Long time, no see – been a busy time as a second semester senior. With that said, I made Green Brick Partners my final formal stock recommendation to the Illinois Investment Management Academy, and I thought I’d turn it into a Warrior Stock post. The pitch possesses a macro element with a backdrop of value investing principles.
I was having trouble trying to come up with a pick within the consumer discretionary sector, but homebuilding and housing made sense once the pieces are put together. Below is the breakdown I put together for the organization. Thank you for your time.
What is a homebuilder?
A homebuilder specializes in constructing housing properties, which can range from entry-level single-family homes to multi-family homes like townhouses to luxury homes. The typical production process begins with land acquisition, design, and construction, which leads to housing sales, marketing, and providing mortgage services.
Homebuilders Compete
Internally, the success of a homebuilder revolves around identifying market opportunities, managing its land assets, innovative designs, strong relationships with suppliers and subsidiaries, and effective sales strategies. In addition to other new homes, these companies compete with the resale market, which can be thought of as the “used” or old housing market.
Externally, homebuilders must face the willingness of consumers to take on debt, which is largely
uncontrollable (interest rates, availability of capital, mortgage rates). However, the companies that possess more efficient operations can take advantage of good macro environments and weather the inevitable downturns. The cyclicality must be navigated by prudent capital allocators and disciplined management.
Brief on Recent US Housing History
The Big Picture
After the dotcom bubble crash at the turn of the century, low interest rates led to the availability of cheap credit. To stimulate the economy, legislators made an effort to ease financial restrictions that surround housing. Amidst a rise in egregious loan behavior, housing prices followed upwards in stride. People began to bet on housing like how people flip Bitcoin today. Leading up to the GFC, the supply of single-family housing chased demand all the way up to a Q3 2005 peak. In other words, homebuilders overbuilt for an unsustainable level of demand. Ultimately, because of the crisis, by 2010, the number of new homes starts per 1000 people fell to a greater than 50 year low (see below).
After the Great Financial Crisis, legislators responded with heightened regulations on the development and sale of land, which led to a decade of subdued housing starts growth.
During the 2010s, the United States enjoyed the longest bull market in the nation’s history amidst historically low interest rates. The decrease in limited new housing compounded with the backdrop of a strong economy sent housing prices on an upward trajectory until launching post pandemic with rates dropping to zero.
Green Brick Partners (GRBK)
Key Financials (as of 3/20/2024)
- Market Cap: $2,543.1 mm
- Enterprise Value: $2,819.2 mm
- P/E: 9.00x
- Current Stock Price: $56.55
CALL TO ACTION: Green Brick Partners is the margin leading homebuilder in the United States. As interest rates decline and remain elevated, Green Brick is an opportunity to have exposure to the soft-landing catalyst with an operational efficiency angle.
Consensus View: HOLD
Mean PT: $54 – High: $59 / Low: $49
“Based on the management commentary from the F4Q23 call, we are factoring the following items into our updated models. FY24 average closing prices should stay near a mid-$550k average closing price versus our prior $560k to $580k range. Our prior PT was based on a 6x to 8x FY24 P/E range. Our $49 PT is a 7x P/E multiple on our $6.99 FY24 EPS estimate and is within our 7x to 10x FY24 P/E range. The new range is similar to the range we are using for most of our builder coverage.” – Wedbush (3/1/24)
Why homebuilders?
Within consumer discretionary, housing is the most interest rate sensitive product. As a result of the Great Financial Crisis, the supply of houses has lagged demand over the past decade. Following a period of near-zero interest rates, the resale market will continue to be constrained by “Golden Handcuffs” (customers who locked in mortgages with sub-5% mortgage rates). If the Federal Reserve decides to reduce rates and quantitative tightening efforts in the back half of 2024, homebuilders should benefit from a boost in demand as financing becomes cheaper but not cheap enough to loosen the resale market.
Why GRBK?
