Green Brick Partners: Update, Guide Down, Shares Look Cheap Again

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 Brickman

These 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:

Net income figures below are projections pulled from Bloomberg and then Green Brick's own lower guidance, if I'm right about profits being pushed out to 2016 the shares look very cheap at just 13.5x 2015 pre-tax earnings, 90% of book value, and essentially a clean balance sheet.

I listened to people smarter than me and sold down some of my position around $12, but still held quite a bit through this slide and today bought back in at $7.00 most of what I sold.  Green Brick is of course partially a jockey play on David Einhorn (who is having a self admitted terrible year) and Jim Brickman, both remain impressive to me, and the structure of the company keeps them involved and encourages them to create long term shareholder value.  I wouldn't lose faith in either just yet off of a $~8MM drop in near-term guidance.

Disclosure: I own shares of GRBK

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

BioFuel Energy (Green Brick Partners) Revisited

BioFuel Energy (BIOF) is a shell company with $181MM in net operating losses that I first toyed with in April as Greenlight Capital and developer James Brickman proposed the NOL shell buy JBGL Capital for $275MM in a convoluted transaction that many including myself misjudged.  Combining the star appeal of David Einhorn with the previously sexy BIOF ticker and a small cap float, the company became a favorite of day traders.  I let the price action and the craziness of others skew my view of how the rights offering math worked and the underlying transaction's value.

JBGL Capital is a residential land developer with 4,300 lots spread pretty evenly between the Dallas-Fort Worth and Atlanta markets.  They own a 50% interest in a few different home builders that operate in their communities, this appears to be a point of emphasis going forward as the home building margins are better than just straight land sales, but there is value in the hybrid model.  JBGL was formed in 2008 during the financial crisis and as a result doesn't have the legacy issues of other home builders, also much of the land on the books is likely understated.

To reiterate, the $275MM price tag will be paid as follows:

1. $150 million in debt financing provided by Greenlight, 10% fixed interest rate for a 5 year term with a 1% prepayment penalty during the first two years.
2. A rights offering of at least $70 million at a $5 offering price.  The rights trade under the ticker BIOFR, 2.2445 shares per right, expiring on 10/17/14.
3. Equity issuance to Greenlight/Brickman, this will ensure that Greenlight owns 49.9% of the shares following the rights offering and James Brickman will own 8.4% of the shares.
4. $8 million cash currently held by the company.

Additionally, Third Point agreed to backstop the rights offering and is expected to own 16.7% of the shares.  After the rights offering is completed 75% of the shares will be in the hands of essentially insiders (85% if you look at it on an enterprise value basis), these shares will be relatively restricted due to the NOLs, aligning insider interests with long term shareholders.  Real estate development requires smart capital allocation, and it seems to be a natural fit to have an asset manager like David Einhorn as the Chairman of the Board (see Bill Ackman at Howard Hughes).

Proforma Income Statement
Eventually the market momentum traders will exit and fundamental investors will move in and value the company based on its assets and earnings stream.  Below is the proforma income statement for the first six months of 2014, there are few items included in the proforma that are hiding the true earnings power of the new Green Bricks Partners (it will lose the BioFuel name after the transaction is finalized).

The SG&A at BioFuel Energy is overstated and double counted with JBGL this year as the company evaluates and goes through this reverse merger process, strip out $3MM there.  Additionally, the proformas are including a 40% income tax expense even though taxable income will be shielded by the NOLs for the foreseeable future, add back another $1.6MM.  Lastly, the interest rate on Greenlight's debt is above market and should be refinanced after Green Brick seasons a bit as a credit.  At a 7.5% interest rate, Green Brick would save $1.73MM over the six month time period. Making those adjustments and the proforma Green Brick Partners would have net income of $0.28 per share, or $0.56 per share annualized.  Even putting a 15x market multiple on Green Brick, and the shares could be worth ~$8.40.  Keep in mind that management has projected 50.4% revenue growth in 2015 creating additional potential upside as BioFuel transitions to Green Brick Partners and becomes valued as an operating company versus an NOL shell.

Duff & Phelps Fairness Opinion
Another fun piece of this transaction is the Duff & Phelps fairness opinion of the $275MM price tag for JBGL Capital.  Fairness opinions are used by boards as a CYA tool, almost always the adviser hired by the board will back into the price paid by cherry picking comps and adjusting the discount rates around to achieve the desired result.

I would argue that both the 14-16% discount rate is too high and the 9-10x net income terminal value is too low, using the lower end of both (16% & 9x) Duff & Phelps was able to back into the $275MM number.  Using more reasonable values would result in a much higher value for JBGL.

As I write this, BIOF is trading for $6.21 and BIOFR is trading for $3.03 (implying a $6.34 share price (2.2445*5+3.03)/2.2445)) making BIOF the better bargain, but the relationship has been moving around a lot so double check before making any decisions.  BIOFR also includes the possibility of an over-subscription allocation that could sweeten the pot a bit as well.  I didn't anticipate Greenlight putting such a valuable asset inside of BIOF, but in hindsight it does make sense as it needs to generate a lot of taxable income to monetize the NOLs and make the transaction worthwhile.

Disclosure: I own BIOFR, plan to fully subscribe to the rights offering