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Operator: Good afternoon and welcome to the Green Brick Partners’ Earnings Call for the Fourth Quarter ended December 31, 2022. 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. Joining us on the call today is Jim Brickman, Co-Founder and Chief Executive Officer; Rick Costello, Chief Financial Officer; and Jed Dolson, Chief Operating Officer. Some of the information discussed on this call is forward-looking, including the company’s financial and operational expectations for 2023 and beyond. In yesterday’s press release and SEC filings, the company detailed material risks that may cause its future results to differ from its expectations.

The company’s statements are as of today, February 28, 2023, and the company has no obligation to update any forward-looking statements 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 then the presentation available on the company’s website. With that, I will now turn the call over to Jim Brickman.

Jim Brickman: Thank you. I am extremely proud that Green Brick finished the year with a record number delivery of over 2,900 homes. Total revenues grew 25% year-over-year to $1.76 billion with an industry-leading gross margin of 29.8%. Our full-year earnings per share increased 62% to $6.02 and return on equity was up 550 basis points from last year to 31.4%. Both measures are the highest in company history. Despite a record-breaking year, demand was negatively impacted by rising interest rates and consistently high inflation in the second half of the year. However, sales momentum started to pick up in December during a seasonally slower period. December sales were up 43% over the average of the prior six months. Sales activity in the first two months of 2023 continued to be very strong.

We believe our sales success is based upon our geographic footprint with desirable lots in supply constrained locations in Dallas, Atlanta, and Florida. These markets have some of the strongest demographic tailwinds and job growth in the country. Beneficials raised interest rates 8x in the past years and signaled their determination to keep raising interest rates this year, possibly in a less aggressive way until inflation is down to their desirable level. Fortunately, there are several leading indicators that suggest this housing cycle is far different than the back pattern around the 2008 global financial crisis. First, the mortgage market is on a much stronger footing this time. Banks and financial institutions have maintained strict lending standards.

Since 2020, borrowers with high credit scores represent close to 70% of originations on average versus 25% in 2006 and 2007. Our homebuyers in the fourth quarter had an average credit score of 742 and a debt-to-income ratio of 39.7%. Second, the supply of single-family homes today remains low, compared to the historical norm. As seen on Slide 4, existing home inventory remains tight. Roughly one-third of homeowners are mortgage-free and the remaining homeowners approximately two-thirds have an interest rate below 4%. Existing homeowners are greatly disincentivized from entering the resale market because of the resulting need to then trade up from their existing residents to a mortgage with much higher interest rates. This is particularly meaningful to Green Brick over 80% of our closing revenues and 75% of our finished and finishing lots are in infill locations.

There is already a scarcity of land in newbuild communities, which translates to fewer new home competitors. So, with a much smaller volume of homeowners selling their existing residences, Green Brick faces a far less competition than in past decades prior to the pandemic when new home sales were only about 10% to 12% of total home sales. Our share of the potential homebuyer , we think is getting much bigger. Third, job growth in our markets is the best in the nation. Dallas added 235,000 jobs in 2022, Atlanta added 126,000 jobs. As shown on Slide 5, an estimated 3 million additional millennials and Gen Z will age into the prime home buying age in the next decade. We believe this will indicate there are significant spend pent-up demand from ready buyers who will purchase as mortgage rates stabilize.

Green Brick is well-positioned for a market rebound with a high-quality land pipeline. We expect to have approximately 6,000 finished lots at the end of 2023, with 75% of these slots located and into locations. I would also like to share the success story of Challenger Homes in which we own a 49.9% unconsolidated interest. Many builders operating in Denver and Colorado Springs had a rough year-end. Challenger Homes has been sustaining sales momentum without sacrificing much of its high margin and has been successfully taking market share from both public and private homebuilders. During the last quarter of the year, they are the Number 1 homebuilder in Colorado Springs by volume of new orders with approximately 40% market share. They are a perfect example of how a well-managed business that has a strong culture, great lot position and capital structure can do great even in a more challenging environment.