The SMID homebuilder subsector is highly competitive with low barriers to entry and product differentiation. However, Green Brick Partners has been one of the best performers due to its geographic location, corporate structure, and strict operations. As seen in the consensus view, GRBK is valued in a similar range to the rest of the homebuilding sector despite its superior margins. I believe the market is undervaluing the Company’s business model compared to other homebuilders. Through exposure to GRBK, we can capitalize on a potential soft-landing, constrained supply, and disciplined operation.
Limitations to the idea
The market has similar macroeconomic expectations, and an investment in Green Brick Partners would not possess a hard informational edge, complete contrarian view, nor sustainable economic moat. An investor would be intentional in its addition to beta and exposure to the soft-landing narrative. See more in discussion of risks.
Catalysts
- Near-Term: Positive economic data supporting the decrease in contractionary monetary policy
- Long-Term: Geographic expansion via Trophy Brand, land value appreciation, and disciplined operations
History of the Green Brick Partners
Green Brick Partners (“GRBK”, the “Company”, or “Green Brick”) incorporated in 2006 to solely invest in BioFuel Energy, LLC. BioFuel Energy built and operated ethanol production facilities in the Midwest. In 2013, Green Brick sold off its stake and became a shell company with no operations.
In 2014, the Company acquired JBGL, a real estate operator involved in developing land for housing, construction lending, and home building. The acquisition was funded by David Einhorn’s Greenlight Capital and Third Point LLC. As a result of the loan and funding agreements, Greenlight and Third Point became major shareholders in the Company along with James Brickman (founder of JBGL). Today, Greenlight is the largest shareholder with ~23% of shares outstanding while Brickman possesses ~3.5% (Third Point sold its ownership to the public in 2018). Einhorn is the Chairman of the Board, and Brickman is the CEO (both considered Co-Founders). On July 1, 2015, the Company completed an underwritten public offering of 17 million shares at $10 per share.
James Brickman
In 2008, Brickman was the CEO of BioFuel Energy Corp and Founding Manager of JBGL Capital. Once Green Brick Capital Partners was formed, he became CEO in 2014. Brickman oversees critical investment choices, determines capital allocation, leads strategic planning efforts, and manages relationships with Green Brick Partners’ builders.
In an interview with Dallas Magazine in 2019, here were some of his answers:
- TOUGHEST CHALLENGES: “Controlling costs, a tight labor market, and dealing with some cities and local governments that want to restrict growth.”
- LESSONS LEARNED: “To have the discipline to not get carried away when times are good, so I have cash to buy when prices are low.”
- LOOKING AHEAD: “I’m excited about the future. We have the capital and organization in place to substantially grow our business.”
Brickman has over 40 years of experience in all phases of real estate construction as a manager of various joint ventures and limited partnerships that developed and supervised office buildings, single/multi-family homes, condos, and entitled land. Previous to GRBK and JBGL, he served as the Chairman and CEO of Princeton Homes Ltd. and Princeton Realty Corporation. Princeton Homes is a small British based luxury homebuilder.
Dallas and Atlanta
Originally, Green Brick split its homebuilding operations between Dallas Fort Worth, Texas (“DFW”) and Atlanta, Georgia.
The Company was structured differently than a typical home builder. Green Brick’s business operations focused primarily on the procurement, development, and sale of land while owning a 50% controlling interest in the homebuilders that built on the sold land (51% voting interest, appoints two-thirds of the board, and ability to exercise control over operations). Between 2011 and 2013, Green Brick formed and purchased 50% of The Providence Group LLC (Atlanta), CB JENI Homes (DFW), Southgate Homes (DFW), and Centre Living Homes (DFW). After selling finished lots to its controlled builders, Green Brick “supported” them by financing the land purchases with an internal rate of return of at least 20% and providing construction financing with a 13.8%-16.5% interest rate. On top of that, the Company would retain 50% equity interest in the builders’ profits. Or, the Company could sell its finished lots to large uncontrolled homebuilders.
Colorado Springs
In 2017, GRBK issued equity to finance the acquisition of a noncontrolling interest in Challenger Entities, which expanded the Company’s reach to Colorado Springs, Colorado. Within the Challenger Entity, GRBK owned 49.9% ownership interest, less than 50% of the voting interest, and two out of the five seats on the board in Challenger Subsidiaries.
