which we have been interested in expanding for several years. Houston, the fourth most populous city in the U.S., was the largest home building market with the most new home construction in 2023. Similar to DFW, Houston has a young and growing population and a strong market that we believe will create demand tailwinds for entry-level and move-up homes. Trophy is in an excellent position to capture this demand with their value-rich products. With that, I'll now turn it over to Rick to provide more detail regarding our financial results. Rick? Thank you, Jim. Please turn to slides 11 and 12 of the presentation. Home closings revenue for the fourth quarter grew 4.6 year-over-year to $448 million, bringing full-year home closings revenues to a record high of $1.77 billion. This represents a growth rate of 4.2 percent, the highest among public home builders. our public peers experienced an average home closings revenue decline of 5.6%. Revenue growth was driven by a 13% year-over-year increase in homes delivered to 825 units, partially offset by an 8% decline in ASP to $544,000. The anticipated decline in ASP was predominantly driven by year-over-year increase in the percentage of Trophy Signature Homes closed homes in more perimeter locations, as well as by a change in product mix within Trophy. Trophy represented 45% of the total number of closings in 2023 versus 38% in 2022. Our home building gross margin continued to lead our public home building peers as shown on slide four. During the fourth quarter, gross margin remained elevated at 31.4%, up 520 basis points year over year. The sequential decline of 190 basis points from Q3 was due to higher incentives on spec homes when mortgage rates peaked in October. Full year gross margin was 30.9%, the highest full year margin in company history and the highest among our public home building peers. Net income attributable to GreenBrick and diluted earnings per share for the fourth quarter increased 31.5% and 33.9% respectively to $73 million and $1.58 per share. For the full year, diluted EPS increased 2% year-over-year to $6.14 per share. During the fourth quarter, net new home orders increased 61% year-over-year to 679 homes sold. For the full year 2023, net new orders increased 70.1% year-over-year to 3,356, the highest growth rate in the home building industry and the highest number of annual new orders in company history. Jen will provide more detail on the sales environment shortly, But limited competition from both existing homes and new construction in our infill and infill adjacent locations have allowed us to meet the unmet demands in these sought after locations. Active selling communities at the end of Q4 increased 14% year over year to 91. Our quarterly absorption rate increased 38% to 7.6 homes per average active selling community. For the full year, our quarterly absorption rate was 9.9 homes for average active selling community. Our cancellation rate for the fourth quarter remained low at 7.2%, the lowest among public home building peers as shown on slide 13. Our backlog value at the end of the fourth quarter increased 50% year over year to $555 million. Backlog ASP slightly increased 4.9% to $721,000. Profi is run as a spec home builder with high inventory turn rates and now represents a low percentage of overall backlog value at approximately 10%. Spec units under construction as a percentage of total units under construction increased sequentially to 70% at the end of the fourth quarter due to the higher number of specs at Trophy, which reflects our intentional strategy to provide homes nearing completion to qualified buyers ready to close. As shown graphically on slide 13, to satisfy the appetite for homes in our target market, we ramped up starts further to 948 units during the fourth quarter, over tripled the starts in 4Q22, and up 8% sequentially. For the full year, we started 34% more homes year over year for a total of 3,327 starts. Our home starts for the last nine months have now averaged almost 900 homes per quarter. Our industry-leading results would not have been possible without our financial discipline and investment-grade balance sheet. We believe that our strong balance sheet demonstrates our ability to manage capital effectively operate and execute our strategies efficiently withstand challenges and capitalize on opportunities for growth at the end of the year our net debt to total capital ratio was 11.4 percent and our debt to capital ratio was only 21.1 percent one of the lowest among our public home building peers as shown in slide six one hundred percent of our data outstanding at year end is fixed rates and with a weighted average interest rate of 3.3%. Our low leverage and cost of debt have enabled us to retain more profits to fund our growth. Additionally, we have $180 million of cash on hand at the end of the year, ready to deploy for strategic opportunities that we believe will bring strong returns for our shareholders. With that, I'll now turn it over to Jed. Jed? Thank you, Rick. Net orders for the full year grew 70% year over year, the highest growth rate in the industry. To achieve this growth, we constantly assess our sales each day in all communities. We monitor demand, mortgage rates, and our competitors, and then adjust pricing and incentives as needed. Incentives peaked in October when mortgage rates hit a 23-year high. However, demand