Many parts of the real estate market have faltered in 2020, but new home sales are not one of them. Since a sharp downturn in the spring, new home sales have been on the rise. Sales of single-family homes in October 2020 were at a seasonally adjusted rate of 999,000, which was 41.5% above one year ago.
This has been great news for homebuilders, which have seen profits rise in recent months. One builder we haven't covered on Millionacres yet is Green Brick Partners (NASDAQ: GRBK). So let's take a look at this small-cap builder on a path toward steady growth.
An expansive business model
Green Brick builds homes in Texas, Georgia, Florida, and Colorado and sees itself as having a truly diversified approach. It works with a variety of what it calls Team Builders and owns five homebuilders in Dallas (CB JENI Homes, Normandy Homes, Southgate Homes, Trophy Signature Homes), as well as having an interest in homebuilders in other markets. It also has an interest in BHome Mortgage and Green Brick Mortgage as well as Green Brick Title and Providence Group Title.
The company has seen total revenues rise 65% from the third quarter of 2018 to the third quarter of 2020. During that time period, it has also dramatically increased its backlog and number of communities. However, with a market capitalization of $1 billion, it's still a relative small fry compared to giants like Lennar (NYSE: LEN), which has a market cap of around $22 billion, or D. R. Horton (NYSE: DHI) with a market cap of around $26 billion.
Taking advantage of strong demand
Green Brick announced net new home orders in the third quarter were up 89% year over year and 41% from the second quarter of 2020. It delivered 622 homes in the third quarter, an increase of 40.4%. It also increased its active selling communities by 18%.
Even more promising, earnings per share for the nine months that ended September 30, 2020, was $1.67, an increase of 96.5% year over year. It started over 700 homes in the third quarter as it tries to keep up with the demand for new homes in its core markets. In order to fuel continued expansion, it has upped its number of owned and controlled lots by 31% to over 12,000 lots, a new record for the company.
“It is important to note that our record growth in land and lots was achieved while maintaining a debt to capital ratio of 25.3%, one of the lowest of all public homebuilders,” said Rick Costello, chief financial officer in the earnings press release.
The case for buying Green Brick Partners
It's hard to go wrong with homebuilders right now. The increase in demand for new homes is expected to continue over the next several years. Green Brick is also well-positioned in the Sunbelt states and in many markets that are experiencing strong inflow from other areas such as Dallas and Atlanta.
Another mark in Green Brick's favor is its smart attitude toward debt. It's increasing homebuilding volume, but it's doing it in a smart way. While it does have a conservative balance sheet, it's also turning a lot of cash flow back into acquiring more lots so it can build more communities.
The case against buying Green Brick Partners
Green Brick has had an extraordinary year and is trading for around $22 a share, nearly double what it traded at around the end of 2019. One question for investors may be how much higher the stock can go. Its per share price is significantly lower than many other homebuilders.
This increase in share price has been very good news for one Green Brick investor, David Einhorn. The billionaire hedge fund manager helped take the company public in 2014, and his Greenlight Capital owns nearly half the stock. Having a large fund own a major part of a company isn't always a concern, and in this case, Einhorn and CEO James Brickman appear to be very much aligned on strategy, but should that change, you have a shareholder who can make some pretty influential moves simply by selling a large number of shares.
Like any builder right now, Green Brick has to focus on building rapidly while still maintaining good gross margins. It raised home prices over the summer as the price of lumber increased. Green Brick is also more concentrated in locations than some of its larger competitors. Should migration patterns shift, this could be a concern. However, prevailing demographic trends indicated that Green Brick has bet on the places where people are interested in living.
The Millionacres bottom line
Green Brick has an intelligent business plan and a solid balance sheet. While it doesn't have the big impact of some of its competitors, they are gaining market share in key cities. If you're looking for a homebuilder on a path toward growth versus an established leader, Green Brick may be worth adding to your portfolio.