Treasure Coast, Titles, and Mortgages
In 2018, the Company started a joint venture with a title company in Georgia to provide settlement services to its Atlanta homebuilder Providence Group (49% equity interest in Providence Title). Green Brick entered the Vero beach, Florida market through an 80% interest in GRBK GHO Homes. In June 2018, the Company formed a second joint venture, Green Brick Mortgage, to provide mortgage loan originations to its builders (49% equity interest).
Wholly Owned!
At the end of 2018, Green Brick formed its first wholly owned homebuilding company, Trophy Signature Homes, to sell homes at an entry-level price point in the DFW Metroplex market. In 2019, Southgate and Centre Living became wholly owned subsidiaries of Green Brick. In 2021, Normandy Homes spun out of CB JENI as another wholly owned DFW subsidiary.
The Business Model Today and 2023 Performance
Exiting Colorado: Sale of Challenger
On February 1, 2024, GBRK sold its minority stake in GB Challenger to the majority stake holder for approximately $64 million. This sale marks an exit after a seven-year run in the Colorado Springs market.
Shifting the Focus to Houston
The Company plans to use the proceeds from the Challenger sale to invest in and expand opportunities where it holds a controlling or full ownership interest. Specifically, GRBK is focusing on growing its Trophy Signature Homes brand in the Austin, Texas market while exploring potential new markets. This marks the first time in the Company’s history where it is attempting to organically expand a wholly owned subsidiary into a new market. If the Company finds success, then it is possible that it will replicate this process in other attractive new markets.
DALLAS FORTH WORTH – the Most Important Market
Regardless of the other markets, 71% of homebuilding revenues are in Dallas Fort Worth. According to U-Haul, Texas achieved the largest number of movers in 2023 making it the third straight year at #1 while Dallas and Austin ranked top 10 in cities with new residents. As of November 2023, DFW was #1 out the 12 largest metropolitan areas in the US in terms of job growth (3.3% vs 1.8% national increase). Based on the US Census, 45% of the US population is under 35 years old while the percentages are 49% in DFW, 48% in Austin, and 47% in Atlanta.
With a 19% year-over-year decrease in sales of existing homes in 2023, first-time homebuyers will continue to look for new homes built by companies like Green Brick. The Company is in a great position to capitalize on the current housing market conditions, especially with its entry-level housing Trophy Signature Homes brand for new Texas homebuyers.
Trophy Brand
Since Trophy was founded in 2018, the brand has grown from 33 closings to 1,378 in 2023, which represents growth from 2% of GRBK’s revenue to 38%. In 2023, Trophy was the seventh largest homebuilder in DFW. The Company believes that this year could serve as a foundational start for sustainable growth based on its lot inventory, operational efficiency, and scalability (Reminder: Trophy is for entry-level homebuyers).
2023 Performance in a Glance
Despite the effects of the interest rate climb of 2022, Green Brick was able to perform well as the interest rate environment stabilized in 2023. The rise in Green Brick’s new home deliveries can be credited to the scarcity of competition in its infill and infill-adjacent community locations, shortened cycle times, and the persistent shortage of both existing and new home inventory within its markets.
- Home closing revenues grew 4.2% ($1.77 B) – highest among public homebuilders
- New homes delivered grew 7.1% (3,123)
- Average sales of homes delivered fell 2.7% ($566,100) – due to anticipated higher mix of Trophy Homes
- Full year gross margin was 30.9% – the highest full year margin in Company history and among public homebuilders
- Diluted EPS grew 2% ($6.14)
Backlog pertains to homes under sales contracts that remain unclosed by the end of the specified period, while absorption rate denotes the pace at which net new home orders are contracted per average active selling community during that same period. It’s important to note that sales contracts may be canceled subsequent to execution, for reasons such as the homebuyer’s inability to secure suitable mortgage financing within the contractually specified timeframe. Therefore, backlog may not reliably forecast GRBK’s future revenue.
