Green Brick Partners, Inc. Q2 FY2025 earnings call

• Strong second quarter results despite affordability challenges, with record closings and net new orders.
• Gross margins remained the highest in the public homebuilding industry for the ninth consecutive quarter.
• Returned $60 million of capital to shareholders in the first half of 2025, with $40 million authorization remaining.
• Trophy brand outperforming, expanding to DFW, Austin, and set to enter Houston.
• Green Brick Mortgage closed over 140 loans in Q2 with strong metrics.
• Reduced average construction cycle time to just under 5 months, an improvement of 13 days from a year ago.
• Spent $49 million on land and lot acquisition and $85 million on land development year-to-date.

Net income attributable to Green Brick for the second quarter was $82 million or $1.85 per diluted share. Home closings for the quarter were 1,042, a record, and net new orders were 908, also a record for any second quarter in company history. Revenue for the quarter was $547 million, virtually flat year-over-year. Homebuilding gross margins declined 410 basis points year-over-year to 30.4%. Trophy, the spec home builder, represented 15% of overall backlog value but accounted for nearly half of closing volume. Year-to-date, deliveries increased 8% to 1,952 homes, home closings revenue increased 5.3% to just over $1 billion, and homebuilding gross margin decreased 320 basis points to 30.8%.

• Focus on maintaining operational excellence and investment-grade balance sheet.
• Continued strategic focus on Trophy brand expansion in key markets.
• Green Brick Mortgage to expand into Austin, Atlanta, and Houston.
• Align capital allocation with long-term growth objectives and market conditions.

• Macro challenges like high interest rates and consumer confidence affecting the housing market.
• Uncertainty regarding tariffs and their potential impact on closings and earnings.
• Restrictive lending environment affecting some competitors' building activities.

Q: First one is on the incentive trajectory. Just 2Q incentives up to close to 8%. Curious to see what the incentive run rate is so far in July and we expect to further increases as we go through the year?

A: Yes. This is Jim. We don't forward look July. We're just trying to explain June right now. But generally, we're seeing things level out, but things are still very spotty by neighborhood. We look at our sales report every morning and try Jed's more active than this than anyone else in our business. But talk to me 1 week, we're really excited. We think things are picking up. Incentives are going down in the next week, it's a total change in the neighborhood.

Q: Understood. All right. And second question on gross margins. Can you give us a sense of how much the gross margin decline was just pure price incentives versus mix with the more sales of Trophy?

A: Sure. Yes, this is Jeff. Yes. Most of it was just due to mortgage rate buydowns. That seems to be the most effective tool that we have right now of the overall, roughly 5% decline in average sales price. I would say that a little under 2% was related to mix. Trophy's closing volume did increase year-over-year by about 4%. So it is having a small impact there. But most of it, like I said, is towards the increased incentives for the mortgage rate buydowns.

Q: Your starts in the second quarter increased in the first quarter. How do you -- how do you think about your starts in the second half of the year? And I know you don't project things like that. But given last year's kind of seasonality of pretty meaningful strength in the quantity of communities and whatnot that you're opening. Any direction there would be helpful?

A: Yes. This is Jed. Thanks, Alex. We're going to match starts to sales. So sales have been fairly consistent throughout the year, and we think our starts cadence will mirror that.

Q: That's helpful. And then another way to maybe ask the gross margin question. So homebuilding gross margins were down 410 basis points year-over-year. Incentives obviously rose 320 basis points, and that's probably the majority of the gross margin weakness. What was the remaining sort of 90 basis points of margin headwind. It sounds like building materials were lower. So was the remaining margin headwind due to a shift in mix of more Trophy product or something else?

A: Yes, Alex, this is Jeff again. The balance is primarily due to mix. Trophy's margins are still relatively in line with the rest of our brands in the company, but their mix did increase. And as you know, Trophy targets primarily the first time, first move-up buyer. And when rates were over 7% last quarter, we really had to continue to incentivize our homes to get some traction and get those sold and closed. Great news is we were very effective in doing so the number of quick move-in homes that we had this year that both sold and closed in the quarter was around 50% versus in the prior year. It was around 40%. So we're seeing a lot of buyers taking advantage of the mortgage rate buydowns to close quickly.

Q: Then last question. How do you think about your inventory level today?

A: Yes, this is Jed. We are seeing the buyer, and this changes month-to-month, currently, we're seeing the buyer really focused on finished homes across all of our brands with the exception of our Florida division. So we want to have plenty of finished homes. The buyers wanting that to take out the uncertainty of the mortgage rates and not, frankly, for reasons we don't completely understand not go through the build process. So we are still selling some build jobs, especially at our upper end line, but entry level is predominantly all specs right now.

Q: I had another question. I was on a pretty significant building materials distributor call earlier today. And there was sort of maybe a suggestion out there that inventory levels might be a little high across the industry itself. So I was wondering if you could maybe comment on inventory levels amongst maybe some of your competitors or in your unique geographies that you happen to be in?

A: Alex, this is Jed. I'll take that. So at the entry level, I'd say a typical Trophy community, we have 2 lot sizes per community. Yes, we're running, say 14 to 15 finished specs at any one time in that community, which has 2 lot sizes, and that's averaging typically what our monthly sales are in that community. So I think the way we're looking at is we want to have 1 to 2 months of finished inventory for the buyer to move in. And something that's interesting that we're seeing is we're spending a lot of time out in the field looking at our competitors and also our own neighborhoods is we're seeing very little resale activity within the communities. And I think people are -- the existing residents are happy with their mortgage rates. And so we are really able to buydown the rates into the 4.99% range, and that's we continue to do that, and we continue to have success doing that and fighting very little retail activity.