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Aug 13, 2021
[20 min Read]
I'm trying my hand at writing “DD”, and I figured you “geniuses” would be the perfect test audience. Alright, so now let me explain to you why I still have a thing for the homebuilding sector - and more specifically: Green Brick Partners $GRBK. That's right, these guys are so confident in their business that they named their company GREEN BRICK! They're feeling themselves and so are the Market Analysts tracking them and their sector.
In case you don't have time to read all of this or look at any of the pictures I included for you, then here's the long and short of it: the housing market likely won't letup anytime soon and builders will continue to keep churning out record profits for quarters to come. The safest play is to stay away from calls and look at shares. If you think shares are stupid and are only for boomers, then I suggest looking at ITM calls with a delta ≥.70 for any OPEX after August 2021. Or, in true WSB fashion, go for those near expiry OTM calls like a moth to a flame and see what happens.
Either way, whatever you choose to do (or don't, because that's just as cool) please don't interpret what I've researched and posted here as financial advice.
i. Overview & CEO
ii. Target Market
iii. Land Lots & Supply
iv. Operating System
vi. Growth Focus
viii. Bear Case
ix. Technical Analysis
xi. Conclusion & Disclaimer
GRBK is a homebuilder and land development company that deals in primarily single-family homes. GRBK does this by working with their subsidiary and affiliate homebuilders in Texas, Colorado, Georgia, and Florida. GRBK subsidiary and affiliate homebuilders are either wholly owned by GRBK or have a majority stake of their business owned by GRBK; GRBK has a pathway to 100% ownership for all subsidiary and affiliate business where they maintain a majority stake in today. Moreover, GRBK has ownership stake in two mortgage lending businesses and one property title business.
GRBK's CEO and co-founder, Jim Brickman (henceforth referred to as “Big Jim”), plays an important part to my investing thesis and why I'm so bullish on his business. Since I don't prefer to invest my money in companies ran by chud CEOs - à la Jimmy Chill - I'm happy to report that Big Jim isn't even close to being a chud.
GRBK isn't Big Jim's first foray into running a homebuilder business. No, in fact Big Jim was part owner of a different Texas homebuilder during the ‘80s. During this period of Big Jim's career is where he got to experience the joys and pains of leverage. Yes, that same kind of leverage you brain surgeons use when buying deep OTM options on meme stocks with your margin accounts funded by student loans, credit cards, personal loans, etc. As you can imagine Big Jim might've also believed things literally couldn't go tits up.
Enter the 1984 - 1990 Texas housing depression which caused things to go tits up. Now, to be fair, things went bad for everyone and not just Big Jim during this period in the Texas housing market. I'm not going to go into the details of how Big Jim managed to come through this with his head still attached, but he did.
The key takeaway from all this is Big Jim has experience playing with leverage and getting burned in the process. GRBK as a result of this is one of the lower levered homebuilders in the market. This is also why GRBK resolves to operate their business by keeping their debt-to-capital ratios at no more than 35%. Despite Big Jim's insistence to grow without the aid of obscene leverage, the business is producing record financial results each year.
ii. Target Market
GRBK has successfully diversified their business portfolio to target buyers at all stages of the homeownership cycle. These could be buyers looking for townhomes, luxury homes, and everything in between. GRBK does this by aligning a specific brand to their target market based on price, geography, and type of home. Here's a snapshot from their recent Q2 2021 investor day presentation deck that outlines this well:
GRBK reported in their Q2 2021 8-K filing that their average home sale price is approximately $438K/unit averaged across all brands. Per their direction advised on their recent earnings call and investor day presentations, GRBK has spent Q1 & Q2 of 2021 focused on their entry-level, detached single family product - Trophy Signature Homes (referred to henceforth as “Trophy”). GRBK has identified that Trophy represents a significant position in how they will look to achieve these tremendous growth figures for years to come, as well as CB JENI, their townhome brand product.
I won't get into too many of the specifics surrounding the various geographies that GRBK's brands are based in, but I will narrow into the Dallas Forth Worth (DFW) market. DFW is where Trophy and CB JENI developments are primarily located. As you might be aware, DFW is one of the most active real estate markets in the country. Although Big Jim wouldn't provide many details surrounding their expansion plans for the Trophy & CB JENI brands outside of the DFW area, he did comment that they are actively looking at the Denver market for these brands to supplement their existing Denver brand product, Challenger Homes.