Hats off to Brian Bahr and his full Challenger team. Like Challenger, we believe Green Brick has a superior culture and our brands possess a number of strategic advantages that position us for industry-leading performance in Texas, Georgia and Florida. We believe these advantages are: first, a significant footprint in infill locations in markets with some of the strongest job growth and demographic fundamentals. A superior and disciplined land and lot pipeline to support long-term growth. A broad spectrum of product types and price points that capture entry level, move up, move down, and luxury home buyers. The highest gross margin among our peers for the trailing 12 months is shown on Slide 7. The development time line flexibility as a result of our self-development business model.

Our strong balance sheet was one of the lowest net debt to total capital ratios among peers of 25.7%, as shown on Slide 6. And most importantly, an experienced team in place to navigate our business and achieve our long-term results. Before turning it over to Rick, let me add that we are cautiously optimistic about the spring selling season based upon the significantly increased demand we are seeing, which is always subject to interest rates. Our business playbook remains consistent. We are proactively managing inventory being capital efficient, maintaining a strong balance sheet liquidity, and working with our trade network to reduce costs and cycle time. Jed will discuss our sales environment and initiatives in depth later in this call. With that, I’ll now turn it over to Rick to provide more detail regarding our financial results.

Rick?

Rick Costello: Thank you, Jim. Please turn to Slide 8 of the presentation. In the fourth quarter, net income attributable to Green Brick was $56 million and diluted EPS was $1.18, down 4.8% year-over-year. Home closing revenue broke our record for any fourth quarter and grew 2.3% year-over-year to $429 million, primarily driven by a 16% increase in average selling prices of closed homes to $590,000, offset by a 12% decline in the number of closings to 727 homes. As shown on Slide 9, 2022 was another record-breaking year for us. We delivered a record number of 2,916 homes and generated records for total revenues at $1.76 billion and gross margin of 29.8%. Diluted earnings per share was also a record at $6.02, representing a CAGR of 43% from 2018.

While the cancellation rate was up sequentially for the fourth quarter to 20%, it decreased each month during the quarter. And as shown on Slide 10, our Q4 cancel rate was one of the lowest among peers who averaged 35%. For the full-year 2022, our cancellation rate was only 14%. Net new home orders in Q4 were up 5% sequentially during a seasonally slower period. As shown on Slide 10, our year-over-year decline of 11% in net orders was the smallest decline among peers who averaged at 52% year-over-year decline in Q4. Average sales price on new orders for Green Brick increased 2.6% year-over-year to $586,000. Quarterly absorption rate for average active selling community was 5.5 homes in Q4, up from 5.3 in 3Q. Year-end active selling communities were up 8.1% year-over-year to 80.

We believe having more communities is the right strategy for Green Brick for several reasons. First, the customers recognize that our new neighborhoods offer a great value and are voting with their pocketbooks by signing contracts. Additionally, with significantly lower construction costs and new starts, we expect to maintain our industry-leading gross margins even as we price to market. Second, we believe we have pricing power because the majority of our new communities are in infill locations where supply faces less competition and existing owners are reticent to sell. As Jim stated 80% of our closing revenues and 75% of our finished and finishing lots are in infill locations. Third, we have inventory. We expect to be positioned to offer move-in ready homes at appealing prices.

Homebuilding gross margin in Q4 was flat year-over-year at 26.2%. Discounts and incentives played a role in our sequential decline from our Q3 record gross margin. Another factor in our margin performance was peak lumber prices flowing through this quarter’s deliveries. As the supply chain and labor market further normalizes, we expect to benefit from cheaper lumber and other cost savings in 2023. Jed will elaborate on cost savings shortly. Our SG&A leverage ratio increased slightly year-over-year to 10.4% during the fourth quarter. The ratio improved 70 basis points to 9.6% for the full-year. We adjusted our overhead during the second half of 2022 with headcount at year-end reduced 7% from the peak earlier in the year. We will remain flexible to align our SG&A with revenues as we monitor market conditions.