- Net new home orders increased by 70.1% (3,356)
- Cancellation rate decreased by 52.2% (6.6%) – lowest among public homebuilders
- Backlog increased 50.4% ($555.2 million)
- Backlog units increased 43.4% (770)
- Average sales price of backlog increased by 4.9% ($721,000)
Land Development Plans for 2024
- Ramp spend in 2024 for raw land acquisitions, finished lot purchases, and land development to approximately $700 million vs $425 million in 2023 (~65% YoY increase)
Returns to Shareholders
- Repurchased 1.18 million shares of stock at $38.46 per share for a total of $45.3 million (2% of shares outstanding)
- Between the 2022 and 2023 Share Repurchase Program, the Company has $103.4 million available to be repurchased (~4.2% of shares outstanding)
Putting Performance in Context: Homebuilder Performance in 2023 vs GRBK
The following graphs indicate how Green Brick grew above the mean while controlling costs best last year. And, it continues to possess a subaverage multiple for a better than average performance.
The next few graphs are from GRBK’s most recent investor presentation (Q4 2023) where it compared subsector specific measurements. Cancellation rate is the percentage of cancelled backlog orders. Net sales orders refer to the total number of orders a company receives for its products or services after adjusting for cancellations, returns, or other adjustments that might affect the final count. “Home closings revenue growth” refers to the increase in revenue generated by a homebuilder from completed home sales over a specified period. When a home is sold and the transaction is finalized, it is referred to as a “home closing.”
Stock Performance in 2023
Ownership and Board
David M. Einhorn and Greenlight Capital – Chairman of the Board and Largest Shareholder
Greenlight Capital is a concentrated value-based equity portfolio with around $2 billion assets under management. Its top ten holdings concentration is 77.01% with GRBK representing 28.92% of the portfolio. The fund owns 23.28% of GRBK’s shares outstanding, which equates to approximately $570 million in market value.
As a result of founding Green Brick Partners, David Einhorn, Founder and President of Greenlight Capital, became a Director of the board in 2006. After becoming public in 2014, Einhorn assumed the responsibility of Chairman of the Board. Einhorn is a well-known investor who began Greenlight Capital in 1996 after graduating from Cornell in 1991 with $900,000 in start-up capital. He gained notoriety in 2002 after giving a speech at the Sohn Investment Research Conference to short a financial company called Allied Capital (which he wrote a book about in 2007). In July 2007, Einhorn shorted Lehman Brothers, which he shared at the Value Investing Congress ahead of the eventually banking crisis in 2008. In 2011, Einhorn’s last great short came at Green Mountain Coffee Roasters’ expense. Greenlight Capital’s peak AUM was around $12 billion in 2014.
The UK Financial Services Authority fined Einhorn for insider trading in 2012.
Harry Brandler, CPA – Independent Director, Chair of Compensation Committee
Harry has been serving on the board since 2014 as the Chair of the Compensation Committee. He was Greenlight Capital’s Chief Financial Officer from 2001 to 2019. As of May 2023, Brandler owned 105,235 shares outstanding.
Lila Murphy, CFA – Independent Director, Audit Committee Member
Lila is the newest member of the board after joining in April 2022. She is the Chief Financial Officer and Executive Vice President of the Dundee Corporation, which is a Toronto based mining sector investor. Additionally, Murphy is an Independent Director of the Gold Resource Corp (Chair of Nominating/Governance Committee, Audit Committee member, Technical, Safety, and Sustainability Committee member), a gold and silver producer.
Richard Press – Lead Independent Director, Audit Committee Member
Before joining the board in 2014, Richard had an extensive career in the insurance industry and as a senior executive in investments. Recently, Richard purchased 2,000 shares on the open market on March 8, 2024, and holds 88,090 shares outstanding post-transaction.
Elizabeth Blake – Independent Director
Elizabeth was Director of Patina Oil & Gas, which was bought by Noble Energy in 2007 and became a director of BioFuels Energy Corp afterwards. She has been on Green Brick’s board ever since.
