Wednesday, November 26, 2014

Follow-Up on Green Brick Partners

I haven't posted in a while, been mostly idle the last month or two, but I thought I'd sum up some additional thoughts on Green Brick Partners now that the deal has closed, 9/30 proforma results came out, and the company hosted its first conference call as a home builder.

The headline Q3 results were down across the board, but with a relatively small home builder, I think it's safe to expect lumpy earnings results quarter to quarter.  With maybe only 25% of the shares outstanding in the float, Green Brick is essentially a private company and can be managed in a way that puts the long term results ahead of meeting estimates and smooth out earnings.  I was a little surprised to see as part of the deal closing that Green Brick took down the entire $150MM expensive term loan from Greenlight, but that gives the company approximately $40MM in cash to grow the business, especially in its two large communities coming online in 2015.

Below is the breakdown of the company's communities and lot position as of the S-1:

25% of the company's assets are in the Twin Creeks and Bellmoore Park communities that come online in 2015 and have a 6-8 year build out runway.  Additionally, there are several mid-sized communities debuting in Atlanta next year that add up to a little more than another Bellmoore Park.  In total, 75% of their lot inventory is in communities that will start delivering in 2015, making the initial 50% revenue jump buried in the company's management projections seems more plausible.

But with that said, the current stock price looks a bit stretched, based on the proforma numbers, Green Brick has a book value of about $156MM with a full allowance for the deferred tax assets, so at $8.85 its trading for 1.7x book, a little rich.  Or if you assume a 15x earnings multiple, the market is baking in $0.59 per share, which is a little higher than my adjusted earnings estimate I made in September that included cost cuts, term loan refinancing, etc., so the market is likely a little ahead of itself there as well. 

Jim Brickman
The other interesting piece of this story is Jim Brickman.  Being backed by Greenlight and Third Point will entivably generate some headlines, but Jim Brickman is really the jockey we're betting on, so who is he?  Back in 2002, David Einhorn presented a short thesis on Allied Capital, a large BDC that had a lot of toxic assets hidden underneath the surface, but still managed to pay a high dividend and attract a loyal retail investor base.  David Einhorn ended up writing a book "Fooling Some of the People All of the Time" about his journey as a short seller in Allied, in the book Brickman plays a central role as he independently researched Allied and came to similar conclusions regarding their faulty asset base.  Below is the way David Einhorn introduced Brickman:
"However, a benefit of publicly discussing Allied was hearing from others.  Jim Brickman, a retired real estate developer from Dallas, introduced himself by e-mail.  Someone had pointed him to Greenlight's analysis because of his background in SBA lending... Brickman's e-mail began a long dialogue.  While I've spent more time on Allied than I can quantify, Brickman has spent much more; he is retired and his kids have grown.  As he sees it, "These people believe they are above the law."  He has become an expert at searching public records, analyzing information, and has been a major collaborator in identifying problems at Allied and BLX.  He is one of the best forensic detectives I have ever met." p137-138
Brickman was also very active on the Yahoo! message boards detailing his findings on Allied, The Wall Street Journal picked up the story and wrote a front page piece about him in 2004: A Retiree in Texas Gives a Firm Grief With Web Postings

I'm an avid golfer, but I find the line about getting bored playing golf as an early retiree great, just the kind of person that I want to be invested alongside.  You also get the strong sense that he created JBGL/Green Brick very opportunistically, the financial crisis lead to such dis-allocations in the real estate market that he couldn't help himself but to jump back in and restart his career.  Says even more that a message board poster built a strong enough relationship with a highly respected hedge fund manager to seed him with millions of dollars to start JBGL/Green Brick.  Pretty fascinating story.

So that's probably it on Green Brick for a while, it's up 50% over the last couple weeks and is no longer obviously cheap, but with such a small float, I wouldn't be surprised to see it become a good value again, keep it on your watchlist.  I'm going to just hold my position for now as I don't like booking short term taxable gains this late in the year, but wouldn't fault people for selling some here.  I like the long term setup and could see Green Brick being acquired by a larger builder in a few years once the NOLs are used up and Brickman wants to retire again.

Disclosure: I own shares of GRBK

7 comments:

  1. Great post, great blog. Mark to market BV is higher, the multiple of book you are assuming is likely decently lower. Biggest lots/sites were bought way below current market value. I essentially agree that price is fair-ish around here, in the high 8s, but could be significantly higher by end of next year, even more so if they do a refi.

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    1. Thanks, and I agree on the mark-to-market BV being higher, I was just more was pumping the breaks a bit after my bullish thesis in September. It might not screen well going forward and will likely be volatile given the low float, but I'm in the same camp that it could be significantly higher this time next year, just a big move recently brought some of those gains forward. Thanks for the comment and Happy Thanksgiving.

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  2. Yes, excellent background info in this article! I have read DE's book, but didn't recall the connection with JB.

    Using a conservative DCF model, I get closer to $12 a share. I don't have it in front of me though, so I will double check it later.

    If I remember correctly, on the conference call Jim Brickman made it sound like he was going to be refinancing shortly.

    Just to play devils advocate since I don't have a crystal ball either: Due to the low float, this stock could also be volatile to the upside.

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    1. Could you please share your assumptions to get to $12/share? Good price target 12-18 months out potentially. As for the refinancing, I thought Brickman hesitated a bit when discussing the term loan, so I wouldn't expect it to get refinanced too quickly, they might need to season as an issuer before getting optimal pricing. And I wouldn't mind more upside volatility at all! Just urging a little caution too, thanks.

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  3. Off topic, but would you have a good resource on demutualizations? I am having a hard time finding good info on them. TSFL is the stock that has me stumbling blindly down this path. Really enjoy the blog, best of luck.

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    1. Spinoff Monitor (http://spinoffmonitor.com) is probably the best website for tracking them before they happen, really it's a great website for event-driven investment ideas.

      I like demutualizations generally, but just think maybe now might not be the best time to invest in them unless you prefer a widely diversified strategy. Smaller banks face a tough environment, low net interest income, higher capital requirements, high costs of developing a bank branch network, etc. And then with the rise of the shadow banking sector (BDCs, CLOs), those structures are better suited to invest in riskier middle market loans, they're funding is either permanent or 10-12 years in duration, while their assets are much shorter duration. Community banks, its the opposite, really short duration liabilities and with longer duration assets. Thanks for reading.

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