I've lost too much money with you rocket scientists on surefire investments - such as one ticker that deals in cow shit - I'll be foregoing the expensive market survey reports from some of the fancy real estate consulting shops and instead will use what is free and accessible - Zonda. The grid below gives a breakout of what Zonda is reporting for a given Metropolitan Statistical Area (MSA) of where they're seeing the highest number of housing build starts reported in 2Q 2021. This is great for GRBK since their two biggest growth brands are already established in DFW, which is seeing a 29.9% increase!
iii. Land Lots & Supply
Now, here's where some of you folks with a wrinkle or two might be thinking to yourself, “hey, housing build starts are great metrics and all, but what happens if they run out of primo land to build on?”. If this was you, congratulations because we're going to talk about land lots soon and why they are ridiculously important - not just for GRBK, but for all homebuilders. Which now leads me to my next exhibit, which is not a graph at all but a tweet from Zonda's Chief Economist, Ali Wolf (henceforth referred to as “The Wolf”), who has exemplified great understanding of millennial homebuyers; this is in addition to her already well documented knowledge and experience of residential housing economics (seriously, go check out her credentials). Here' what The Wolf has recently said concerning the importance of land lots and their subsequent availability:
The Wolf goes on to share the following graph with us from Zonda's New Home Land Supply Index (LSI) study. LSI aims to show how specific MSAs are trending regarding available single family vacant lot availability. LSI outputs are adjusted to provide greater weight of figures to vacant lots in MSA subdivisions showing higher building activity. LSI outputs an easy-to-digest scale of measurements based on the following score strata:
· 125 - Significantly Oversupplied
· 115 - 125 - Slightly Oversupplied
· 85 - 115 - Appropriately Supplied
· 75 - 85 - Slightly Undersupplied
· < 75 - Significantly Undersupplied
Now, just focusing in on Dallas since this is where GRBK has stated is their primary development geography, we can see a reported LSI value of 48.2. Based on the above strata, this means that the Dallas MSA is significantly undersupplied. Here's why, for me at least, this plays into my bull case for GRBK. GRBK has spent the better part of the last 16 months building up their lot position. Based on GRBK's recently reported numbers, they're stating they have either ownership or control of approximately 21,000 lots in their entire book. Their current lot catalog represents a 133% increase over the last 12 months, which is huge. Increase in lot size is a strong indicator for future financial growth.
Although GRBK doesn't report out how many of those lots are secured for DFW, we can safely assume that a good bulk of these numbers are allocated for this MSA due to how much of a focus market it is for their growth strategy. GRBK is in a great spot with their lot supply and we can now look to their projections of lot pipeline delivery for the next 6 - 18 months. GRBK plans to be able to deliver to their builders an estimated 1,800 lots within the next 6 months. Moreover, they are projecting they will be able to deliver an estimated 4,600 lots to their builders in 2022.
Next to buyer demand, developed land lots are the single most important thing for builders. GRBK's superior lot size and strict underwriting model is what they see most attributable to their growth results and will continue to play a role in their future growth. I already mentioned that GRBK has a unique internal control system on their debt-to-capital ratios that they don't allow to exceed 35%; they're currently below this threshold although not by much. Additionally, GRBK has a strict underwriting model that they adhere to which targets meeting a 20% un-levered return and exceeding 20% gross margins on transactions. GRBK's operating model also aims for them to maintain these numbers without having to rely solely on passing the expense onto customers. This is a great segue into GRBK's Operating System.
iv. Operating System
It's not uncommon for large homebuilders to have multiple different affiliate builder and subsidiaries that operate underneath them and GRBK is no different. Out of all of the subsidiary and affiliate builders that GRBK either wholly owns or maintains a majority ownership stake, they all utilize GRBK's Operating System (OS). GRBK's OS is focused on the following:
So, what does this all mean? This OS is how GRBK handles and runs their entire business in an efficient and scalable way. GRBK's builders are provided with an IT platform that allows them to easily track and manage their production pipelines from end-to-end. This in turn allows GRBK to collect and analyze real-time business analytics to identify any worrying gaps or trends within the various segments of their business.