Kathleen Olsen, CPA – Independent Director
Kathleen has been on the board since 2014. Her background is in audit with a specialization in investment partnerships.
Discussion of Risks
Macroeconomic Expectations
Currently, the market is pricing in around 2 – 3 interest rate cuts in 2024. However, if inflation data keeps rolling in hotter than expected, the Fed might not feel inclined to move interest rates. There is a potential “no landing” situation that is not being discussed as much in the market where the United States economy adjusts to this new normal in interest rates. In this situation, GRBK may not perform as well as our expectations in a soft-landing scenario.
Competition
There is not much that separates one operation from another besides the efficiency displayed in margin performance. It is unclear how GRBK is able to attain a greater edge over the competition besides disciplined operations and strong relationships with suppliers and customers. Perhaps, it is a strong management team, board, or geographic luck that has led to GRBK’s recent success. The competitive environment prevents me from assigning any kind of “sustainable economic moat” to the Company.
Multiple Expansion
The value-recognition thesis pertaining to the Company’s strong performance relative to peers yet possessing a below-average subsector multiple is partially reliant on market participants developing a shared appreciation for Green Brick’s operations. This thesis is largely out of GRBK and our control, but consistent performance and the success of Trophy’s expansion could drive the multiple higher.
Managing Cyclicality
Brickman’s primary responsibility is making the big decisions on how to allocate capital, which is putting a large amount of responsibility on one person’s shoulders for a Company’s success that is quite reliant on capital decisions. That being said, the Company has been able to generate strong returns for shareholders since 2018 through the expansion of the Trophy brand, obtaining wholly owned subsidiaries, and strong DFW economics. To note, GRBK has not experienced an extended housing downturn, but Brickman has.
Long Shot Thesis and Closing
Green Brick’s lesser usage of options and owning most of its inventoried land factors into its industry leading gross margin. When the homebuilding industry began, most companies operated in a similar fashion. But, those companies needed a significant amount of leverage to hold its land until option usage became normalized. However, if a homebuilder utilizes options, it can eat-up 3% of gross margins. Once companies like D. H. Horton and NVR adopted this asset-light inventory management, they were able to grow faster and clean up their balance sheets.
My long shot thesis begins with the way James Brickman and David Einhorn have slowly built up Green Brick since 2014 (the Company has only been around for 10 years). This timeline is what I am inferring is their vision:
- Begin as a disciplined value investor focused on buying great land at good prices
- Enter homebuilding through majority controlled acquisitions before absorbing wholly-owned risk
- Expand into more regions to see if operations are repeatable elsewhere
- Using all of their experience, start a builder from the ground-up to make it an ideal investment (Trophy) – hopefully, it has success (it has). Additionally, buy out subsidiaries.
- Expand Trophy to another market and see how organic expansion plays out (Houston in 2024/25)
Long Shot Thesis
6. If the expansion into Houston is a success, Green Brick management will have the confidence to utilize more risk like the industry leaders DHI and NVR did later in their lifetimes. Then, GRBK grows-grows-grows Trophy end markets while maintaining its sector leading operations.
Or Continue as Business as Usual
Overall, Green Brick Partners is properly positioned to benefit from a soft-landing situation given the current housing market dynamics – tight resale market, strong DFW economics, and exposure to entry-level housing through the Trophy Signature Homes brand. In the event of a no landing or hard landing situation, Green Brick would still be the preferred homebuilder investment due to its superior margins, industry best cancellation rate, and favorable geographic regions.
Continue the Research
This post is a bit on the lengthier side despite a relatively simple thesis.
Best to learn more about other opportunities within consumer discretionary to compare with the opportunity in homebuilders. To be frank, there are other companies within larger competitive advantages compared to peers, but the macro situation could be GRBK’s market buoy.
There are other homebuyers that could be interesting as well. Perhaps, there are homebuilders that are located near home – then you might be able to get an informational edge via osmosis.
If you have more questions or want to talk all things GRBK, do not hesitate to reach out on twitter, instagram, or shoot me a text.
Employ your curiosity.
-Maximus Beach
Learn more about Maximus Beach’s background here.
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