Update time, I haven't discussed Green Brick for about a year - quick background:
- Green Brick Partners (GRBK) is a former NOL shell (BIOF) which David Einhorn engineered an interesting reverse merger in 2014 with a home-building operation founded by Jim Brickman. David Einhorn came to know Jim Brickman on the old Yahoo message boards discussing Allied Capital, Brickman's analysis helped fuel Einhorn's short crusade against the company and afterwards they became close friends/partners. Einhorn is now the Chairman of Board and Brickman is the CEO of Green Brick.
- The company has an $83MM deferred asset as a result of the old BioFuel Energy net operating losses, meaning it won't pay income taxes for the next several years.
- The low float (Greenlight owns 49%, Third Point 16.5%), initial rights offering, secondary raise, and other events have led to a lot of stock price volatility.
- Some of my earlier posts from 2014: http://clarkstreetvalue.blogspot.com/2014/11/follow-up-on-green-brick-partners.html, http://clarkstreetvalue.blogspot.com/2014/09/biofuel-energy-green-brick-partners.html
- On 7/1/15, the company completed a secondary offering of 17.45 million shares at a price of $10.00, with Greenlight and Third Point fully participating in the offering to maintain their ownership percentages (important to keep the NOLs in place), the cash raised fully paid off the expensive 10% term loan the company had in place with Greenlight when it completed the reverse merger with the old BioFuel Energy.
On October 30th, Green Brick Partners fired their COO and took down their 2015 pre-tax income guidance from the $29-32MM range to $22-24MM, since then about $210MM in market cap (stock price was as high as $14.94 this summer, now $6.60) has been sliced off the company leaving the shares trading at a discount to book value (which includes the DTA). The Q3 conference call held on 11/13 didn't provide much reassurance as the company admitted to misjudging their customers in Atlanta and building too high-specification homes that just weren't selling (fixable). Combined that with their labor shortage issues in their Dallas communities (fixable) and the stock market has harshly penalized management who made the mistake of just reaffirming their original guidance in a mid-September investor presentation. Where does that leave us now?
Homes aren't a fad product like say a GoPro camera or a FitBit wearable device where a guide down in the later half of the year could signal much larger demand problems. We knew that Green Brick's revenue was going to be back loaded this year with the opening of two large communities (Twin Creek in Dallas and Bellmoore Park in Atlanta) happening in the fall. While it's disappointing that both of these developments are facing issues at the same time, I get the sense that the revenue will simply get pushed back into 2016 and the current washout is a buying opportunity. Both Dallas and Atlanta are high demand, growing, sun belt markets, and the housing market seems to have finally burned off most of the excess supply built leading up to the financial crisis.
With their unlevered balanced sheet, Green Brick should be in a position to additionally make acquisitions, there was a hint of that in the Q3 press release below, but I didn't catch any further commentary during the conference call.
"We are continuing to find attractive "A" location land investments that should translate into profitable growth for years to come. Since the summer of 2014, we have quietly been finalizing entitlements and planning on numerous land development opportunities. In the coming weeks and months, we expect to utilize our strong balance sheet to opportunistically pursue attractive land purchases and other prospects to improve long term shareholder value and accelerate our growth in 2016 and beyond." - Jim BrickmanThese land investments would presumably be above and beyond what they already have projected to open in 2016 and 2017, including a "~30%" increase in communities next year:
Disclosure: I own shares of GRBK
I whole heartedly agree and made the same error of not selling all, I would say that BV for GRBK is also understated so it is even cheaper than it appears, probably pushing $9. These issues look to me to be fixable. I think the plan is the same as its ever been, use the NOL and sell the thing, Jim already retired once.ReplyDelete
Insider purchase yesterday by Jed Dolson, head of land acquisition and development. Small purchase but its worth 14% of his salary. http://www.sec.gov/Archives/edgar/data/1373670/000089924315008389/xslF345X03/doc4.xmlReplyDelete
Good catch. Not a game changer, but still a positive data point.Delete
It is clear that the company stock is trading at a discount to TBV, which itself is likely understated as real estate has appreciated over the past 5-6 years. But what about a valuation on cash flows/ earnings power basis? Would you care to provide your view on how you value the company? Worst case/Best case? thanks.ReplyDelete
Good question. I don't know if I have a solid answer for you, I get the sense there's a lot of growth in the pipeline over the next 2-5 years, but management isn't good at forecasting when the revenue hits. Brickman's previous venture was private, GRBK is closely held, but he still wants to get the story out, seems like there's some growing pain in his communication with the street. Their business model is also a little confusing, they don't recognize land sale revenue to their controlled builders until the finished home is sold. So it essentially reduces near term revenue versus selling to third party builders, but should result in profit margin at both the land sale and the finished product once its done. With the two big communities coming online, could have some delays in when the revenue recognition starts to happen that pushes it back a quarter or two. Just another thought. But I haven't put the time in to develop a full blown DCF model or anything like that. Open to other thoughts here.Delete
It is difficult to work a model on them, for sure. A lot of moving parts. You are right, there is a lot of deferred revenue built up in some large projects getting completed only now. SG&A has shot up as it seems to be front-end loaded; then there is the non-controlling interest line item that fluctuates all over the place and is a large portion of net income; then there is the matter of NOLs that are not reflected on the P&L as the co uses a full tax rate in GAAP results.. its a long list.Delete
So I can see why you don't have a DCF on it ;)
Let's be honest about this - this idea is more of a piggy back on insiders than anything else. Numbers are elusive but the story is great. Let's just leave it there..
You probably say it better than me, in agreement. Also somewhat noteworthy, Brickman bought 22,500 shares at an average price of $7.31 on 11/19.Delete
and Kathleen Olsen bought 10,000 shares at 7.52 two days ago...ReplyDelete
consensus is at 34c for '16. any idea what the difference is between that figure and guidance? I assume theyre just building in a normalized tax rate (despite the NOLs).ReplyDelete
apples to apples: 34c for '15ReplyDelete
I don't completely follow, how many analysts cover it? I don't have access to much if any sell side research. My guess is a difference in how they're handling the income tax as you suggest and then maybe the weighted average sharecount? The equity raise really throws a wrench into the accounting until they ramp up, add some leverage and land lots sold to the controlled builders get sold. Sorry if that's not helpful.Delete