Backlog value at the end of the quarter declined 58% year-over-year to $369 million. This was due to a 64% drop in backlog units, partially offset by a 17% increase in ASP. The drop in backlog units is a function of slower sales and a higher cancellation rate. As consumer preferences evolve in a volatile interest rate environment, we have shifted our focus on selling more homes at later construction stages. Spec units under construction as a percentage of total units under construction stood at 73% at the end of the fourth quarter. During the fourth quarter, we reduced our total debt to total capital ratio by 230 basis points from the third quarter to 25.7%. As of December 31, 2022, our weighted average cost of debt was 3.5% and over 90% of the outstanding debt was long-term at fixed rates.

As previously announced in December 2022, we amended our unsecured revolving credit agreement to update total commitments by $25 million to $325 million. Additionally, maturity of all the commitments under the revolver have been extended to December 14, 2025. With that, I’ll now turn it over to Jed. Jed?

Jed Dolson: Thank you, Rick. Sales volume increased as we entered the holiday season with interest rates dropping to the low 6s, sales activity picked up in November with sequential increases of net orders by 15% in November and 46% in December. Net sales continued to be very strong in the first two months of 2023 across all 8 building brands. We are pleased to see that this positive momentum carried into 2023. Trophy Signature Homes, in particular, fared better in terms of sales during the fourth quarter. Shares of total Green Brick net sales from Trophy increased to 49% by volume in the fourth quarter from 39% at the end of the second quarter when mortgage rates started to take off. We believe this is ascribed to three reasons.

First, Trophy’s business is designed to be efficient and spec heavy and many homebuyers today favor move-in ready homes with a streamlined home-buying process. Second, Trophy offers more affordable products that cater to entry-level on first-time move-up buyers. We believe these homebuyers represent a deeper pool of potential customers. Third, Trophy’s homes come with design features that are appealing to the younger generation at affordable prices. For example, all of Trophy’s homes include spray foam insulation, which produces an air pipe envelope that insulates homes better. This encapsulation brings greener and more efficient homes to homeowners at a low cost that will continue to generate energy savings for years to come. We believe that through this product desirability, operational efficiency and scalability, Trophy will continue to capture unmet demand from entry-level and first-time move-up homebuyers and fuel Green Brick’s growth strategy.

Overall, discounts and incentives for new net orders during the fourth quarter were approximately 7.5% on average, up from the previous quarter of 4.2 percentage. During the fourth quarter, approximately 80% of revenues were again generated in in-fill locations. We believe our geographic footprint is one of the main drivers of our sales and gross margin outperformance. Incentives are assessed and approved on community-by-community and house-by-house basis. During the fourth quarter, we started 38% fewer homes sequentially in line with the industry. We will continue to adjust starts to match sales pace on a community-by-community basis to respond quickly to the market. Next, we have made capital allocation another top priority. During the fourth quarter, we made no new land acquisition and renegotiated terms on a number of lot purchase contracts.

As shown on Slides 12 and 13, approximately 75% of our 2023 finished lots in Atlanta and DFW will be concentrated in infill and adjacent desirable locations. We believe an ample lot supply in high-quality locations will give us an edge in taking market share. As we stressed during past earnings calls, the self-developing nature of our land business gives us tremendous flexibility to control delivery schedule and costs. If sales momentum continues to build up during the spring selling season, we have the capability to quickly ramp up home construction and have 90 to 100 ending selling communities as of Q4 2023 or Q1 2024. With the deceleration in land acquisition and development spending, we expect to generate additional cash flow as we close backlog and clear our spec inventory.

We will evaluate all options for the use of cash, which include, but are not limited to opportunistic acquisitions or stock buyback. We stand by our commitment to continue generating industry-leading returns on equity. On the cost side, our teams continue to make good strides in reducing construction costs. We have successfully reduced construction costs for homes in DFW that started in December or later so far, by an average of approximately $40,000 per home, compared to homes that started in the second and third quarters of 2022. We have expanded our efforts in negotiating with vendors and trade partners, and we believe we will further reduce our construction costs. Additionally, cycle time during the second half of 2022 was down with Dallas builders leading the improvement.