quickly resumed in November and December as some buyers were ready to take advantage of the decline in mortgage rates. As a result, incentives dropped from 6% in October to 5.2% in December. Net orders remained steady in November and December, despite the typical sales slowdown around the holiday season. We won't be specific on early 2024 orders other than to say Sales velocities thus far in the quarter have meaningfully accelerated from our Q4 levels. And as always, we remain diligent on monitoring any shifts in the market dynamics. The lack of supply in affordable homes has created a favorable backdrop for our value proposition builder, Trophy Signature Homes. Trophy was founded in 2018 and offers more affordable products that cater to both entry-level and first-time move-up homebuyers. We believe homebuyers targeted by Trophy represent a deep and growing pool of potential customers. Since its founding, Trophy has grown from 33 closings in 2019 to 1,378 in 2023, as shown on slide 14. Its share of GreenBrick's revenues has also grown from less than two percent in its first year to more than 38 percent in 2023. in 2023 trophy was individually ranked as the seventh largest home builder in dfw based on number of starts we believe that 2023 was more than just a successful year for trophy it can also serve as a springboard for sustainable growth going forward based on our lot inventory product desirability, operational efficiency, and scalability. Trophy's homes feature airy open space and resonate with customers from wide-ranging backgrounds, especially among our younger buyers. Many features that come standard with Trophy are expensive upgrades with other builders. Trophy is also a leading builder in constructing energy-efficient homes that brings savings to homebuyers for years to come, including offering in many homes fully encapsulated spray foam insulation, tankless water heaters, and Energy Star appliances. Trophy is designed to be efficient and spec heavy. This strategy is critical in the mortgage rate environment, as many homebuyers today favor move-in rate homes. Our streamlined home buying process, including high-level standard features, eliminates decision fatigue for many buyers. This approach also creates predictability in material selection and cost, enabling Trophy to be efficient in managing the construction process with purchase orders and simplified start packages. As a result, the current cycle time for Trophy is 3.9 months, compared to a peak cycle time of nine months in 2022. For GreenBrick overall, the current cycle time is 5.7 months down from peak cycle time of 10 months in 2022. Trophy's construction model is also highly scalable in location agnostic. We were able to successfully apply Trophy's playbook across the DFW Metroplex, as well as Austin, a more challenging market than DFW in 2023. We have had great success in Austin since we opened our first community at the end of July of 2023. The sales base in Austin during the fourth quarter averaged 4.5 homes per month, while incentives were consistent with Trophy's DFW market. And we look to recreate that same success in Houston in 2025. As we look forward, we remain focused on investing in land in a disciplined way. In 2023, we spent a total of approximately $425 million in purchases of land and finished lots, as well as land development. We expect to ramp up our spend in 2024 for raw land acquisitions, finished lot purchases, and land development to approximately $700 million in total. Ultimately, the strong buyer demand we've seen across all of our brands confirms our belief that strategically located infill and infill adjacent communities represent a significant opportunity for growth and high sales velocities. With strong starts and shorter cycle times, we believe that GreenBrick is entering 2024 with a strong platform for generating growth and continuing to provide strong returns to our shareholders. Lastly, during the fourth quarter, we resumed stock buybacks and repurchased approximately 374,000 shares of stock at $47.09 per share. For the full year, we repurchased 1.18 million shares of stock at $38.46 per share for a total of 45.3 million, representing approximately 2% of our shares outstanding. Share repurchases will remain in our toolbox as we continue to evaluate other investment opportunities as we strive to continue to deliver one of the best risk-adjusted returns in the industry. With that, I'll turn it over to Jim for closing remarks. Jim? Thank you, Jed. 2023 was a phenomenal year for GreenBrick, marked by record results despite a challenging high interest rate environment. I would like to extend my heartfelt appreciation to our employees for the collective efforts in delivering exceptional homes to thousands of homebuyers, as well as generating industry-leading performance. We remain steadfast in our commitment in delivering long-term value to our shareholders. As we look forward into 2024, the dynamic housing landscape creates many opportunities. Our land and lot positions, financial strength, and highly motivated and experienced employees sets the stage for an exciting future. In closing, I'm extremely pleased with our first quarter results, and we look forward to building on this momentum in the quarters to come.

This concludes our prepared remarks, and we will now open the line for questions. Thank you. The floor is now open for questions.