For those unfamiliar with Selling, General, and Administrative Expenses (SG&A), it's an important metric for any business. SG&A though becomes more important for businesses that deal in actual physical goods when compared to other businesses. The reason for this is that margin can be more easily affected by external forces. Companies that lower their SG&A can generally expect to see a positive impact to their profit margins as a result. GRBK's OS allows them to monitor their business channels tightly and efficiently to ensure that they are truly reducing SG&A wherever possible. GRBK has successfully reduced their SG&A YoY and is currently reporting an SG&A of 9.1%, or $45K/unit. GRBK projects that they will be able to continue reducing their SG&A and therefore add additional room for higher profit margins per unit.
GRBK has a solid OS which provides me with added confidence that they are managing all ends of their business responsibly and effectively. Additionally, it tells me that should GRBK look to acquire future builders into their portfolio this OS should help them integrate M&A targets more easily and quickly. Lastly, I like their OS because it allows them to actively track and monitor their internal debt-to-capital ratios by providing access to real-time business financial performance.
We'll cover some of the financial performance figures of GRBK in this section. Fair warning, there may be some things in these financial statements that you're unfamiliar with, such as an astounding lack of parentheses around numbers, and that's okay - we're going to talk about it. GRBK has a profitable business and a balance sheet to support this. Let's look at their recent Q2 2021 filing:
To me, this statement is nothing but beautiful. Out of the many great figures reported, their revenue and Earnings Per Share (EPS) are what jump out at me. When comparing this quarter's results to Q2 of 2020, you can see that they increased their total reported revenues by more than 62%. Additionally, they saw their EPS grow by more than 53% when compared to the same period. Outstanding all around and absolutely above board what The Street projected.
In terms of where these revenues are being derived from, GRBK reports that they maintain four prominent revenue streams for their business (in no particular order): homebuilding, mortgage, title, and residential management service operation. I believe it's safe to assume based on their financial statement that homebuilding represents their single largest revenue channel of their entire business. In the next section we'll touch on how they're poised to continue this growth by focusing their efforts on their Trophy & CB JENI product brands.
In summary, nothing personally jumps out to me as being bad or worrisome about their financial statement. I will say both here and in the bear case section, that this level of growth is enormous and should certainly be viewed as a positive but could also prove to trap GRBK to meeting continuously loftier financial results YoY. One thing I will note is that later in their 8-K filing it is shown that GRBK has 100MM shares authorized of their common stock versus a float of roughly half that at 50.7MM.
vi. Growth Focus
GRBK has stated that they're looking to possibly expand into other MSAs but have not publicly identified which MSAs they're currently eyeing except for Denver. It's important to note that GRBK already has a presence in Denver with their Challenger Homes brand; I speculate this statement to mean that they will consider moving other brand offerings into this MSA with a focus on entry level home buyers via their Trophy & CB JENI brands. GRBK reported that their average unit home sale price was approximately $438K in Q2 2021.
Trophy & CB JENI are already established brands in DFW. As noted earlier, we know that GRBK increased their lot size by over 133% in the past 12 months. Taking into consideration their strong lot size position and Zonda's reporting that the DFW MSA is significantly undersupplied for available developed lots is key when contrasting the reported number of new home build starts for this same MSA. My interpretation of this is that GRBK expects to see tremendous, continued growth for the balance of 2021 and into 2022 based on how they have appropriated their lot sizing and development pipeline. I find additional confidence in my thesis knowing that a large portion of GRBK's lot positions will be allocated to support the Trophy & CB JENI brands that cater to the entry level buyer group with an average purchase price below GRBK's reported $438K average unit sale price.
Looking back to GRBK's investor day presentation, it was reported that their Trophy brand of homes represented their largest portion of sales YTD. This is great news especially when considering that Trophy is one of GRBK's highest margin brands. Let's look at the following exhibit which supports this position:
Per the above, you can see that the majority of GRBK's lot position is indeed allocated to support the Trophy brand in the DFW area. Moreover, when comparing their YTD units started being lower than their other brands but showing a higher allocation of total lots controlled for the same period makes me believe that they're truly focusing in on driving growth at the entry level buyer segment and have big plans for the remainder of 2021. Unfortunately, GRBK didn't provide as much information regarding their plans for the CB JENI brand outside of comments made by GRBK's leadership team, and the President of CB JENI, that they would indeed be focusing on this brand as well. Lastly, look at the financial growth results produced by Trophy:
The key takeaway here is how GRBK has managed to so efficiently manage their Trophy brands product to secure such incredible results on its financial growth. Lowered SG&A will lead to higher margins and GRBK has already stated that their OS is how they hope to continue improving upon lowering their SG&A. Another interesting thing to comment on about Trophy is how GRBK has led with some market innovation by using pre-manufactured roofing trusses and pre-built wall panels. These strategies have allowed the Trophy brands to better control construction materials costs and decrease their skilled labor needs. Lastly, they're able to increase their build cycle timelines by having these pre-manufactured and pre-built materials included as part of their home construction.