Overall, our cycle time reduced by 30 days from the peak earlier in the year and is expected to continue to improve. Lastly, with our expansion into Austin, I’m pleased to announce the construction of homes began in February. Our Trinity Ranch community is going to have beautiful open spaces, a variety of amenities and convenient proximity to downtown Austin. Most importantly, we are focused on keeping homeownership attainable, especially for first-time homebuyers. Trophy plans to begin selling homes from the high-200s in May of 2023. We are excited about entering the market and look forward to sharing more details in the following quarters. With that, I will turn it over to Jim for closing remarks. Jim?

Jim Brickman: Thank you, Jed. In closing, our results speak for the operational excellence and the backbone behind it, our people. I would like to thank our entire Green Brick team for their continued hard work. Looking ahead, we derive confidence from our people and products, our strategic advantages in land and our strong balance sheet. We have all hands on deck at Green Brick to ensure we calibrate our moves and utilize our capital in the most efficient way. We will always proceed with caution, while navigating and pursuing opportunities that may arise during this housing cycle. This concludes our prepared remarks. We will now open the line for questions.

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Operator: Thank you. We’ll take our first question from Michael Rehaut with JPMorgan.

Michael Rehaut: Thanks. Good morning everyone or good afternoon. I appreciate all the details always. I wanted to try and get any thoughts you might be able to provide in terms of how to think about 2023 from both the closings and a gross margin standpoint. On the closings front, obviously, you’ve had your orders stabilize a little bit, I guess, down only 11% in the fourth quarter, and you pointed to strength in the first, so far this year, but obviously, you’re dealing with a significantly lower backlog at the same time going into the year. So, just any thoughts around how closings might progress, any type of quantification for the full-year would be really helpful? And then secondly, on the gross margin side, you were able to maintain a strong gross margin in the fourth quarter, but obviously down from the third. Any thoughts on the first quarter of this year might be helpful as well on that. And maybe how to think about things going forward from there?

Jim Brickman: Okay. Thanks, Mike. This is Jim Brickman. We can try to pick apart a lot of your questions , but we don’t generally provide, as you know, earnings guidance. But we can share with you that our sales pace has picked up considerably since December into January. It’s continued into February. But what we’re most pleased with is that because 75% to 80% of our lots are infill locations, we’ve maintained our pricing power. So, we talk to our peers, most of our peers are not in A and B . They’re serving a bell curve of buyer in the C locations, and it’s a little more challenging in the C locations. We have some of those, so we know that. But with 75%, 80% of our lots in the infill locations, we’re not seeing margin degradation at all right now. And I think, really, that’s one of the highlights I’d like to everybody to take away from this call.

Michael Rehaut: So well, I don’t know, Rick, I don’t know if you have anything to add in terms of the questions on closings or margins. But Jim, I guess, to that point about margin degradation. So, obviously, your margins remain very strong, but they were down a little over 500 basis points sequentially in the fourth quarter. And I assume that was in part driven by higher incentives in the marketplace. So, I’d love to get your thoughts around is that 26.9 or 26.2 after interest is, kind of the new number going forward? Would it go a little lower in the first quarter? Many builders have talked about a little bit of a further slip just given how tough the last three months of 4Q was? Just trying to get a sense of directionally how we should think about first half gross margins versus 4Q?

Jim Brickman: Well, we’d like to have a look at the adjusted gross margin because one of the things that influenced our margins going down in the fourth quarter was we took a $6 million impairment and that impairment €“ that’s why we’re very cautious in looking at what’s going on in the marketplace overall. But those are on C lot locations that we decided not to proceed with development on. So, when you’re looking at our margins, you really need to adjust it by that $6 million, and that pushes it up quite a bit more than what you’re thinking in that 500 basis point decline. What is it net adjusted to Rick?