Overall, I think GRBK has a great strategy in place for their Trophy & CB JENI brands and will ultimately continue to see popularity amongst entry level homebuyers. One thing I will note is that we cannot turn a blind eye to the global supply chain disruptions that are plaguing the market end-to-end and as a result of GRBK using pre-manufactured and pre-built construction materials in their homes could open them to susceptible project overages if they must pivot to more conventional methods during the construction process; this would most likely create a negative impact to their brand SG&A and profit margins.
Make no mistake, there is plenty of competition in this sector. When comparing GRBK to their competition you will find that they're generally a smaller player in this sector in terms of market cap. For comparison, Lennar (LEN) maintains a market cap of ~$33.5BN vs. GRBK's market cap of $1.35BN. However, of all the competitors there really are only two that have a similar market cap, float, and P/E to GRBK. Those competitors are Tri Point Homes (TPH) and Taylor Morrison (TMHC). Other tickers for this sector include: KBH, NVR, MHO, CCS, MDC, DHI, PHM, and LGIH.
I have not spent nearly as much time researching GRBK's competitors, however a review of their overall performance seems to show that the sector in general is doing very well. I think there are some other sympathetic trading plays here to be made that apply to GRBK's competition, too. If you're interested in GRBK I think it would be worth the time to investigate some of these other tickers for investment consideration, too. Lastly, I'll comment that you should look at XHB, which is the S&P homebuilder ETF.
viii. Bear Case
The primary concern that I have for not just GRBK alone, but this sector, is maintain buyer demand. Without buyer demand high there is little opportunity for GRBK to continue posting these record profits. Personally, I got interested in this space after having gone through the process of trying to buy a home myself and subsequently being priced out of where I hoped to buy. My response to this was to simply to just “wait and see” how the market responds. I'll admit that I'm beginning to think my decision was a mistake based on what I've researched.
Another consideration to make is existing unit backlogs. GRBK reported a backlog of 1,876 at an average unit price of $519K for Q2 2021. By GRBK's own admission, they are closely monitoring their backlog inventories but are not yet concerned of driving down these supply figures. There are two concerns here I recognize: if buyer demand drops off the backlog and spec home units will pile up and create a negative impact to GRBK's bottom life and capital efficiencies. I will be closely watching GRBK's backlog numbers reported for Q3 2021.
Mortgage rates right now are at historic lows but are starting to creep up ever so slightly. Low interest rates can offset some of the financial cost associated with purchasing a more expensive home - you're robbing Peter (mortgage company) with a lower interest rate, to pay Paul (GRBK, other builders) for their higher priced products. The concern here is that if cost does not equally level out when interest rates eventually increase, then you can no longer expect to be able to rob Peter to pay Paul, which would effectively price more people out of the market. Again, it's going to be critical to see what happens with the Trophy & CB JENI brand lines of GRBK since they'll be focusing on the cheaper entry level buyer space.
Lot availability is a concern. I've already pointed out how The Wolf has stated that homebuilder success is directly attributable to their lot positions. If GRBK is not able to continue to manage their lot pipeline to pace accordingly with their building timelines and schedules for the upcoming years, then they will face problems with meeting their high growth projections. Watching the overall progression of available lots for the MSAs that GRBK operates in, and their subsequent lot acquisition pricing will be huge to gauge whether they can keep up this performance.
I'm sure there are other bear cases to be made, however this is what I've come up with now. Please feel free to add and comment with your own takes and considerations. Overall, I feel as though the bull cases still outweigh the bear cases to be made for this ticker.