Rick Costello: 28.3.

Jim Brickman: 28.3. So, you’re getting back up to where we used to be. And we’re really seeing that type of margin sustainable in our business right now, assuming interest rates don’t totally go bonkers. But we’re real pleased with what we’re seeing on margins in our January and February orders. We look at it every week. And unlike many peers, we’re seeing it’s pretty stable.

Rick Costello: There’s a couple of points that I can add in here. We obviously are experiencing in Q4 and a little bit of rollover into Q1 just in prices. But as we said in the call and in the earnings release, we’re seeing the next generation cost of our starts being $40,000 less than direct construction costs. So that’s eventually going to be felt as a positive. In Q4, certainly, we did see, as I referred in my discussion, some discounts and incentives working their way into their results in Q4. The incentives that Jed talked about went from 4.2% to 7.5%, but we are seeing the incentives and discounts in Q1 at a lower level. So, we’ll have some downside from what happened in Q4 and then some upside to what’s happening in Q1 and throughout the year from a cost standpoint.

From a closing unit standpoint, it remains to be seen because we’re still early in 2023 with the ability to start more homes and try to match our starts to our sales. And given the improvement that we’ve seen in cycle time, the more that we can start early in the year, the better chance we’re going to have to close more houses. So, it’s €“ if you could tell us exactly what’s going to happen to interest rates, we could probably be more precise, but that’s probably a challenge that’s unrealistic.

Michael Rehaut: Okay, great. Thanks so much.

Operator: We’ll take our next question from Max Downie with BTIG.

Max Downie: Hey guys, congrats on the quarter. You gave some color around demand trends since December. Would you be able to quantify the improvement in January and February?

Jim Brickman: No, we don’t provide because that €“ we would basically be providing monthly sales numbers, and we don’t want to go there. We went back and forth on how much optimism we really thought it was appropriate to share with the market. We didn’t want to leave them thinking that things hadn’t improved, but they have improved pretty significantly. I think that we were close to 73% spec inventory at one point in time in the fourth quarter. We’re seeing that get balanced to where we want it to be around the 50-50 level. And we think that if sales continue like they are, we’re going to really have a really nice building and sales cadence where we can match production to sales right now very closely.

Max Downie: Okay. Thank you. And then you guys are pretty active in share repurchase in 2022, but how do you guys think about repurchases and your other capital allocation priorities in 2023? If you can maybe rank that would be really helpful?

Jim Brickman: Well, I wish we could rank them better right now. We’re playing all that against the middle like we always try to do. We’re evaluating share repurchases. We’re actually looking at an acquisition for the first time. We haven’t looked at an acquisition in a long time. And then we’re also looking at expanding into a new market with a large land purchase. So, I guess stay tuned, we’re going to have to report those things after they occur not before they occur, but we’re aggressively pursuing all three of those options.

Max Downie: Awesome. Thanks guys.

Operator: We do have a question from Alex Rygiel with B. Riley.

Alex Rygiel: Thank you gentlemen. Very nice quarter. A couple of quick questions here. Within SG&A, what is the mix between fixed and variable?

Rick Costello: Yes. It certainly is a mix. Everything is variable in the long-run, but it really where we land is going to be based on what our starts and what our ups and downs are going to be are in the employment levels, number of employees. So, it remains to be seen, given what the market might give us. Obviously, higher volume of closings is always going to give us the lower SG&A. Our units under construction are down, but we’re hoping that they kick back up. That’s where we love to allocate our capital is start building more houses.

Alex Rygiel: And then directionally, can you help us to think about average selling price over the next few quarters, understanding there’s probably going to continue to be a mix shift towards Trophy product?

Jim Brickman: Jed, why don’t you handle that on your risk daily?

Jed Dolson: Yes. So, we €“ as Jim mentioned, we’ll zoom out and talk about Green Brick as a whole. The A and B locations are €“ continue to perform very well right now. The C locations, we have had to offer more or similar incentives to what we offered in Q4, but those continue to sell at high paces. Many of those communities have large number of lots, and it’s easy to build houses in those communities. And so, it’s going to be €“ demand is going to be stronger at the A and B locations, but we will do fine in the C locations, given the number of lots and the price point that we can hit.

Alex Rygiel: And then lastly, with strong orders in December, January, and February. Have you seen €“ has the quantity or the percentage of discounts and incentives, has that changed much from the fourth quarter?

Jed Dolson: Actually, they’ve improved since the fourth quarter. In the C locations, even we’ve opened two large new communities, and we’ve reduced incentives in both of those because they were €“ we were able to offer them at a really favorable price points, still produced really nice margins, and we’ve reduced incentives there. I think that the crazy is still interest rates. We’re really surprised that we haven’t seen it affect demand more. But I think part of that is that we’re talking about job growth in both of our markets and so many of our buyers. Right now, there’s not existing homes for them to purchase, the inventory is very low. And if you’re a corporate person that’s relocating with a new job and doing market, it’s really not that much of a discretionary purchase, and we’re still seeing pretty strong demand there.

Alex Rygiel: Very helpful. Thank you very much.

Operator: We’ll take our next question from Jay McCanless with Wedbush.

Jay McCanless: Hi, thanks for taking my questions. Actually, Jim, if you could stay on that topic for a minute, what is your percentage now of buyers coming from out of market into your communities versus maybe where it was a year ago?

Jim Brickman: Jed, can take part of that, because I ask him this question all the time. One of the things we talk to are mortgage people, we look at their addresses and all that, the problem at skews it is many times if a person is coming from California or New York, which are obviously a lot of migration out of those markets into Georgia and Texas. They rent a house first, so it’s hard, they will actually have a Texas address before they end up buying a house from us. And we’re trying to get a little bit better benchmark on that. Do you have any other color you can add on that, Jed, because we’re?

Jed Dolson: We’re seeing a little bit more this year, in-state buyers then so a little bit less relocation, but that’s probably in the relocations down, I would say, 10% to 20% looking at the numbers we’re looking at.

Jim Brickman: Our General Counsel just came from a presentation this morning. And he’s €“ of course, they were very optimistic. I think they had 18 companies still looking €“ moving in the Dallas-Fort Worth area.

Jay McCanless: Okay. That’s great. And then for a second, on the acquisition you mentioned, Jim. We’ve been hearing banks potentially pulling back and putting builders, private builders, maybe into making them pull more skin in the game. I guess, have you seen the potential deal flow pick up? What are you seeing happen with your private competitors? And then any color you could give us on this acquisition you might be considering?

Jim Brickman: Well, the three or four kind of brokers really quit showing any transactions two or three years ago because they knew we were going to pay big premiums for businesses. The deal we’re looking at is, what I would consider as a low probability. It’s an off-market deal. And really, I can’t speak any more than that. I wouldn’t make any investment decisions by Green Brick stock and an acquisition occurring. I can tell you we are aggressively looking at expanding into a new market if we can get a good foothold on buying land. That kind of dovetails to the back end of your question and the banks are being much more restrictive in how they do lending right now. And we think that’s great for our business because the equity requirements are so huge that we think we have a real advantage in going after some larger land acquisitions not only in Dallas, but potentially in new markets.

We just put two nice-sized deals under contract in Texas. One was a $32 million deal, the other was a $21 million deal. And those just are not the, kind of deals that you’re going to see large private builders and many public builders want to take a bite on right now.

Jay McCanless: Great. That’s all I have. Thank you.

Operator: Alright. And there are no further questions. I would like to turn the call back over to our presenters for any additional or closing remarks.

Jim Brickman: I just appreciate everybody’s interest in our company. And we hope really some people will come visit us, see what we’re doing, see our different price points, our products and really see the Trophy story because that’s going to be really the anchor for our growth strategy going forward. And I appreciate everybody’s interest.

Operator: Thank you. And that does conclude today’s presentation. Thank you for your participation, and you may now disconnect.