iv. Technical Analysis
For those of you who place a considerable amount of weight to TA, then you can thank u/Fox_Technicals for reviewing this. I'm going to do my best to interpret what I see, however I'll let u/Fox_Technicals chime in with any additional comments or observations they would like to make in the form of edits and updates to the post. We'll start looking at the following:
This chart is looking to show us that GRBK may be on its way towards a breakout from the 2X.XX something share price it's been trading at for so long. I'd also comment here that following their recent Q2 2021 earnings that most Analysts are maintaining price targets that range from the low to mid 30s; one such example is B. Riley raised their original PT of $35/share to $37/share on 8/05/21. This also shows that the lower trend could target somewhere in the 24s. Also, it's important to note the comparison to XHB and that GRBK's RSI is improving against XHB. Earlier I mentioned LEN as a competitor to GRBK, so let's look at LEN:
Looking at this chart, u/Fox_Technicals is showing that LEN also appears to be on a breakout trend upwards. Now, admittedly I'm not as familiar with LEN's business as I am with GRBK but based on what little review I've done they also seem to be doing extremely well as far as financial results are concerned. I'll let u/Fox_Technicals provide any additional commentary on this ticker that they've identified. Next, we'll look at XHB:
Looking back to the initial chart of GRBK, and then comparing it to XHB, you'll recall that GRBK's RSI was increasing against homebuilders (XHB). Well, when you look at this chart and compare XHB against SPY you can see there are higher highs being made against SPY. This action could signal that we're looking at a potential breakout for leading the market
As mentioned in the initial, TL;DR, I think the primary play here is with shares. However, there is a way to play this with options as well, but we need to be clear on the risks as such. Fortunately, this section should be brief in contrast to the rest of this submission, but there really isn't much strategy surrounding what I think is best or “safest” with respect to this stock and that's holding shares. Truly, just buy shares and hold and I think you will see a great return especially around their Q3 2021 earnings call.
Now, about options there is a way to play this if you're okay with the risk. Couple of things you need to know is that overall GRBK doesn't have much volume in their average daily shares traded. Currently their three-month average daily volume is only 433K shares/day against a float of approximately 50.77MM shares. Additionally, you must recognize that GRBK's options are extremely illiquid. The bid/ask spreads are tremendously wide, and you will run the risk of getting hammered on bad fills (or plainly just not getting filled at all).
That's not a lot of daily movement and as a result the IV for their option chain is low - only currently showing ~48%. So, if you're interested, you could look at picking up OTM calls for September & November expiries to try and possibly benefit from increased performance in this sector over the coming weeks/months and make your gains from any increases in IV accordingly. Personally, I do not think this is a good idea and is well outside of my risk profile but I'm sure for some of you this is right what you're looking for.
Now, the safer options play would be to target ITM options with a delta value of ≥.70 for expiries beginning in September at the earliest. If you can afford these calls, you would be able to (more or less) establish for yourself a synthetic long position without needing to hold shares. The caveat to this is that you're going to benefit less from things such as IV expansion as the delta values of your calls become closer to a value of 1.0. The strategy here is to ride the calls for as long as you probably would if you were instead holding shares. Again, I still think shares are the better play, but you do what's best for you.
xi. Conclusion & Disclaimer
I am not a financial advisor. I have made tremendously questionable investment decisions during my short time spent here on WSB. As a result, please do your own research. Please review what I've written and check into it for yourself. Essentially do not blindly take my word for anything and instead do a bit of legwork and figure out if you think you see the value in this ticker (hell, or even sector) like I do. These statements and writings are nothing more than my opinion and should not be interpreted as professional and legitimate financial or investment advice.
That now being out the way, I do believe in GRBK's growth strategy and overall business model. I think that GRBK is an affordable, value play in this sector that will only look to see increased coverage in months to come. I also think that GRBK is uniquely positioned above their competition to be successful in how they manage their affiliate and subsidiary builders. Also, I'm quite pleased to see how GRBK was head of the curve in their decision to accumulate immense lot ownership to fuel their continued growth objectives. Lastly, GRBK's CEO and co-founder, Big Jim, has a great approach to manage debt-to-capital in a way that has successfully proven that you don't need to lever yourself to the tits to secure great profit results.
Currently I only maintain active positions in GRBK. My positions are solely in call options. Let me explain why that is. I've currently been holding 2x 8/20 25c since this past April to speculate on this stock before entering a long position. My intent was to see the share price rise to ~$27 sometime in June and then at that point make the decision to either cut away and STC my calls or exercise. I never hit my PT and therefore will most likely look to roll my calls to November OPEX or flat out exercise next Friday. I also picked up some lottery tickets this week when the rally began on Monday at 3x $30 strike - these calls are not doing great as you can imagine for all the reasons I mentioned above. Lastly, I have a single call for September OPEX at the $30 strike. Here is a snapshot of my positions: