201 9
ANNUAL REPORT
IMPORTANT INFORMATION
Trophy Signature Homes, Edgestone at Legacy
Frisco, TX
This annual report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements concern expectations, beliefs,
projections, plans and strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts, and they are subject to risks, uncertainties
and other important factors. See the section entitled “Forward-Looking Statements” on
page 50 of this annual report for more information.
This annual report also contains certain non-GAAP financial measures as defined by the
Securities and Exchange Commission, including pre-tax return on average invested capital,
compounded annual growth of pre-tax earnings, and certain GAAP measures adjusted
for the impact of the Tax Act. For more information on why we use these measures and
for a reconciliation of these measures to their most comparable GAAP measures, see the
section entitled “Appendix & Non-GAAP Reconciliation” on page 28 of this annual report.
CONTACTS
Green Brick Partners
Investor Relations
Anthony England, CPA
Manager of Financial Analysis
aengland@greenbrickpartners.com
Mailing Address
2805 Dallas Pkwy Suite 400
Plano, TX 75093
Audit, RSM US LLP
Mailing Address
13155 Noel Road Suite 2200
Dallas, TX 75240
Transfer Agent, Broadridge Financial Solutions
Mailing Address
51 Mercedes Way
Edgewood, NY 11717
2
Media Relations
Shalott Cecchini
Marketing Manager
scecchini@greenbrickpartners.com
Website
www.greenbrickpartners.com
Website
www.rsmus.com
Website
www.broadridge.com
TABLE OF CONTENTS
4
6
10
12
14
Letter from the CEO
and Chairman
Financial highlights
Company culture &
values
Land development
Our brands
24
28
30
32
20 Quarter financial
summary
Appendix & non-GAAP
reconciliation
Board of Directors
Operating results &
Form 10K
Centre Living Homes, Winnetka Estates & Bungalows
Dallas, TX
3
TO OUR SHAREHOLDERS
2019 represented another significant year for Green Brick Partners, Inc. and
our subsidiary Team Builders. This past year our award-winning homes and
neighborhoods, eight Team Builder brands, and financial service operations
produced record revenues of $759.8M up 31.3% from the prior year, record
pre-tax income of $78.4M up 14.3% from the prior year, and record earnings
per share of $1.16 up 13.7% from the prior year.
Building a better HOME
Though each of our Team Builders is locally branded, managed, and unique
in the locations, architecture, and price-point of homes they build, all of our
Team Builders are united by Green Brick Partners’ common set of values we
call HOME. Our Team Builders are expected to uphold our values of Honesty,
Objectivity, Maturity, and Efficiency in everything they do.
Fortune Magazine recognized our significant growth by awarding us a top 100
rank in their list of 100 fastest growing companies in the world. Where many
would see this as a reason for pause and celebration, this public acknowledgment
of our success inspires us to work even harder, smarter, and more efficiently.
Despite times of uncertainty due to COVID-19, we entered 2020 with a record
backlog of $346.8M as of 12.31.2019, up 31.2% over the prior year, and record
sales in January and February 2020, which we believe has positioned us for
continued success.
Risk and Capital Discipline
We strive to balance high growth with low risk. Our 31.3% debt to capital ratio
makes us one of the least leveraged balance sheets of any public builder.
The credit markets have noticed. In August, we obtained an unsecured $75
million, seven-year term loan at a 4.00% interest rate; a rate only slightly higher
than the long-term rates paid by the lower-leveraged large-cap builders, and
more attractive than the long-term rates paid by all small-cap and all mid-cap
builders at the time of placement in August 2019.
This transaction represented another positive step in Green Brick Partners’ long-
term balance sheet strategy by laddering debt maturities, locking in long- term
borrowings at attractive rates, enabling us to have additional financial flexibility,
and partnering with a world-class organization in Prudential Private Capital.
Low cost debt enables us to retain more profits to fund even faster future
growth. We are striving to deliver the best risk-adjusted returns in the industry.
Subsidiary Team Builders
Each of our Team Builders holds a strategic and market niche advantage in
its local market. During the year, we continued to significantly enhance the
operating capabilities and efficiency in each of our eight brands.
In 2019, we entered the first-time and value proposition home buyer market with
Trophy Signature Homes in Dallas and Fort Worth. We believe that expanding
into high-demand markets will strategically position Trophy Signature Homes
for accelerated growth off a low base.
4
For more information on HOME, we encourage you to review our chapter on
company culture and values found later in this book.
Conclusion
As we approach $1 billion in annual revenue, we are confident our shareholders
should continue to see the benefits of the synergistic integration of our culture
with operating scale.
Thank you for being a shareholder, stakeholder, and for your interest in Green
Brick Partners. We look forward to keeping you updated on our developments
in the coming years and appreciate your support.
James R. Brickman
CEO and Co-Founder
Green Brick Partners
David Einhorn
Chairman and Co-Founder
Green Brick Partners
GHO Homes, Venezia Estates
Vero Beach, FL
OUR BRANDS
Team Builder
Market
The Providence
Group of Georgia
Atlanta, GA
Products
Offered
Price Range
Townhomes
Condominiums
Single Family
$320k - $690k
$380k - $580k
$340k - $1.01M
CB JENI Homes
Dallas, TX
Townhomes
$230k - $480k
Normandy Homes
Dallas, TX
Single Family
$330k - $760k
Southgate Homes
Dallas, TX
Luxury Homes
$500k - $1.06M
GHO Homes
Vero Beach, FL
Treasure Coast, FL
Single Family
Patio Homes
$250k - $750k
$200k - $400k
Centre Living
Homes
Dallas, TX
Townhomes
Single Family
$340k - $550k
$390k - $850k
Trophy Signature
Homes
Dallas, TX
Single Family
$240k - $560k
Challenger Homes*
Colorado
Springs, CO
Townhomes
Patio Homes
Single Family
$240k - $310k
$315k - $385k
$225k - $600k
* 49.9% ownership with contractual pathway to control
5
FINANCIAL HIGHLIGHTS
$1.16
$1.02
4,734
5,189
6,219
8,976
8,078
$791.7
$623.6
$458.3
$391.0
$298.8
$0.68
$0.49
$0.38
2015
2016
2017(1)*
2018
2019
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Basic EPS
Lots Owned & Controlled
Total Revenues
(in millions)
* 2017 Basic EPS has been normalized to adjust for the impact of the Tax Act. See appendix.
CB JENI Homes, Apple’s Crossing
Fairview, TX
6
$78.4
$68.6
$53.9
$39.0
$24.4
95
76
50
55
43
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Pre-Tax Income Attributable to GRBK
(in millions)
Active Selling Communities
Southgate Homes, Brockdale Estates
Lucas, TX
GREEN BRICK
AT A GLANCE
$791.7M
2019 company revenue of
$791.7 million
(+72.8% over 2017)
$78.4M
2019 pre-tax
income of $78.4M(2)
(+45.5% over 2017)
31.3%
2019 debt to total
capitalization ratio
33.9%
Compounded Annual
Growth of GRBK
Pre-Tax Earnings(2)
7
HOMEBUYER DIVERSIFICATION
Customer Diversification in Texas, Georgia, and Florida Markets
In addition to managing risk by diversifying the markets where we operate, our diverse homebuyer customer mix has allowed for us to grow even in periods of
more modest growth in specific product types.
In 2019 we continued our diversification efforts by expanding our Age Targeted product to Georgia and Texas, a product previously only offered in Florida. We
further expanded upon this strategy in 2019 through the launch of an entry-level product line with Trophy Signature Homes in Texas.
Our strategy to improve diversification has contributed to a 31% YOY growth in home closings revenue from 2018 to 2019.
2%
13%
39%
46%
73%
growth over
2 years
5%
15%
32%
19%
29%
$435.6m
2017 Home Closings
$752.3m
2019 Home Closings
Suburban townhouse
Single-family second time plus move-up
Single-family first time move-up
Age-targeted
Urban
8
Southgate Homes, Edgewood
Frisco, TX
9
COMPANY CULTURE & VALUES
Mission Statement
Our mission is to expand our business by combining our strong financial resources
with our Team Builder brands in locations across the country who have deep
relationships in the communities where they live and build.
Company Culture
Our business model is founded on the belief that locally-focused land development
is the starting point for a builders’ profitability and that both homebuilding and
land development are best executed on a decentralized basis.
To really succeed, a builder/developer needs a track record of creating award-
winning neighborhoods and decades of building superior local, political, and
subcontractor relationships. Green Brick and our group of controlled builders,
known as Team Builders, have outstanding local relationships in land development
and are recognized by homebuyers and by our industry for our award-winning
neighborhoods and homes.
Our Team Builders have typically worked decades to build their reputations,
establish brand recognition, and cultivate critical realtor and customer
The Providence Group, Idylwilde
Canton, GA
relationships. We work tirelessly to preserve our Team Builders’ unique local
branding and make every effort to retain key employees. These steps help
ensure builder success and increase returns. We differentiate ourselves with low
leverage and a strong capital base which we deploy with discipline. At the same
time, we create value and strengthen our Team Builders through our GRBK-
managed standardized financial and integrated operating system. This system
allows comprehensive real-time visibility to enable our Team Builders to grow
their business with access to state-of-the-art real-time data.
We only seek local partnerships or 100% ownership with Team Builders of
upstanding character who operate with the highest integrity. Notably, these
Team Builders share Green Brick’s values and take the “long view” in seeking
to maximize economic returns. We make a point not to run our business like
our public peers, where success is measured by quarterly GAAP results that
can distort the true value and economic results of the business. We believe
this often causes issues including huge employee turnover at the division level,
lower customer satisfaction, and lower realized returns in the long run. Much of
our success can be attributed to this “long view” approach.
10
Core Values
Our core values guide our business and are
instrumental in building a better HOME.
While each of our Team Builders are locally
branded, managed, and unique
in their
locations, architecture, and price point of
homes they build, all our Team Builders are
united by Green Brick Partners’ common set
of values we call HOME.
Honesty: Honesty and integrity are the
foundation of any lasting business, and
we strive each day to treat our customers,
employees, and shareholders as we would
like to be treated.
Objectivity: Objectivity drives our business
practices, and our decisions are always
made on best practices and market-driven
information available.
Maturity: The emotional intelligence of our
staff is integral to our success. In order to
accomplish our common goals, we must be
solution driven and view every challenge
as an opportunity. Emotionally intelligent
employees see the bigger picture and strive
each day to work collaboratively toward a
shared story of success.
is
the
Efficiency: Efficiency
result of
competent, hard-working people who
perform with a competitive spirit to produce
rapid and consistent results. We continually
evaluate our processes and systems to
ensure that we remain the most efficient in
our industry.
Southgate Homes, NorthGlen
Haslet, TX
11
LAND DEVELOPMENT
The Green Brick Difference
We manage land risk through rigorous local and centralized underwriting and provide our Team Builders centralized state-of-the-art operational support in IT
systems, accounting, operational systems, national purchasing, marketing analytics, and human resource management. However, daily operations and construction
decisions remain in the hands of our Team Builder brands.
Our ultimate goal is to build neighborhoods with timeless, classic architecture interwoven with the latest technological advancements that provide superior long-
term returns for our investors, stakeholders, residents, and cities where we build. Our Team Builders have typically worked decades to build their reputations,
establish brand recognition, and cultivate critical realtor and customer relationships.
The Providence Group, Bellmoore Park
Johns Creek , GA
12
Trophy Signature Homes, Park West
Frisco, TX
13
OUR BRANDS
The Team Builders
The Green Brick Partners Team Builder
network is composed of seven consolidated
homebuilders and one homebuilder with a
49.9% ownership interest.
By preserving our builders’ unique brands and
working hard to retain key employees, we
have been able to ensure builder success and
increase returns.
in product
Though diverse
type and
branding, our Team Builders share a steadfast
commitment to quality construction and
unmatched customer service. Every Team
Builder is required to participate in Eliant, a
leader in customer experience management,
ensuring consistent quality control and happy
homebuyers.
Our Team Builders build in the largest markets
in the country including Dallas, Texas and
Atlanta Georgia, and in some of the fastest
growing markets including Vero Beach, Florida,
the Florida Treasure Coast, and Colorado
Springs, Colorado.
Financial Services
In addition to independently branded Team
Builders, Green Brick Partners retains 100%
ownership in Green Brick Title and 49%
ownership in Green Brick Mortgage.
14
CB JENI Homes, Heritage Creekside
Plano, TX
CB JENI HOMES
About CB JENI Homes
Since 2009, CB JENI Homes has proudly built new
townhomes in premium Dallas-Fort Worth locations for
lifestyle-conscious homebuyers.
CB JENI Homes, now part of the Green Brick Partners
Team Builders, was founded to provide new home
options for an under-served portion of the market:
those looking to buy moderately-sized homes (whether
first-timers or those moving down), with beautiful
architecture, low maintenance, and a level of service
and professionalism that puts them at ease.
Over the last 10 years, CB JENI has grown to become
DFW’s largest townhome builder, both in number of
neighborhoods and homes sold. CB JENI townhomes
lead the way in quality, amassing numerous awards
each year.
The CB JENI Homes leadership team boasts more
than 200 years of combined homebuilding experience,
expertise that is passed along to every individual
customer.
CB JENI Homes is currently selling in 19 communities
across the Dallas-Fort Worth metroplex.
Strategic Advantages
Premier lot position and substantial market share of the
townhome market in Dallas-Fort Worth metroplex.
CB JENI Homes, Apple’s Crossing
Fairview, TX
CB JENI Homes, Heritage Creekside
Plano, TX
CB JENI Homes, Terraces of Las Colinas
Irving, TX
15
THE PROVIDENCE
GROUP OF GEORGIA
About The Providence Group of Georgia
The Providence Group of Georgia has been one of
Atlanta’s most respected names in homebuilding for
decades. The company’s successor joined the Green
Brick Partners family of Team Builders in 2011 and has
continued to build the quality homes that cemented its
hometown legacy. Known for well-crafted new homes
with a personal touch, the company takes pride in
creating places where people can make space for life
and feel right at home.
The Providence Group is considered to be the leading
lifestyle builder in Atlanta, offering a variety of home
styles including single-family homes, townhomes, and
mid-rise condominiums.
From the first road to the last trim detail, The Providence
Group is committed to providing its buyers a best-
in-class experience that has been recognized across
Atlanta through numerous awards.
In 2019, The Providence Group received an astonishing
15 OBIE awards, presented by the Greater Atlanta
Home Builders Association, for their superior designs,
merchandising, and innovative sales centers.
Strategic Advantages
The Providence Group has the ability to entitle, develop,
and build complex infill neighborhoods. Currently, 65%
of their lots are owned. Additionally, in 2020 they
intend to expand their product range by entering the
age-targeted market.
16
The Providence Group, Idylwilde
Canton, GA
The Providence Group, Pratt Stacks
Atlanta, GA
The Providence Group, The Views on Ponce
Atlanta, GA
Southgate Homes, The Grove
Frisco, TX
Southgagte Homes, NorthGlen
Haslet, TX
The Providence Group, The Views on Ponce
Atlanta, GA
Southgate Homes, 5T Ranch
Argyle, TX
SOUTHGATE HOMES
About Southgate Homes
Founded in 2012, award-winning Southgate Homes is
recognized as one of the top luxury production home
builders in the Dallas-Fort Worth metroplex. When
you see a Southgate home, the difference is clear -
the Southgate commitment to design and quality is
represented inside and out in each of their homes.
The builder’s proven formula of setting high standards
for each of the five key home building elements -
desirable communities, unsurpassed architecture and
design, desirable floor plans, stylish home features, and
quality construction - has made them a premier DFW
luxury production home builder.
Much of their success has come from combining
local homebuilding expertise with the strong financial
resources of Green Brick Partners. This unique position
has allowed the builder to maintain nimbleness in
designs while leveraging the financial strength and
superior lot positions across the metroplex that come
from a national, publicly traded parent company.
Southgate’s boutique approach to home building
offers customizable floor plans, authentic architecture,
generous standard home features, and upgrade options
to individualize the look and feel of every home.
Strategic Advantages
Delivering competitive pricing on award-winning semi-
custom homes at value production pricing.
17
CENTRE LIVING
HOMES
About Centre Living Homes
Founded in 2012, Centre Living Homes is a premier
DFW residential urban infill builder dedicated to
quality, solid state-of-the-art construction, excellent
craftsmanship, modern features, and service beyond
the sale.
Their high-density housing developments boast world-
class architecture, the latest in smart home technology,
and rooftop decks with some of Dallas’ most coveted
views of the city.
Much of the builder’s success can be attributed to their
unique modern aesthetic that has resonated strongly
with buyers seeking uncompromising luxury and style
in centrally located neighborhoods.
Since inception, Centre Living Homes has been the
recipient of various Dallas Builders Association McSAM
awards including the 2019 award for Best Architectural
Design, and the 2019 award for Best Design Series for
their Residences at CityLine community.
Strategic Advantages
Skilled in developing lots and building urban, high-
density homes in complex infill communities.
Centre Living Homes, Winnetka Estates & Bungalows
Dallas, TX
Centre Living Homes, Swiss Avenue Crossing
Dallas, TX
Centre Living Homes, Residences at CityLine
Richardson, TX
18
Trophy Signature Homes, Ventana
Fort Worth, TX
Centre Living Homes, Swiss Avenue Crossing
Dallas, TX
TROPHY SIGNATURE
HOMES
About Trophy Signature Homes
Trophy Signature Homes was founded in 2018 to serve
the Dallas-Fort Worth market’s ever-growing need for
quality, affordable homes. Every Trophy Signature Home
offers a unique blend of functionality, design, and value.
This translates into thoughtfully designed communities,
state-of-the-art technology, and contemporary floor
plans and designs at affordable prices.
Despite being Green Brick Partners’ newest addition to
its Team Builder network, in its first year of inception
Trophy Signature Homes developed 11 product lines,
started six models, and, by the end of their first year,
was actively selling in 10 communities across DFW.
The builder currently owns or controls nearly 3,000 lots
in Dallas and Fort Worth.
Trophy Signature Homes offers unique designs with
entry level homes priced as low as $240,000 to more
luxurious first time move up products currently priced
in excess of $550,000.
Strategic Advantages
Offering a wide range of products fit for first time and
move up buyers. Skilled in constructing value-oriented
homes with a streamlined process.
Trophy Signature Homes, Hollyhock
Frisco, TX
Trophy Signature Homes, Ventana
Fort Worth, TX
Trophy Signature Homes, Edgestone at Legacy
Frisco, TX
19
NORMANDY HOMES
About Normandy Homes
Normandy Homes has been acknowledged through
numerous awards as one of Dallas’ leading single family
boutique home builders. Each Normandy home is
crafted with the discerning homebuyer in mind, offering
upscale homes with finely-crafted architecture, stylish
finishes, and superior construction.
In 2019 Normandy Homes expanded their product line
with the introduction of their Legends Series of homes,
an age-restricted product currently offered in Allen,
Texas. The one and two-story collection of homes was
designed for the active-adult community in mind with
an emphasis on low maintenance living, sleek designs,
and energy efficiency.
Upon completion, the age-restricted community will
boast 200 homes and a variety of resort-style amenities
including pickleball courts and a fitness studio along
with a multitude of classes and events led by the onsite
lifestyle director.
Strategic Advantages
Unbeatable lot position and value in some of Dallas-
Fort Worth’s most desirable neighborhoods.
Normandy Homes, Apple’s Crossing
Fairview, TX
20
Normandy Homes, Villas at Southgate
Flower Mound, TX
Normandy Homes, Viridian
Arlington, TX
GHO Homes, Summer Lake North
Vero Beach, FL
GHO Homes, Venezia Estates
Vero Beach, FL
GHO Homes, Orchid Cove
Vero Beach, FL
GHO HOMES
About GHO Homes
GHO Homes proudly boasts a distinctive and diverse
floor plan collection that has consistently won awards
and accolades over three decades for townhome,
single-family, and custom estate home design.
In April of 2018, Green Brick Partners acquired the
assets of GHO homes and continued the GHO tradition
in a newly formed GHO LLC. As with all other Green
Brick Team Builders, the company infrastructure and
building production style that have made GHO so
successful remained in place during the transition.
GHO Homes has continued to raise the bar through the
creation of the GHO Tailor-Made program. This program
sets GHO apart from it’s competitors by allowing home
buyers to customize their homes with numerous plan
options, built-ins, and upgrades that exceed industry
standards and result in custom, one-of-a-kind homes at
an outstanding value.
This program has proven to be a resounding success
with buyers choosing to purchase a GHO home in large
part due to the flexibility of their plan options.
Strategic Advantages
Offering a large array of customizable plans that cater
to move-down and active adult buyers.
21
CHALLENGER HOMES
About Challenger Homes
Over the last 20 years, Challenger Homes has grown
from just one home site into one of Colorado’s most
trusted new home builders. Thanks to strong core values
and an unwavering commitment to their homebuyers,
associates, trade partners, and communities, the
company strives to be Making Lives Better for decades
to come.
Challenger Homes joined the Green Brick Partners
Team Builder family in 2017. During the acquisition,
Green Brick issued 1,497,000 new shares and, through
a wholly owned subsidiary, acquired a 49.9% ownership
of Challenger Homes through an investment in a newly
formed entity, GB Challenger, LLC.
Strategic Advantages
Located in Colorado Springs, one of Forbes’ “10 Hottest
Real Estate Markets to Watch”, Challenger Homes is
skilled in building value-rich homes catering to first-
time buyers, move-up buyers, and military families.
Due to overwhelming success, Challenger Homes has
announced an expansion into the Denver area.
22
Challenger Homes, Branding Iron at Sterling Ranch
Colorado Springs, CO
Challenger Homes, Branding Iron at Sterling Ranch
Colorado Springs, CO
Challenger Homes, Revel @ Wolf Ranch
Colorado Springs, CO
CB JENI Homes, Vista Del Lago
Lewisville, TX
Challenger Homes, Revel @ Wolf Ranch
Colorado Springs, CO
GREEN BRICK
MORTGAGE
About Green Brick Mortgage*
Much like our Team Builders have a reputation of delivering
beautifully designed homes and unparalleled customer service,
Green Brick Mortgage delivers the same level of excellence by
providing our buyers with best-in-class home financing services
and expertise.
The company offers the powerful tools, resources, and advice our
buyers need for the best home buying experience possible. Our
homebuyers are currently able to finance their homes through
Green Brick Mortgage’s preferred lender referral program in Dallas,
Texas and Atlanta, Georgia.
GREEN BRICK TITLE
About Green Brick Title
Green Brick Title provides outstanding depth of experience to the
residential and commercial real estate industry in four locations
across the country. In addition to partnering with our Team Builders
to help new homeowners quickly and efficiently close on their new
homes, Green Brick Title works closely with realtors, banks, land
brokers, builders, developers, and mortgage companies.
As part of the Green Brick Partners family, Green Brick Title’s
access to resources beyond those of a traditional title company
enables us to always stay one step ahead of our competition.
*Green Brick Partners owns a 49% equity interest in Green Brick Mortgage LLC.
23
GRBK 20 QUARTER FINANCIAL SUMMARY (4)
Summary Consolidated Statement of Income Data for Quarter Ended
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
Total revenues
$230,122
$209,404
$183,506
$168,628
Net income attributable to Green Brick Partners, Inc.
Income tax provision attributable to Green Brick Partners, Inc.
Pre-tax income attributable to Green Brick Partners, Inc.(2)
Basic EPS
Basic weighted-average number of shares outstanding
15,920
4,959
20,879
$0.32
50,429
15,671
5,743
21,414
$0.31
50,475
14,460
5,216
19,676
$0.29
50,655
12,605
3,794
16,399
$0.25
50,563
Summary Consolidated Balance Sheet Data as of
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
Inventory
Total assets
Borrowings on lines of credit, net
Senior unsecured notes, net
Notes payable
Term loan facility
Total debt
Total liabilities
Total Green Brick Partners, Inc. stockholders’ equity
Noncontrolling interests
Total equity
Number of shares outstanding
Book value per share
Total invested capital
Pre-tax return on average invested capital (3)
Home Data for Quarter Ended
New homes delivered
Net new home orders
Home Data as of
Backlog, units
Backlog, $ in millions
Units under construction
Active communities as of
Lots owned
Lots controlled
Lots owned and controlled
24
$753,567
$740,799
875,539
164,642
73,406
238,048
325,533
523,168
13,227
536,395
50,488
761,216
11.0%
865,789
164,792
73,358
-
238,150
337,087
508,715
7,778
516,493
50,488
746,865
10.6%
$719,878
832,961
232,657
-
-
232,657
321,809
493,470
5,173
498,643
50,696
726,127
10.5%
$690,817
793,020
206,522
-
-
206,522
297,068
480,869
4,788
485,657
50,676
687,391
11.2%
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
514
590
443
436
394
453
368
444
December 31, 2019
September 30, 2019
June 30, 2019
March 31, 2019
786
$346.8
1,297
95
6,419
2,557
8,976
710
$319.7
1,306
85
6,414
2,855
9,269
717
$331.3
1,214
75
6,127
3,050
9,177
658
$307.5
1,170
79
6,186
2,308
8,494
December 31, 2018 September 30, 2018
June 30, 2018
March 31, 2018 December 31, 2017 September 30, 2017
June 30, 2017
March 31, 2017
$185,120
$152,052
$157,312
$129,163
$137,424
$114,342
$105,750
$100,734
13,354
3,754
17,108
$0.26
50,678
12,197
4,746
16,943
$0.24
50,686
14,869
5,149
20,018
$0.29
50,664
11,203
3,335
14,538
$0.22
50,577
10,805
6,356
17,161
$0.21
50,555
9,280
5,336
14,616
$0.19
49,808
7,689
4,349
12,038
$0.16
49,047
6,197
3,855
10,052
$0.13
48,958
December 31, 2018 September 30, 2018
June 30, 2018
March 31, 2018 December 31, 2017 September 30, 2017
June 30, 2017
March 31, 2017
$668,961
$648,241
$581,368
$528,881
$496,054
$478,616
$434,938
$406,519
784,026
200,386
-
-
200,386
289,863
468,351
17,281
485,632
50,583
668,737
11.4%
771,016
198,965
-
1,045
200,010
292,981
455,686
14,508
470,194
50,720
655,696
11.6%
705,049
166,395
-
1,205
167,600
242,845
443,324
12,208
455,532
50,720
610,924
12.1%
641,944
133,752
-
9,914
143,666
202,876
428,386
10,682
439,068
50,686
572,052
11.3%
611,003
105,773
-
9,926
115,699
177,965
416,347
16,691
433,038
50,959
532,046
10.8%
605,510
94,002
-
10,204
104,206
167,265
424,214
14,031
438,245
50,585
528,420
10.1%
553,616
73,293
-
10,213
83,506
142,165
399,944
11,507
411,451
49,108
483,450
9.9%
532,681
61,716
-
10,223
71,939
126,152
392,096
14,433
406,529
49,070
464,035
9.9%
December 31, 2018 September 30, 2018
June 30, 2018
March 31, 2018 December 31, 2017 September 30, 2017
June 30, 2017
March 31, 2017
382
279
312
297
327
387
267
434
292
265
235
241
237
270
226
287
December 31, 2018 September 30, 2018
June 30, 2018
March 31, 2018 December 31, 2017 September 30, 2017
June 30, 2017
March 31, 2017
582
$264.3
1,127
76
6,235
1,843
8,078
685
$309.0
1,113
75
5,429
2,672
8,101
700
$314.2
988
69
5,248
2,402
7,650
477
$226.5
760
54
4,816
1,502
6,318
310
$151.5
736
55
4,495
1,724
6,219
337
$164.6
715
56
4,624
1,073
5,697
331
$165.2
714
54
4,283
1,111
5,394
298
$145.2
625
52
4,039
917
4,956
25
GRBK 20 QUARTER FINANCIAL SUMMARY (4)
Summary Consolidated Statement of Income Data for Quarter Ended
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
Total revenues
$122,004
$94,032
$103,394
$71,556
Net income attributable to Green Brick Partners, Inc.
Income tax provision attributable to Green Brick Partners, Inc.
Pre-tax income attributable to Green Brick Partners, Inc. (2)
Basic EPS
Basic weighted-average number of shares outstanding
7,676
6,001
13,677
$0.16
48,910
6,243
3,624
9,867
$0.13
48,899
$6,743
4,213
10,956
$0.14
48,894
3,094
1,423
4,517
$0.06
48,814
Summary Consolidated Balance Sheet Data as of
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
Inventory
Total assets
Borrowings on lines of credit, net
Senior unsecured notes, net
Notes payable
Term loan facility
Total debt
Total liabilities
Total Green Brick Partners, Inc. stockholders’ equity
Noncontrolling interests
Total equity
Number of shares outstanding
Book value per share
Total invested capital
Pre-tax return on average invested capital (3)
Home Data for Quarter Ended
New homes delivered
Net new home orders
Home Data as of
Backlog, units
Backlog, $ in millions
Units under construction
Active communities as of
Lots owned
Lots controlled
Lots owned and controlled
26
$410,662
540,196
74,212
-
10,948
85,160
138,711
384,572
16,913
401,485
48,956
469,732
8.8%
$418,356
553,399
80,785
-
9,713
90,498
164,700
376,592
12,107
388,699
48,937
467,090
7.8%
$384,742
$505,260
$62,874
-
9,000
71,874
122,601
370,206
12453
382,659
48,937
442,080
6.9%
$378,956
504,861
66,833
-
9,988
-
76,821
127,543
362,871
14,447
377,318
48,833
439,692
5.7%
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
275
197
196
204
212
239
161
240
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
237
$108.0
564
50
4,235
954
5,189
315
$138.7
665
49
4,199
870
5,069
307
$140.3
660
48
3,743
744
4,487
280
$129.2
541
44
3,736
936
4,672
December 31, 2015 September 30, 2015
June 30, 2015
March 31, 2015
$88,789
$77,797
$72,988
$59,227
4,693
2,915
7,608
$0.10
48,802
2,826
1,832
4,658
$0.06
48,495
3,788
2,127
5,915
$0.12
31,346
4,018
2,184
6,202
$0.13
31,346
December 31, 2015 September 30, 2015
June 30, 2015
March 31, 2015
$346,100
$319,098
$301,527
$289,852
473,074
46,698
-
10,158
-
56,856
101,219
359,532
12,323
371,855
48,833
439,745
13,575
-
11,458
-
25,033
75,705
352,791
11,249
364,040
48,814
417,728
20,108
-
11,822
149,992
181,922
225,329
179,860
12,539
192,399
31,369
408,589
19,087
-
10,750
149,979
179,816
220,976
175,959
11,654
187,613
31,346
416,388
377,824
361,782
355,775
December 31, 2015 September 30, 2015
June 30, 2015
March 31, 2015
194
160
154
140
162
169
145
186
December 31, 2015 September 30, 2015
June 30, 2015
March 31, 2015
201
$88.1
507
43
3,650
1,084
4,734
235
$98.3
543
42
2,889
1,232
4,121
249
$102.4
522
43
3,529
1,136
4,665
242
$92.8
517
37
3,124
752
3,876
Trophy Signature Homes, Park West
Frisco, TX
27
APPENDIX & NON-GAAP RECONCILIATION
Reconciliation of Non-GAAP Measures
In this annual report, we utilize certain financial measures that are non-GAAP financial measures as defined by the Securities and Exchange Commission in addition
to certain operational metrics. We present these measures because we believe they and similar measures are useful to management and investors in evaluating the
Company’s operating performance and financing structure. We also believe these measures facilitate the comparison of our operating performance and financing
structure with other companies in our industry. Because these measures are not calculated in accordance with Generally Accepted Accounting Principles (“GAAP”), they
may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial
measures prepared in accordance with GAAP.
(1) As a result of the comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), enacted by the U.S. government on December 22,
2017, the Company remeasured its deferred tax asset which resulted in additional tax expense of $19.0 million during the three months ended December 31, 2017. Due
to the effects of the Tax Act, the net (loss) income attributable to Green Brick for the three months ended December 31, 2017 and for the year ended December 31, 2017
is not comparable to the other periods presented in this report. As such, certain annual and quarterly amounts shown in this report have been adjusted to a “Normalized”
non-GAAP amount as shown below.
For the quarter ended 12.31.2017
Income Before Taxes
Income Tax Expense Attributable to Noncontrolling Interest
Income Tax Expense Attributable to Green Brick
Income Tax Provision
Net (loss) income
Less: net income attributable to noncontrolling interests
Net (loss) income attributable to Green Brick Partners, Inc.
Weighted average commons shares outstanding
Basic earnings per share
For the year ended 12.31.2017:
Income Before Taxes
Income Tax Expense Attributable to Noncontrolling Interest
Income Tax Expense Attributable to Green Brick
Income Tax Provision
Net (loss) income
Less: net income attributable to noncontrolling interests
Net (loss) income attributable to Green Brick Partners, Inc.
Weighted average commons shares outstanding
Basic earnings per share
Weighted average commons shares outstanding
Basic earnings per share
28
Per GAAP Financials
Adjustment
"Normalized" Non-GAAP Amount Presented
$21,017
(40)
(25,356)
(25,396)
(4,379)
(3,816)
(8,195)
50,555
$(0.16)
$-
-
19,000
19,000
19,000
-
19,000
50,555
$0.38
$21,017
(40)
(6,356)
(6,396)
14,621
(3,816)
10,805
50,555
$0.21
Per GAAP Financials
Adjustment
"Normalized" Non-GAAP Amount Presented
$64,237
(135)
(38,896)
(39,031)
25,206
(10,236)
14,970
49,597
$0.30
$-
-
19,000
19,000
19,000
-
19,000
50,555
$0.38
$64,237
(135)
(19,896)
(20,031)
44,206
(10,236)
33,970
49,597
$0.68
(2) Pre-tax income attributable to Green Brick Partners, Inc. is reconciled by quarter on pages 24 - 27 of this annual report. This measure is calculated by adding Income
tax attributable to Green Brick Partners, Inc. to Net Income attributable to Green Brick Partners, Inc. The compounded annual growth of this figure is shown on page 7 of
this annual report and calculated as follows:
Pre-tax income attributable to Green Brick Partners
Pre-tax income attributable to Green Brick Partners, Inc. for the year ended 12.31.2019
Divided by: Pre-tax income attributable to Green Brick Partners, Inc. for the year ended
12.31.2015
To the Power Of:
One
Divided by: Number of periods less one
Power
Less: one
Compounded Annual Growth Rate
78,368
24,384
3.21
1.00
4.00
0.25
1.34
(1.00)
0.34
(3) Total invested capital and pre-tax return on average invested capital are both Non-GAAP measures. Total invested capital is calculated as the sum of total debt plus total
Green Brick Partners, Inc. stockholders’ equity. Pre-tax return on average invested capital is calculated as the sum of Pre-tax income attributable to Green Brick Partners,
Inc. for the last four quarters divided by the average of the ending invested capital and beginning invested capital for the period included in the calculation.
(4) Certain prior period amounts have been reclassified to conform to the current period presentation; specifically, (i) mechanic’s lien contracts revenue was reclassified
from other income to revenue, (ii) the cost of model home furnishings was reclassified from inventory to fixed assets, (iii) prepaid plans & development costs were
reclassified from other assets to inventory, and (iv) debt balances were presented net of debt issuance costs.
(5) Sales is an operational metric reflecting the number of new homes sold. This metric is not indicative of quarterly or annual revenues, gross margins, or financial results.
CB JENI Homes, Riverset
Garland, Texas
29
BOARD OF DIRECTORS
David Einhorn, Chairman
Mr. Einhorn has been a director of our predecessor company since May
2006. Mr. Einhorn co-founded and has served as the President of Greenlight
Capital, Inc., since January 1996. Funds managed by Greenlight are some
of our principal stockholders. Since July 2004, Mr. Einhorn has served as
Chairman of the Board of Greenlight Capital Re, Ltd. (Nasdaq: GLRE). Mr.
Einhorn received a B.A. in Government from Cornell University.
Harry Brandler
Mr. Brandler previously served as the Chief Financial Officer of Greenlight
Capital, Inc. Prior to joining Greenlight Capital, Inc., he served as Chief
Financial Officer of Wheatley Partners, a venture capital firm, where he
oversaw the firm’s back office operations and restructured the firm’s
marketing, client relations, and technology. From 1996 to 2000, Mr. Brandler
served as a Manager at Goldstein, Golub & Kessler, where he provided audit,
tax, and consulting services to investment partnerships and other financial
organizations and where he was promoted to Manager in 1999. Mr. Brandler
received a B.S. in Accounting from New York University and is admitted as a
Certified Public Accountant.
Kathleen Olsen
Since 2011, Ms. Olsen has been a private investor. From 1999 through
2011, Ms. Olsen served as Chief Financial Officer of Eminence Capital, LLC,
a long/short global equity fund. From 1993 to 1999, Ms. Olsen served as
audit manager specializing in investment partnerships at Anchin, Block &
Anchin LLP, a public accounting firm located in New York City. Ms. Olsen
received a B.S. degree with honors from the State University of New York
at Albany. Ms. Olsen is a Certified Public Accountant, a member of the
American Institute of Certified Public Accountants, and a member of the
New York State Society of Certified Public Accountants.
from 2006 to 2017. He is Chairman of the Board of Anesthesia Associates
of Massachusetts. Previously, he served as a board member and chairman
of Transatlantic Holdings (NYSE: TRH) from 2006 to 2012 and Pomeroy
IT Solutions (NASDAQ: PMRY) from 2007 to 2009. He served as a board
member of the Housing Authority Insurance Group from 2008 to 2015. He
was a founding member of the Board of Governors and the Advisory Board of
the National Pediatric Multiple Sclerosis Center, Stony Brook University and
Medical School, New York. Mr. Press earned a B.A. from Brown University;
and after serving in the US Army, received his M.B.A. from Harvard Business
School.
Elizabeth K. Blake
Before retiring, Ms. Blake served as Senior Vice President — Advocacy,
Government Affairs & General Counsel of Habitat For Humanity International
Inc. from 2006 to 2014. Ms. Blake served on the Board of Patina Oil & Gas
Corporation from 1998 through its sale to Noble Energy in 2005. From
2003 to 2005, Ms. Blake was the Executive Vice President — Corporate
Affairs, General Counsel and Corporate Secretary for US Airways Group,
Inc. She also served as Senior Vice President and General Counsel of Trizec
Properties, Inc., a public real estate investment trust. Ms. Blake served as
Vice President and General Counsel of General Electric Power Systems from
1998 to 2002. From 1996 to 1998, Ms. Blake served as Vice President and
Chief of Staff of Cinergy Corp. From 1982 to 1984, she was an associate
with Frost & Jacobs, a law firm in Cincinnati, Ohio and a partner from 1984
to 1996. From 1977 to 1982, she was with the law firm of Davis Polk &
Wardwell in New York. She is past Chair of the Ohio Board of Regents. Ms.
Blake received a B.A. degree with honors from Smith College and her JD
from Columbia Law School, where she was a Harlan Fiske Stone Scholar. Ms.
Blake was awarded an Honorary Doctorate of Technical Letters by Cincinnati
Technical College and an Honorary Doctorate of Letters from the College of
Mt. St. Joseph.
Richard Press
Before retiring in 2006, Mr. Press was a Senior Vice President at Wellington
Management, where he started and built the firm’s insurance asset
management practice. Prior to that, Mr. Press was a Senior Vice President
of Stein Roe & Farnham from 1982 to 1994 and Scudder Stevens and
Clark from 1964 to 1982. Mr. Press sat on various committees of the
Controlled Risk Insurance Company and the Risk Management Foundation
John R. Farris
Since 2007, Mr. Farris has been the founder and President of Commonwealth
Economics, LLC. Prior to forming Commonwealth Economics, LLC, he
served as Secretary of the Finance and Administration Cabinet for the
Commonwealth of Kentucky. From 2008 to 2012, Mr. Farris served as an
adjunct Professor of Economics and Finance at Centre College in Danville,
Kentucky. Mr. Farris previously worked at the Center for Economics Research
30
at the Research Triangle Institute, the World Bank, and the International
Finance Corporation. He currently sits on the board of directors for
Farmers Capital Bank Corporation (NASDAQ: FFKT). Mr. Farris holds a
B.S. from Centre College and a M.P.A. from Princeton University.
James R. Brickman
Mr. Brickman is responsible for all major investment decisions, capital
allocation, strategic planning, and relationships with Green Brick
Partners builders. He was the founding manager and advisor of each
of JBGL Capital LP, since 2008, and JBGL Builder Finance LLC, since
2010. Prior to forming JBGL, Mr. Brickman was a manager of various
joint ventures and limited partnerships that developed and built low-
and high-rise office buildings, multi-family and condominium homes,
single-family homes, entitled land and provided property management
services. He previously also served as Chairman and CEO of Princeton
Homes Ltd. and Princeton Realty Corporation, which developed land,
constructed custom single-family homes, and managed apartments it
built. Mr. Brickman has over 40 years of experience in nearly all phases of
real estate construction, development, and real estate finance property
management. Mr. Brickman received a B.B.A. and M.B.A degrees from
Southern Methodist University.
COMMITTEE MEMBERS
All Green Brick Partners committee members are independent directors.
Audit Committee
Kathleen Olsen, Committee Chair
John R. Farris and Richard Press
Compensation Committee
Richard Press, Committee Chair
Kathleen Olsen and Elizabeth K. Blake
Governance and Nominating Committee
Elizabeth K. Blake, Committee Chair
Kathleen Olsen and John R. Farris
GHO Homes, Orchid Cove
Vero Beach, FL
31
OPERATING RESULTS & FORM 10-K
Part I
Item 1. Business
Green Brick Partners, Inc. (formerly named BioFuel Energy Corp.) and its
subsidiaries (together, the “Company”, “we”, or “Green Brick”) is a diversified
homebuilding and land development company incorporated under the laws
of the State of Delaware on April 11, 2006.
We acquire and develop land, provide land and construction financing
to our wholly owned and controlled builders (together, “builders”) and
participate in the profits of our builders. Our core markets are in the high
growth U.S. metropolitan areas of Dallas, Texas and Atlanta, Georgia, as
well as the Vero Beach, Florida area. We also own a noncontrolling interest
in a builder in Colorado Springs, Colorado. We are engaged in all aspects
of the homebuilding process, including land acquisition and development,
entitlements, design, construction, title and mortgage services, marketing
and sales and the creation of brand images at our residential neighborhoods
and master planned communities.
We believe we offer higher quality homes with more distinctive designs
and floor plans than those built by our competitors at comparable prices.
Our communities are located in premium locations and we seek to enhance
homebuyer satisfaction by utilizing high-quality materials, offering a broad
range of customization options and building well-crafted homes. We seek
to maximize value over the long term and operate our business to mitigate
risks in the event of a downturn by controlling costs and quickly reacting to
regional and local market trends.
We are a leading lot developer in our markets and believe that our strict
operating discipline provides us with a competitive advantage in seeking
to maximize returns while minimizing risk. We currently own or control
approximately 9,000 home sites in high-growth submarkets throughout the
Dallas and Atlanta metropolitan areas and the Vero Beach, Florida market.
We are strategically positioned to either build new homes on our lots
through our builders or to sell finished lots to third-party homebuilders. We
sell finished lots to our builders or option lots from third-party developers for
our builders’ homebuilding operations and provide them with construction
financing and strategic planning. Our builders provide us with their local
knowledge and relationships.
We support some of our Dallas and Atlanta builders by financing their
purchases of land from us at an unlevered internal rate of return (“IRR”) of
typically 20% or more and by providing construction financing at an interest
rate target of at least 13.85%, subject to changes due to market conditions.
Our income is further enhanced by our equity interest in the profits of our
builders.
In December 2018, EJB River Holdings, LLC joint venture (“EJB River
Holdings”) was formed by The Providence Group of Georgia LLC (“TPG”)
with the purpose to acquire and develop a tract of land in Gwinnett County,
Georgia. In May 2019, East Jones Bridge, LLC, a Georgia limited liability
company (“EJB”) was admitted as a member of EJB River Holdings, which
resulted in TPG and EJB each having a 50% ownership interest in EJB River
Holdings. EJB River Holdings had no activity in the period from its formation
until October 2019. In October 2019, EJB River Holdings received two $5.0
million initial contributions from its two members, TPG and EJB. In December
2019, two additional contributions of $0.3 million were made by TPG and EJB
to EJB River Holdings. The Company determined that the investment in EJB
River Holdings should be treated as an unconsolidated investment under the
equity method of accounting and included in investments in unconsolidated
entities in the Company’s consolidated balance sheets.
Frisco Springs Amenity Center
Frisco, TX
32
Effective November 30, 2019, we, through our wholly owned subsidiary,
SGHDAL LLC (“Southgate”), acquired the remaining membership and voting
interests in our subsidiary, Southgate Homes DFW LLC. As a result, Southgate
became an indirect wholly owned subsidiary of the Company.
Effective December 31, 2019, we, through our wholly owned subsidiary,
CLH20, LLC (“Centre Living”), acquired the remaining membership and voting
interests in our subsidiary, Centre Living Homes, LLC, and we contributed
certain real estate inventory assets to Centre Living. Subsequently, the prior
owner of a portion of the membership and voting interests in Centre Living
Homes, LLC acquired a ten percent membership and voting interest in Centre
Living for $3.6 million. As a result, as of December 31, 2019, Centre Living
was an indirect subsidiary in which the Company owned a ninety percent
membership interest and a ninety percent voting interest.
In December 2019, the Company announced its plans to expand the business
of Trophy Signature Homes, LLC, a wholly owned homebuilding company
(“Trophy”) into Houston, Texas. Trophy was formed in September 2018 and
allowed the Company to expand its business and offer homes at a new price
point within the Dallas-Fort Worth Metroplex market. Trophy began home
sales in the first half of 2019 and has generated revenues of $13.9 million
during the year ended December 31, 2019.
The following table presents general information about our builders, including
the types of homes they build and their price ranges.
Builder
Year
Formed
Market
Products
Offered
Price Range
The Providence Group of
Georgia LLC (“TPG”)
2011
Atlanta Townhomes
Condominiums
Single Family
$320,000 to $690,000
$380,000 to $580,000
$340,000 to $1,010,000
CB JENI Homes DFW LLC
(“CB JENI”)
2012
Dallas
Townhomes
Single Family
$230,000 to $480,000
$330,000 to $760,000
CLH20 LLC
(“Centre Living”)
2012
Dallas
Townhomes
Single Family
$340,000 to $550,000
$390,000 to $850,000
SGHDAL LLC (“Southgate”) 2013
Dallas
Luxury Homes
$500,000 to $1,060,000
GRBK GHO Homes LLC
(“GRBK GHO”)
2018
Vero
Beach
Patio Homes
Single Family
$200,000 to $400,000
$250,000 to $750,000
Trophy Signature Homes
LLC (“Trophy”)
2018
Dallas
Single Family
$240,000 to $560,000
Centre Living Homes, CL @ Lakewood
Dallas, TX
33
Revenues from homebuilding operations accounted for 96%, 94% and 96%
of the Company’s total revenues for the years ended December 31, 2019,
2018, and 2017, respectively. For more information regarding the Company’s
segments, refer to Note 11 to the Consolidated Financial Statements located
in Part II, Item 8 of this Annual Report on Form 10-K and to “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
located in Part II, Item 7 of this Annual Report on Form 10-K.
Our backlog reflects the number and value of homes for which we have
entered into sales contracts with customers but not yet delivered. With the
exception of a normal cancellation rate, we expect all of the backlog as of
December 31, 2019 to be filled during 2020. The following table sets forth
the information about selling communities and backlog of our builders.
Year Ended
December 31, 2019
December 31, 2019
December 31, 2018
Builder
Average Selling
Communities
Selling
Communities
Backlog, Units
Backlog, in
thousands
Selling
Communities
Backlog, Units
TPG
CB JENI
Centre Living
Southgate
GRBK GHO
Trophy
Total
23
25
7
10
16
5
86
19
28
9
11
18
10
95
104
294
14
71
147
156
786
$58,905
115,057
7,696
49,280
56,021
59,869
$346,828
27
21
6
8
14
—
76
146
170
14
55
197
—
582
Backlog in
thousands
$77,563
67,988
7,493
37,873
73,358
—
$264,275
For more information on recent business developments and results of operations, refer to “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” located in Part II, Item 7 of this Annual Report on Form 10-K.
Centre Living Homes, Swiss Ave Crossing
Dallas, TX
34
Business Strategy
We believe we are well-positioned for growth through the disciplined
execution of the following elements of our strategy:
Combine Land Acquisition and Development Expertise with Homebuilding
Operations to Maximize Profitability
Our ability to identify, acquire and develop land in desirable locations and
on favorable terms is critical to our success. We evaluate land opportunities
based on how we expect such opportunities will contribute to overall
profitability and returns, rather than how they might drive volume on a
market basis. We identify attractive properties that are typically located in
prime neighborhood locations. We consider the existing and future supply
of developable land before working to acquire the best-valued properties.
Analysis includes consideration of development costs in addition to land
costs. We have found that the prime quality infill locations have limited supply
competition that may result in smaller value declines in down markets. We
manage and oversee all land development with our in-house staff.
We believe our expertise in land development and planning enables us to
create desirable communities that meet or exceed our target homebuyer’s
expectations, while selling homes at competitive prices. Our strategy of
holding land inventory provides us with a multi-year supply of lots for future
homebuilding while limiting any excess supply that would otherwise be
subject to market cycle risk. We focus on the development of entitled parcels
in communities where we can generally sell all lots and homes within 24 to
60 months from the start of sales. This focus allows us to limit exposure to
land development and market cycle risk while pursuing favorable returns
on our investments. We seek to minimize our exposure to land risk through
disciplined management of entitlements, the use of land and lot options and
other flexible land acquisition arrangements. We are actively involved in
every step of the land entitlement, home design and construction processes
with our builders.
Maximize Benefits of Diversified Homebuilding and Land Development Structure
Our diversified homebuilding and land development structure provides the
flexibility to monetize the value of our land assets either by building and
selling homes through our builders or developing land and selling finished lots
to unaffiliated homebuilders. When evaluating our land assets, we consider
the potential contribution of each asset to our overall performance, taking
into account the timeframe over which we may monetize the asset. While we
currently expect the majority of our land to be utilized by our homebuilders,
we believe our land development and homebuilding strategy provides us
with increased flexibility to seek to maximize risk-adjusted returns as market
conditions warrant.
Increase Long-Term Value by Investing in Infrastructure
In our communities, we typically make enhanced investment in infrastructure,
including landscaping and amenity centers, and enforce higher construction
standards through our builders. We believe this creates greater long-
term value for us and for our builders, homebuyers, shareholders and the
communities in which we build.
Disciplined Investment Approach
We seek to maximize value over the long-term and operate our business
to mitigate risks in the event of a downturn by controlling costs and
focusing on regional and local market trends. Our management team has
gained significant operating expertise through varied economic cycles. The
perspective gained from these experiences has helped shape our investment
approach. We believe that our management team has learned to effectively
evaluate housing trends in our markets, and to react quickly and rationally to
market changes. Our cycle-tested management approach balances strategic
planning with day-to-day decision-making responsibilities, freeing up our
builders to concentrate on growing our homebuilding business rather than
focusing on obtaining capital to fund their operations. We believe that our
strict operating discipline provides us with a competitive advantage in seeking
to maximize returns while minimizing risk.
Increase Market Positions in Housing Markets with a Favorable Growth Outlook
and Strong Demand Fundamentals
We believe that we have strategically well-located land and lot positions
within our core markets and that we have acquired our land and lot positions at
attractive prices, providing us with significant opportunity for a healthy return
on our investment. We believe our core markets exhibit attractive residential
real estate investment characteristics, such as growing economies, improving
levels of employment and population growth relative to national averages,
favorable migration patterns, general housing affordability, and desirable
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lifestyle and weather characteristics. We believe that increasing demand and
supply constraints in our core markets create favorable conditions for our
future growth.
We believe that there are significant opportunities to profitably expand in our
core markets. For example, we currently own or control approximately 9,000
home sites in the Dallas, Atlanta and Vero Beach markets. In Dallas and Atlanta,
we seek to acquire land with convenient access to metropolitan areas which
have diverse economic and employment bases and demographics that we
believe will support long-term growth. We continuously review the allocation
of our investments in these markets taking into account demographic trends
and the likely impact on our operating results. We use the results of these
reviews to reallocate our investments to those areas where we believe we
can maximize our profitability and return on capital. We seek to use our local
relationships with land sellers, brokers and investors to pursue the purchase
of additional land parcels in our core markets. While our primary growth
strategy focuses on increasing our market position in our existing markets,
we may, on an opportunistic basis, explore expansion into attractive new
markets.
on lines of credit and the senior unsecured notes, net of debt issuance costs,
divided by the total Green Brick Partners, Inc. stockholders’ equity. It is
our intent to prudently employ leverage to continue to invest in our land
acquisition, development and homebuilding businesses. We target a debt to
total capitalization ratio of approximately 30% to 35%, which we expect will
continue to provide us with significant additional growth capital.
Pursue Acquisitions of Additional Homebuilders
We intend to pursue the acquisition of additional homebuilders in our core
and new markets. Our preference is to continue to acquire controlling interests
in homebuilders with existing management continuing to own a significant
ownership stake. We will seek to acquire and then retain management
teams which have strong local relationships with land owners and have a
positive reputation for building well-crafted homes in their markets. We
expect that our ability to provide capital discipline and strategic oversight
will complement the local skills, relationships and reputations of our future
homebuilder partners.
Superior Design, Broad Product Range and Enhanced Homebuying Experience
Marketing and Sales Process
Within each of our markets, we partner our expertise with that of our builders
to design attractive neighborhoods and homes to appeal to a wide variety of
potential homebuyers. One of our core operating philosophies is to create a
culture which provides a positive, memorable experience for our homebuyers
through active engagement in the building process. At higher price points,
we provide our homebuyers with customization options to suit their specific
needs and tastes. In consultation with nationally and locally recognized
architecture firms, interior and exterior consultants and homeowner focus
groups, we research and design a diversified range of products for various
levels and price points. Our homebuilding projects include townhomes, patio
homes, single family homes and luxury custom homes. We believe we can
adapt quickly to changing market conditions and optimize performance and
returns while strategically reducing portfolio risk because of our diversified
product strategy.
Pursue Further Growth Through the Prudent Use of Leverage
As of December 31, 2019, our debt to total capitalization ratio was 31.3%.
The debt to total capitalization ratio is calculated as the sum of borrowings
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We offer a preferred lender referral program through our mortgage subsidiary
to provide lending options to homebuyers in need of financing. We offer
homeowners a comprehensive warranty on each home. Homes are generally
covered by a ten-year warranty for structural concerns, one year for defects
and products used, two years for electrical, plumbing, heating, ventilation,
and air conditioning parts and labor.
We sell our homes through our internal sales representatives and also through
independent real estate brokers. Our in-house sales force typically works
from sales offices located in model homes near or in each community. Sales
representatives assist potential buyers by providing them with basic floor
plans, price information, development and construction timetables, tours of
model homes, and the selection of customization and upgrade options. Sales
personnel are trained by us and generally have had prior experience selling
new homes in the local market. Our personnel, along with subcontracted
marketing and design consultants, carefully design the exterior and interior of
each home to appeal to the lifestyles of targeted homebuyers. Additionally,
we advertise through the use of model homes, social media, newspapers,
billboards, real estate market publications, brochures, and newsletters.
Raw Materials
Typically, all the raw materials and most of the components used in our
business are readily available in the United States. Most are standard items
carried by major suppliers. However, a rapid increase in the number of homes
started could cause shortages in the availability of such materials or in the
price of services, thereby leading to delays in the delivery of homes. We
continue to monitor the supply markets to achieve the best prices available.
See “Risk Factors - Labor and raw material shortages and price fluctuations
could delay or increase the cost of land development and home construction,
which could materially and adversely affect our business.”
Seasonality
The homebuilding industry experiences seasonal fluctuations in quarterly
operating results and capital requirements. We typically experience the
highest new home order activity in spring and summer, although this activity
is also highly dependent on the number of active selling communities, timing
of new community openings and other market factors. Since it typically takes
five to nine months to construct a new home, we deliver more homes in the
second half of the year as spring and summer home orders are delivered.
Because of this seasonality, home starts, construction costs and related cash
outflows have historically been highest in the second and third quarters, and
the majority of cash receipts from home deliveries occur during the third and
fourth quarters. We expect this seasonal pattern to continue over the long-
term, although it may be affected by volatility in the homebuilding industry.
Competition
Competition in the homebuilding industry is intense, and there are relatively
low barriers to entry. Homebuilders compete for, among other things,
homebuyers, desirable land parcels, financing, raw materials and skilled
labor. Increased competition could hurt our business, as it could prevent us
from acquiring attractive land parcels on which to build homes or make such
acquisitions more expensive, hinder our market share expansion, and lead to
pricing pressures on our homes that may adversely impact our revenues and
margins. If we are unable to successfully compete, our business, liquidity,
financial condition and results of operations could be materially and adversely
affected. Our competitors may independently develop land and construct
housing units that are superior or substantially similar to our products.
Furthermore, a number of our primary competitors are significantly larger,
have a longer operating history and may have greater resources or lower
cost of capital; accordingly, they may be able to compete more effectively in
one or more of the markets in which we operate. Many of these competitors
also have longstanding relationships with subcontractors and suppliers in
the markets in which we operate. We also compete for sales with individual
resales of existing homes and with available rental housing.
Government Regulation and Environmental Matters
Our developments are subject to numerous local, state, federal and other
statutes, ordinances, rules and regulations concerning zoning, development,
building design, construction and similar matters that impose restrictive
zoning and density requirements, the result of which is to limit the number
of homes that can be built within the boundaries of a particular area. Projects
that are not entitled may be subjected to periodic delays, changes in use,
less intensive development or elimination of development in certain areas
due to government regulations. We may also be subject to periodic delays
or may be precluded entirely from developing in certain communities due to
building moratoriums or “slow-growth” or “no-growth” initiatives that could
be implemented in the future. Local governments also have broad discretion
regarding the imposition of development and service fees for projects in their
jurisdiction. Projects for which we have received land use and development
entitlements or approvals may still require a variety of other governmental
approvals and permits during the development process and can also be
impacted adversely by unforeseen health, safety and welfare issues, which
can further delay these projects or prevent their development.
We are also subject to a variety of local, state, federal and other statutes,
ordinances, rules and regulations concerning the environment. The particular
environmental laws that apply to any given homebuilding site vary according
to multiple factors, including the site’s location, its environmental conditions
and the present and former uses of the site, as well as adjoining properties.
Environmental laws and conditions may result in delays, may cause us to
incur substantial compliance and other costs, and can prohibit or severely
restrict homebuilding and land development activity in environmentally
sensitive regions or areas. In addition, in those cases where an endangered
or threatened species is involved, environmental rules and regulations
can result in the restriction or elimination of development in identified
environmentally sensitive areas. From time to time, the United States
Environmental Protection Agency and similar federal or state agencies review
homebuilders’ compliance with environmental laws and may levy fines and
penalties for failure to comply strictly with applicable environmental laws
or impose additional requirements for future compliance as a result of past
failures. Any such actions taken may increase our costs. Further, we expect
37
that increasingly stringent requirements will be imposed on homebuilders
and land developers in the future. Environmental regulations can also have
an adverse impact on the availability and price of certain raw materials such
as lumber.
Under various environmental laws, current or former owners of real estate,
as well as certain other categories of parties, may be required to investigate
and clean up hazardous or toxic substances, and may be held liable to a
governmental entity or to third parties for related damages, including bodily
injury, and investigation and clean-up costs incurred in connection with the
contamination. Please see “Risk Factors” located in Part I, Item 1A in this
Annual Report on Form 10-K.
Employees
As of December 31, 2019, we had approximately 460 employees, including
those of our builders. Although none of our employees are covered by
collective bargaining agreements, certain of the subcontractors engaged by
us or our affiliates are represented by labor unions or are subject to collective
bargaining arrangements. We believe that our relations with our employees
and subcontractors are good.
Available Information
Our website address is www.greenbrickpartners.com. Our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section
13 or 15(d) of the Exchange Act are available free of charge through our
website as soon as reasonably practicable after they are electronically filed
with, or furnished to, the Securities and Exchange Commission (the “SEC”).
Our website and the information contained or incorporated therein are not
intended to be incorporated into this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
Set forth below are the risks that we believe are material to our investors. Any
of these risks could significantly and adversely affect our business, financial
condition and results of operations. You should carefully consider the risks
described below, together with the other information included in this Annual
Report on Form 10-K, including the information contained under the caption
“Forward-Looking Statements”.
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Risks Related to our Business and Industry
The homebuilding industry is cyclical. A severe downturn in the industry could
adversely affect our business, results of operations and stockholders’ equity.
The residential homebuilding industry is cyclical and is highly sensitive to
changes in general economic conditions such as levels of employment,
consumer confidence and income, availability of financing for acquisitions,
construction and permanent mortgages, interest rate levels, inflation and
demand for housing. The U.S. housing market could be negatively impacted
by declining consumer confidence, restrictive mortgage standards and large
supplies of foreclosures, resales and new homes, among other factors. When
combined with a prolonged economic downturn, high unemployment levels,
increases in the rate of inflation and uncertainty in the U.S. economy, these
conditions could contribute to decreased demand for housing, declining
sales prices and increasing pricing pressure. In the event that demand for
housing stalls or declines, we could experience declines in the market value
of our inventory and demand for our lots, homes and construction loans,
which could have a material adverse effect on our business, liquidity, financial
condition and results of operations.
Our operating performance is subject to risks associated with the real estate
industry.
Real estate investments are subject to various risks and fluctuations and
cycles in value and demand, many of which are beyond our control. Certain
events may decrease cash available for operations, as well as the value of our
real estate assets. These events include, but are not limited to:
•adverse changes in international, national or local economic and demographic
conditions;
•adverse changes in financial conditions of buyers and sellers of properties,
particularly residential homes and land suitable for development of residential
homes;
•competition from other real estate investors with significant capital, including
other real estate operating companies and developers and institutional
investment funds;
•fluctuations in interest rates, which could adversely affect the ability of
homebuyers to obtain financing on favorable terms or their willingness to
obtain financing at all;
•unanticipated increases in expenses, including, without limitation, insurance
costs, development costs, real estate assessments and other taxes and costs
of compliance with laws, regulations and governmental policies; and
•changes in enforcement of laws, regulations and governmental policies,
including, without limitation, health, safety, environmental, zoning and tax
laws.
Alternatively, a significant period of deflation could cause a decrease in
overall spending and borrowing levels. This could lead to a deterioration in
economic conditions, including an increase in the rate of unemployment.
Deflation could also cause the value of our inventory to decline or reduce
the value of existing homes below the related mortgage loan balance, which
could potentially increase the supply of existing homes and have a negative
impact on our results of operations.
In addition, periods of economic slowdown or recession, rising interest rates
or declining demand for real estate, or the public perception that any of
these events may occur, could result in a general decline in the purchase of
homes or an increased incidence of home order cancellations. If we cannot
successfully implement our business strategy, our business, liquidity, financial
condition and results of operations will be adversely affected.
Further, acts of war, any outbreak or escalation of hostilities between the
United States and any foreign power or acts of terrorism may cause disruption
to the U.S. economy, or the local economies of the markets in which we
operate, cause shortages of building materials, increase costs associated
with obtaining building materials, result in building code changes that could
increase costs of construction, affect job growth and consumer confidence
or cause economic changes that we cannot anticipate, all of which could
reduce demand for our lots, homes and construction loans and adversely
impact our business and results of operations.
We are dependent on the continued availability and satisfactory performance
of subcontractors which, if unavailable, could have a material adverse effect on
our business.
We conduct our land development and homebuilding operations primarily as
a general contractor. Virtually all land development and construction work is
performed by unaffiliated third-party subcontractors. As a consequence, the
timing and quality of the development of our land and the construction of
our homes depends on the availability and skill of our subcontractors. There
may not be sufficient availability of and satisfactory performance by these
unaffiliated third-party subcontractors in the markets in which we operate. If
there are inadequate subcontractor resources, our ability to meet customer
demands, both timing and quality, could be adversely affected which could
have a material adverse effect on our reputation, our future growth and our
profitability.
Our business and financial results could be adversely affected by significant
inflation or deflation.
Inflation can adversely affect our homebuilding operations by increasing costs
of land, financing, materials, labor and construction. While we attempt to pass
on cost increases to homebuyers through increased prices, in a weak housing
market, we may not be able to offset cost increases with higher selling prices.
In addition, significant inflation is often accompanied by higher interest rates,
which have a negative impact on housing demand. In a highly inflationary
environment, depending on industry and other economic conditions, we may
be precluded from raising home prices enough to keep up with the rate of
inflation, which could reduce our profit margins. Moreover, with inflation,
the costs of capital increase and the purchasing power of our cash resources
could decline. Current or future efforts by the government to stimulate the
economy may increase the risk of significant inflation and its adverse impact
on our business or financial results.
Labor and raw material shortages and price fluctuations could delay or increase
the cost of land development and home construction, which could materially
and adversely affect our business.
The residential construction industry experiences labor and raw material
shortages from time to time, including shortages in qualified tradespeople
and supplies such as insulation, drywall, cement, steel and lumber. These
labor and raw material shortages can be more severe during periods of
strong demand for housing or during periods when a region in which we
operate experiences a natural disaster that has a significant impact on
existing residential and commercial structures. The cost of labor and raw
materials may also be adversely affected during periods of shortage or high
inflation. Shortages and price increases could cause delays in, and increase
our costs of, land development and home construction, which we may not be
able to recover by raising home prices due to market demand and because
the price for each home is typically set prior to its delivery pursuant to the
agreement of sale with the homebuyer. In addition, the federal government
has, at various times during 2018 and 2019, imposed tariffs on a variety
39
of imports from foreign countries and may impose additional tariffs in the
future. Significant tariffs or other restrictions are placed on raw materials
that we use in our homebuilding operation, such as lumber or steel, could
cause the cost of home construction to increase which we may not be able
to recover by raising home prices or which could slow our absorption due
to being constrained by market demand. As a result, shortages or increased
costs of labor and raw materials could have a material adverse effect on our
business, prospects, financial condition and results of operations.
Failure to recruit, retain and develop highly skilled, competent employees may
have a material adverse effect on our business and results of operations.
Key employees, including management team members at both the corporate
and homebuilder subsidiary levels, are fundamental to our ability to obtain,
generate and manage opportunities. If any of the management team members
were to cease employment with us, our results of operations could suffer.
Our ability to retain our management team or to attract suitable replacements
should any members of its management team leave is dependent on the
competitive nature of the employment market. The loss of services from
key management team members or a limitation in their availability could
materially and adversely impact our business, liquidity, financial condition
and results of operations. Further, such a loss could be negatively perceived
in the capital markets. In addition, we do not maintain key person insurance
in respect of any member of our named executive officers.
In addition, key employees working in the land development, homebuilding
and construction industries are highly sought after. Experienced employees
in the homebuilding, land acquisition and construction industries are
fundamental to our ability to generate, obtain and manage opportunities.
In particular, local knowledge and relationships are critical to our ability to
source attractive land acquisition opportunities. Failure to attract and retain
such personnel or to ensure that their experience and knowledge is not lost
when they leave the business through retirement, redundancy or otherwise
may adversely affect the standards of our service and may have an adverse
impact on our business, financial conditions and results of operations.
Our long-term success depends on our ability to acquire undeveloped land,
partially finished developed lots and finished lots suitable for residential
homebuilding at reasonable prices, in accordance with our land investment
criteria.
The homebuilding industry is highly competitive for suitable land and the risk
inherent in purchasing and developing land is directly impacted by changes
in consumer demand for housing. The availability of finished and partially
finished developed lots and undeveloped land for purchase that meet our
investment criteria depends on a number of factors outside our control,
including land availability, competition with other homebuilders and land
buyers, inflation in land prices, zoning, allowable housing density, the ability
to obtain building permits and other regulatory requirements. Should suitable
land or lots become more difficult to locate or obtain, the number of lots we
may be able to develop and sell could decrease, the number of homes we
may be able to build and sell could be reduced and the cost of land could
increase, perhaps substantially, which could adversely impact our results of
operations.
As competition for suitable land increases, the cost of acquiring both finished
and undeveloped lots and the cost of developing owned land could rise and
the availability of suitable land at acceptable prices may decline, which could
adversely impact our financial results. The availability of suitable land assets
could also affect the success of our land acquisition strategy, which may
impact our ability to increase the number of active selling communities, to
grow our revenues and margins and to achieve or maintain profitability.
If we are unable to develop communities successfully or within expected
timeframes, our results of operations could be adversely affected.
Before a community generates any revenue, time and material expenditures
are required to acquire and prepare land, entitle and finish lots, obtain
development approvals, pay taxes and construct significant portions of
project infrastructure, amenities, model homes and sales facilities. It can take
several years from the time that we acquire control of a property to the time
that we make our first home sale on the site. Delays in the development
of communities expose us to the risk of changes in market conditions for
homes. A decline in our ability to develop and market our communities
successfully and to generate positive cash flow from these operations in
a timely manner could have a material adverse effect on our business and
results of operations and on our ability to service our debt and to meet our
working capital requirements.
40
Real estate investments are relatively illiquid. As a result, our ability to promptly
sell one or more properties in response to changing economic, financial and
investment conditions may be limited and we may be forced to hold non-
income producing assets for an extended period of time. We cannot predict
whether we will be able to sell any property for the price or on the terms
that we set or whether any price or other terms offered by a prospective
purchaser would be acceptable to us. We also cannot predict the length of
time needed to find a willing purchaser and to close the sale of a property.
We depend on the success of our partially owned controlled builders.
We participate in the homebuilding business, in part, through non-wholly
owned subsidiaries, which we refer to as our “controlled builders.” We are able
to exercise control over the operations of each controlled builder. We have
entered into arrangements with these controlled builders in order to take
advantage of their local knowledge and relationships, acquire attractive land
positions and brand images, manage our risk profile and leverage our capital
base. Even though the co-investors in our controlled builders are subject to
certain non-competition provisions, the viability of our participation in the
homebuilding business depends on our ability to maintain good relationships
with our controlled builders. Our controlled builders are focused on
maximizing the value of their operations and working with a partner that can
help them be successful. The effectiveness of our management, the value of
our expertise and the rapport we maintain with our controlled builders are
important factors for new builders considering doing business with us and
may affect our ability to attract homebuyers, subcontractors, employees or
others upon whom our business, financial condition and results of operations
ultimately depend. Further, our relationships with our controlled builders
generate additional business opportunities that support our growth. If we
are unable to maintain good relationships with our controlled builders, we
may be unable to fully take advantage of existing agreements or expand our
relationships with these controlled builders. Additionally, our opportunities
for pursuing acquisitions of additional builders may be adversely impacted.
In Dallas and Atlanta, we sell lots to our controlled builders for their
homebuilding operations and provide them loans to finance home
construction. If our controlled builders fail to successfully execute their
business strategies for any reason, they may be unable to purchase lots from
us, repay outstanding construction finance loans made by us or borrow from
us in the future, any of which could negatively impact our business, financial
condition and results of operations.
An integral component of our growth strategy is the use of controlled builders,
joint ventures, partnerships and other strategic investments, and these
counterparties’ interests may not be wholly aligned with ours or those of our
investors.
Our controlled builders and the third parties with whom we enter into
partnerships, joint ventures or other strategic investments are separate
and distinct entities from us. Consequently, these counterparties may have
different economic, financial and industry positions from us which could
influence their business decisions, including but not limited to strategic
decision-making which they believe to be in their best interests but which
may not be aligned with those of our shareholders. While we exercise
different levels of control over the entities in which we invest or co-invest,
our rights may be limited contractually or by statute and we may not be able
to ensure that their decisions are in alignment with those of our investors.
Disputes between us and these third parties could result in legal proceedings
that would increase our expenses and prevent our officers and/or directors
from focusing their time and effort on our business. If our counterparties
take actions that are not in our best interests it could have a material adverse
effect on our business and our profitability.
If we are required to either repurchase or sell a substantial portion of the equity
interest in our controlled homebuilding subsidiaries, our capital resources and
liquidity could be adversely affected.
The operating agreements governing our partially owned controlled builders
contain buy-sell provisions that may be triggered in certain circumstances.
In the event that a buy-sell event occurs, our builder will have the right to
initiate a buy-sell process, which may happen at an inconvenient time for
us. In the event the buy-sell provisions are exercised at a time when we lack
sufficient capital to purchase the remaining equity interest, we may elect to
sell our equity interest in the entity. If we are forced to sell our equity interest,
we will no longer benefit from the future operations of the applicable entity.
If a buy-sell provision is exercised and we elect to purchase the interest
in an entity that we do not already own, we may be obligated to expend
significant capital in order to complete such acquisition, which may result in
our being unable to pursue other investments or opportunities. If either of
these events occurs, our revenue and net income could decline or we may
not have sufficient capital necessary to implement our growth strategy.
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Our geographic concentration could materially and adversely affect us if the
homebuilding industry in our current markets should decline.
Changes in global or regional environmental conditions and governmental
actions in response to such changes may adversely affect us by increasing the
costs of or restricting our planned or future growth activities.
In Dallas, we principally operate in the counties of Dallas, Collin and Denton.
In Atlanta, we principally operate in the counties of Fulton, Gwinnett, Cobb,
Forsyth, Cherokee and Dekalb. In Florida, we principally operate in the
counties of Indian River and St. Lucie. To the extent housing demand and
population growth slow in our core markets, our favorable growth outlook
may not be realized. Furthermore, we may be unable to compete effectively
with the resale home market in our core markets. Because our operations are
concentrated in these areas, a prolonged economic downturn in one or more
of these areas could have a material adverse effect on our business, liquidity,
financial condition and results of operations, and a disproportionately greater
impact on us than other homebuilders with more diversified operations.
Further, slower rates of population growth or population declines in the
Dallas, Atlanta or Vero Beach markets, especially as compared to the high
population growth rates in prior years, could affect the demand for housing,
causing home prices in these markets to decline and adversely affect our
business, financial condition and results of operations.
Our developments are subject to government regulation, which could cause us
to incur significant liabilities or restrict our business activities.
Our developments are subject to numerous local, state, federal and other
statutes, ordinances, rules and regulations concerning zoning, development,
building design, construction and similar matters that impose restrictive
zoning and density requirements, the result of which is to limit the number
and type of homes that can be built within the boundaries of a particular
area. Projects that are not yet entitled may be subjected to periodic delays,
changes in use, less intensive development or elimination of development in
certain specific areas due to government regulations. We may also be subject
to periodic delays or may be precluded entirely from developing in certain
communities due to building moratoriums or “slow-growth” or “no-growth”
initiatives that could be implemented in the future. Local governments also
have broad discretion regarding the imposition of development and service
fees for projects in their jurisdiction. Projects for which we have received land
use and development entitlements or approvals may still require a variety of
other governmental approvals and permits during the development process
and can also be impacted adversely by unforeseen health, safety and welfare
issues, which can further delay these projects or prevent their development.
As a result, lot and home sales could decline and costs could increase, which
could have a material adverse effect on our current results of operations and
our long-term growth prospects.
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There is growing concern from many members of the scientific community
and the general public that an increase in global average temperatures due to
emissions of greenhouse gases and other human activities have caused, or will
cause, significant changes in weather patterns and increase the frequency and
severity of natural disasters. Government mandates, standards or regulations
intended to reduce greenhouse gas emissions or projected climate change
impacts have resulted, and are likely to continue to result, in restrictions on
land development in certain areas and increased energy, transportation and
raw material costs. Governmental requirements directed at reducing effects
on climate could cause us to incur expenses that we cannot recover or that
will require us to increase the price of homes we sell to the point that it
affects demand for those homes.
Our financial condition and results of operations may be adversely affected by
and decrease in the value of our land or homes declines as well as the associated
carrying costs.
We continuously acquire land for replacement of land inventory and expansion
within our current markets, and may in the future acquire land for expansion
into new markets. However, the market value of land, building lots and
housing inventories can fluctuate significantly as a result of changing market
conditions, and the measures we employ to manage inventory risk may not be
adequate to insulate our operations from a severe drop in inventory values.
If housing demand decreases below what we anticipated when we acquired
our inventory, we may not be able to generate profits consistent with those
we have generated in the past and we may not be able to recover our costs
when we sell lots and homes. When market conditions are such that land
values are not appreciating, option arrangements previously entered into may
become less desirable, at which time we may elect to forgo deposits and pre-
acquisition costs and terminate such arrangements. In the face of adverse
market conditions, we may have substantially higher inventory carrying costs,
may have to write down our inventory as a result of impairment and/or may
have to sell land or homes at a loss. Any material write-downs of assets, or
sales at a loss, could have a material adverse effect on our financial condition
and results of operations.
Demand for our homes and lots is dependent on the cost and availability of
mortgage financing.
Changes in the method pursuant to which LIBOR rates are determined and
potential phasing out of LIBOR after 2021 may affect our financial results.
Our business depends on the ability of our homebuyers, as well as the ability
of those who buy homes from the third-party homebuilding entities to
which we sell lots (our “homebuilding customers”), to obtain financing for the
purchase of their homes. Many of these homebuyers must sell their existing
homes in order to buy a home from us or our homebuilding customers.
Rising interest rates, decreased availability of mortgage financing or of
certain mortgage programs, higher down payment requirements or increased
monthly mortgage costs may lead to reduced demand for our homes, lots
and construction loans. Increased interest rates can also hinder our ability to
realize our backlog because certain of our home purchase contracts provide
homebuyers with a financing contingency. Financing contingencies allow
homebuyers to cancel their home purchase contracts in the event that they
cannot arrange for adequate financing. As a result, rising interest rates can
decrease our home sales and mortgage originations. Any of these factors
could have a material adverse effect on our business, liquidity, financial
condition and results of operations.
In addition, the federal government has a significant role in supporting
mortgage lending through its conservatorship of Federal National Mortgage
Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation
(“Freddie Mac”), both of which purchase home mortgages and mortgage-
backed securities originated by mortgage lenders, and its insurance of
mortgages originated by lenders through the Federal Housing Administration
(the “FHA”) and the Veterans Administration (“VA”). The availability and
affordability of mortgage loans, including consumer interest rates for such
loans, could be adversely affected by a curtailment or cessation of the federal
government’s mortgage-related programs or policies. The FHA may continue
to impose stricter loan qualification standards, raise minimum down payment
requirements, impose higher mortgage insurance premiums and other costs
and/or limit the number of mortgages it insures. Due to growing federal
budget deficits, the U.S. Treasury may not be able to continue supporting
the mortgage-related activities of Fannie Mae, Freddie Mac, the FHA and the
VA at present levels, or it may revise significantly the federal government’s
participation in and support of the residential mortgage market. Because
the availability of Fannie Mae, Freddie Mac, FHA- and VA-backed mortgage
financing is an important factor in marketing and selling many of our homes,
any limitations, restrictions or changes in the availability of such government-
backed financing could reduce our home sales, which could have a material
adverse effect on our business, liquidity, financial condition and results of
operations.
The United Kingdom Financial Conduct Authority (the “FCA”), which
regulates the London Interbank Offered Rate (“LIBOR”) has announced that
the FCA intends to stop compelling banks to submit rates for the calculation
of LIBOR after 2021 (the “FCA Announcement”). The FCA Announcement
indicates that the continuation of LIBOR on the current basis cannot and will
not be guaranteed after 2021. Following the implementation of any reforms
to LIBOR or the methods pursuant to which LIBOR rates are determined,
or other benchmark rates that may be enacted in the United Kingdom or
elsewhere, the manner of administration of such benchmarks may change,
with the result that such benchmarks may perform differently than in the
past, such benchmarks could be eliminated entirely, or there could be other
consequences which cannot be predicted. Under our Unsecured Revolving
Credit Facility, LIBOR may be used to set the fluctuating interest rate (the
“Base Rate”) and the interest rate for any Eurodollar Rate Advance. If LIBOR
is phased out, we may be required to renegotiate with our lender to establish
a new interest rate (the “LIBOR Successor Rate”). We can give no assurance
that we and our lender will be able to agree on a LIBOR Successor Rate. If we
and our lender cannot agree on a LIBOR Successor Rate, our ability to draw
upon the Unsecured Revolving Credit Facility may be materially impacted.
Any increase in unemployment or underemployment may lead to an increase
in the number of loan delinquencies and property repossessions, which would
have an adverse impact on our business.
People who are not employed, are underemployed, who have left the labor
force or are concerned about the loss of their jobs are less likely to purchase
new homes, may be forced to try to sell the homes they own and may face
difficulties in making required mortgage payments. Therefore, any increase in
unemployment or underemployment may lead to an increase in the number
of loan delinquencies and property repossessions and have an adverse
impact on our business both by reducing demand for our homes, lots and
construction loans and by increasing the supply of homes for sale.
Increases in the after-tax costs of owning a home could prevent reduce demand
for our homes and lots.
On December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).
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The Tax Act made major changes to the Internal Revenue Code that, in part,
affect the after-tax cost of owning a home. Specifically, the Tax Act limited
the ability of homebuyers to deduct (i) property taxes, (ii) mortgage interest,
and (iii) state and local income taxes. Due to such changes, the after-tax cost
of owning a new home has increased for many of our potential homebuyers
and the potential homebuyers of our homebuilding customers. In addition, if
the federal government or a state government further changes its income tax
laws to further eliminate or substantially limit these income tax deductions,
the after-tax cost of owning a new home would further increase for many
of our potential customers. The loss or reduction of these homeowner tax
deductions that have historically been available has and could further reduce
the perceived affordability of homeownership, and therefore the demand
for and sales price of new homes, including ours. In addition, increases in
property tax rates or fees on developers by local governmental authorities,
as experienced in response to reduced federal and state funding or to fund
local initiatives, such as funding schools or road improvements, or increases
in insurance premiums can adversely affect the ability of potential customers
to obtain financing or their desire to purchase new homes, and can have an
adverse impact on our business and financial results.
The occurrence of severe weather or natural disasters could increase our
operating expenses and reduce our revenues and cash flows.
The climates and geology of the states in which we operate present increased
risks of severe weather and natural disasters. The occurrence of severe
weather conditions or natural disasters can delay new home deliveries and
lot development, reduce the availability of materials and/or negatively impact
the demand for new homes in affected areas.
Further, to the extent that hurricanes, severe storms, earthquakes, tornadoes,
droughts, floods, wildfires or other natural disasters or similar events occur,
our homes under construction or our lots under development could be
damaged or destroyed, which may result in losses exceeding our insurance
coverage. Any of these events could increase our operating expenses, impair
our cash flows and reduce our revenues. To the extent that climate change
increases the frequency and severity of weather related disasters, we may
experience increasing negative weather related impacts to our operations in
the future.
High cancellation rates may negatively impact our business.
Our backlog reflects the number and value of homes for which we have
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entered into non-contingent sales contracts with homebuyers but not yet
delivered. Although these sales contracts require a cash deposit, a homebuyer
may in certain circumstances cancel the contract and receive a complete
or partial refund of the deposit as a result of contract provisions. If home
prices decline, the national or local homebuilding environment or general
economy weakens, our neighboring competitors reduce their sales prices (or
increase their sales incentives), interest rates increase or the availability of
mortgage financing tightens, homebuyers may have an incentive to cancel
their contracts with us, even where they might be entitled to no refund or
only a partial refund. Significant cancellations could have a material adverse
effect on our business as a result of lost sales revenue and the accumulation
of unsold housing inventory.
We may not be able to compete effectively against competitors in the
homebuilding, land development and financial services industries.
Competition in the land development and homebuilding industries is
intense, and there are relatively low barriers to entry. Land developers and
homebuilders compete for, among other things, homebuyers, desirable land
parcels, financing, raw materials and skilled labor. Increased competition
could hurt our business, as it could prevent us from acquiring attractive
land parcels for development and resale or homebuilding (or make such
acquisitions more expensive), hinder our market share expansion and lead to
pricing pressures that adversely impact our margins and revenues. If we are
unable to compete successfully, our business, liquidity, financial condition
and results of operations could be materially and adversely affected. Our
competitors may independently develop land and construct housing units
that are superior or substantially similar to our products. Furthermore, a
number of our primary competitors are significantly larger, have a longer
operating history and may have greater resources or lower cost of capital
than us. Accordingly, competitors may be able to compete more effectively in
one or more of the markets in which we operate. Many of these competitors
also have longstanding relationships with subcontractors and suppliers in
the markets in which we operate. Our homebuilding business also competes
for sales with individual resales of existing homes and with available rental
housing.
Our construction financing business competes with other lenders, including
national, regional and local banks and other financial institutions, some of
which have greater access to capital or different lending criteria and may be
able to offer more attractive financing to potential homebuyers.
Our future growth may include additional strategic investments, joint ventures,
partnerships and/or acquisitions of companies that may not be as successful as
we anticipate and could disrupt our ongoing businesses and adversely affect our
operations.
In addition to the financing provided by the senior unsecured notes, we
currently have access to a senior secured revolving credit facility and a senior
unsecured revolving credit facility. We cannot ensure that we will be able to
extend the maturity of these credit facilities or arrange another facility on
acceptable terms or at all.
Our investments in our homebuilding subsidiaries have contributed to our
historical growth and similar investments may be a component of our growth
strategy in the future. We may make additional strategic investments, enter
into new joint venture or partnership arrangements or acquire businesses,
some of which may be significant. These endeavors may involve significant
risks and uncertainties, including distraction of management from current
operations, significant start-up costs, insufficient revenues to offset expenses
associated with these new investments and inadequate return of capital on
these investments, any of which may adversely affect our financial condition
and results of operations. Our failure to successfully identify and manage
future investments, joint ventures, partnerships or acquisitions could harm
our results of operations.
We may be unable to obtain suitable bonding for the development of our housing
projects.
We are periodically required to provide bonds to governmental authorities
and others to ensure the completion of our projects. Depending on market
conditions, surety providers may be reluctant to issue new bonds and may
request credit enhancements (such as cash deposits or letters of credit) in
order to maintain existing bonds or to issue new bonds. If we are unable
to obtain required bonds for our future projects, or if we are required to
provide credit enhancements with respect to our current or future bonds,
our business, liquidity, financial condition and results of operations could be
materially and adversely affected.
Difficulty in obtaining sufficient capital could result in an inability to acquire
land for our developments or increased costs and delays in the completion of
development projects.
The homebuilding industry is capital-intensive and requires significant up-
front expenditures to acquire land parcels and begin development. Land
acquisition, development and construction activities may be adversely
affected by any shortage or increased cost of financing or the unwillingness
of third parties to engage in partnerships, joint ventures or other alternative
arrangements.
Furthermore, in the future, we may seek additional capital in the form of
equity or debt financing from a variety of potential sources, including
additional bank financings and/or securities offerings. The availability of
borrowed funds, especially for land acquisition and construction financing,
may be greatly reduced nationally, and the lending community may require
increased amounts of equity to be invested in a project by borrowers in
connection with both new loans and the extension of existing loans. The
credit and capital markets are subject to volatility. If we are required to seek
additional financing to fund our operations, volatility in these markets may
restrict our flexibility to access such financing. If we are not successful in
obtaining sufficient capital to fund our planned capital and other expenditures,
we may be unable to acquire land for our housing developments and/or to
develop the housing. Any difficulty in obtaining sufficient capital for planned
development expenditures could also cause project delays and any such delay
could result in cost increases. Any one or more of the foregoing events could
have a material adverse effect on our business, liquidity, financial condition
and results of operations.
Our debt instruments contain limitations and restrictions that could prevent
us from capitalizing on business opportunities and could adversely affect our
growth.
Our revolving credit facilities and the terms of our senior unsecured notes
impose certain restrictions on our and certain of our subsidiaries’ operations
and activities and require us to maintain certain financial covenants. The
most significant restrictions relate to debt incurrence (including non-recourse
indebtedness), creation of liens, repayment of certain indebtedness prior to
its respective stated maturity, sales of assets, cash distributions, (including
paying dividends), capital stock repurchases, and investments by us and
certain of our subsidiaries. These restrictions may prevent us from capitalizing
on business opportunities and could adversely affect our growth.
The restrictions in our debt instruments could prohibit or restrict our and
certain of our subsidiaries’ activities, such as undertaking capital raising or
restructuring activities or entering into other transactions. In addition, if we
fail to comply with these restrictions, an event of default could occur and
our debt under these debt instruments could become due and payable prior
45
to maturity. Any such event of default could lead to cross defaults under
certain of our other debt or negatively impact other covenants. In any of
these situations, we may be unable to amend the applicable instrument or
obtain a waiver without significant additional cost, or at all. Any such situation
could have a material adverse effect on our liquidity and financial condition.
We are subject to environmental laws and regulations, which may increase our
costs, limit the areas in which we can build homes and develop land and delay
completion of our projects.
We are subject to a variety of local, state, federal and other statutes,
ordinances, rules and regulations concerning the environment. The particular
environmental laws that apply to any given homebuilding or development
site vary according to multiple factors, including the site’s location, its
environmental conditions and the present and former uses of the site, as
well as adjoining properties. Environmental laws and conditions may result
in delays, may cause us to incur substantial compliance and other costs and
can prohibit or severely restrict homebuilding and land development activity
in environmentally sensitive regions or areas. In addition, in those cases
where an endangered or threatened species is involved, environmental rules
and regulations can result in the restriction or elimination of development
in identified environmentally sensitive areas. From time to time, the United
States Environmental Protection Agency and similar federal or state agencies
review homebuilders’ compliance with environmental laws and may levy fines
and penalties for failure to comply strictly with applicable environmental laws
or impose additional requirements for future compliance as a result of past
failures. Any such actions taken with respect to our business may increase
our costs. Environmental regulations can also have an adverse impact on
the availability and price of certain raw materials such as lumber. Further,
we expect that increasingly stringent requirements will be imposed on
homebuilders and land developers in the future.
Under various environmental laws, current or former owners of real estate
may be required to investigate and clean up hazardous or toxic substances,
and may be held liable to a governmental entity or to third parties for related
damages, including for bodily injury, and for investigation and clean-up costs
incurred by such parties in connection with the contamination.
A major health and safety incident relating to our business could be costly in
terms of potential liabilities and reputational damage.
Building sites are inherently dangerous, and operating in the land development
46
and homebuilding industries poses certain inherent health and safety
risks. Due to health and safety regulatory requirements, health and safety
performance is critical to the success of our business. Any failure in health and
safety performance may result in penalties for non-compliance with relevant
regulatory requirements, and a failure that results in a major or significant
health and safety incident is likely to be costly in terms of potential liabilities
incurred as a result. Such a failure could generate significant negative publicity
and have a corresponding impact on our reputation, our relationships with
relevant regulatory agencies or governmental authorities and our ability to
attract employees, subcontractors and homebuyers, which in turn could have
a material adverse effect on our business, financial condition and results of
operations.
Poor relations with the residents of our communities, or with local real estate
agents, could negatively impact our home sales, which could cause our revenues
or results of operations to decline.
Residents of communities we develop rely on us to resolve issues or disputes
that may arise in connection with the operation or development of their
communities. Efforts made by us to resolve these issues or disputes could be
deemed unsatisfactory by the affected residents and subsequent actions by
these residents could adversely affect sales or our reputation.
In addition, we could be required to make material expenditures related to the
settlement of such issues or disputes or to modify community development
plans, which could adversely affect our results of operations.
Most of our potential homebuyers engage local real estate agents who are
unaffiliated with us in connection with their search for a new home. If we
do not maintain good relations with, and a good reputation among, these
real estate agents, the agents may not encourage potential homebuyers
to consider, or may actively discourage homebuyers from considering, our
communities, which could adversely affect our results of operations.
Information technology failures and data security breaches could harm our
business.
We use information technology and other computer resources to carry out
operational and marketing activities, as well as to maintain our business
records. As part of our normal business activities, we may collect and store
certain confidential information, including information about employees,
homebuyers, customers, vendors and suppliers and may share information
with vendors who assist us with certain aspects of our business. Many of
these resources are provided to us and/or maintained on our behalf by
third-party service providers pursuant to agreements that specify certain
security and service level standards. Our ability to conduct our business
may be impaired if these resources are compromised, degraded, damaged
or fail, whether due to a virus or other harmful circumstance, intentional
penetration or disruption of our information technology resources by a third-
party, natural disaster, hardware or software corruption or failure or error
(including a failure of security controls incorporated into or applied to such
hardware or software), telecommunications system failure, service provider
error or failure, intentional or unintentional personnel actions (including the
failure to follow our security protocols) or lost connectivity to networked
resources.
Breaches of our data security systems, including by cyber-attacks, could result
in the unintended public disclosure or the misappropriation of our proprietary
information or personal and confidential information, about our employees,
consumers who view our homes, homebuyers or business partners, requiring
us to incur significant expense to address and resolve such issues. The release
of confidential information may also lead to identity theft and related fraud,
litigation or other proceedings against us by affected individuals and/or
business partners and/or regulators, and the outcome of such proceedings,
which could include penalties or fines, and any significant disruption of our
business could have a material and adverse effect on our reputation and
cause us to lose homebuyers, customers, sales and revenue. We maintain
insurance coverage for potential breaches but the costs to remedy a breach
may not be fully covered by our insurance. We provide employee awareness
training of cybersecurity threats and utilize information technology security
experts to assist us in our evaluations of the effectiveness of the security of
our information technology systems, and we regularly enhance our security
measures to protect our systems and data. We use various encryption,
tokenization and authentication technologies to mitigate cybersecurity risks
and have increased our monitoring capabilities to enhance early detection
and rapid response to potential cyber threats.
Product liability claims and litigation and warranty claims that arise in the
ordinary course of business may be costly, which could adversely affect our
business.
As a homebuilder, we are subject to construction defect and home warranty
claims arising in the ordinary course of business. These claims are common
in the homebuilding industry and can be costly. In addition, the costs of
insuring against construction defect and product liability claims are high.
This coverage may be restricted and become more costly in the future. If
the limits or coverages of our current and former insurance programs prove
inadequate, or we are not able to obtain adequate, or reasonably priced,
insurance against these types of claims in the future, or the amounts currently
provided for future warranty or insurance claims are inadequate, we may
experience losses that could negatively impact our financial results.
Our business is seasonal in nature, so our quarterly results of operations may
fluctuate.
The homebuilding industry experiences seasonal fluctuations in quarterly
results of operations and capital requirements. We typically experience the
highest new home order activity in spring and summer, although this activity
is also highly dependent on the number of active selling communities, timing
of new community openings and other market factors. Since it typically
takes five to nine months to construct a new home, we deliver more homes
in the second half of the year as spring and summer home orders convert
to home deliveries. Because of this seasonality, home starts, construction
costs and related cash outflows have historically been highest in the second
and third quarters, and the majority of cash receipts from home deliveries
occurs during the second half of the year. We expect this seasonal pattern to
continue over the long-term, although we may also be affected by volatility
in the homebuilding industry.
Additionally, weather-related problems may occur, delaying starts or closings
or increasing costs and reducing profitability. In addition, delays in opening
new communities or new sections of existing communities could have an
adverse impact on home sales and revenues. Expenses are not incurred
and recognized evenly throughout the year. Because of these factors, our
quarterly results of operations may be uneven and may be marked by lower
revenues and earnings in some quarters compared with others.
Shortages or extreme fluctuation in availability of natural resources and utilities
could have an adverse effect on our operations.
The markets in which we operate may in the future be subject to utility
or other resource shortages, including significant changes to the availability
of electricity and water. Shortages of natural resources in our markets,
particularly of water, may make it more difficult for us to obtain regulatory
approval of new developments. We may experience material fluctuations in
utility and resource costs across our markets, and we may incur additional
costs and may not be able to complete construction on a timely basis if such
47
fluctuations arise. Furthermore, these shortages and interest rate fluctuations
may adversely affect the regional economies in which we operate, which may
reduce demand for our homes, lots and construction loans and negatively
affect our business and results of operations.
Our business and financial results could be adversely affected by the failure
of persons who act on our behalf to comply with applicable regulations and
guidelines.
Although we expect all of our employees, officers and directors to comply at
all times with all applicable laws, rules and regulations, there may be instances
in which subcontractors or others through whom we do business engage in
practices that do not comply with applicable regulations or guidelines. Should
we learn of practices relating to homes we build, lots we develop or financing
we provide that do not comply with applicable regulations or guidelines, we
would move actively to stop the non-complying practices as soon as possible
and would take disciplinary action with regard to employees who were
aware of the practices and did not take steps to address them, including in
some instances terminating their employment. However, regardless of the
steps we take after we learn of practices that do not comply with applicable
regulations or guidelines, we can in some instances be subject to fines or
other governmental penalties, and our reputation can be injured, due to the
practices having taken place.
We may suffer uninsured losses or suffer material losses in excess of insurance
limits.
We could suffer physical damage to property or incur liabilities resulting in
losses that may not be fully recoverable by insurance. In addition, certain
types of risks, such as personal injury claims, may be, or may become in
the future, either uninsurable or not economically insurable, or may not be
currently or in the future covered by our insurance policies or otherwise be
subject to significant deductibles or limits. Should an uninsured loss or a
loss in excess of insured limits occur or be subject to deductibles, we could
sustain financial loss or lose capital invested in the affected property as well
as anticipated future income from that property. In addition, we could be
liable to repair damage or meet liabilities caused by risks that are uninsured
or subject to deductibles. We may be liable for any debt or other financial
obligations related to affected property. Material losses or liabilities in excess
of insurance proceeds may occur in the future.
Products supplied to us and work done by subcontractors can expose us to risks
that could adversely affect our business.
We rely on subcontractors to perform the actual construction of our homes,
and, in some cases, to select and obtain building materials. Despite our detailed
specifications and quality control procedures, in some cases, subcontractors
may use improper construction processes or defective materials. Defective
products widely used by the homebuilding industry can result in the need to
perform extensive repairs to large numbers of homes. The cost of complying
with our warranty obligations may be significant if we are unable to recover
the cost of repairs from subcontractors, materials suppliers and insurers.
Laws and regulations governing the residential mortgage industry could have an
adverse effect on our business and financial results.
In 2018, we established a joint venture, Green Brick Mortgage, to provide
mortgage related services to homebuyers. The residential mortgage lending
industry remains under intense scrutiny and is heavily regulated at the
federal, state and local levels. Although we do not originate mortgages, we
are directly or indirectly subject to certain of these regulations. Changes to
existing laws or regulations or adoption of new laws or regulations could
require our joint venture to incur significant compliance costs. A material
failure to comply with any of these laws or regulations could result in the
loss or suspension of required licenses or other approvals, the imposition
of monetary penalties, and restitution awards or other relief. Any of these
outcomes could have an adverse effect on our results of operations.
Risks Related to Ownership of Our Common Stock
The price of our common stock may continue to be volatile.
The trading price of our common stock is highly volatile and could be subject
to future fluctuations in response to a number of factors beyond our control.
In recent years the stock market has experienced significant price and
volume fluctuations. These fluctuations may be unrelated to the operating
performance of particular companies. These broad market fluctuations may
cause declines in the market price of our common stock. The price of our
common stock could fluctuate based upon factors that have little or nothing
to do with our company or its performance, and those fluctuations could
materially reduce our common stock price. If we fail to meet expectations
48
related to future growth, profitability or other market expectations, our stock
price may decline significantly, which could have a material adverse impact
on investor confidence and our stock price.
Certain large stockholders own a significant percentage of our shares and exert
significant influence over us. Their interests may not coincide with ours and they
may make decisions with which we may disagree.
Greenlight Capital, Inc. and its affiliates (“Greenlight”) and James R. Brickman
own approximately 48% and 4%, respectively, of the voting power of the
Company. These large stockholders, acting together, could determine
substantially all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions, such as a sale
or other change of control transaction. In addition, this concentration of
ownership may delay or prevent a change in control of our company and
make some transactions more difficult or impossible without the support
of these stockholders. The interests of these stockholders may not always
coincide with our interests as a company or the interests of other stockholders.
Accordingly, these stockholders could cause us to enter into transactions or
agreements that you would not approve or make decisions with which you
may disagree.
We do not intend to pay dividends on our common stock for the foreseeable
future.
We have not paid any dividends since our inception and do not anticipate
paying any cash dividends on our common stock in the foreseeable future.
Any payment of future dividends will be at the discretion of our Board of
Directors (“BOD”) and will depend upon, among other things, our earnings,
financial condition, capital requirements, levels of indebtedness, statutory and
contractual restrictions applying to the payment of dividends or contained
in our financing instruments and other considerations that the BOD deems
relevant. Investors must rely on sales of their common stock after price
appreciation, which may never occur, as the only way to realize a return on
their investment. Investors seeking cash dividends should not purchase our
common stock.
Certain large stockholders’ shares may be sold into the market in the future, which
could cause the market price of our common stock to decrease significantly.
We believe that all or a significant portion of our common stock beneficially
owned by Greenlight and Mr. Brickman are “restricted securities” within the
meaning of the federal securities laws because they were acquired from us
on a private, non-registered basis. We have entered into registration rights
agreements with each of these parties, however, that gives these parties
the right to require us to register the resale of their shares under certain
circumstances. If these holders sell substantial amounts of these shares, the
price of our common stock could decline. In addition, the sale of these shares
could impair our ability to raise capital through the sale of additional equity
securities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease our principal executive office located at 2805 Dallas Parkway,
Suite 400, Plano, Texas, 75093. Our homebuilding and title division offices
are located in leased space in the markets where we conduct business. We
believe that such properties are suitable and adequate to meet the needs
of our businesses. Because of the nature of our homebuilding operations,
we and our builders hold significant amounts of property as inventory in
connection with our homebuilding business. We discuss these properties in
the discussion of our homebuilding operations in Part I, Item 1 and Part II,
Item 7 of this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and litigation arising in the ordinary course
of business. We do not believe that any such claims and litigation will have a
material adverse effect upon our results of operations or financial position.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
49
PART II
FORWARD-LOOKING STATEMENTS
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
Our common stock trades on The Nasdaq Capital Market under the symbol
“GRBK”.
Holders of Record
On March 2, 2020, there were 27 stockholders of record of our common
stock. We believe the number of beneficial owners of our common stock
is substantially greater than the number of record holders because a large
portion of our outstanding common stock is held of record in broker “street
names” for the benefit of individual investors. As of March 2, 2020, there
were 50,488,010 common shares outstanding.
Dividends
We have not paid any dividends since our inception and do not anticipate
declaring or paying any cash dividends on our common stock in the
foreseeable future. We currently anticipate that we will retain all of our
available cash for general corporate purposes. Payment of future dividends,
if any, will be at the discretion of our BOD and will depend on many factors,
including general economic and business conditions, our strategic plans, our
financial results and condition, legal requirements and other factors as our
BOD deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable to smaller reporting companies.
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This annual report on Form 10-K contains “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements concern expectations, beliefs, projections, plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. These forward-looking statements
typically include the words “anticipate,” “believe,” “consider,” “estimate,”
“expect,” “forecast,” “intend,” “objective,” “plan,” “predict,” “projection,” “seek,”
“strategy,” “target,” “will” or other words of similar meaning. Some of them are
opinions formed based upon general observations, anecdotal evidence and
industry experience, but that are not supported by specific investigation or
analysis. Forward-looking statements in this Annual Report include statements
concerning our belief that we have ample liquidity; our goals and strategies
and their anticipated benefits; our intentions and the expected benefits and
advantages of our product and land positioning strategies; our exposure to
supplier concentration risk; our delivery of substantially all of our backlog
existing as of year end; our positions and our expected outcome relating to
litigation in general; the sufficiency of our warranty accruals; our intentions
to not pay dividends; expectations regarding our industry and our business
into 2020 and beyond, the demand for and the pricing of our homes; our
land and lot acquisition strategy and potential expansion into new markets;
the availability of labor and materials for our operations; the sufficiency of
our insurance coverage and warranty accruals; the sufficiency of our capital
resources to support our business strategy; our balance sheet strategy; the
sufficiency of our land pipeline; the impact of new accounting standards and
changes in accounting estimates; trends and expectations regarding sales
prices, sales orders, cancellations, construction costs, gross margins, land
costs and profitability and future home inventories; the impact of January
and February 2020 sales on future results; our future cash needs; the impact
of seasonality; and our future compliance with debt covenants.
These statements are necessarily subjective and involve known and
unknown risks, uncertainties and other important factors that could cause
our actual results, performance or achievements, or industry results, to differ
materially from any future results, performance or achievements described
in or implied by such statements. Actual results may differ materially from
expected results described in our forward-looking statements, including with
respect to correct measurement and identification of factors affecting our
business or the extent of their likely impact, the accuracy and completeness
of the publicly available information with respect to the factors upon which
our business strategy is based or the success of our business. In addition,
even if results are consistent with the forward-looking statements contained
in this Annual Report on Form 10-K, those results may not be indicative of
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For business overview and developments during the year ended December
31, 2019, refer to Part I, Item 1 of this Annual Report on Form 10-K.
Overview and Outlook
Our key financial and operating metrics are home deliveries, home closings
revenue, average sales price of homes delivered, and net new home orders,
which refers to sales contracts executed reduced by the number of sales
contracts canceled during the relevant period. During the year ended
December 31, 2019 as compared to the year ended December 31, 2018:
•Home deliveries increased by 33.6%
•Home closings revenue increased by 31.7%
•Average sales price of homes delivered decreased by 1.4%
•Net new home orders increased by 37.7%
From December 2018 to December 2019, homes in the Dallas and Atlanta
markets appreciated by 2.6% and 4.1%, respectively (Source: S&P Dow Jones
Indices & CoreLogic, December 2019). We believe that we operate in two
of the most desirable housing markets in the nation. Among the 12 largest
metropolitan areas in the country, the Dallas area ranked first and the Atlanta
area ranked fifth in the annual rate of job growth from November 2018 to
November 2019 (Source: US Bureau of Labor Statistics, November 2019).
We believe that increasing demand and supply constraints in our target
markets create favorable conditions for our future growth.
results or developments in subsequent periods. Furthermore, industry
forecasts are likely to be inaccurate, especially over long periods of time
and in industries particularly sensitive to market conditions such as land
development, homebuilding and builder financing.
These forward-looking statements reflect our current views about future
events and are subject to risks, uncertainties and assumptions. We wish to
caution readers that certain important factors may have affected and could
in the future affect our actual results and could cause actual results to differ
significantly from what is anticipated by our forward-looking statements. The
most important factors that could cause actual results to differ materially
from those anticipated by our forward-looking statements include, but
are not limited to: slowdowns in the real estate markets across the nation,
including a slowdown in real estate markets in regions where we have
significant homebuilding or multifamily development activities; increases in
operating costs, including costs related to labor, construction materials, real
estate taxes and insurance, which exceed our ability to increase prices; our
inability to successfully execute our strategies; changes in general economic
and financial conditions that reduce demand for our homes and finished lots,
lower our profit margins or reduce our access to credit; our inability to acquire
land at anticipated prices; the possibility that we will incur nonrecurring costs
that affect earnings in one or more reporting periods; decreased demand
for our homes and finished lots; increased competition for home sales from
other sellers of new and resale homes; increases in mortgage interest rates
or tightening of mortgage lending practices; a decline in the value of our
inventories and resulting write-downs of the carrying value of our real estate
assets; the failure of the controlled builders or third parties with whom
we enter into joint ventures, partnerships or other strategic investments;
participants in various joint ventures to honor their commitments; difficulty
obtaining land-use entitlements or construction financing; natural disasters
and other unforeseen events for which our insurance does not provide
adequate coverage; new laws or regulatory changes that adversely affect the
profitability of our businesses; our inability to refinance our debt as it matures
on terms that are acceptable to us; and changes in accounting standards that
adversely affect our reported earnings or financial condition.
Please see “Risk Factors” located in Part I, Item 1A in this Annual Report on
Form 10-K for a further discussion of these and other risks and uncertainties
which could affect our future results. We undertake no obligation to revise
any forward-looking statements to reflect events or circumstances after
the date of those statements or to reflect the occurrence of anticipated or
unanticipated events, except to the extent we are legally required to disclose
certain matters in SEC filings or otherwise.
51
Results of Operations
New Home Orders and Backlog
Year Ended December 31, 2019 Compared to the Year Ended December
31, 2018
The table below represents new home orders and backlog related to our
builder operations segments, excluding mechanic’s liens contracts (dollars in
thousands):
Residential Units Revenue and New Homes Delivered
The table below represents residential units revenue and new homes
delivered for the years ended December 31, 2019 and December 31, 2018
(dollars in thousands):
Years Ended December 31,
2019
2018
Change
%
Years Ended December 31,
2019
2018
Change
%
Net new home orders
1,923
1,397
526
37.7%
Cancellation rate
12.9%
14.9%
(2.0)%
(13.4)%
Absorption rate per average active selling
community per quarter
Average active selling communities
Active selling communities at end of period
5.6
86
95
5.3
66
76
0.3
5.7%
20
19
30.3%
25.0%
Home closings revenue
$752,273
$571,177 $181,096
31.7%
Backlog
$346,828 $264,275
$82,553
31.2%
Mechanic’s lien contracts revenue
7,557
7,716
(159)
(2.1)%
Backlog (units)
786
582
204
35.1%
Residential units revenue
$759,830
$578,893 $180,937
31.3%
Average sales price of backlog
$441.3
$454.1
$(12.8)
(2.8)%
New homes delivered
1,719
1,287
432
33.6%
Average sales price of homes delivered
$437.6
443.8
(6.2)
(1.4)%
The $180.9 million increase in residential units revenue was driven by the
33.6% increase in the number of homes delivered, which was primarily due
to an organic increase in the number of active selling communities during the
year ended December 31, 2019, as well as the acquisition of GRBK GHO in
April 2018. The 1.4% decline in the average sales price of homes delivered
for the year ended December 31, 2019 was attributable to a change in
product mix.
Backlog refers to homes under sales contracts that have not yet closed at the
end of the relevant period, and absorption rate refers to the rate at which
net new home orders are contracted per average active selling community
during the relevant period. Upon a cancellation, the escrow deposit may
be returned to the prospective purchaser. Accordingly, backlog may not be
indicative of our future revenue.
Our cancellation rate, which refers to sales contracts canceled divided by
sales contracts executed during the relevant period, was 12.9% for the
year ended December 31, 2019, compared to 14.9% for the year ended
December 31, 2018. Sales contracts relating to homes in backlog may be
canceled by the prospective purchaser for a number of reasons, such as
the prospective purchaser’s inability to obtain suitable mortgage financing.
Upon a cancellation, the escrow deposit may be returned to the prospective
purchaser. Accordingly, backlog may not be indicative of our future revenue.
Management believes a cancellation rate in the range of 15% to 20% is
representative of an industry average cancellation rate. Our cancellation rate
is on the lower end of the industry average, which we believe is due to our
target buyer demographics which generally have not included a significant
amount of the first time homebuyers through December 31, 2019.
52
Residential Units Gross Margin
Land and Lots Revenue
The table below represents the components of residential units gross margin
(dollars in thousands):
The table below represents lots closed and land and lots revenue (dollars in
thousands):
Years Ended December 31,
2019
2018
Years Ended December 31,
2019
2018
Change
%
Home closings revenue
$752,273
100.0% $571,177
100.0%
Lots revenue
$31,820
$35,074
$(3,254)
(9.3)%
Cost of homebuilding units
591,321
78.6%
427,164
74.8%
Land revenue
10
9,680
(9,670)
(99.9)%
Homebuilding gross margin
$160,952
21.4% $144,013
25.2%
Land and lots revenue
$31,830
$44,754
$(12,924)
(28.9)%
Mechanic’s lien contracts revenue
$7,557
100.0%
$7,716
100.0%
Cost of mechanic’s lien contracts
6,563
86.8%
6,115
79.3%
Mechanic’s lien contracts gross margin
$994
13.2%
$1,601
20.7%
Residential units revenue
$759,830
100.0% $578,893
100.0%
Cost of residential units
597,884
78.7%
433,279
74.8%
Residential units gross margin
$161,946
21.3% $145,614
25.2%
Beginning in the first quarter of 2019, the Company reclassified its sales
commission expenses from cost of residential units to selling, general and
administrative expense in the consolidated statements of income in order to
be more comparable with a majority of its peers. Sales commission expenses
represented 4.2% and 4.1% of the residential units revenue for the years
ended December 31, 2019 and 2018, respectively. Prior period amounts
have been reclassified to conform to the current period presentation.
Cost of residential units for the year ended December 31, 2019 increased by
$164.6 million, or 38.0%, compared to the year ended December 31, 2018,
primarily due to the 33.6% increase in the number of new homes delivered,
a change in mix of homes delivered, and a decrease in the number of homes
built on self-developed lots.
Residential units gross margin for the year ended December 31, 2019
decreased to 21.3%, compared to 25.2% for the year ended December 31,
2018 primarily because of lower initial prices on new communities opened
and increases in sales incentives to customers. Such sales incentives have
contributed to an overall 31.3% increase in residential units revenue for the
year ended December 31, 2019 compared to the year ended December 31,
2018.
Lots closed
211
239
(28)
(11.7)%
Average sales price of lots closed
$150.8
$146.8
$4.0
2.7%
The 9.3% decrease in lots revenue was driven by the 11.7% decrease in
the number of lots closed, which was due to us retaining more lots for our
builders, partially offset by the 2.7% increase in the average lot price. The
decrease in land revenue is due to the lower volume of land sold during the
year ended December 31, 2019 compared to the year ended December 31,
2018.
Selling, General and Administrative Expense
The table below represents the components of selling, general and
administrative expense (dollars in thousands):
Years Ended December 31,
As Percentage of Segment
Revenue
2019
2018
2019
2018
Builder operations
$94,520
$73,037
12.4%
12.5%
Land development
1,730
3,147
5.6%
7.9%
Corporate and other unallocat-
ed
Total selling, general and
administrative expense
2,409
4,518
—%
—%
$98,659
$80,702
12.5%
12.9%
The 0.4% decrease of total selling, general and administrative expense as a
percentage of revenue was driven by an increase in expenditures to support
the growth in home sales, more than offset by an increase in revenues and in
capitalized overhead adjustments.
53
Builder Operations
Other Income, Net
Selling, general and administrative expense as a percentage of revenue for
builder operations remained relatively flat. Builder operations expenditures
include salary expenses, sales commissions, and community costs such
as advertising and marketing expenses, rent, professional fees, and non-
capitalized property taxes.
Other income, net, increased to $9.0 million for the year ended December
31, 2019, compared to $2.6 million for the year ended December 31, 2018.
The increase was primarily due to approximately $5.0 million in forfeited
deposit monies on the sale of finished lots and an increase in title closing and
settlement services.
Land Development
Income Tax Expense
The 2.3% decrease in selling, general and administrative expense as a
percentage of revenue for land development was primarily driven by an
increase in capitalized property taxes during the year ended December 31,
2019 compared to the year ended December 31, 2018.
Corporate, Other and Unallocated
Selling, general and administrative expense for the corporate, other and
unallocated non-operating segment for the year ended December 31, 2019
was $2.4 million, compared to $4.5 million for the year ended December
31, 2018, the decrease driven primarily by transaction expenses related to a
public secondary offering of the Company’s shares in 2018 and an increase in
capitalized overhead adjustments that are not allocated to builder operations
and land development segments.
Income tax expense increased to $20.0 million for the year ended December
31, 2019 from $17.1 million for the year ended December 31, 2018, driven
by the increase in the projected effective tax rate, which was primarily
attributable to the decrease in tax benefits related to noncontrolling interests
and an increase in state income taxes.
As of December 31, 2019, all federal net operating loss carryforwards were
fully utilized.
During the year ended December 31, 2019, the Company decided to write
off its gross state net operating loss carryforwards in Minnesota of $13.7
million, as well as the related deferred tax asset and valuation allowance.
Management believes on a more-likely-than-not basis that the Minnesota
net operating loss carryforwards would not have been utilized.
Equity in Income of Unconsolidated Entities
Equity in income of unconsolidated entities increased to $9.8 million, or
35.1%, for the year ended December 31, 2019, compared to $7.3 million for
the year ended December 31, 2018, primarily due to an increase in earnings
from GB Challenger, LLC and the formation of Green Brick Mortgage.
Year Ended December 31, 2018 Compared to the Year Ended December 31,
2017
For discussion and analysis of the Company’s results of operations for the
year ended December 31, 2018 as well as for comparison to the Company’s
results of operations for the year ended December 31, 2017, refer to Item 7
of Part II of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018.
54
Lots Owned and Controlled
The following table presents the lots we owned or controlled, including
lot option contracts, as of December 31, 2019 and December 31, 2018.
Owned lots are those for which we hold title, while controlled lots are lots
past feasibility studies for which we do not hold title but have the contractual
right to acquire title.
December 31, 2019
December 31, 2018
Lots owned
Central
Southeast
Total lots owned
Lots controlled
Central
Southeast
Total lots controlled
Total lots owned and controlled (1)
Percentage of lots owned
4,223
2,196
6,419
1,410
1,147
2,557
8,976
71.5%
4,447
1,788
6,235
853
990
1,843
8,078
77.2%
* Total lots excludes lots with homes under construction.
The increase in the number of lots controlled is related to the formation of
Trophy in Dallas in September 2018.
Liquidity and Capital Resources Overview
As of December 31, 2019 and December 31, 2018, we had $33.3 million
and $38.3 million of unrestricted cash, respectively. Management believes
that we have a prudent cash management strategy, including consideration
of cash outlays for land and lot acquisition and development. We intend
to generate and redeploy net cash from the sale of inventory to acquire
and develop land and lots that represent opportunities to generate desired
margins. We may also use cash to make additional investments in business
acquisitions, joint ventures, or other strategic activities.
Our principal uses of capital for the year ended December 31, 2019 were
home construction, land purchases, land development, operating expenses,
and payment of routine liabilities. We used funds generated by operations and
available borrowings to meet our short-term working capital requirements.
We remain focused on generating positive margins in our builder operations
segments and acquiring desirable land positions in order to maintain a strong
balance sheet and remain poised for continued growth.
Cash flows for each of our communities depend on the community’s stage in
the development cycle and can differ substantially from reported earnings.
Early stages of development or expansion require significant cash outlays for
land acquisitions, entitlements and other approvals, roads, utilities, general
landscaping and other amenities. These costs are a component of our
inventory and are not recognized in our statement of income until a home
closes. In the later stages of community development, cash inflows may
significantly exceed earnings reported for financial statement purposes, as
the cash outflows associated with home construction and land development
previously occurred.
Our debt to total capitalization ratio, which is calculated as the sum of
borrowings on lines of credit and the senior unsecured notes, net of debt
issuance costs, divided by the total Green Brick Partners, Inc. stockholders’
equity, was approximately 31.3% as of December 31, 2019. It is our intent
to prudently employ leverage to continue to invest in our land acquisition,
development and homebuilding businesses. We target a debt to total
capitalization ratio of approximately 30% to 35%, which we expect will
continue to provide us with significant additional growth capital.
The Company’s key sources of liquidity were funds generated by operations
and provided by lines of credit and issuance of senior unsecured notes
during the year ended December 31, 2019. Borrowings on lines of credit
outstanding, net of debt issuance costs, as of December 31, 2019 and
December 31, 2018 consisted of the following (in thousands):
Secured revolving credit facility
$38,000
$46,500
December 31, 2019
December 31, 2018
Unsecured revolving credit facility
128,000
155,500
Debt issuance costs, net of amortization
(1,358)
(1,614)
Total borrowings on lines of credit, net
$164,642
$200,386
55
Borrowings on the secured revolving credit facility have a maturity date of
May 1, 2022 and bear interest at a floating rate per annum equal to the
rate announced by Bank of America, N.A. as its “Prime Rate” less 0.25%.
Notwithstanding the foregoing, the interest may not, at any time, be less
than 4% per annum or more than the lesser amount of 18% and the highest
maximum rate allowed by applicable law. As of December 31, 2019, the
interest rate on outstanding borrowings under the secured revolving credit
facility was 4.50% per annum.
December 31, 2019 were primarily driven by an increase in inventory of
$84.0 million, a decrease in customer and builder deposits of $8.0 million, a
decrease in accrued expenses of $4.4 million, an increase in other assets of
$1.5 million, and a $1.3 million payment of contingent consideration related
to the acquisition of GRBK GHO in excess of acquisition date fair value,
partially offset by $71.0 million of cash generated from business operations,
a $4.0 million increase in accounts payable and a $2.1 million decrease in
earnest money deposits.
Borrowings on the unsecured revolving credit facility have a maturity date of
December 14, 2021 for $17.9 million and December 14, 2022 for $110.1
million, respectively, and bear interest at a floating rate equal to either (a) for
base rate advances, the highest of (1) the lender’s base rate, (2) the federal
funds rate plus 0.5% and (3) the one-month LIBOR plus 1.0%, in each case
plus 1.5%; or (b) in the case of Eurodollar rate advances, the reserve adjusted
LIBOR plus 2.5%. As of December 31, 2019, the interest rates on outstanding
borrowings under the unsecured revolving credit facility ranged from 4.25%
to 4.30% per annum.
Senior unsecured notes, net of debt issuance costs, were $73.4 million and
$0.0 million as of December 31, 2019 and December 31, 2018, respectively.
Principal on the senior unsecured notes is required to be paid in increments
of $12.5 million on August 8, 2024 and $12.5 million on August 8, 2025. The
final principal payment of $50.0 million is due on August 8, 2026. Optional
prepayment is allowed with payment of a “make-whole” premium which
fluctuates depending on market interest rates. Interest, which accrues at a
fixed rate of 4.00% per annum, is payable quarterly in arrears commencing
November 8, 2019.
• Investing activities. Net cash used in investing activities for the year ended
December 31, 2019 decreased to $7.9 million compared to $30.8 million
for the year ended December 31, 2018. The $23.0 million decrease in
cash outflows was primarily attributable to the acquisition of GRBK GHO
during the year ended December 31, 2018, partially offset by the $5.3
million investment in EJB River Holdings joint venture during the year ended
December 31, 2019.
• Financing activities. Net cash provided by financing activities for the year
ended December 31, 2019 was $25.9 million, compared to $71.8 million
during the year ended December 31, 2018. The cash inflows for the year
ended December 31, 2019 were primarily due to borrowings on lines of
credit of $224.0 million and borrowings from senior unsecured notes of
$75.0 million, partially offset by $260.0 million of repayments of lines of
credit and $11.5 million of distributions to noncontrolling interests partners.
For discussion and analysis of the Company’s cash flows for the year ended
December 31, 2018 as well as for comparison to the Company’s cash flows
for the year ended December 31, 2017, refer to Item 7 of Part II of the
Company’s Annual Report on Form 10-K for the year ended December 31,
2018.
For more detailed information on the Company’s lines of credit, refer to Note
7 to the Consolidated Financial Statements located in Part II, Item 8 of this
Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
Cash Flows
Land and Lot Option Contracts
The following summarizes our primary sources and uses of cash for the year
ended December 31, 2019 as compared to the year ended December 31,
2018:
• Operating activities. Net cash used in operating activities for the year ended
December 31, 2019 was $22.1 million, compared to $39.5 million during the
year ended December 31, 2018. The net cash outflows for the year ended
In the ordinary course of business, we enter into land purchase contracts
with third-party developers in order to procure lots for the construction of
our homes in the future. We are subject to customary obligations associated
with such contracts. These purchase contracts typically require an earnest
money deposit, and the purchase of properties under these contracts is
generally contingent upon satisfaction of certain requirements, including
obtaining applicable property and development entitlements.
56
We also utilize option contracts with lot sellers as a method of acquiring lots
in staged takedowns, which are the schedules that dictate when lots must
be purchased to help manage the financial and market risk associated with
land holdings, and to reduce the use of funds from our corporate financing
sources. Lot option contracts generally require us to pay a non-refundable
deposit for the right to acquire lots over a specified period of time at pre-
determined prices which typically include escalations in lot prices over time.
Our utilization of lot option contracts is dependent on, among other things,
the availability of land sellers willing to enter into these arrangements, the
availability of capital to finance the development of optioned lots, general
housing market conditions and local market dynamics. Options may be more
difficult to procure from land sellers in strong housing markets and are more
prevalent in certain geographic regions.
We generally have the right, at our discretion, to terminate our obligations
under both purchase contracts and option contracts by forfeiting the earnest
money deposit with no further financial responsibility to the land seller. As
of December 31, 2019, the Company had earnest money deposits of $17.3
million at risk associated with contracts to purchase 2,557 lots past feasibility
studies with an aggregate purchase price of approximately $189.8 million.
Deposits and pre-acquisition costs written off related to option contracts
abandoned totaled $0.9 million, $0.7 million and $0.2 million for the years
ended December 31, 2019, 2018 and 2017, respectively.
Letters of Credit and Performance Bonds
Refer to Note 17 in the accompanying Notes to the consolidated financial
statements included in this Annual Report on Form 10-K for details of letters
of credit and performance bonds outstanding.
Guarantee
Refer to Note 3 in the accompanying Notes to the consolidated financial
statements included in this Annual Report on Form 10-K for details of our
guarantee in relation to EJB River Holdings joint venture.
Critical Accounting Policies
The preparation of financial statements in accordance with United States
generally accepted accounting principles (“GAAP”) requires management to
use judgment and make estimates that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues, costs and expenses during the reporting period. Management
bases estimates and judgments on historical experience and on various other
factors that we believe to be reasonable under the circumstances. Actual
results may differ from estimates under different assumptions or conditions.
Management believes that the following accounting area is most critical to
the portrayal of our financial condition and results of operations and requires
the most subjective or complex judgments.
Impairment of Inventory
The Company values inventory at cost unless the carrying value is determined
to be not recoverable in which case the affected inventory is written down to
fair value. In accordance with ASC 360, Property, Plant, and Equipment (“ASC
360”), we evaluate our inventory for indicators of impairment by individual
community and development during each reporting period.
For our builder operations segments, management reviews community gross
margins, levels of completed speculative home units, quantities of lots not
started, and community outlook factors. In the event that this review suggests
higher potential for losses at a specific community, the Company monitors
such communities by adding them to its “watchlist” communities, and, when
an impairment indicator is present, further analysis is performed.
For our land development segment, we perform a quarterly review for
indicators of impairment for each project which involves projecting future
lot closings based on executed contracts and comparing these anticipated
revenues to projected costs. In determining the allocation of costs to
a particular land parcel, we rely on project budgets which are based on a
variety of assumptions, including assumptions about development schedules
and future costs to be incurred. It is common that actual results differ from
budgeted amounts for various reasons, including delays, changes in costs
that have not been committed, unforeseen issues encountered during
project development that fall outside the scope of existing contracts, or
items that ultimately cost more or less than the budgeted amount. We apply
procedures to maintain best estimates in our budgets, including assessing
and revising project budgets on a periodic basis, obtaining commitments
57
from subcontractors and vendors for future costs to be incurred and utilizing
the most recent information available to estimate costs.
that could have an impact on sales pace, sales price and/or building costs;
and (v) alternative uses for the property.
Many assumptions are interdependent and a change in one may require
a corresponding change to other assumptions. For example, increasing or
decreasing sales absorption rates has a direct impact on the estimated per
unit sales price of a home, the level of time-sensitive costs (such as indirect
construction, overhead and carrying costs), and selling and marketing costs
(such as model home maintenance costs and advertising costs). Due to
uncertainties in the estimation process, the volatility in demand for new
housing and the long life cycle of many communities, actual results could
differ significantly from such estimates.
Refer to Note 1 to our consolidated financial statements included in Part II,
Item 8 of this Annual Report on Form 10-K for further description of the
Company’s significant accounting policies.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements included in Part II, Item 8
of this Annual Report on Form 10-K for recent accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable to smaller reporting companies.
For each real estate asset that has an indicator of impairment, we analyze
whether the estimated remaining undiscounted future cash flows are
more or less than the asset’s carrying value. The estimated cash flows are
determined by projecting the remaining revenue from closings based on the
contractual lot takedowns remaining or historical and projected home sales
or delivery absorptions for homebuilding operations and then comparing
such projections to the remaining projected expenditures for development
or home construction. Remaining projected expenditures are based on the
most current pricing/bids received from subcontractors for current phases
or homes under development. For future phases of land development,
management uses its judgment to project potential cost increases. When
projecting revenue, management does not assume improvement in market
conditions.
If the estimated undiscounted cash flows are less than the asset’s carrying
value, the asset is deemed impaired and will be written down to fair value
less associated costs to sell. These impairment evaluations require us to make
estimates and assumptions regarding future conditions, including the timing
and amounts of development costs and sales prices of real estate assets,
to determine if expected future cash flows will be sufficient to recover the
asset’s carrying value.
Fair value is determined based on estimated future cash flows discounted
for inherent risks associated with real estate assets. These discounted cash
flows are impacted by expected risk based on estimated land development
activities, construction and delivery timelines, market risk of price erosion,
uncertainty of development or construction cost increases, and other risks
specific to the asset or market conditions where the asset is located when
the assessment is made. These factors are specific to each community and
may vary among communities.
When estimating cash flows of a community, management makes various
assumptions, including: (i) expected sales prices and sales incentives to be
offered, including the number of homes available, pricing and incentives being
offered by us or other builders, and future sales price adjustments based
on market and economic trends; (ii) expected sales pace and cancellation
rates based on local housing market conditions, competition and historical
trends; (iii) costs expended to date and expected to be incurred including,
but not limited to, land and land development costs, home construction
costs, interest costs, indirect construction and overhead costs, and selling
and marketing costs; (iv) alternative product offerings that may be offered
58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Green Brick Partners, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Green Brick Partners, Inc. and its subsidiaries (the Company) as of December 31, 2019
and 2018, the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December
31, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 6, 2020 expressed an unqualified opinion on
the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company’s auditor since 2016.
Dallas, Texas
March 6, 2020
59
Green Brick Partners, Inc. Consolidated Balance Sheets (In Thousands, Except Share Data)
As of December 31,
Assets
Cash
Restricted cash
Receivables
Inventory
Investments in unconsolidated entities
Right-of-use assets - operating leases
Property and equipment, net
Earnest money deposits
Deferred income tax assets, net
Intangible assets, net
Goodwill
Other assets
Total assets
Liabilities:
Accounts payable
Accrued expenses
Customer and builder deposits
Lease liabilities - operating leases
Borrowings on lines of credit, net
Senior unsecured notes, net
Contingent consideration
Total liabilities
Commitments and contingencies
Liabilities and Equity
Redeemable noncontrolling interest in equity of consolidated subsidiary
Equity:
Green Brick Partners, Inc. stockholders’ equity
Preferred stock, $0.01 par value: 5,000,000 shares authorized; none issued and outstanding
Common stock, $0.01 par value: 100,000,000 shares authorized; 50,879,949 and 50,719,884 issued and 50,488,010 and 50,583,128 outstanding as of December
31, 2019 and December 31, 2018, respectively
Treasury stock, at cost, 391,939 and 136,756 shares as of December 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Retained earnings
Total Green Brick Partners, Inc. stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
60
The accompanying notes are an integral part of these consolidated financial statements.
2019
2018
$33,269
$38,315
4,416
4,720
3,440
4,842
753,567
668,961
30,294
20,269
3,462
4,309
14,686
15,262
707
680
—
4,690
16,793
16,499
856
680
10,167
8,681
$875,539
$784,026
$30,044
$26,091
24,656
23,954
3,564
29,201
31,978
—
164,642
200,386
73,406
5,267
—
2,207
325,533
289,863
13,611
8,531
-
509
(3,167)
-
507
(981)
290,799
291,299
235,027
177,526
523,168
468,351
13,227
17,281
536,395
485,632
$ 875,539
$784,026
Green Brick Partners, Inc. Consolidated Statement of Income
(In Thousands, Except Share Data)
Southgate Homes, The Village at Twin Creeks
Allen, TX
Residential units revenue
Land and lots revenue
Total revenues
Cost of residential units
Cost of land and lots
Total cost of revenues
Total gross profit
Years Ended December 31,
2019
2018
2017
$759,830
$578,893
$439,520
31,830
44,754
18,730
791,660
623,647
458,250
597,884
433,279
325,934
24,694
36,166
13,856
622,578
469,445
339,790
169,082
154,202
118,460
Selling, general and administrative expense
98,659
80,702
58,442
Change in fair value of contingent consideration
Equity in income of unconsolidated entities
Other income, net
4,906
9,809
9,003
1,693
7,259
2,605
—
2,746
1,473
Income before income taxes
84,329
81,671
64,237
Income tax expense
Net income
Less: Net income attributable to noncontrolling interests
20,027
64,302
5,646
17,136
64,535
12,912
39,031
25,206
10,236
Net income attributable to Green Brick Partners, Inc.
$58,656
$51,623
$14,970
Net income attributable to Green Brick Partners, Inc. per
common share:
Basic
Diluted
$1.16
$1.16
$1.02
$1.02
$0.30
$0.30
Weighted average common shares used in the calculation
of net income attributable to Green Brick Partners, Inc.
per common share:
Basic
Diluted
50,530
50,636
50,652
50,751
49,597
49,683
The accompanying notes are an integral part of these consolidated financial statements.
61
Green Brick Partners, Inc. Consolidated Statement of Changes in Stockholders’ Equity
(In Thousands, Except Share Data)
Common Stock
Treasury Stock
Shares
Ammount
Shares
Ammount
Additional
Paid-in
Capital
Retained
Earnings
Total Green Brick
Partners, Inc.
Stockholders’
Equity
Noncontrolling
Interests
Total
Stockholders’
Equity
Balance at December 31, 2016
48,955,909
$490
Share-based compensation
Issuance of common stock under 2014
Omnibus Equity Incentive Plan
Withholdings from vesting of restricted stock
awards
Amortization of deferred share-based
compensation
—
229,049
(63,057)
—
Common stock issued in connection with the
investment in Challenger
1,477,000
Common stock issuable in connection with the
investment in Challenger
Contributions
Distributions
Net income
—
—
—
—
—
2
(1)
—
15
—
—
—
—
Balance at December 31, 2017
50,598,901
$506
Share-based compensation
Issuance of common stock under 2014 Omnibus
Equity Incentive Plan
Withholdings from vesting of restricted stock
awards
Amortization of deferred share-based
compensation
Common stock issued in connection with the
investment in Challenger
Stock repurchases
Contributions
Distributions
Net income
—
140,211
(39,228)
—
20,000
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(136,756)
(981)
—
—
—
—
—
—
$273,149
$110,933
$384,572
$16,913
$401,485
289
1,924
(585)
356
14,607
198
—
—
—
—
—
—
—
—
—
—
—
289
1,926
(586)
356
14,622
198
—
—
—
—
—
—
—
—
438
289
1,926
(586)
356
14,622
198
438
(10,896)
(10,896)
14,970
14,970
10,236
25,206
$289,938
$125,903
$416,347
$16,691
$433,038
288
1,081
(412)
404
—
—
—
—
—
—
—
—
—
—
—
—
—
288
1,082
(412)
404
—
(981)
—
—
—
—
—
—
—
—
5
288
1,082
(412)
404
—
(981)
5
(10,747)
(10,747)
51,623
51,623
11,332
62,955
Balance at December 31, 2018
50,719,884
$507
(136,756)
(981)
$291,299
$177,526
$468,351
$17,281
$485,632
62
Green Brick Partners, Inc. Consolidated Statement of Changes in Stockholders’ Equity
(In Thousands, Except Share Data)
Common Stock
Treasury Stock
Shares
Ammount
Shares
Ammount
Additional
Paid-in
Capital
Retained
Earnings
Total Green Brick
Partners, Inc.
Stockholders’
Equity
Noncontrolling
Interests
Total
Stockholders’
Equity
Balance at December 31, 2018
50,719,884
$507
(136,756)
(981)
$291,299
$177,526
$468,351
$17,281
$485,632
Share-based compensation
Issuance of common stock under 2014 Omnibus
Equity Incentive Plan
Withholdings from vesting of restricted stock
awards
Amortization of deferred share-based
compensation
Stock repurchases
Accretion of redeemable noncontrolling interest
Increase in ownership in Southgate Homes
Increase in ownership in Centre Living Homes
Contributions
Distributions
Net income
—
219,181
(59,116)
—
—
—
—
—
—
—
—
—
3
(1)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(255,183
(2,186)
—
—
—
—
—
—
—
—
—
—
—
—
236
1,463
(543)
489
—
(2,145)
—
—
—
—
—
—
—
—
—
—
—
(891)
(264)
—
—
236
1,466
(544)
489
(2,186)
(2,145)
(891)
(264)
—
—
—
—
—
—
—
—
891
264
236
1,466
(544)
489
(2,186)
(2,145)
—
—
3,600
3,600
(10,993)
(10,993)
58,656
58,656
2,184
60,840
Balance at December 31, 2019
50,879,949
$509
(391,939)
$(3,167)
$290,799
$235,027
$523,168
$13,227
$536,395
The accompanying notes are an integral part of these consolidated financial statements.
Trophy Signature Homes, Park West
Frisco, TX
63
Green Brick Partners, Inc. Consolidated Statements of Cash Flows (In Thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization expense
Share-based compensation expense
Change in fair value of contingent consideration
Deferred income taxes, net
Equity in income of unconsolidated entities
Distributions of income from unconsolidated entities
Changes in operating assets and liabilities:
Decrease (increase) in receivables
Increase in inventory
Decrease (increase) in earnest money deposits
Increase in other assets
Increase (decrease) in accounts payable
(Decrease) increase in accrued expenses
Payment of contingent consideration in excess of
acquisition date fair value
Years Ended December 31,
2019
2018
2017
Continued
Years Ended December 31,
2019
2018
2017
Cash flows from financing activities:
$64,302
$64,535
$25,206
Borrowings from lines of credit
224,000
165,000
88,500
3,079
2,191
4,906
1,237
(9,809)
5,084
2,943
1,774
1,693
14,712
(7,259)
4,623
Borrowings from senior unsecured notes
Payments of debt issuance costs
Repayments of lines of credit
Repayments of notes payable
Payment of contingent consideration
Payments of withholding tax on vesting of
restricted stock awards
325
2,571
—
36,299
(2,746)
974
Stock repurchases
Contributions from noncontrolling interests
75,000
(1,974)
—
(870)
—
(809)
(260,000)
(70,000)
(56,500)
—
(10,226)
(1,022)
(514)
(544)
(2,186)
3,600
—
(412)
(981)
5
—
(586)
—
438
Distributions to noncontrolling interests
(10,993)
(10,747)
(10,896)
122
(3,029)
843
(83,970)
(129,291)
(95,452)
Distributions to redeemable noncontrolling
interest
Net cash provided by financing activities
2,107
2,119
(1,525)
(2,741)
(483)
9,470
3,953
(4,384)
(1,332)
(3,097)
(1,701)
7,241
4,175
—
—
Cash, end of period
Net (decrease) increase in cash and restricted cash
Cash, beginning of period
Restricted cash, beginning of period
(527)
25,862
(4,070)
38,315
3,440
—
—
71,769
1,466
36,684
3,605
19,125
687
35,157
4,445
33,269
4,416
38,315
3,440
36,684
3,605
Cash and restricted cash, beginning of period
$41,755
$40,289
$39,602
(Decrease) increase in customer and builder deposits
(8,024)
1,458
7,359
Restricted cash, end of period
Net cash used in operating activities
(22,063)
(39,476)
(18,003)
Cash and restricted cash, end of period
$37,685
$41,755
$40,289
Cash flows from investing activities:
Business combination, net of acquired cash
Investments in unconsolidated entities
Purchase of property and equipment
Net cash used in investing activities
—
(26,861)
(5,300)
(2,569)
(755)
(3,211)
(7,869)
(30,827)
—
(286)
(149)
(435)
Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized interest
—
—
—
Cash paid for income taxes, net of refunds
$14,313
$4,611
$2,941
Supplemental disclosure of noncash investing and
financing activities:
Equity issuance related to investment in
unconsolidated entity
—
—
$14,622
Consolidated Statement of Cash Flow continued on right
The accompanying notes are an integral part of these consolidated financial statements.
64
GREEN BRICK PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared
in accordance with United States generally accepted accounting principles
(“GAAP”) as set forth in the Financial Accounting Standards Board’s (“FASB”)
Accounting Standards Codification (“ASC”) and applicable regulations of the
Securities and Exchange Commission (“SEC”).
The preparation of the consolidated financial statements in conformity
with GAAP requires management of the Company to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes, including the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could
differ from those estimates.
Principles of Consolidation
Reclassifications
The accompanying consolidated financial statements include the accounts
of Green Brick Partners, Inc., its controlled subsidiaries, and variable interest
entities in which Green Brick Partners, Inc. or one of its controlled subsidiaries
is deemed to be the primary beneficiary (together, the “Company”, “we”, or
“Green Brick”).
The Company evaluated its wholly-owned subsidiaries and controlled
builders under ASC 810, Consolidation (“ASC 810”) and concluded that each
controlled builder is a variable interest entity (“VIE”). The Company owns a
50% percent equity interest and a 51% voting interest in each controlled
builder. In addition, the Company appoints two of the three board managers
of each controlled builder and is able to exercise control over the operations
of each controlled builder. The Company accounts for its controlled builders
under the variable interest model and is the primary beneficiary of each
controlled builder in accordance with ASC 810.
All intercompany balances and transactions have been eliminated in
consolidation.
The Company uses the equity method of accounting for its investments in
unconsolidated entities over which it exercises significant influence but does
not have a controlling interest. Under the equity method, the Company’s
share of the unconsolidated entities’ earnings or losses is included in the
consolidated statements of income.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
Beginning in the first quarter of 2019, the Company reclassified its sales
commission expenses from cost of residential units to selling, general and
administrative expense in the consolidated statements of income in order to
be more comparable with a majority of its peers. There was no impact on net
income from the reclassification in any period.
Cash
The cash balances of the Company are held with multiple financial institutions.
At times, cash balances at certain banks and financial institutions may exceed
insurable amounts. The Company believes it mitigates this risk by monitoring
the financial stability of institutions holding material cash balances. The
Company has not experienced any losses in such accounts and believes that
the risk of loss is minimal.
Restricted Cash
Restricted cash primarily relates to cash held in escrow for sales of developed
lots to third parties and customer deposits from homebuyers.
65
Receivables
Receivables consist of amounts collectible from manufacturing rebates
earned by our homebuilders during the normal course of business, amounts
collectible from third-party escrow agents related to closings on land, lots
and homes, amounts collectible related to mechanic’s lien contracts, as well
as income tax receivables. As of December 31, 2019 and 2018, all amounts
are considered fully collectible and no allowance for doubtful accounts is
recorded. Any allowance for doubtful accounts is estimated based on our
historical losses, the existing economic conditions, and the financial stability
of our customers. Receivables are written off in the period that they are
deemed uncollectible.
Inventory and Cost of Revenues
Inventory consists of undeveloped land, raw land scheduled for development,
land in the process of development, land held for sale, developed lots,
homes completed and under construction, and model homes. Inventory is
valued at cost unless the carrying value is determined to be not recoverable
in which case the affected inventory is written down to fair value. Cost
includes any related pre-acquisition costs that are directly identifiable with a
specific property so long as those pre-acquisition costs are anticipated to be
recoverable at the sale of the property.
Residential lots held for sale and lots held for development include the
initial cost of acquiring the land as well as certain costs capitalized related to
developing the land into individual residential lots including direct overhead,
interest and real estate taxes.
Land development and other project costs, including direct overhead, interest
and property taxes incurred during development and home construction, are
capitalized. Land development and other common costs that benefit an entire
community are allocated to individual lots or homes based on relative sales
value. The costs of completed lots are transferred to work in process when
home construction begins. Home construction costs and related carrying
charges (principally interest and real estate taxes) are allocated to the cost of
individual homes.
Inventory costs for completed homes are expensed upon closing and
delivery of the homes. Changes to estimated total land development costs
subsequent to initial home closings in a community are generally allocated
to the unclosed homes and lots in the community on a pro-rata basis. The
66
life cycle of a community generally ranges from 2 to 6 years, commencing
with the acquisition of land, continuing through the land development
phase, construction, and concluding with the sale and delivery of homes. We
recognize costs as incurred on our mechanic’s lien contracts.
Impairment of Inventory
In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), we
evaluate our inventory for indicators of impairment by individual community
and development during each reporting period.
For our builder operations segments, during each reporting period, community
gross margins, levels of completed speculative home units, quantities of lots
not started, and community outlook factors are reviewed by management.
In the event that this review suggests higher potential for losses at a specific
community, the Company monitors such communities by adding them to
its “watchlist” communities, and, when an impairment indicator is present,
further analysis is performed.
For our land development segment, we perform a quarterly review for
indicators of impairment for each project which involves projecting future
lot closings based on executed contracts and comparing these anticipated
revenues to projected costs. In determining the allocation of costs to
a particular land parcel, we rely on project budgets which are based on a
variety of assumptions, including assumptions about development schedules
and future costs to be incurred. It is common that actual results differ from
budgeted amounts for various reasons, including delays, changes in costs
that have not been committed, unforeseen issues encountered during
project development that fall outside the scope of existing contracts, or
items that ultimately cost more or less than the budgeted amount. We apply
procedures to maintain best estimates in our budgets, including assessing
and revising project budgets on a periodic basis, obtaining commitments
from subcontractors and vendors for future costs to be incurred and utilizing
the most recent information available to estimate costs.
Each reporting period, management reviews each real estate asset which
has an indicator of impairment in order to determine whether the estimated
remaining undiscounted future cash flows are more or less than the asset’s
carrying value. The estimated cash flows are determined by projecting the
remaining revenue from closings based on the contractual lot takedowns
remaining or historical and projected home sales or delivery absorptions
for homebuilding operations and then comparing such projections to the
remaining projected expenditures for development or home construction.
Remaining projected expenditures are based on the most current pricing/
bids received from subcontractors for current phases or homes under
development. For future phases of land development, management uses its
judgment to project potential cost increases. In determining the estimated
cash flows for land held for sale, management considers recent comparisons
to market comparable transactions, bona fide letters of intent from outside
parties, executed sales contracts, broker quotes, and similar information.
When projecting revenue, management does not assume improvement in
market conditions.
If the estimated undiscounted cash flows are more than the asset’s carrying
value, no impairment adjustment is required. However, if the estimated
undiscounted cash flows are less than the asset’s carrying value, the asset
is deemed impaired and will be written down to fair value less associated
costs to sell. These impairment evaluations require us to make estimates and
assumptions regarding future conditions, including the timing and amounts
of development costs and sales prices of real estate assets, to determine if
expected future cash flows will be sufficient to recover the asset’s carrying
value.
Fair value is determined based on estimated future cash flows discounted
for inherent risks associated with real estate assets. These discounted cash
flows are impacted by expected risk based on estimated land development
activities, construction and delivery timelines, market risk of price erosion,
uncertainty of development or construction cost increases, and other risks
specific to the asset or market conditions where the asset is located when
the assessment is made. These factors are specific to each community and
may vary among communities.
When estimating cash flows of a community, management makes various
assumptions, including: (i) expected sales prices and sales incentives to be
offered, including the number of homes available, pricing and incentives being
offered by us or other builders, and future sales price adjustments based
on market and economic trends; (ii) expected sales pace and cancellation
rates based on local housing market conditions, competition and historical
trends; (iii) costs expended to date and expected to be incurred including,
but not limited to, land and land development costs, home construction
costs, interest costs, indirect construction and overhead costs, and selling
and marketing costs; (iv) alternative product offerings that may be offered
that could have an impact on sales pace, sales price and/or building costs;
and (v) alternative uses for the property.
Many assumptions are interdependent and a change in one may require
a corresponding change to other assumptions. For example, increasing or
decreasing sales absorption rates has a direct impact on the estimated per
unit sales price of a home, the level of time-sensitive costs (such as indirect
construction, overhead and carrying costs), and selling and marketing costs
(such as model home maintenance costs and advertising costs). Due to
uncertainties in the estimation process, the volatility in demand for new
housing and the long life cycle of many communities, actual results could
differ significantly from such estimates.
Capitalization of Interest
The Company capitalizes interest costs incurred to inventory during
development and other qualifying activities. Interest capitalized as cost of
inventory is charged to cost of revenues as related homes, land and lots
are closed. Interest incurred on undeveloped land is directly expensed and
included in interest expense in our consolidated statements of income.
Investments in Unconsolidated Entities
In accordance with ASC 323, Investments - Equity Method and Joint
Ventures (“ASC 323”), the Company uses the equity method of accounting
for its investments in unconsolidated entities over which it exercises
significant influence but does not have a controlling interest. The equity
method of accounting requires the investment to be initially recorded at
cost and subsequently adjusted for the Company’s share of equity in the
unconsolidated entity’s earnings or losses. The Company evaluates the
carrying amount of the investments in unconsolidated entities for impairment
in accordance with ASC 323. If the Company determines that a loss in the
value of the investment is other than temporary, the Company writes down
the investment to its estimated fair value. Any such losses are recorded to
equity in income of unconsolidated entities in the Company’s consolidated
statements of income. Due to uncertainties in the estimation process and the
volatility in demand for new housing, actual results could differ significantly
from such estimates.
The Company has made an election to classify distributions received from
unconsolidated entities using the nature of the distribution approach.
Distributions received are classified as cash inflows from operating activities
based on the nature of the activities of the investee that generated the
distribution.
67
Variable Interest Entities
The Company accounts for variable interest entities (“VIEs”) in accordance
with ASC 810. In accordance with ASC 810, an entity is a VIE when: (a) the
equity investment at risk in the entity is not sufficient to permit the entity
to finance its activities without additional subordinated financial support
provided by other parties, including the equity holders; (b) the entity’s equity
holders as a group either (i) lack the direct or indirect ability to make decisions
about the entity, (ii) are not obligated to absorb expected losses of the entity
or (iii) do not have the right to receive expected residual returns of the entity;
or (c) the entity’s equity holders have voting rights that are not proportionate
to their economic interests, and the activities of the entity involve or are
conducted on behalf of the equity holder with disproportionately few
voting rights. If an entity is deemed to be a VIE pursuant to ASC 810, the
enterprise that has both (i) the power to direct the activities of the VIE
that most significantly impacts the entity’s economic performance and
(ii) the obligation to absorb the expected losses of the entity or right to
receive benefits from the entity that could be potentially significant to the
VIE is considered the primary beneficiary and must consolidate the VIE. In
accordance with ASC 810, the Company performs ongoing reassessments
of whether it is the primary beneficiary of a VIE. The financial statements of
the VIEs for which the Company is considered to be the primary beneficiary,
if any, are consolidated in the Company’s consolidated financial statements.
The noncontrolling interests attributable to other beneficiaries of the VIEs are
included as noncontrolling interests in the Company’s consolidated financial
statements.
Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives of the assets using
the straight-line method. The estimated useful lives of assets range from 1 to
15 years. Repairs and maintenance are expensed as incurred.
Impairment of Long-Lived Assets
In accordance with ASC 360, our property and equipment and right-of-use
assets related to operating leases are reviewed for possible impairment if
there are indicators that their carrying amounts are not recoverable. The
carrying amount of a long-lived asset is considered not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from
68
the use and eventual disposition of the asset. An impairment loss shall be
measured as the amount by which the carrying amount of a long-lived asset
exceeds its fair value.
Earnest Money Deposits
In the ordinary course of business, the Company enters into land and lot
option contracts in order to procure land for the construction of homes in the
future. Pursuant to these option contracts, the Company generally provides
a deposit to the seller as consideration for the right to purchase land at
different times in the future, usually at predetermined prices. Such contracts
enable the Company to defer acquiring portions of properties owned by
third parties or unconsolidated entities until the Company has determined
whether and when to exercise its option, which reduces the Company’s
financial risk associated with long-term land holdings. Option deposits and
pre-acquisition costs (such as environmental testing, surveys, engineering,
and entitlement costs) are capitalized if the costs are directly identifiable with
the land under option and acquisition of the property is probable. Such costs
are reflected in earnest money deposits and are reclassified to inventory
upon taking title to the land. The Company writes off deposits and pre-
acquisition costs if it becomes probable that the Company will not proceed
with the project or recover the capitalized costs. Such decisions take into
consideration changes in local market conditions, the timing of required land
takedowns, the availability and best use of necessary incremental capital, and
other factors.
Under ASC 810, a non-refundable deposit paid to an entity is deemed to be
a variable interest that will absorb some or all of the entity’s expected losses
if they occur and, as such, the Company’s land and lot option contracts are
considered variable interests. The Company’s option contract deposits along
with any related pre-acquisition costs represent the Company’s maximum
exposure to the land seller if the Company elects not to purchase the
optioned property. Therefore, whenever the Company enters into an option
or purchase contract with an entity and makes a non-refundable deposit,
a VIE assessment is performed. However, the Company generally has little
control or power to direct the activities that most significantly impact the
VIE’s economic performance due to the Company’s lack of an equity interest
in them. Additionally, creditors of the VIE typically have no material recourse
against the Company, and the Company does not provide financial or other
support to these VIEs other than as stipulated in the option contracts. In
accordance with ASC 810, the Company performs ongoing reassessments of
whether the Company is the primary beneficiary of a VIE.
Intangible Assets
Intangible assets, net consists of the estimated fair value of the acquired
trade name, net of amortization. The trade name has a definite life and is
amortized over ten years.
Intangible assets are tested for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss would be recognized if the carrying amount of the asset
exceeds the estimated undiscounted future cash flows expected to result
from the use of the asset and its eventual disposition. The impairment loss
recorded would be the excess of the asset’s carrying value over its fair value.
Fair value would be determined using a discounted cash flow analysis or
other valuation technique.
Goodwill
The excess of the purchase price of a business acquisition over the net fair
value of assets acquired and liabilities assumed is capitalized as goodwill in
accordance with ASC 805, Business Combinations (“ASC 805”). Goodwill
is assessed for impairment at least annually in the fourth quarter, or more
frequently if certain impairment indicators are present. Goodwill impairment
exists when a reporting unit’s goodwill carrying value exceeds its implied fair
value.
Per ASC 350, Intangibles - Goodwill and Other (“ASC 350”), an entity may
make a qualitative assessment of whether it is more likely than not that a
reporting unit’s fair value is less than its carrying amount before applying
a two-step goodwill impairment test. When performing a qualitative
assessment, an entity evaluates relevant events and circumstances,
including but not limited to, macroeconomic conditions, industry and market
conditions, overall financial performance, reporting unit specific events and
entity specific events. If, after completing a qualitative assessment, an entity
concludes that it is not likely that the fair value of the reporting unit is less
than its carrying amount, a two-step impairment test would not be required
for that reporting unit.
In the event that the conclusion of the qualitative assessment requires the
two-step test, the first step compares the fair value of the reporting unit with
its carrying value, including goodwill. If the fair value of the reporting unit is
less than its carrying value, an indication of goodwill impairment exists for
the reporting unit and the entity must perform step two of the impairment
test. Under step two, an impairment loss is recognized for any excess of
the carrying amount of the reporting unit’s goodwill over the implied fair
value of that goodwill. The implied fair value of goodwill is determined
by allocating the fair value of the reporting unit in a manner similar to a
purchase price allocation and the residual fair value after this allocation is the
implied fair value of the reporting unit goodwill. Fair value of the reporting
unit is determined using a discounted cash flow analysis. If the fair value
of the reporting unit exceeds its carrying value, step two is not required.
An impairment loss is recognized to the extent that the carrying amount of
goodwill exceeds its implied fair value.
If the Company is required to perform the two-step test, it would determine
fair value using generally accepted valuation techniques, including discounted
cash flows and market multiple analyses. The Company’s valuation
methodology for assessing impairment would require management to make
judgments and assumptions based on historical experience and projections
of future operating performance. If these assumptions differ materially from
future results, the Company may record impairment charges in the future.
Warranties
The Company accrues an estimate of its exposure to warranty claims based on
both current and historical home closings data and warranty costs incurred.
The Company offers homeowners a comprehensive third-party warranty on
each home. Homes are generally covered by a ten-year warranty for qualified
and defined structural defects, one year for defects and products used, and
two years for electrical, plumbing, heating, ventilation, and air conditioning
parts and labor. Warranty accruals are included within accrued expenses
on the consolidated balance sheets. Any legal costs associated with loss
contingencies related to warranties are expensed as incurred.
Debt Issuance Costs
Debt issuance costs represent costs incurred related to the senior unsecured
notes and revolving secured and unsecured credit facilities, including
amendments thereto, and reduce the carrying amount of debt on the
consolidated balance sheets. These costs are subject to capitalization to
inventory over the term of the related debt facility using the straight-line
method.
69
Business Combinations
Acquisitions are accounted for in accordance with ASC 805. Following
the determination that control of a business and its inputs, processes and
outputs were obtained in exchange for consideration, all material assets and
liabilities of the business, including contingent consideration, are measured
and recognized at fair value as of the date of the acquisition to reflect the
purchase price. Depending on the fair value of net assets acquired, the
purchase price allocation may or may not result in goodwill.
and requires third-party builders to submit a deposit in connection with
land sale or lot option contracts. The non-refundable deposits serve as an
incentive for performance under homebuilding and land sale or development
contracts. Cash received as customer deposits, if held in escrow, is reflected
as restricted cash and as customer and builder deposits on the consolidated
balance sheets.
Performance Obligations
Contingent consideration is subsequently remeasured to fair value at each
reporting date until the contingency is resolved, with any change in fair value
recognized in the consolidated statements of income.
The Company’s contracts with homebuyers contain a single performance
obligation. The performance obligation is satisfied when homes are completed
and legal title has been transferred to the buyer. The Company does not
have any variable consideration associated with home sales transactions.
Redeemable Noncontrolling Interest in Equity of Consolidated Subsidiary
Redeemable noncontrolling interest in equity of consolidated subsidiary
represents equity related to a put option held by a minority shareholder of
a subsidiary. Based on the put option structure, the minority shareholder’s
interest in the controlled subsidiary is classified as a redeemable noncontrolling
interest on the consolidated balance sheets. The accretion of the redeemable
noncontrolling interest to its estimated redemption value is recorded in
additional paid-in capital on the consolidated balance sheets if the estimated
redemption value, net of accretion, is greater than the current value of the
noncontrolling interest capital account.
Revenue Recognition
Contracts with Customers
The Company derives revenues from two primary sources: the closing and
delivery of homes through our builder operations segments and the closing
of lots sold to homebuilders through our land development segment. All of
our revenue is from contracts with customers.
Contract Liabilities
The Company requires homebuyers to submit a deposit for home purchases
70
Revenue from mechanic’s lien contracts in which the Company serves as
the general contractor for custom homes where the customer, and not the
Company, owns the underlying land and improvements is recognized based
on the input method, where progress toward completion is measured by
relating the actual cost of work performed to date to the estimated total cost
of the respective contracts.
Lot option contracts contain multiple performance obligations. The
performance obligations are satisfied as lots are closed and legal title has been
transferred to the builder. For lot option contracts, individual performance
obligations are accounted for separately. The transaction price is allocated
to the separate performance obligations on a relative stand-alone selling
price basis. Certain lot option contracts require escalations in lot price
over the option period. Any escalator is not collectible until the lot closing
occurs. While we recognize lot escalators as variable consideration within
the transaction price, we do not recognize escalator revenue until a builder
closes on a lot subject to an escalator as the escalator relates to general
inflation and holding costs.
Occasionally, the Company sells developed and undeveloped land parcels.
If the land parcel is developed prior to the sale of the land, the revenue
is recognized at closing since we deliver a single performance obligation
in the form of a developed parcel. We also recognize revenue at closing
on undeveloped land parcel sales as there are no other obligations beyond
delivering the undeveloped land.
Homebuyers are not obligated to pay for a home until the closing and
delivery of the home. The selling price of a home is based on the contract
price adjusted for any change orders, which are considered modifications of
the contract price.
Homebuilders are not obligated to pay for developed lots prior to control
of the lots and any associated improvements being transferred to them.
The term of our lot option contracts is generally based upon the number of
lots being purchased and an agreed upon lot takedown schedule, which can
be in excess of one year. Lots cannot be taken down until development is
substantially complete. There is no significant financing component related
to our third-party lot sales.
The Company does not sell warranties outside of the customary workmanship
warranties provided on homes or developed lots at the time of sale. The
warranties offered to homebuyers are short term, with the exception of ten-
year warranties on structural concerns for homes. As these are assurance-
type warranties, there is no separate performance obligation related to
warranties provided to homebuyers or homebuilder.
Significant Judgments and Estimates
completion and customer satisfaction. The builder incentives do not
represent incremental costs that would require capitalization as we would
incur these costs whether or not we sold the home. As such, we recognize
builder incentives as expense at the time they are paid.
Advertising costs, sales salaries and certain costs associated with model
homes, such as signage, do not qualify for capitalization under ASC 340-
40, Other Assets and Deferred Costs - Contracts with Customers, as they
are not incremental costs of obtaining a contract. As such, we expense
these costs to selling, general and administrative expense as incurred. Costs
incurred related to model home furnishings and sales office construction are
capitalized and included in property and equipment, net on the consolidated
balance sheets.
Selling, General and Administrative Expense
Selling, general and administrative expense represents salaries, benefits,
share-based compensation, property taxes on finished homes, depreciation,
amortization, advertising and marketing, rent, and other administrative items,
and is recorded in the period incurred.
There are no significant judgments involved in the recognition of residential
units revenue. The performance obligation of delivering a completed home is
satisfied upon the sale closing when title transfers to the buyer.
Advertising Expense
There are no significant judgments involved in the recognition of land and lots
revenue. The performance obligation of delivering land and lots is satisfied
upon the closing of the sale when title transfers to the homebuilder.
The Company expenses advertising costs as incurred. Advertising costs are
included in selling, general and administrative expense in the consolidated
statements of income. Advertising expense for the years ended December
31, 2019, 2018 and 2017 totaled $2.1 million, $1.5 million and $0.8 million,
respectively.
Contract Costs
The Company recognizes an asset for the incremental costs of obtaining a
contract with a customer if it expects to recover those costs.
Interest Expense
The Company pays sales commissions to employees and/or outside realtors
related to individual home sales which are expensed as incurred at the time
of closing. Commissions on the sale of land parcels are also expensed as
incurred upon closing. Sales commissions on the sale of homes are included
in the cost of revenues in the consolidated statements of income.
The Company also pays builder incentives to employees which are based
on the time it takes to build individual homes, as well as quality inspection
Interest expense consists primarily of interest costs incurred on our debt that
are not capitalized, and amortization of debt issuance costs. We capitalize
interest costs incurred to inventory during development and other qualifying
activities. Debt issuance costs are capitalized to inventory over the term of
the underlying debt using the straight-line method, in accordance with our
interest capitalization policy. All interest costs were capitalized during the
years ended December 31, 2019, 2018 and 2017.
71
Net Income Attributable to Green Brick Partners, Inc. per Share
Income Taxes
The Company’s restricted stock awards have the right to receive forfeitable
dividends on an equal basis with common stock and therefore are not
considered participating securities that must be included in the calculation of
net income per share using the two-class method. Basic earnings per share
is computed by dividing net income by the weighted average number of
common shares outstanding during each period, adjusted for non-vested
shares of restricted stock awards during each period. Diluted earnings per
share is calculated using the treasury stock method and includes the effect
of all dilutive securities, including stock options and restricted stock awards.
Cost Recognition
Lot acquisition, materials, direct costs, interest and indirect costs related to the
acquisition, development, and construction of lots and homes are capitalized.
Direct and indirect costs of developing residential lots are allocated evenly
to all applicable lots. Capitalized costs of residential lots are charged to
earnings when the related revenue is recognized. Non-capitalizable costs in
connection with developed lots and completed homes and other selling and
administrative costs are charged to earnings when incurred.
Share-Based Compensation
The Company measures and accounts for share-based awards in accordance
with ASC 718, Compensation - Stock Compensation. The Company expenses
share-based payment awards made to employees and directors, including
stock options and restricted stock awards. Share-based compensation
expense associated with stock options and restricted stock awards with
vesting contingent upon the achievement of service conditions is recognized
on a straight-line basis, net of estimated forfeitures, over the requisite service
period over which the awards are expected to vest. The Company estimates
the value of stock options with vesting contingent upon the achievement
of service conditions as of the date the award was granted using the Black-
Scholes option pricing model. The Black-Scholes option pricing model
requires the use of certain input variables, such as expected volatility, risk-
free interest rate and expected award life.
The Company accounts for income taxes using the asset and liability method,
under which deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, operating losses and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in years in which temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
The Company regularly reviews historical and anticipated future pre-tax
results of operations to determine whether we will be able to realize the
benefit of deferred tax assets. A valuation allowance is required to reduce the
deferred tax asset when it is more-likely-than-not that all or some portion
of the deferred tax asset will not be realized due to the lack of sufficient
taxable income. The Company assesses the recoverability of deferred tax
assets and the need for a valuation allowance on an ongoing basis. In making
this assessment, management considers all available positive and negative
evidence and available income tax planning to determine whether it is more-
likely-than-not that some portion or all of the deferred tax assets will be
realized in future periods. This assessment requires significant judgment and
estimates involving current and deferred income taxes, tax attributes relating
to the interpretation of various tax laws, historical bases of tax attributes
associated with certain assets and limitations surrounding the realization of
deferred tax assets.
We establish accruals for uncertain tax positions that reflect our best
estimate of deductions and credits that may not be sustained on a more-
likely-than-not basis. We recognize interest and penalties related to uncertain
tax positions in the income tax expense in the consolidated statements of
income. Accrued interest and penalties, if any, are included within accrued
expenses on the consolidated balance sheets. In accordance with ASC 740,
Income Taxes, the Company recognizes the effect of income tax positions
only if those positions have a more-likely-than-not chance of being sustained
by the Company. Recognized income tax positions are measured at the
largest amount that is greater than 50% likely of being realized. Changes in
recognition or measurement are reflected in the period in which the change
in judgment occurs.
72
Fair Value Measurements
The Company has adopted and implemented the provisions of ASC 820-10,
Fair Value Measurements, with respect to fair value measurements of: all
elected financial assets and liabilities and any nonfinancial assets and liabilities
that are recognized or disclosed in the consolidated financial statements at
fair value on a recurring basis (at least annually). Under ASC 820-10, fair value
is defined as an exit price, or the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants as of the measurement date. These provisions establish a three-
tiered fair value hierarchy that prioritizes inputs to valuation techniques used
in fair value calculations. The three levels of input are defined as follows:
Level 1 — unadjusted quoted prices for identical assets or liabilities in active
markets accessible by the Company;
Level 2 — inputs that are observable in the marketplace other than those
classified as Level 1; and
Level 3 — inputs that are unobservable in the marketplace and significant to
the valuation.
Entities are encouraged to maximize the use of observable inputs and minimize
the use of unobservable inputs. If a financial instrument uses inputs that fall
in different levels of the hierarchy, the instrument will be categorized based
upon the lowest level of input that is significant to the fair value calculation.
Our valuation methods may produce a fair value calculation that may
not be indicative of net realizable value or reflective of future fair values.
Furthermore, while we believe our valuation methods are appropriate and
consistent with other market participants, the use of different methodologies
or assumptions to determine the fair value of certain financial instruments
could result in a different fair value measurement at the reporting date.
Transfers between levels of the fair value hierarchy are deemed to have
occurred on the date of the event or change in circumstances that caused
the transfer.
Segment Information
In accordance with ASC 280, Segment Reporting (“ASC 280”), an operating
segment is defined as a component of an enterprise for which discrete
financial information is available and reviewed regularly by the chief
operating decision maker (“CODM”), or decision-making group, to evaluate
performance and make operating decisions.
A reportable segment is an operating segment, either separately defined or
aggregated from several operating segments based on similar economic and
other characteristics, that exceeds certain quantitative thresholds of ASC
280.
Effective November 15, 2019, the Company identifies its CODM as three
key executives - the Chief Executive Officer, the Chief Financial Officer,
and the President of Texas Region. In determining the reportable segments,
the CODM considers similar economic and other characteristics, including
geography, class of customers, product types, and production processes.
Recent Accounting Pronouncements
In February 2016, the FASB established Topic 842, Leases (“Topic 842”),
by issuing ASU 2016-02, which requires lessees to recognize leases on the
balance sheet and disclose key information about leasing arrangements.
Topic 842 was subsequently amended by ASU 2018-01, Land Easement
Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification
Improvements to Topic 842, Leases; and ASU 2018-11, Targeted
Improvements. The new standard establishes a right-of-use (“ROU”) model
that requires a lessee to recognize a ROU asset and lease liability on the
balance sheet for all leases with a term longer than 12 months. Leases will be
classified as finance or operating, with classification affecting the pattern and
classification of expense recognition in the statement of income.
The new standard was effective for the Company on January 1, 2019. A
modified retrospective transition approach is required, applying the new
standard to all leases existing at the date of initial application. An entity
may choose to use either (1) its effective date or (2) the beginning of the
earliest comparative period presented in the financial statements as its date
of initial application. If an entity chooses the second option, the transition
requirements for existing leases also apply to leases entered into between
the date of initial application and the effective date. The entity must also
recast its comparative period financial statements and provide the disclosures
required by the new standard for the comparative periods. We adopted the
new standard on January 1, 2019 and used the effective date as our date
of initial application. Consequently, financial information will not be updated
and the disclosures required under the new standard will not be provided for
dates and periods before January 1, 2019.
73
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and
Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-
04”), which removes Step 2 of the goodwill impairment test. A goodwill
impairment will now be determined by the amount by which a reporting unit’s
carrying value exceeds its fair value, not to exceed the carrying amount of
goodwill. ASU 2017-04 is effective for annual reporting periods, and interim
periods therein, beginning after December 15, 2019, with early adoption
permitted. The Company does not expect the adoption of ASU 2017-04 to
have a material impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic
740): Simplifying Accounting for Income Taxes (“ASU 2019-12”), which
simplifies the accounting for income taxes by eliminating certain exceptions
to the guidance in ASC 740, Income Taxes related to the approach for
intraperiod tax allocation, the methodology for calculating income taxes in
an interim period and the recognition of deferred tax liabilities for outside
basis differences. ASU 2019-12 also simplifies aspects of the accounting
for franchise taxes and enacted changes in tax laws or rates and clarifies
the accounting for transactions that result in a step-up in the tax basis of
goodwill. ASU 2019-12 is effective for annual reporting periods, and interim
periods therein, beginning after December 15, 2020, with early adoption
permitted. The Company does not expect the adoption of ASU 2019-12 to
have a material impact on the Company’s consolidated financial statements.
The Providence Group, Pratt Stacks
Atlanta, GA
The new standard provides a number of optional practical expedients in
transition. We elected the “package of practical expedients”, which permits
us not to reassess under the new standard our prior conclusions about lease
identification, lease classification and initial direct costs. We did not elect the
use-of-hindsight or the practical expedient pertaining to land easements, the
latter not being applicable to us. The new standard also provides practical
expedients for an entity’s ongoing accounting. We elected the short-term
lease recognition exemption for all leases that qualify. This means, for those
leases that qualify, we will not recognize ROU assets or lease liabilities,
and this includes not recognizing ROU assets or lease liabilities for existing
short-term leases of those assets in transition. We also elected the practical
expedient to not separate lease and non-lease components for all of our
leases.
The adoption of this standard did not have a material effect on our
consolidated financial statements and related disclosures. We believe the
most significant effects relate to (1) the recognition of new ROU assets and
lease liabilities on our consolidated balance sheet for our office operating
leases and (2) providing new disclosures about our leasing activities. There
was no change in our leasing activities as a result of adoption.
Upon adoption, we recognized additional operating liabilities of approximately
$4.2 million, with corresponding ROU assets of the same amount based on
the present value of the remaining minimum rental payments under current
leasing standards for existing operating leases.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”), which changes the impairment model for most financial
assets and certain other instruments from an “incurred loss” approach to an
“expected credit loss” methodology. Following the issuance of ASU 2019-10,
Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815), and Leases (Topic 842): Effective Dates in November 2019, ASU
2016-13 is expected to be effective for the Company for annual and interim
periods beginning after December 15, 2022, with early adoption permitted,
and requires full retrospective application on adoption. The Company is
currently evaluating the impact of the adoption of ASU 2016-13 on the
Company’s consolidated financial statements but does not expect such
impact to be material.
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Normandy Homes, Viridian
Arlington, Texas
75
2. BUSINESS COMBINATION
Acquisition of GRBK GHO Homes, LLC
the date of the acquisition to reflect the purchase price.
The following is a summary of fair value of assets acquired and liabilities
assumed (in thousands):
On April 26, 2018 (the “Acquisition Date”), following a series of transactions,
the Company acquired substantially all of the assets and assumed certain
liabilities of GHO Homes Corporation and its affiliates (“GHO”) through
a newly formed subsidiary, GRBK GHO Homes, LLC (“GRBK GHO”), in
which the Company holds an 80% controlling interest. The owner of GHO
contributed $8.3 million of net assets to GRBK GHO in an exchange for a
20% interest in GRBK GHO. The minority partner of GRBK GHO serves as
the president of GRBK GHO.
GRBK GHO operates primarily in the Vero Beach, Florida market and is
engaged in land and lot development, as well as all aspects of the homebuilding
process. The acquisition allowed the Company to expand its operations into
a new geographic market.
The Company consolidates the financial statements of GRBK GHO as the
Company owns 80% of the outstanding voting shares of the builder. The
noncontrolling interest attributable to the 20% minority interest owned by
our Florida-based partner is included as redeemable noncontrolling interest
in equity of consolidated subsidiary in the Company’s consolidated financial
statements.
The original consideration of $42.2 million consisted of $33.2 million in
cash paid by the Company to the owner of GHO, $8.3 million of assets
contributed by the owner of GHO, and an estimated $0.6 million of
contingent consideration. Following completion of the audit of the balance
sheet of GHO as of the Acquisition Date, the purchase price was adjusted by
$2.0 million that was contributed by the Company in cash, and the value of
contributed assets from the minority partner was increased by $0.5 million.
Contingent consideration was adjusted to $0.5 million based on finalization
of valuation procedures. Thus, the final total consideration was $44.6 million.
Total consideration for the Company’s 80% interest in GRBK GHO was $35.8
million.
Under the terms of the purchase agreement, the Company may be obligated
to pay contingent consideration to our partner if certain annual performance
targets are met over the three-year period following the Acquisition Date.
The contingent consideration amounts are not contractually limited.
In accordance with ASC 805, all material assets and liabilities, including
contingent consideration, were measured and recognized at fair value as of
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Assets acquired
Cash
Inventory
Property and equipment
Intangible assets - trade name
Intangible assets - home construction contracts
Goodwill(1)
Other assets
Total Assets
Liabilities assumed
Notes payable
Accrued expenses and other liabilities
Customer deposits
Total liabilities
Redeemable noncontrolling interest
Net assets acquired(2)
8,399
45,005
1,462
850
290
680
898
57,584
300
5,486
9,073
14,859
6,951
35,774
(1) Goodwill is expected to be fully deductible for tax purposes.
(2) Contingent consideration of $0.5 million is included in the fair value of net assets acquired.
The final purchase price allocation reflected above is based upon estimates
and assumptions. The Company engaged a valuation firm to assist in the
allocation of the purchase price, and valuation procedures related to the
acquired assets and assumed liabilities have been completed. The estimated
cash flows and ultimate valuation have been significantly affected by
estimated discount rates, estimates related to expected average selling
prices and sales incentives, expected sales pace and cancellation rates,
expected land development and construction timelines, and anticipated land
development, construction, and overhead costs and may vary significantly
between communities.
The valuation of redeemable noncontrolling interest is based on a market
approach, considering the equity contribution made by the 20% partner,
adjusted for control and marketability factors.
Acquired inventory consisted of both land under development and work in
process inventory, as well as completed homes held for sale. The estimated
fair value of real estate inventory was determined on a community-by-
community basis, primarily using the income approach which derives a value
using a discounted cash flow for income-producing real property. The values
of work in process and completed home inventory were estimated based
upon the stage of production of each unit and a gross margin that we believe
a market participant would require to complete the remaining construction
and sales and marketing efforts through the sale of the homes. The stage of
production, as of the acquisition date, ranged from recently started lots to
fully completed homes. A sales comparison approach was used for land for
which significant lot development had not yet begun as of the Acquisition
Date. An income approach was also utilized to value mechanic’s lien home
construction contracts acquired.
The estimated fair values of the acquired trade name, GHO Homes, and the
home construction contracts, were determined using the relief-from-royalty
method under the income approach, which involved assumptions related to
revenue growth, market awareness and useful life.
The supplemental pro forma information for revenue and earnings of the
Company as though the business combination had occurred as of January 1,
2017 is impractical to provide due to the fact that consolidated reporting for
the specific group of entities acquired had not existed prior to the acquisition.
31, 2019, all the home construction contracts have been completed, and the
carrying value of the related intangible asset and accumulated amortization
were written off with no impact to net income. As of December 31, 2019,
all the home construction contracts have been completed, and the carrying
value of the related intangible asset and accumulated amortization were
written off with no impact to net income.
The amortization of the acquired trade name of $0.1 million for the year
ended December 31, 2019 was recorded in selling, general and administrative
expense in the consolidated statements of income. The accumulated
amortization of the acquired trade name was $0.1 million as of December
31, 2019.
The estimated amortization expense related to the acquired trade name
for each of the next five years as of December 31, 2019 is as follows (in
thousands):
2020
2021
2022
2023
2024
Total
$85
85
85
85
85
$425
During the year ended December 31, 2018, we had incurred transaction
costs of $0.5 million related to the business combination, which have been
expensed as incurred and are included in selling, general and administrative
expense.
Goodwill
Intangible Assets
The amortization of the acquired intangible assets of $0.2 million for the
period from April 26, 2018 through December 31, 2018 was recorded in
selling, general and administrative expense in the consolidated statements of
income. The accumulated amortization of the acquired intangible assets was
$0.2 million as of December 31, 2018.
The estimated fair value of the acquired home construction contracts
intangible asset was amortized to cost of residential units as income on the
related contracts was earned, over a period of eleven months. As of December
The allocation to goodwill represents the excess of the purchase price,
including contingent consideration, over the estimated fair value of assets
acquired and liabilities assumed. Goodwill results primarily from operational
synergies expected from the business combination.
The Company performed its annual goodwill impairment test during the
fourth quarter of 2019 by completing a qualitative assessment in accordance
with ASC 350. The Company determined that it was not more likely than not
that the reporting unit’s estimated fair value was more than its carrying value
and, therefore, the two-step goodwill impairment test was unnecessary. The
Company did not record any goodwill impairment during the years ended
December 31, 2019 and 2018.
77
The following table shows the changes in redeemable noncontrolling interest
in equity of consolidated subsidiary during the year ended December 31,
2019 (in thousands):
Redeemable noncontrolling interest, beginning of period
Net income attributable to redeemable noncontrolling interest partner
Distributions of income to redeemable noncontrolling interest partner
Accretion of redeemable noncontrolling interest
Redeemable noncontrolling interest, end of period
Year Ended
December 31, 2019
$8,531
3,462
(527)
2,145
$13,611
Contingent Consideration
The performance targets specified in the purchase agreement were met for
the period from April 26, 2018 through December 31, 2018, and contingent
consideration of $1.8 million was earned by the minority partner and paid
by the Company in April 2019 in addition to a $0.5 million distribution of
income. The performance targets specified in the purchase agreement were
met for the period from January 1, 2019 through December 31, 2019, and the
contingent consideration of $5.3 million was earned by the minority partner.
As of December 31, 2019, the estimate of the undiscounted contingent
consideration payouts for the period from January 1, 2020 through April
26, 2021 was $0. The change in the range of estimates of the undiscounted
contingent consideration compared to the range of estimates disclosed in
the Company’s Annual Report on Form 10-K for the year ended December
31, 2018 was due to revision of the Company’s forecasts of GRBK GHO
profits and capital requirements, as well as reduced volatility of earnings.
Redeemable Noncontrolling Interest in Equity of Consolidated Subsidiary
As part of the GRBK GHO business combination, we entered into a put/call
agreement (“Put/Call Agreement”) with respect to the equity interest in the
joint venture held by the minority partner. The Put/Call Agreement provided
that the 20% ownership interest in GRBK GHO held by the minority partner
would be subject to put and purchase options starting in April 2021. Refer
to Note 18 for additional information on subsequent events. The exercise
price would be based on the financial results of GRBK GHO for the three
years prior to exercise of the option. If the minority partner does not exercise
the put option, we have the option, but not the obligation, to buy the 20%
interest in GRBK GHO from our partner.
Based on the nature of the put/call structure, the noncontrolling interest
attributable to the 20% minority interest owned by our Florida-based partner
is included as redeemable noncontrolling interest in equity of consolidated
subsidiary in the Company’s consolidated financial statements.
78
CB JENI Homes, The Village at Twin Creeks
Allen, TX
3. VARIABLE INTEREST ENTITIES
Effective November 30, 2019, we, through our wholly owned subsidiary,
SGHDAL LLC (“Southgate”), acquired the remaining membership and voting
interests in our subsidiary, Southgate Homes DFW LLC. As a result, Southgate
became an indirect wholly owned subsidiary of the Company, was no longer
considered a VIE and was consolidated based on the majority voting interest
pursuant to ASC 810.
Effective December 31, 2019, we, through our wholly owned subsidiary,
CLH20, LLC (“Centre Living”), acquired the remaining membership and voting
interests in our subsidiary, Centre Living Homes, LLC, and we contributed
certain real estate inventory assets to Centre Living.
As both Centre Living, to which ownership interests were assigned and
assets and liabilities were transferred, and Centre Living Homes, LLC were
controlled by the Company on December 31, 2019, the acquisition of the
remaining membership interest and the contribution of the real estate
inventory assets were accounted for at carrying amounts on Centre Living
Homes, LLC’s books on the date of the transfer, pursuant to provisions of
ASC 805 that govern transactions between entities under common control.
Subsequently, the prior owner of a portion of the membership and voting
interests in Centre Living Homes, LLC acquired a ten percent membership and
voting interest in Centre Living for $3.6 million. As a result, as of December
31, 2019, Centre Living was an indirect subsidiary in which the Company
owned a ninety percent membership interest and a ninety percent voting
interest, was no longer considered a VIE and was consolidated based on the
majority voting interest pursuant to ASC 810.
Consolidated VIEs
CB JENI Homes DFW LLC (“CB JENI”) and The Providence Group of Georgia
LLC (“TPG”), the controlled builders based in Dallas and Atlanta, respectively,
in which the Company owns a 50% equity interest and a 51% voting interest,
are deemed to be VIEs for which the Company is considered the primary
beneficiary. We sell finished lots and option lots from third-party developers to
these controlled builders for their homebuilding operations and provide them
with construction financing and strategic planning. The board of managers of
each of these controlled builders has the power to direct the activities that
significantly impact the controlled builder’s economic performance. Pursuant
to the Company’s agreements with these controlled builders, it has the
ability to appoint two of the three members to the controlled builder’s board
of managers. A majority of the board of managers constitutes a quorum to
transact business. No action can be approved by the board of managers
without the approval from at least one individual whom the Company has
appointed at the controlled builder.
The Company has the ability to control the activities of each controlled
builder that most significantly impact the controlled builder’s economic
performance. Such activities include, but are not limited to, involvement in
the day to day capital and operating decisions, the ability to determine the
budget and plan, the ability to control financing decisions, and the ability
to acquire additional land or dispose of land. In addition, the Company has
the right to receive the expected residual returns and obligation to absorb
the expected losses of each controlled builder through the pro rata profits
and losses we are allocated based on our ownership interest. Therefore, the
financial statements of the Dallas and Atlanta-based controlled builders are
consolidated in the Company’s consolidated financial statements following
the variable interest model.
The aggregated carrying amounts of assets and liabilities of CB JENI and TPG
consolidated following the variable interest model were $279.8 million and
$265.3 million, respectively, as of December 31, 2019 and $262.9 million and
$234.0 million, respectively, as of December 31, 2018. The noncontrolling
interests attributable to the 50% minority interests owned by the Dallas and
Atlanta-based controlled builders were included as noncontrolling interests
in the Company’s consolidated financial statements. The creditors of the
above controlled builders have no recourse against the Company.
Unconsolidated VIEs
Land and lot option purchase contracts
The Company evaluates all option contracts to purchase land and lots to
determine whether they are VIEs and, if so, whether the Company is the
primary beneficiary of counterparts of these option contracts. Although
the Company does not have legal title to the optioned land or lots, if the
Company is deemed to be the primary beneficiary of or makes a significant
deposit for optioned land or lots, it may need to consolidate the land or lots
under option at the purchase price of the optioned land or lots.
79
As of December 31, 2019 and 2018, the Company’s exposure to loss related
to its option contracts with third parties primarily consisted of its non-
refundable option deposits. Following VIE evaluation, it was concluded that
the Company was not the primary beneficiary in any of the VIEs related to
land or lot option contracts as of December 31, 2019 and 2018.
EJB River Holdings, LLC
In December 2018, EJB River Holdings, LLC joint venture (“EJB River
Holdings”) was formed by TPG with the purpose to acquire and develop a
tract of land in Gwinnett County, Georgia. In May 2019, East Jones Bridge,
LLC, a Georgia limited liability company (“EJB”) was admitted as a member
of EJB River Holdings, which resulted in TPG and EJB each having a 50%
ownership interest in EJB River Holdings. EJB River Holdings had no activity
in the period from its formation until October 2019.
In October 2019, EJB River Holdings received two $5.0 million initial
contributions from its two members, TPG and EJB. In December 2019,
two additional contributions of $0.3 million were made by TPG and EJB to
EJB River Holdings. Per EJB River Holdings’ operating agreement, TPG and
EJB share equally in the profits and losses of EJB River Holdings, with the
exception of certain customary fees.
In October 2019, EJB River Holdings issued two loans with the total maximum
amount of borrowings of $21.9 million to finance its land acquisition and
development in Gwinnett County, Georgia. One of the investors in EJB
issued a personal guarantee on one of the loans in the amount of $9.4
million. Subsequently, in October 2019, a wholly owned subsidiary of the
Company provided a limited $2.0 million guarantee to the investor in EJB.
The approximate term of the guarantee is 35 months. In the event EJB River
Holdings defaults on its $9.4 million loan and the investor in EJB makes the
$9.4 million payment under his personal guarantee, the maximum potential
amount of future payments that the Company could be required to make
under its limited guarantee is $2.0 million. As of December 31, 2019, the
Company has no current liability related to the guarantee obligation as the
payment risk of the guarantee has been assessed to be very low.
Following the analysis of the above facts and provisions of EJB River Holdings’
operating agreement, the Company has determined that EJB River Holdings
is a VIE in which the Company is not the primary beneficiary. Therefore, the
investment in EJB River Holdings was treated as an unconsolidated investment
under the equity method of accounting and was included in investments in
80
unconsolidated entities in the Company’s consolidated balance sheets.
As of December 31, 2019, the carrying amounts of assets and liabilities of
EJB River Holdings were $23.7 million and $13.1 million, respectively. Assets
were comprised of real estate inventory and cash, whereas the liabilities
were comprised of loans and interest payable. As of December 31, 2019, the
Company’s maximum exposure to loss as a result of its involvement with EJB
River Holdings was $7.3 million, represented by the sum of the Company’
investment in EJB River Holdings of $5.3 million and the $2.0 million limited
guarantee described above.
4. INVENTORY
A summary of inventory is as follows (in thousands):
Homes completed or under construction
Land and lots - developed and under development
Land held for sale
Total inventory
December 31,
2019
December 31,
2018
$314,966
$268,763
437,553
1,048
399,809
389
$753,567
$668,961
A summary of interest costs incurred, capitalized and expensed is as follows
(in thousands):
Years Ended December 31,
2019
2018
2017
Interest capitalized at beginning of period
$14,780
$10,474
$9,417
Interest incurred
12,140
9,003
4,456
Interest charged to cost of revenues
(8,324)
(4,697)
(3,399)
Interest capitalized at end of period
$18,596
$14,780
$10,474
As of December 31, 2019, the Company reviewed the performance and
outlook for all of its communities for indicators of potential impairment and
performed detailed impairment analysis when necessary. As of December
31, 2019, the Company performed further impairment analysis of the selling
communities with indicators of impairment with a combined corresponding
carrying value of approximately $11.2 million.
For the years ended December 31, 2019, 2018 and 2017, the Company
recorded impairment adjustments of $0.1 million, $0.1 million, and $0.1
million, respectively, to reduce the carrying value of impaired communities
to fair value. The recorded impairment adjustments related to real estate
inventory in our builder operations segments and were included in cost of
residential units in our consolidated statements of income.
5. INVESTMENTS IN UNCONSOLIDATED ENTITIES
Challenger
On August 15, 2017, the Company, JBGL and GB Challenger, LLC, a Texas
limited liability company (“Challenger”) entered into a Membership Interest
Purchase and Contribution Agreement (the “Challenger Agreement”) with
The Challenger Group, Inc., a Wyoming corporation (“TCGI”), and certain of
its affiliates (the “Challenger Entities”) and Brian R. Bahr (“Bahr”), resulting
in the Company, through its interest in JBGL, and the Challenger Entities
owning a 49.9% and 50.1% ownership interest, respectively, in Challenger,
and Challenger owning all of the membership and ownership interests in the
subsidiaries of the Challenger Entities named in the Challenger Agreement.
As consideration for such interests, the Company agreed to issue to the
Challenger Entities, or their designees, 1,497,000 shares of its common stock,
par value $0.01 per share, in a private placement, with 20,000 shares of its
common stock held back pending satisfactory resolution of indemnification
claims (“Holdback Shares”). On March 16, 2018, the Company issued the
Holdback Shares; therefore, $0.2 million was recorded in additional paid-in
capital on the consolidated balance sheet as of December 31, 2017. The
Challenger Entities, at their discretion, may offer to sell and transfer an
additional 20.1% or, in certain circumstances, all of the Challenger Entities’
interest in Challenger (“Additional Membership Interests”) to the Company on
or after the third anniversary of the Challenger Agreement. The Company is
not required to purchase the Additional Membership Interests. The Company
incurred $0.3 million in related acquisition costs during the year ended
December 31, 2017 which are included in the cost basis of investment in
the unconsolidated entity.
gain a presence in the Colorado Springs market.
The issuance of the common stock by the Company related to the investment
in Challenger was exempt from registration pursuant to Section 4(a)(2) of the
Securities Act of 1933, as amended, and the safe harbor provided by Rule 506
promulgated thereunder. The Company relied, in part, upon representations
from each of the individuals that they are “accredited investors” as such term
is defined in Rule 501 of Regulation D.
The Company’s investment in Challenger at August 15, 2017 of $15.1
million was more than its share of the estimated underlying net assets of
Challenger, resulting in a preliminary difference in basis of $5.1 million, which
was attributed to inventory and intangible assets.
The Company’s investment in Challenger on August 15, 2017 was determined
as follows (in thousands, except per share data):
Consideration transferred at closing
Green Brick common stock issued
Price per share of Green Brick common stock (1)
Fair value of common stock consideration
Acquisition related costs
Total fair value of consideration
Subsequent consideration
Holdback Shares
Price per share of Green Brick common stock (1)
Total fair value of subsequent consideration
Total fair value of consideration
1,477
$9.90
$14,622
$241
$14,863
20
$9.90
198
$15,061
(1) Based upon closing price of the Company’s common stock upon the parties’ execution
of the Challenger Agreement.
The Challenger Entities operate homebuilding operations under the name
Challenger Homes. Challenger constructs townhouses, single family homes
and luxury patio homes, and is located in Colorado Springs, Colorado. The
Company partnered with Challenger in order to expand its business with
partners that are complementary to its current builder partner group and to
The Company holds two of the five board of managers (the “Managers”)
seats of Challenger. Challenger’s six officers, employees of the Challenger
Entities, were designated by the Managers for the purpose of managing the
day to day operations. The Company does not have a controlling financial
81
interest in Challenger as the Company has less than 50% of the voting
interests in Challenger. The Company’s investment in Challenger is treated
as an unconsolidated investment under the equity method of accounting
and is included in investments in unconsolidated entities in the Company’s
consolidated balance sheets.
The Company’s investment in Challenger is carried at cost, as adjusted for
the Company’s share of income or losses and distributions received, as well
as for adjustments related to basis differences between the Company’s cost
and the Company’s underlying equity in net assets recorded in Challenger’s
financial statements as of the date of acquisition.
As of December 31, 2019, the carrying value of the investment in Challenger
was $23.8 million, whereas the underlying 49.9% equity in net assets of
Challenger was $19.6 million. The $4.2 million difference represents the
premium paid for the Company’s equity interest in excess of Challenger’s
carrying value. This basis difference primarily relates to the estimated
fair value of inventory, as well as the Challenger Homes trade name and
capitalized acquisition costs. The amortization of the basis differences related
to inventory is recorded as a reduction of equity in income of unconsolidated
entities as homes are closed on and delivered to homebuyers. The basis
difference related to the trade name is amortized over ten years as a reduction
of equity in income of unconsolidated entities.
The Company recognized $8.3 million, $7.0 million, and $2.7 million related
to Challenger in equity in income of unconsolidated entities during the years
ended December 31, 2019, 2018, and 2017, respectively.
Providence Title
In March 2018, the Company formed a joint venture with a title company in
Georgia to provide title closing and settlement services to our Atlanta-based
builder. The Company, through its controlled builder, The Providence Group
of Georgia, L.L.C. (“TPG”), owns a 49% equity interest in Providence Group
Title, LLC (“Providence Title”). The Company determined that the investment
in Providence Title should be treated as an unconsolidated investment
under the equity method of accounting and included in investments in
unconsolidated entities in the Company’s consolidated balance sheets.
Green Brick Mortgage
In June 2018, the Company formed a joint venture with PrimeLending to
provide mortgage loan origination services to our builders. The Company
owns a 49% equity interest in Green Brick Mortgage, LLC (“Green Brick
Mortgage”) which initiated mortgage loan origination activities in September
2018. The Company determined that the investment in Green Brick Mortgage
should be treated as an unconsolidated investment under the equity method
of accounting and included in investments in unconsolidated entities in the
Company’s consolidated balance sheets.
CB JENI Homes, Vista Del Lago
82
Lewisville, TX
EJB River Holdings
In December 2018, EJB River Holdings joint venture was formed by TPG
with the purpose to acquire and develop a tract of land in Gwinnett County,
Georgia. In May 2019, EJB was admitted as a member of EJB River Holdings,
which resulted in TPG and EJB each having a 50% ownership interest in
EJB River Holdings. EJB River Holdings had no activity in the period from its
formation until October 2019. Please refer to Note 3 for more information.
Years Ended December 31,
2019
2018
2017
Revenues
$166,368
$166,102
$58,958
Costs and expenses
144,097
148,222
44,969
Net earnings of unconsolidated entities
$22,271
$17,880
$13,989
Company’s share in net earnings of
unconsolidated entities
$9,809
$7,259
$2,746
The Company determined that the investment in EJB River Holdings should
be treated as an unconsolidated investment under the equity method of
accounting and included in investments in unconsolidated entities in the
Company’s consolidated balance sheets.
During the years ended December 31, 2019, 2018, and 2017, the Company
did not identify indicators of impairment for its investments in unconsolidated
entities.
A summary of the financial information of the unconsolidated entities that
are accounted for by the equity method is as follows (in thousands):
6. PROPERTY AND EQUIPMENT
Assets:
Cash
Accounts receivable
Bonds and notes receivable
Loans held for sale, at fair value
Inventory
Other assets
Total assets
Liabilities:
Accounts payable
Accrued expenses and other liabilities
Notes payable
Total liabilities
Owners’ equity:
Green Brick
Others
Total owners’ equity
Total liabilities and owners’ equity
December 31,
2019
December 31,
2018
The following is a summary of property and equipment by major classification
and related accumulated depreciation as of December 31, 2019 and 2018
(in thousands):
$11,699
$14,584
3,252
5,864
23,143
73,704
4,012
1,259
5,864
3,083
44,375
3,132
$121,674
$72,297
$1,726
7,784
58,223
$2,173
5,328
31,402
$67,733
$38,903
$25,910
28,031
$53,941
$121,674
$15,653
17,741
$33,394
$72,297
Land
Building
Model home furnishings and capitalized sales office costs
Office furniture and equipment
Leasehold improvements
Computers and equipment
Vehicles and field trailers
December 31,
2019
December 31,
2018
$763
180
6,090
424
1,824
912
357
10,550
$763
82
5,218
427
1,692
901
279
9,362
Less: accumulated deprecation
(6,241)
(4,672)
Total property and equipment, net
$4,309
$4,690
Depreciation expense for the years ended December 31, 2019, 2018 and
2017 totaled $2.9 million, $2.7 million, and $0.3 million, respectively, and is
included in selling, general and administrative expense in our consolidated
statements of income.
83
7. DEBT
and the maturity date of the Secured Revolving Credit Facility was May 1,
2022.
The aggregated annual principal payments under the borrowings on lines of
credit and senior unsecured notes over the next five years as of December
31, 2019 are (in thousands):
As of December 31, 2019, letters of credit outstanding totaling $8.9 million
reduced the aggregate maximum commitment amount to $66.1 million.
2020
2021
2022
2023
2024
Thereafter
Total
$—
17,860
148,140
—
12,500
62,500
$241,000
Lines of Credit
Borrowings on lines of credit outstanding, net of debt issuance costs, as of
December 31, 2019 and 2018 consist of the following (in thousands):
Secured revolving credit facility
Unsecured revolving credit facility
Debt issuance costs, net of amortization
Total borrowings on lines of credit, net
Secured Revolving Credit Facility
December 31,
2019
December 31,
2018
38,000
46,500
128,000
155,500
(1,358)
(1,614)
164,642
200,386
On July 30, 2015, the Company entered into a secured revolving credit
facility (the “Secured Revolving Credit Facility”) with Inwood National Bank,
which initially provided for up to $50.0 million. Amounts outstanding under
the Secured Revolving Credit Facility are secured by mortgages on real
property and security interests in certain personal property (to the extent
that such personal property is connected with the use and enjoyment of the
real property) that is owned by certain of the Company’s subsidiaries.
The entire unpaid principal balance and any accrued but unpaid interest is
due and payable on the maturity date. Following several amendments, as of
December 31, 2019, the aggregate commitment amount was $75.0 million
84
As of December 31, 2019, outstanding borrowings under the amended
Secured Revolving Credit Facility bear interest payable monthly at a floating
rate per annum equal to the rate announced by Bank of America, N.A., from
time to time, as its “Prime Rate” (the “Index”) with such adjustments to the
interest rate being made on the effective date of any change in the Index,
less 0.25%. Notwithstanding the foregoing, the interest may not, at any time,
be less than 4% per annum or more than the lesser amount of 18% and the
highest maximum rate allowed by applicable law. As of December 31, 2019,
the interest rate on outstanding borrowings under the Secured Revolving
Credit Facility was 4.50% per annum.
As of December 31, 2019, the amended Secured Revolving Credit Facility
was subject to a borrowing base limitation equal to the sum of 50% of the
total value of land and 65% of the total value of lots owned by certain of the
Company’s subsidiaries, each as determined by an independent appraiser,
with the value of land being restricted from being more than 65% of the
borrowing base.
As of December 31, 2019, the amended Secured Revolving Credit Facility
was also subject to a non-usage fee equal to 0.25% of the average unfunded
amount of the commitment amount over a trailing 12 month period.
Under the terms of the amended Secured Revolving Credit Facility, the
Company is required, among other things, to maintain minimum multiples
of tangible net worth in excess of the outstanding Secured Revolving
Credit Facility balance, minimum interest coverage and maximum leverage.
The Company was in compliance with these financial covenants under the
Secured Revolving Credit Facility as of December 31, 2019.
Fees and other debt issuance costs of $0.0 million, $0.0 million and $0.2
million were incurred during the years ended December 31, 2019, 2018
and 2017, respectively, associated with the Secured Revolving Credit Facility
amendments. These costs are deferred and reduce the carrying amount of
debt in our consolidated balance sheets. The Company capitalizes these
costs to inventory over the term of the Secured Revolving Credit Facility
using the straight-line method.
Unsecured Revolving Credit Facility
On December 15, 2015, the Company entered into a credit agreement (the
“Credit Agreement”) with Citibank, N.A. and Credit Suisse AG, Cayman Islands
Branch (“Credit Suisse”) as lenders, and Citibank, N.A. as administrative
agent, providing for a senior, unsecured revolving credit facility with initial
aggregate lending commitments of up to $40.0 million (the “Unsecured
Revolving Credit Facility”).
The Unsecured Revolving Credit Facility provides for interest rate options on
advances at rates equal to either: (a) in the case of base rate advances, the
highest of (1) Citibank’s base rate, (2) the federal funds rate plus 0.5%, and (3)
the one-month LIBOR plus 1.0%, in each case plus 1.5%; or (b) in the case of
Eurodollar rate advances, the reserve adjusted LIBOR plus 2.5%. Interest on
amounts borrowed under the Unsecured Revolving Credit Facility is payable
in arrears on a monthly basis. As of December 31, 2019, the interest rates
on outstanding borrowings under the Unsecured Revolving Credit Facility
ranged from 4.25% to 4.30% per annum.
The Company pays the lenders a commitment fee on the amount of the
unused commitments on a quarterly basis at a rate per annum equal to 0.45%.
Outstanding borrowings under the Unsecured Revolving Credit Facility
are subject to, among other things, a borrowing base. The borrowing base
limitation is equal to the sum of: 100% of unrestricted cash in excess of $15.0
million; 85% of the book value of model homes, construction in progress
homes, completed sold and speculative homes (subject to certain limitations
on the age and number of speculative homes and model homes); 65% of
the book value of finished lots and land under development; and 50% of
the book value of entitled land (subject to certain limitations on the value of
entitled land and land under development as a percentage of the borrowing
base).
Following amendments to the Credit Agreement and the addition of Flagstar
Bank, FSB (“Flagstar Bank”), JPMorgan Chase Bank, N.A. (“JPMorgan”) and
Chemical Financial Corporation (“Chemical”) as lenders, the aggregate
lending commitment available under the Unsecured Revolving Credit Facility
as of December 31, 2019 was $215.0 million, the maximum aggregate
amount of the Unsecured Revolving Credit Facility was $275.0 million, and
the termination date with respect to commitments under the Unsecured
Revolving Credit Facility was December 14, 2021 for $30.0 million and
December 14, 2022 for $185.0 million out of the aggregate lending
commitment of $215.0 million.
Fees and other debt issuance costs of $0.3 million, $0.9 million and $0.7
million were incurred during the years ended December 31, 2019, 2018 and
2017, respectively, associated with the amendments, term extensions and
increases in lenders’ commitments. These costs are deferred and reduce the
carrying amount of debt in our consolidated balance sheets. The Company
capitalizes these costs to inventory over the term of the Unsecured Revolving
Credit Facility using the straight-line method.
Under the terms of the Unsecured Revolving Credit Facility, the Company is
required to maintain compliance with various financial covenants, including a
maximum leverage ratio, a minimum interest coverage ratio, and a minimum
consolidated tangible net worth. The Company was in compliance with
these financial covenants under the Unsecured Revolving Credit Facility as
of December 31, 2019.
Senior Unsecured Notes
On August 8, 2019, the Company issued $75.0 million aggregate principal
amount of senior unsecured notes due on August 8, 2026 at a fixed rate
of 4.00% per annum to Prudential Private Capital in a Section 4(a)(2)
private placement transaction and received net proceeds of $73.3 million.
A brokerage fee of approximately $1.5 million associated with the issuance
was paid at closing. The brokerage fee, and other debt issuance costs of
approximately $0.2 million, were deferred and reduced the amount of debt
on our consolidated balance sheet. The Company used the net proceeds
from the issuance of the senior unsecured notes to repay borrowings under
the Company’s existing revolving credit facilities.
Principal on the senior unsecured notes is required to be paid in increments
of $12.5 million on August 8, 2024 and $12.5 million on August 8, 2025. The
final principal payment of $50.0 million is due on August 8, 2026. Optional
prepayment is allowed with payment of a “make-whole” premium which
fluctuates depending on market interest rates. Interest is payable quarterly
in arrears commencing November 8, 2019.
Under the terms of the senior unsecured notes, the Company is required,
among other things, to maintain compliance with various financial covenants,
including maximum leverage ratios, a minimum interest coverage ratio, and
a minimum consolidated tangible net worth. The senior unsecured notes
are guaranteed on an unsecured senior basis by the Company’s significant
subsidiaries and certain other subsidiaries. The senior unsecured notes will
rank equally in right of payment with all of the Company’s existing and future
senior unsecured and unsubordinated indebtedness.
85
8. STOCKHOLDERS’ EQUITY
Common Stock
Pursuant to the Company’s amended and restated certificate of incorporation
(“Certificate of Incorporation”), the Company is authorized to issue up to
100,000,000 shares of common stock, par value $0.01 per share. As of
December 31, 2019, there were 50,879,949 shares of common stock issued
and 50,488,010 outstanding.
On March 16, 2018, 20,000 shares of common stock were issued as
additional consideration for the investment in Challenger upon resolution of
terms for such holdback shares.
Preferred Stock
Pursuant to the Company’s Certificate of Incorporation, the Company is
authorized to issue up to 5,000,000 shares of preferred stock, par value
$0.01 per share. The Board of Directors (the “BOD”) has the authority,
subject to any limitations imposed by law or Nasdaq rules, without further
action by the stockholders, to issue such preferred stock in one or more
series and to fix the voting powers (if any), the preferences and relative,
participating, optional or other special rights or privileges, if any, of such
series and the qualifications, limitations or restrictions thereof. These rights,
preferences and privileges may include, but are not limited to, dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any series or the
designation of that series. As of December 31, 2019, there were no shares
of preferred stock issued and outstanding.
Share Repurchase Programs
In March 2016, the Company’s BOD authorized a share repurchase program
of up to 1,000,000 shares of its common stock through 2017. The share
repurchase program expired in 2017. No shares were repurchased during
the year ended December 31, 2017.
to exceed $30.0 million. The timing, volume and nature of share repurchases
are at the discretion of management and dependent on market conditions,
corporate and regulatory requirements, available cash and other factors,
and may be suspended or discontinued at any time. Authorized repurchases
may be made from time to time in the open market, through block trades
or in privately negotiated transactions. No assurance can be given that any
particular amount of common stock will be repurchased. All or part of the
repurchases may be implemented under a trading plan under Rule 10b5-1 or
Rule 10b-18 established by the SEC, which would allow repurchases under
pre-set terms at times when the Company might otherwise be prevented
from doing so under insider trading laws or because of self-imposed blackout
periods. This repurchase program may be modified, extended or terminated
by the BOD at any time. The Company intends to finance any repurchases
with available cash and proceeds from borrowings under lines of credit.
In December 2018, the Company repurchased 136,756 shares for
approximately $1.0 million.
On December 31, 2018, the Company’s BOD authorized implementation of
share repurchases in accordance with a trading plan under Rule 10b5-1 (the
“December 2018 Trading Plan”) within the 2018 Share Repurchase Program.
The trading plan was effective from January 2, 2019 until March 30, 2019.
In January 2019, the Company repurchased 7,862 shares for approximately
$0.1 million under the December 2018 Trading Plan.
In June 2019, the Company’s BOD authorized discrete repurchases under
the 2018 Share Repurchase Program of 39,320 shares for approximately
$0.3 million.
On June 27, 2019, the Company’s BOD authorized implementation of share
repurchases in accordance with a trading plan under Rule 10b5-1 (the “June
2019 Trading Plan”) within the 2018 Share Repurchase Program. The trading
plan was effective from July 1, 2019 until August 5, 2019. In July 2019, the
Company repurchased 144,584 shares for approximately $1.2 million under
the June 2019 Trading Plan.
In September 2019, the Company’s BOD authorized discrete repurchases
under the 2018 Share Repurchase Program of 63,417 shares for approximately
$0.6 million.
In October 2018, the Company’s BOD authorized a share repurchase
program for the period beginning on October 3, 2018 and ending on
October 3, 2020 of the Company’s common stock for an aggregate price not
As of December 31, 2019, the remaining dollar value of shares that may yet
be purchased under the 2018 Share Repurchase Program was $26.8 million.
86
that can only be settled in cash will not be treated as shares of common
stock granted for purposes of the 2014 Equity Plan. The maximum amount
that can be paid to any single participant in any one calendar year pursuant
to a cash bonus award under the 2014 Equity Plan is $2.0 million. As of
December 31, 2019, 1,656,703 shares remain available for future grant of
awards under the 2014 Equity Plan.
The Providence Group, Pratt Stacks
Atlanta, GA
9. SHARE-BASED COMPENSATION
2014 Omnibus Equity Incentive Plan
On October 17, 2014, the Company’s stockholders approved the Green Brick
Partners, Inc. 2014 Omnibus Equity Incentive Plan (the “2014 Equity Plan”).
The purpose of the 2014 Equity Plan is to provide a means for the Company
to attract and retain key personnel and to provide a means whereby current
and prospective directors, officers, employees, consultants and advisors can
acquire and maintain an equity interest in the Company, or be paid incentive
compensation, which may (but need not) be measured by reference to
the value of the Company’s common stock, thereby strengthening their
commitment to the welfare of the Company and aligning their interests with
those of the Company’s stockholders. The 2014 Equity Plan will terminate
automatically on the tenth anniversary of the date it became effective. No
awards will be granted under the 2014 Equity Plan after that date, but awards
granted prior to that date may extend beyond that date.
Under the 2014 Equity Plan, awards of stock options, including both incentive
stock options and nonqualified stock options, stock appreciation rights,
restricted stock and restricted stock units, other share-based awards and
performance compensation awards, may be granted. The maximum number
of shares of the Company’s common stock that is authorized and reserved
for issuance under the 2014 Equity Plan is 2,350,956 shares, subject to
adjustment for certain corporate events or changes in the Company’s capital
structure.
In general, the Company’s employees or those reasonably expected to
become the Company’s employees, consultants and directors, are eligible for
awards under the 2014 Equity Plan, provided that incentive stock options
may be granted only to employees. The Company has six non-employee
directors and approximately 460 employees (including employees of our
builders) who are eligible to receive awards under the 2014 Equity Plan.
Written agreements between the Company and each participant evidence
the terms of each award granted under the 2014 Equity Plan.
If any award under the 2014 Equity Plan expires or otherwise terminates, in
whole or in part, without having been exercised in full, the common stock
withheld from issuance under that award will become available for future
issuance under the plan. If shares issued under the 2014 Equity Plan are
reacquired by the Company pursuant to the terms of any forfeiture provision,
those shares will become available for future awards under the plan. Awards
87
Share-Based Award Activity
Stock Options
During the year ended December 31, 2019, the Company granted restricted
stock awards (“RSAs”) under the 2014 Equity Plan to Executive Officers
(“EOs”) and non-employee members of the BOD. The RSAs granted to EOs
were 100% vested and non-forfeitable on the grant date. Some members of
the BOD elected to defer up to 100% of their annual retainer fee in the form
of common stock. The RSAs granted to the BOD will become fully vested
on the earlier of (i) the first anniversary of the date of grant of the shares
of restricted common stock or (ii) the date of the Company’s 2019 Annual
Meeting of Stockholders. The fair value of the RSAs granted to EOs and non-
employee members of the BOD were recorded as share-based compensation
expense on the grant date and over the vesting period, respectively. During
the year ended December 31, 2019, the Company withheld 59,116 shares
of common stock from EOs, at a total cost of $0.5 million, to satisfy statutory
minimum tax requirements upon grant of the RSAs.
A summary of share-based awards activity during the years ended December
31, 2019, 2018 and 2017 is as follows:
Stock options granted to date were not granted under the 2014 Equity Plan.
The stock options outstanding as of December 31, 2019 vested and became
exercisable in five substantially equal installments on each of the first five
anniversaries of the grant date and expire 10 years after the date on which
they were granted. Compensation expense related to these options was
expensed on a straight-line basis over the 5 years year service period. All
of the stock options outstanding as of December 31, 2019 are vested. We
utilized the Black-Scholes option pricing model for estimating the grant date
fair value of the stock options. There were no stock options granted during
the years ended December 31, 2019, 2018 and 2017.
A summary of stock option activity during the year ended December 31,
2019 is as follows:
Number
of Shares
(in thousands)
Weighted
Average Exercise
Price per Share
Weighted Aver-
age Remaining
Contractual
Term (in years)
Aggregate
Intrinsic Value
(in thousands)
Number
of Shares
(in thousands)
Weighted Average
Grant Date Fair
Value per Share
38
229
(229)
—
38
140
(144)
—
34
219
(194)
—
59
$7.51
$10.11
$9.66
—
$10.25
$10.45
$10.03
—
$12.00
$9.14
$9.67
—
$9.05
Options outstanding,
December 31, 2018
500
$7.49
Granted
Exercised
Forfeited
Options outstanding,
December 31, 2019
Options exercisable,
December 31, 2019
—
—
—
500
500
—
—
—
$7.49
$7.49
4.82
4.82
$1,995
$1,995
A summary of unvested stock option activity during the year ended December
31, 2019 is as follows:
Unvested, December 31, 2018
Granted
Vested
Forfeited
Unvested, December 31, 2019
Number of Shares
(in thousands)
Weighted Average Grant
Date Fair Value per Share
100
—
(100)
—
—
$2.88
—
$2.88
—
$2.88
Nonvested, December 31, 2016
Granted
Vested
Forfeited
Nonvested, December 31, 2017
Granted
Vested
Forfeited
Nonvested, December 31, 2018
Granted
Vested
Forfeited
Nonvested, December 31, 2019
88
Share-Based Compensation Expense
Share-based compensation expense was $2.2 million, $1.8 million and $2.6 million for the years ended 2019, 2018 and 2017, respectively. Recognized tax
benefit related to share-based compensation expense was $0.5 million, $0.4 million and $0.6 million for the years ended December 31, 2019, 2018 and
2017, respectively.
As of December 31, 2019, the estimated total remaining unamortized share-based compensation expense related to unvested RSAs, net of forfeitures, was
$0.2 million which is expected to be recognized over a weighted-average period of 0.4 years. The total fair value of RSAs vested during the years ended
December 31, 2019, 2018 and 2017 was $1.9 million, $1.4 million and $2.2 million, respectively.
As of December 31, 2019, there was no remaining unamortized share-based compensation expense related to stock options.
10. REVENUE RECOGNITION
Disaggregation of Revenue
The following reflects the disaggregation of revenue by primary geographic market, type of customer, product type, and timing of revenue recognition (in thousands):
2019
2018
2017
Residential units
revenue
Land and lots
revenue
Residential
units revenue
Land and lots
revenue
Residential units
revenue
Land and lots
revenue
Years Ended December 31,
Primary Geographical Market
Central
Southeast
Total revenues
Type of Customer
Homebuyers
Homebuilders
Total revenues
Product Type
Residential units
Land and lots
Total revenues
Timing of Revenue Recognition
Transferred at a point in time
Transferred over time
Total revenues
$396,900
362,930
$759,830
$759,830
—
$759,830
$759,830
—
$759,830
$752,273
7,557
$759,830
$31,080
750
$31,830
$185
31,645
$31,830
$—
31,830
$31,830
$31,830
—
$31,830
$281,868
297,025
$578,893
$578,893
—
$578,893
$578,893
—
$578,893
$571,177
7,716
$578,893
$40,184
4,570
$44,754
$670
44,084
$44,754
$—
44,754
$44,754
$44,754
—
$44,754
$224,670
214,850
$439,520
$439,520
—
$439,520
$439,520
—
$439,520
$435,644
3,876
$439,520
Revenue recognized over time represents revenue from mechanic’s lien contracts.
$17,928
802
$18,730
$—
18,730
$18,730
$—
18,730
$18,730
$18,730
—
$18,730
89
Contract Balances
Transaction Price Allocated to Remaining Performance Obligations
Opening and closing contract balances included in customer and builder
deposits on the consolidated balance sheets are as follows (in thousands):
December 31, 2019
December 31, 2018
Customer and builder deposits
$23,954
$31,978
The aggregate amount of transaction price allocated to the remaining
performance obligations on our land sale and lot option contracts is $50.4
million. The Company will recognize the remaining revenue when the lots are
taken down, or upon closing for the sale of a land parcel, which is expected
to occur as follows (in thousands):
The difference between the opening and closing balances of customer and
builder deposits results from the timing difference between the customer’s
payment of a deposit and the Company’s performance, impacted slightly by
terminations of contracts.
2020
2021
2022
Total
$30,333
18,940
1,160
$50,433
The amount of deposits on residential units and land and lots held as of the
beginning of the period and recognized as revenue during the years ended
December 31, 2019 and 2018 are as follows (in thousands):
The timing of lot takedowns is contingent upon a number of factors, including
customer needs, the number of lots being purchased, receipt of acceptance
of the plat by the municipality, weather-related delays, and agreed-upon lot
takedown schedules.
2019
2018
Type of Customer
Homebuyer
Homebuilder
Total deposits recognized as revenue
$17,888
$3,417
$21,305
$19,342
$1,806
$21,148
Our contracts with homebuyers have a duration of less than one year. As such,
the Company uses the practical expedient as allowed under ASC 606 and
has not disclosed the transaction price allocated to remaining performance
obligations as of the end of the reporting period.
11. SEGMENT INFORMATION
As a result of the GRBK GHO business combination, customer deposits
from homebuyers in the amount of $9.1 million were acquired, of which
$8.2 million was recognized during the period from April 26, 2018 through
December 31, 2018.
The Company has three reportable segments - Builder operations Central,
Builder operations Southeast, and Land development. Builder operations
Central represents operations of our builders in Texas, whereas Builder
operations Southeast represents operations of our builders in Georgia and
Florida.
Performance Obligations
There was no revenue recognized during the years ended December 31,
2019, 2018 and 2017 from performance obligations satisfied in prior periods.
The operations of the Company’s builders were aggregated in these three
reportable segments based on similar economic characteristics, including
geography, housing products, class of homebuyer, regulatory environments,
and methods used to construct and sell homes. The Company believes such
presentation is consistent with the objective and basic principles of ASC 280
and provides the most meaningful information about the types of business
activities in which the Company engages and the economic environments in
which it operates.
90
Corporate operations are reported as a non-operating segment and include
activities which support the Company’s builder operations, land development,
title and mortgage operations through centralization of certain administrative
functions, such as finance, treasury, information technology and human
resources, as well as development of strategic initiatives. Unallocated corporate
expenses are reported in the corporate, other and unallocated segment as
these activities do not share a majority of aggregation criteria with either the
builder operations or land development segments.
While the operations of Challenger meet the criteria for an operating segment,
they do not meet the quantitative thresholds of ASC 280 to be separately
reported and disclosed. As such, Challenger’s results are included within the
corporate, other and unallocated segment.
Green Brick Title, LLC (“Green Brick Title”), Providence Title and Green Brick
Mortgage operations are not economically similar to either builder operations
or land development and do not meet the quantitative thresholds of ASC 280
to be separately reported and disclosed. As such, these entities’ results are
included within the corporate, other and unallocated segment.
Operations of EJB River Holdings do not meet the criteria for an operating
segment, and they do not meet the quantitative thresholds of ASC 280 to
be separately reported and disclosed. As such, EJB River Holdings’ results are
included within the corporate, other and unallocated segment.
Segment information for the year ended December 31, 2017 has been
restated to conform with the revised segment presentation for the years ended
December 31, 2019 and 2018.
Edgewood
Frisco, Texas
91
Financial information relating to the Company’s reportable segments is as follows. Operational results of each reportable segment are not necessarily indicative
of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented.
Years Ended December 31,
(in thousands)
December 31, 2019
December 31, 2018
2019
2018
2017
Inventory:
Builder operations
Central
$396,900
$282,218
$224,670
Southeast
363,680
760,580
31,080
301,595
583,813
39,834
214,850
Total builder operations
439,520
Land development
18,730
Corporate, other and unallocated (5)
$791,660
$623,647
$458,250
Total inventory
$251,677
168,140
419,817
308,071
25,679
$753,567
$160,980
159,616
320,596
329,105
19,260
$668,961
Goodwill: (6)
Builder operations - Southeast
$680
$680
(1) The sum of Builder operations Central and Southeast segments’ revenues does not equal
residential units revenue included in the consolidated statements of income in periods when
our builders have revenues from land or lot closings, which for the years ended December
31, 2019, 2018 and 2017 were $0.8 million, $4.9 million and $0.0 million, respectively.
(2) Corporate, other and unallocated gross loss is comprised of capitalized overhead and
capitalized interest adjustments that are not allocated to builder operations and land
development segments.
(3) Interest expense of Builder operations Central and Southeast segments represents
an interest expense charged by Corporate, other and unallocated segment in relation to
financing purchases of land and construction of some of the Company’s Dallas and Atlanta
builders. Intercompany interest revenue of the Corporate, other and unallocated segment is
eliminated in consolidation.
(4) Corporate, other and unallocated loss before income taxes includes results from Green
Brick Title, Challenger, Green Brick Mortgage, EJB River Holdings, and Providence Title.
(5) Corporate, other and unallocated inventory consists of capitalized overhead and interest
related to work in process and land under development.
(6) In connection with the GRBK GHO business combination, the Company recorded
goodwill of $0.7 million.
$88,480
92,088
180,568
8,050
(19,536)
$169,082
$24,072
15,686
39,758
(39,758)
$—
$75,006
82,935
157,941
9,334
(13,073)
$154,202
$18,207
12,795
31,002
(31,002)
$—
$64,427
57,820
122,247
5,506
(9,293)
$118,460
$11,623
14,141
25,764
(25,764)
$—
$36,569
$37,535
$36,224
47,210
83,779
10,759
(10,209)
$84,329
47,237
84,772
6,155
(9,256)
$81,671
34,636
70,860
4,320
(10,943)
$64,237
(in thousands)
Revenues: (1)
Builder operations
Central
Southeast
Total builder operations
Land development
Total revenues
Gross profit:
Builder operations
Central
Southeast
Total builder operations
Land development
Corporate, other and unallocated (2)
Total gross profit
Interest expense: (3)
Builder operations
Central
Southeast
Total builder operations
Corporate, other and unallocated
Total interest expense
Income before income taxes:
Builder operations
Central
Southeast
Total builder operations
Land development
Corporate, other and unallocated (4)
Income before income taxes
92
12. INCOME TAXES
Effective Income Tax Rate Reconciliation
On December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).
The Tax Act made major changes to the Internal Revenue Code. The Company
recognized the income tax effects of the Tax Act in its financial statements
in accordance with Staff Accounting Bulletin 118 which provides SEC staff
guidance for the application of ASC 740, Income Taxes. The Company finalized
its accounting for the income tax effects of the Tax Act in the fourth quarter
of 2018 with no adjustments recorded during the measurement period.
Income Tax Expense
The components of current and deferred income tax expense are as follows
(in thousands):
Current income tax expense (benefit):
Federal
State
Total current income tax expense
Deferred income tax expense (benefit):
Federal
State
Total deferred income tax expense
Total income tax expense
$15,980
2,810
18,790
774
463
1,237
$20,027
$(569)
2,993
2,424
15,023
(311)
14,712
$999
1,733
2,732
36,569
(270)
36,299
$17,136
$39,031
Years Ended December 31,
Change in valuation allowance
2019
2018
2017
Change in federal statutory tax rate
The income tax expense differs from the amount that would be computed by
applying the statutory federal income tax rates of 21%, 21% and 35% for the
years ended December 31, 2019, 2018 and 2017, respectively, to income
before income taxes as a result of the following (amounts in thousands):
Tax on pre-tax book income (before
reduction of noncontrolling interests)
Tax effect of non-controlled earnings
State income tax expense, net of
federal benefit
Adjustments to deferred tax assets
related to state net operating losses
Other
Total income tax expense
Effective income tax rate
Years Ended December 31,
2019
2018
2017
$17,709
$17,151
$22,483
(1,252)
2,706
1,063
(1,063)
—
864
$20,027
23.7%
(2,743)
1,940
283
(283)
—
788
$17,136
21.0%
(3,630)
931
41
(41)
19,017
230
$39,031
60.8%
The effective income tax rate for 2017 reflects the impact of compliance
with the Tax Act, signed into law on December 22, 2017. The Company
remeasured its deferred tax assets due to the change in federal statutory tax
rate which resulted in additional tax expense of $19.0 million.
The Village at Twin Creeks
Allen, Texas
93
Deferred Income Taxes
The rollforward of valuation allowance is as follows (amounts in thousands):
The primary differences between the financial statement and tax bases of
assets and liabilities are as follows (in thousands):
Valuation allowance at beginning of the year
December 31, 2019 December 31, 2018
Write-off of state net operating losses
$9,212
$10,947
Valuation allowance at end of the year
Expiration of state net operating losses
Years Ended December 31,
2019
2018
$1,063
(1,063)
-
$-
$1,346
-
(283)
$1,063
Deferred tax assets:
Basis in partnerships
Accrued expenses
Inventory
Change in fair value of contingent consideration
Lease liabilities - operating leases
State net operating loss carryover
Federal net operating loss carryover
Alternative minimum tax credit carryover
Stock-based compensation
Other
Deferred tax assets, gross
Valuation allowance
Deferred tax assets, net
Deferred tax liabilities:
Right-of-use assets - operating leases
Prepaid insurance
Other
Deferred tax liabilities
2,206
2,316
1,444
832
—
—
—
408
191
16,609
—
$16,609
$(818)
(419)
(110)
$(1,347)
$15,262
2,182
1,521
385
—
1,063
432
576
347
175
17,628
(1,063)
$16,565
$—
(66)
—
$(66)
$16,499
Uncertain Tax Positions
The Company establishes accruals for uncertain tax positions that reflect
management’s best estimate of deductions and credits that may not be
sustained on a more-likely-than-not basis. In accordance with ASC 740,
Income Taxes, the Company recognizes the effect of income tax positions
only if those positions have a more-likely-than-not chance of being sustained
by the Company. Recognized income tax positions are measured at the
largest amount that is considered greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the period in which
the change in judgment occurs. There were no uncertain tax positions as of
December 31, 2019.
A reconciliation of the beginning and ending amount of uncertain tax positions
for the year ended December 31, 2017 is as follows (in thousands):
Uncertain tax positions at beginning of year
Change related to Georgia state income taxes
Uncertain tax positions at end of year
Year Ended December 31, 2017
$249
(249)
$-
There were no expenses for interest and penalties related to uncertain tax
positions for the years ended December 31, 2019, 2018, and 2017. There
were no accrued liabilities related to uncertain tax positions as of December
31, 2019 and 2018, respectively.
Statutes of Limitations
Total deferred income tax assets, net
Net Operating Losses and Valuation Allowances
As of December 31, 2019, all federal net operating loss carryforwards were
fully utilized.
During the year ended December 31, 2019, the Company decided to write
off its gross state net operating loss carryforwards in Minnesota of $13.7
million, as well as the related deferred tax asset and valuation allowance.
Management believes on a more-likely-than-not basis that the Minnesota
net operating loss carryforwards would not have been utilized.
The U.S. federal statute of limitations remains open for our 2016 and
subsequent tax years. Due to the carryover of the federal net operating
losses for years 2009 and forward, income tax returns going back to the
2009 tax year are subject to adjustment.
94
The Colorado and Minnesota statutes of limitations remain open for our
2015 and subsequent tax years. The Nebraska statute of limitations remains
open for our 2016 and subsequent tax years.
The computation of basic and diluted net income attributable to Green Brick
Partners, Inc. per share is as follows (in thousands, except per share amounts):
The Company’s subsidiaries file returns in Texas, Georgia and Florida.
The Texas statute of limitations remains open for the 2015 and subsequent
tax years. Any Texas adjustments relating to returns filed by the subsidiary
partnerships would be borne by the subsidiary partnership entities.
The Georgia statute of limitations remains open for the 2016 and subsequent
tax years. Any Georgia adjustments relating to returns filed by the subsidiary
partnerships would be borne by the partner.
The Florida statute of limitations will remain open for the 2018 and
subsequent tax years. Any Florida adjustments relating to returns filed by
the subsidiary partnerships would be borne by the partner.
Net income attributable to Green Brick
Partners, Inc.
Years Ended December 31,
2019
2018
2017
$58,656
$51,623
$14,970
Weighted-average number of shares
outstanding - basic
50,530
50,652
49,597
Basic net income attributable to Green Brick
Partners, Inc. per share
$1.16
$1.02
$0.30
Weighted-average number of shares
outstanding - basic
50,530
50,652
49,597
The Company is not presently under examination by the Internal Revenue
Service or state tax authority.
Dilutive effect of stock options and restricted
stock awards
106
99
86
13. EMPLOYEE BENEFITS
We have a qualifying 401(k) defined contribution plan that covers all
employees of the Company. Each year, we may make discretionary matching
contributions equal to a percentage of the employees’ contributions. The
Company contributed $0.8 million, $0.6 million and $0.5 million of matching
contributions to the 401(k) plan during the years ended December 31, 2019,
2018 and 2017.
14. EARNINGS PER SHARE
The Company’s restricted stock awards have the right to receive forfeitable
dividends on an equal basis with common stock and therefore are not
considered participating securities that must be included in the calculation of
net income per share using the two-class method. Basic earnings per share
is computed by dividing net income by the weighted average number of
common shares outstanding during each period, adjusted for non-vested
shares of restricted stock awards during each period. Diluted earnings per
share is calculated using the treasury stock method and includes the effect
of all dilutive securities, including stock options and restricted stock awards.
Weighted-average number of shares
outstanding - diluted
50,636
50,751
49,683
Diluted net income attributable to Green Brick
Partners, Inc. per share
$1.16
$1.02
$0.30
The following shares that could potentially dilute earnings per share in the
future are not included in the determination of diluted net income attributable
to Green Brick Partners, Inc. per common share (in thousands):
Antidilutive options to purchase common stock
and restricted stock awards
14
8
-
Years Ended December 31,
2019
2018
2017
95
15. FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The Company’s financial instruments, none of which are held for trading
include cash, restricted cash, receivables, earnest money
purposes,
deposits, other assets, accounts payable, accrued expenses, customer and
builder deposits, borrowings on lines of credit, senior unsecured notes, and
contingent consideration liability.
Per the fair value hierarchy, level 1 financial instruments include: cash,
restricted cash, receivables, earnest money deposits, other assets, accounts
payable, accrued expenses, and customer and builder deposits due to their
short-term nature. The Company estimates that, due to the short-term nature
of the underlying financial instruments or the proximity of the underlying
transaction to the applicable reporting date, the fair value of level 1 financial
instruments does not differ materially from the aggregate carrying values
recorded in the consolidated financial statements as of December 31, 2019
and 2018.
Level 2 financial instruments include borrowings on lines of credit and senior
unsecured notes. Due to the short-term nature and floating interest rate
terms, the carrying amounts of borrowings on lines of credit are deemed
to approximate fair value. The estimated fair value of the senior unsecured
notes as of December 31, 2019 was $78.6 million.
The fair value of the contingent consideration liability related to the GRBK
GHO business combination was estimated using an internally developed
discounted cash flow analysis. As the measurement of the contingent
consideration is based primarily on significant inputs not observable in the
market, it represents a level 3 measurement.
Key inputs in measuring the fair value of the contingent consideration liability
are management’s projections of GRBK GHO’s net income and debt, and the
annual discount rate of 16.5% that reflects the risk associated with achieving
the milestones of the contingent consideration payments.
The reconciliation of the beginning and ending balances for level 3
measurements is as follows (in thousands):
Contingent consideration liability, balance as of
December 31, 2018
$2,207
$2,207
Carrying Value
Estimated Fair Value
Payment of contingent consideration
(514)
(514)
Payment of contingent consideration in excess
of acquisition date fair value
(1,332)
(1,332)
Change in fair value of contingent consider-
ation
4,906
4,906
Contingent consideration liability, balance as of
December 31, 2019
$5,267
$5,267
There were no transfers between the levels of the fair value hierarchy for
any of our financial instruments as of December 31, 2019 when compared
to December 31, 2018.
Fair Value of Nonfinancial Instruments
Nonfinancial assets and liabilities include inventory which is measured at
cost unless the carrying value is determined to be not recoverable in which
case the affected instrument is written down to fair value. Per the fair value
hierarchy, these items are level 3 nonfinancial instruments. For additional
information on the Company’s inventory, refer to Note 4.
16. RELATED PARTY TRANSACTIONS
During 2019, 2018 and 2017, the Company had the following related party
transactions through the normal course of business.
The Parc at Cogburn
In September 2015, the Company purchased 11 lots from an entity affiliated
with the president of TPG, one of its controlled builders. The lots are part
of a 19-home community, The Parc at Cogburn in Atlanta. The total paid for
the lots in 2015 was $1.8 million. Under the option contract in place, the
96
Company purchased $0.3 million in lots during the year ended December 31,
2016, and $1.0 million in lots during the year ended December 31, 2017.
The Company purchased all 19 lots as of December 31, 2017.
Company entered into a partnership agreement with an entity affiliated
with the president of TPG to develop the land for sale of the lots to TPG.
Contributions and profits are shared 50% by the Company and 50% by the
affiliated entity.
Academy Street
In March 2016, the Company purchased undeveloped land for an 83-lot
community, Academy Street in Atlanta. Simultaneously, the Company entered
into a partnership agreement with an entity affiliated with the president of
TPG to develop the land for sale of the lots to TPG. Contributions and profits
are shared 80% by the Company and 20% by the affiliated entity.
During the year ended December 31, 2017, TPG purchased 62 lots within
the community for $11.2 million. During the year ended December 31, 2018,
TPG purchased the remaining 21 lots within the community for $2.9 million.
Total capital contributions as of December 31, 2019 were $11.7 million.
Total capital contributions paid during the year ended December 31, 2016
were $11.2 million, of which $9.0 million was paid by the Company. Total
capital contributions paid during the year ended December 31, 2017 were
$0.5 million, of which $0.4 million was paid by the Company. There were
no capital contributions made to the partnership during the years ended
December 31, 2019 and 2018.
Total capital distributions as of December 31, 2019 were $14.8 million.
There were no capital distributions from the partnership during the year
ended December 31, 2016. Total capital distributions from the partnership
during the year ended December 31, 2017 were $11.5 million, of which
$9.2 million was paid to the Company. Total capital distributions from the
partnership during the year ended December 31, 2018 were $3.3 million, of
which $2.7 million was paid to the Company. The capital distributions made
during the year ended December 31, 2018 were final, and the affiliated
entity has ceased its activity.
The Company has consolidated the entity’s results of operations and
financial condition into its consolidated financial statements based on its
80% ownership.
Suwanee Station
In March 2016, the Company purchased undeveloped land for a 73-unit
townhome community, Suwanee Station in Atlanta. Simultaneously, the
During the years ended December 31, 2019, 2018 and 2017, TPG purchased
13, 25, and 27 lots within the community for $0.5 million, $1.3 million and
$1.6 million, respectively. As of December 31, 2019, there were no lots
remaining to be sold to TPG.
Total capital contributions as of December 31, 2019 were $2.5 million. Total
capital contributions paid during the year ended December 31, 2016 were
$1.8 million, of which $0.9 million was paid by the Company. The capital
contributions paid during the year ended December 31, 2017 were $0.7
million, of which $0.4 million was paid by the Company. The were no capital
contributions paid during the year ended December 31, 2019 and 2018.
Total capital distributions as of December 31, 2019 were $3.3 million. There
were no capital distributions from the partnership during the year ended
December 31, 2016. Total capital distributions from the partnership during
the year ended December 31, 2017 were $1.5 million, of which $0.7 million
was paid to the Company. Total capital distributions from the partnership
during the year ended December 31, 2018 were $0.9 million, of which
$0.4 million was paid to the Company. Total capital distributions from the
partnership during the year ended December 31, 2019 were $0.9 million, of
which $0.5 million was paid to the Company. The capital distributions made
during the year ended December 31, 2019 were final, and the affiliated
entity has ceased its activity.
The Company holds two of the three board seats and is able to exercise
control over the operations of the partnership and therefore has consolidated
the entity’s results of operations and financial condition into its consolidated
financial statements.
Dunwoody Towneship
In June 2016, the Company purchased 14 lots from an entity affiliated with
the president of TPG. The lots are part of a 40-unit townhome community,
Dunwoody Towneship in Atlanta. The total paid for the 14 lots in 2016 was
$1.8 million. The Company purchased the remaining 26 lots during the year
ended December 31, 2017 for $3.3 million.
97
Corporate Officers
17. COMMITMENTS AND CONTINGENCIES
In February 2017, Richard A. Costello paid a $0.1 million deposit to Centre
Living Homes, LLC, one of the Company’s builders, on a townhome. During
the fourth quarter of 2017, Mr. Costello closed on the townhome for
approximately $0.5 million. In accordance with the Company’s employee
discount policy, the contract price resulted in a margin of approximately 13%.
In February 2017, Jed Dolson paid a $0.1 million deposit to Centre Living
on a townhome. During the fourth quarter of 2017, as allowed for in the
Company’s employee discount policy, Mr. Dolson assigned his rights to
purchase the townhome to his sister-in-law. The townhome was closed on
in the fourth quarter of 2017 for approximately $0.5 million. In accordance
with the Company’s employee discount policy, the contract price resulted in
a margin of approximately 13%.
Trevor Brickman, the son of Green Brick’s Chief Executive Officer, is the
President of Centre Living. Following a series of transactions described in
Part I, Item 1 of this Annual Report on Form 10-K and in Note 3, effective
December 31, 2019, Green Brick’s ownership interest in Centre Living is
90% and Trevor Brickman’s ownership interest is 10%. Green Brick has 90%
voting control over the operations of Centre Living. As such, 100% of Centre
Living’s operations are included within our consolidated financial statements.
GRBK GHO
GRBK GHO leases office space from entities affiliated with the president
of GRBK GHO. During the year ended December 31, 2019 and during
the period from April 26, 2018 through December 31, 2018, GRBK GHO
incurred a lease cost of $0.1 million and $0.1 million, respectively, under
such lease agreements. As of December 31, 2019, there were no amounts
due to the affiliated entities related to such lease agreements.
Letters of Credit and Performance Bonds
During the ordinary course of business, certain regulatory agencies and
municipalities require the Company to post letters of credit or performance
bonds related to development projects. As of December 31, 2019 and 2018,
letters of credit outstanding were $9.0 million and $2.2 million, respectively,
and performance bonds outstanding totaled $5.4 million and $5.3 million,
respectively. The Company does not believe that it is likely that any material
claims will be made under a letter of credit or performance bond in the
foreseeable future.
Warranties
Warranty activity, included in accrued expenses in our consolidated balance
sheets, for 2019, 2018 and 2017 consists of the following (in thousands):
Warranty accrual, beginning of
period
2019
2018
2017
$2,980
$2,083
$1,210
Warranties issued
3,358
2,384
1,454
Changes in liability for existing
warranties
37
163
482
Settlements
(2,535)
(1,650)
(1,063)
Warranty accrual, end of period
$3,840
$2,980
$2,083
Operating Leases
GRBK GHO receives title closing services on the purchase of land and third-
party lots from an entity affiliated with the president of GRBK GHO. During
the year ended December 31, 2019 and during the period from April 26,
2018 through December 31, 2018, GRBK GHO incurred de minimus fees
related to such title closing services. As of December 31, 2019, no amounts
were due to the title company affiliate.
The Company has leases associated with office and design center space in
Georgia, Texas, and Florida that, at the commencement date, have a lease
term of more than 12 months and are classified as operating leases. The
exercise of any extension options available in such operating lease contracts
is not reasonably certain.
Operating lease cost of $1.3 million for these leases for the year ended
December 31, 2019 is included in selling, general and administrative expense
in the consolidated statements of income. For the year ended December 31,
98
2019, cash paid for amounts included in the measurement of operating lease
liabilities was $1.2 million.
Rental expense for these leases totaled $1.2 million and $0.9 million for the
years ended December 31, 2018 and 2017, respectively, and was included
in selling, general and administrative expense in the consolidated statements
of income.
As of December 31, 2019, the weighted-average remaining lease term and
the weighted-average discount rate used in calculating our lease liabilities
were 3.3 years and 5.22%, respectively.
The future annual undiscounted cash flows in relation to the operating leases
and a reconciliation of such undiscounted cash flows to the operating lease
liabilities recognized in the consolidated balance sheet as of December 31,
2019 are presented below (in thousands):
2020
2021
2022
2023
2024
Total future lease payments
Less: Interest
Present value of lease liabilities
$1,320
1,096
819
1,218
14
$4,467
$903
$3,564
The Company elected the short-term lease recognition exemption for all
leases that, at the commencement date, have a lease term of 12 months or
less and do not include an option to purchase the underlying asset that the
Company is reasonably certain to exercise. For such leases, the Company
does not recognize ROU assets or lease liabilities and instead recognizes
lease payments in the consolidated income statements on a straight-line
basis. Short-term lease cost of $0.4 million for the year ended December
31, 2019 related to such lease contracts is included in selling, general and
administrative expense in the consolidated statements of income.
Legal Matters
Lawsuits, claims and proceedings may be instituted or asserted against us in
the normal course of business. The Company is also subject to local, state
and federal laws and regulations related to land development activities,
house construction standards, sales practices, title company regulations,
employment practices and environmental protection. As a result, the
Company may be subject to periodic examinations or inquiry by agencies
administering these laws and regulations.
The Company records an accrual for legal claims and regulatory matters when
they are probable of occurring and a potential loss is reasonably estimable.
The Company accrues for these matters based on facts and circumstances
specific to each matter and revises these estimates when necessary.
In view of the inherent difficulty of predicting outcomes of legal claims and
related contingencies, the Company generally cannot predict their ultimate
resolution, related timing or eventual loss. If evaluations indicate loss
contingencies that could be material are not probable, but are reasonably
possible, the Company will disclose their nature with an estimate of the possible
range of losses or a statement that such loss is not reasonably estimable. We
believe that the disposition of legal claims and related contingencies will not
have a material adverse effect on our results of operations and liquidity or on
our financial condition.
18. SUBSEQUENT EVENTS
In February 2020, the Company and the minority partner of GRBK GHO
amended the operating agreement of GRBK GHO to change the start of the
put and purchase options described in Note 2 from April 2021 to April 2024.
The Company is currently evaluating the accounting for this change on the
Company’s consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
99
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
has audited our consolidated financial statements included in this report
and has issued an attestation report on the Company’s internal control over
financial reporting, which is included herein.
The Company has established disclosure controls and procedures that are
designed to ensure that information required to be disclosed in reports filed
or submitted under the Exchange Act, as amended, is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the SEC and, as such, is accumulated and communicated to the
Company’s management, including our Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), as appropriate to allow timely decisions
regarding required disclosure. Management, together with our CEO and
CFO, evaluated the effectiveness of the Company’s disclosure controls and
procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of December
31, 2019. Based on our evaluation, the CEO and CFO concluded that our
disclosure controls and procedures were effective as of December 31, 2019.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined
in Exchange Act Rule 13a-15(f). Internal control over financial reporting
is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Under the supervision and with the participation of our management,
including the CEO and CFO, we conducted an evaluation of the effectiveness
of our internal control over financial reporting as of December 31, 2019
based upon Internal Control-Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, our management concluded that our internal
control over financial reporting was effective as of December 31, 2019.
RSM US LLP, the Company’s independent registered public accounting firm,
100
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2019, there were no changes in our
internal controls that have materially affected or are reasonably likely to have
a material effect on our internal control over financial reporting.
Challenger Homes, Enclaves at Mountain Vista
Colorado Springs, CO
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Green Brick Partners, Inc.
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Opinion on the Internal Control Over Financial Reporting
We have audited Green Brick Partners, Inc. and subsidiaries’ (the Company)
internal control over financial reporting as of December 31, 2019, based
on criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
in 2013. In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States) (PCAOB), the consolidated
financial statements of the Company and our report dated March 6, 2020
expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company
in accordance with U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Dallas, Texas
March 6, 2020
101
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information required by Part III, Item 12, is incorporated herein by reference
to the Company’s Proxy Statement to be filed with the SEC no later than 120
days after the end of the Company’s fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Information required by Part III, Item 10, is incorporated herein by reference to
the Company’s proxy statement for its 2020 annual meeting of shareholders
(“Proxy Statement”) to be filed with the SEC no later than 120 days after the
end of the Company’s fiscal year.
Information required by Part III, Item 13, is incorporated herein by reference
to the Company’s Proxy Statement to be filed with the SEC no later than 120
days after the end of the Company’s fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by Part III, Item 11, is incorporated herein by reference
to the Company’s Proxy Statement to be filed with the SEC no later than 120
days after the end of the Company’s fiscal year.
Information required by Part III, Item 14, is incorporated herein by reference
to the Company’s Proxy Statement to be filed with the SEC no later than 120
days after the end of the Company’s fiscal year.
GHO Homes, Timberlake
Vero Beach, FL
102
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements
See Part II, Item 8 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules
Financial statements schedules are omitted because they are not required or applicable or the required information is included in the consolidated financial
statements or notes thereto.
(3) Exhibits
The following exhibits are filed with this Annual Report on Form 10-K or are incorporated herein by reference:
Number
3.1
3.2
4.1
4.2*
10.1
Exhibit Description
Amended and Restated Certificate of Incorporation, (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed October 31, 2014).
Amended and Restated Bylaws of BioFuel Energy Corp, dated as of March 20, 2009, (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed March 23, 2009).
Specimen Common Stock Certificate, (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed October 31, 2014).
Description of Capital Stock.
Amended and Restated Limited Liability Company Operating Agreement of The Providence Group of Georgia, L.L.C., dated as of July 1, 2011 (incorporated by reference to Exhibit
10.20 to the Company’s Registration Statement on Form S-1 (File No. 333-197446) filed on July 16, 2014).
10.2*
Second Amended and Restated Company Agreement of CB JENI Homes DFW LLC, dated as of January 1, 2018.
10.3
Amended and Restated Limited Liability Company Operating Agreement of JBGL A&A, LLC, dated November 15, 2011 (incorporated by reference to Exhibit 10.23 to the
Company’s Registration Statement on Form S-1 (File No. 333-197446) filed on July 16, 2014).
10.4†
Green Brick Partners, Inc. 2014 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed March 31, 2015).
10.5†
10.6†
10.7†
10.8†
10.9
10.10
Employment Agreement, dated as of July 22, 2019, between the Company and James R. Brickman (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed July 26, 2019).
Green Brick Partners, Inc. Stock Option Agreement, dated as of October 27, 2014, between the Company and James R. Brickman (incorporated by reference to Exhibit 10.16 to
the Company’s Current Report on Form 8-K filed October 31, 2014).
Employment Agreement, effective as of January 15, 2019, between the Company and Richard A. Costello
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 11, 2018).
Employment Agreement, dated as of October 27, 2017, between the Company and Jed Dolson
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 27, 2017).
Promissory Note, dated as of October 13, 2011, by JBGL Builder Finance LLC for the benefit of Inwood National Bank (incorporated by reference to Exhibit 10.25 to the
Company’s Registration Statement on Form S-1 (File No. 333-197446) filed on July 16, 2014).
Promissory Note, dated October 13, 2012, by JBGL Builder Finance LLC for the benefit of Inwood National Bank
(incorporated by reference to Exhibit 10.26 to the Company’s Registration Statement on Form S-1 (File No. 333-197446) filed on July 16, 2014).
103
Number
Exhibit Description
Second Renewal, Extension and Modification of Promissory Note and Second Amendment to Business Loan Agreement, dated as of October 13, 2013,
by and between JBGL Builder Finance LLC and Inwood National Bank
(incorporated by reference to Exhibit 10.27 to the Company’s Registration Statement on Form S-1 (File No. 333-197446) filed on July 16, 2014).
Commercial Security Agreement, dated as of October 13, 2011, by and between JBGL Builder Finance LLC and Inwood National Bank
(incorporated by reference to Exhibit 10.28 to the Company’s Registration Statement on Form S-1 (File No. 333-197446) filed on July 16, 2014).
Commercial Security Agreement, dated as of October 13, 2012 by and between JBGL Builder Finance LLC and Inwood National Bank
(incorporated by reference to Exhibit 10.29 to the Company’s Registration Statement on Form S-1 (File No. 333-197446) filed on July 16, 2014).
Business Loan Agreement (Asset Based), dated as of October 13, 2011, by and between JBGL Builder Finance LLC and Inwood National Bank
(incorporated by reference to Exhibit 10.30 to the Company’s Registration Statement on Form S-1 (File No. 333-197446) filed on July 16, 2014).
Business Loan Agreement, dated as of October 13, 2012, by and between JBGL Builder Finance LLC and Inwood National Bank
(incorporated by reference to Exhibit 10.31 to the Company’s Registration Statement on Form S-1 (File No. 333-197446) filed on July 16, 2014).
Cross-Pledge Agreement, dated as of October 11, 2013, between Inwood National Bank, JBGL Builder Finance LLC and JBGL Model Fund 1, LLC
(incorporated by reference to Exhibit 10.32 to the Company’s Registration Statement on Form S-1 (File No. 333-197446) filed on July 16, 2014).
Third Renewal, Extension, and Modification of Promissory Note and Third Amendment to Business Loan Agreement, effective as of September 23, 2014, by and between
JBGL Builder Finance LLC and Inwood National Bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 22, 2015).
Loan Agreement, dated as of July 30, 2015, by and among Green Brick Partners, Inc., Inwood National Bank, JBGL Mustang, LLC, JBGL Exchange, LLC, JBGL Chateau, LLC, Johns
Creek 206, LLC and JBGL Builder Finance, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 5, 2015).
Revolving Line of Credit Note, dated as of July 30, 2015, issued by Green Brick Partners, Inc. in favor of Inwood National Bank
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed August 5, 2015).
Guaranty Agreement, dated as of July 30, 2015, by and among JBGL Mustang, LLC, JBGL Chateau, LLC, JBGL Exchange, LLC, JBGL Builder Finance, LLC, and Johns Creek 206, LLC
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed August 5, 2015).
Deed of Trust and Security Agreement, dated as of July 30, 2015, by JBGL Mustang, LLC, as grantor, to Gary L. Tipton, as trustee, for the benefit of Inwood National Bank
(incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed August 5, 2015).
Deed of Trust and Security Agreement, dated as of July 30, 2015, by JBGL Exchange, LLC, as grantor, to Gary L. Tipton, as trustee, for the benefit of Inwood National Bank
(incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed August 5, 2015).
Deed of Trust and Security Agreement, dated as of July 30, 2015, by JBGL Chateau, LLC, as grantor, to Gary L. Tipton, as trustee, for the benefit of Inwood National Bank
(incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed August 5, 2015).
Deed to Secure Debt, Assignment of Rents and Leases, Security Agreement and Fixture Filing, dated as of July 30, 2015, by Johns Creek 206, LLC, as grantor, to Inwood National
Bank, as grantee (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed August 5, 2015).
Credit Agreement, dated as of December 15, 2015, among Green Brick Partners, Inc., the lenders named therein, and Citibank, N.A., as administrative agent
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 18, 2015).
Guarantee Agreement, dated as of December 15, 2015, among Green Brick Partners, Inc., certain subsidiaries of Green Brick Partners, Inc. from time to time party thereto, and Citi-
bank, N.A., as agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 18, 2015).
First Amendment to Loan Agreement, dated as of May 3, 2016, by and among Green Brick Partners, Inc., Inwood National Bank, JBGL
Mustang, LLC, JBGL Exchange, LLC, JBGL Chateau, LLC, Johns Creek 206,
First Modification of Promissory Note, dated as of May 3, 2016 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed May 9, 2016).
Guaranty Agreement, dated as of May 3, 2016, by GRBK Frisco LLC (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed May 9, 2016).
Deed of Trust and Security Agreement, dated as of May 3, 2016, by GRBK Frisco LLC, as grantor, to Gary L. Tipton, as trustee, for the benefit of Inwood National Bank
(incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed May 9, 2016).
First Amendment to Credit Agreement, dated as of August 31, 2016, by and among Green Brick Partners, Inc., Flagstar Bank, FSB, the lenders named therein, and Citibank, N.A., as
administrative agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 1, 2016).
Amendment No. 2 to the Credit Agreement, dated as of December 1, 2016, by and among Green Brick Partners, Inc., the lenders named therein, and Citibank, N.A., as agent
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed December 1, 2016).
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
104
Number
10.33
10.34
10.35
10.36
10.37†
10.38†
10.39
10.40
21*
23*
31.1*
31.2*
32.1*
32.2*
Third Amendment to the Credit Agreement, dated as of September 1, 2017, by and among Green Brick Partners, Inc., the lenders named therein, Flagstar Bank,
FSB, as successor administrative agent, and Citibank, N.A., as existing administrative agent
(incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed September 6, 2017).
Amendment No. 4 to the Credit Agreement, dated as of December 1, 2017, by and among Green Brick Partners, Inc., the lenders named therein, and Flagstar Bank, FSB, as agent
(incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed December 4, 2017).
Exhibit Description
Fifth Amendment to the Credit Agreement, dated as of November 2, 2018, by and among Green Brick Partners, Inc.,
the lenders named therein, Flagstar Bank, FSB, as administrative agent
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed November 5, 2018).
Third Modification of Promissory Note, dated as of October 26, 2018
(incorporated by reference to Exhibit 10.52 to the Company’s Annual Report on Form 10-K filed March 8, 2019).
Form of Other Stock-Based Award Award Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 3, 2018).
Form of Performance Compensation Award Award Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed April 3, 2018).
Note Purchase Agreement, dated as of August 8, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 9, 2019).
Subsidiary Guaranty Agreement, dated as of August 8, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed August 9, 2019).
List of Subsidiaries of the Company.
Consent of RSM US LLP, Independent Registered Public Accounting Firm to the Company.
Certification of the Company’s Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241).
Certification of the Company’s Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241).
Certification of the Company’s Chief Executive Officer Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
Certification of the Company’s Chief Financial Officer Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
101.INS**
XBRL Instance Document.
101.SCH** XBRL Taxonomy Extension Schema Document.
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB** XBRL Taxonomy Extension Label Linkbase Document.
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document.
104**
Cover Page Interactive Data File (embedded within the Inline XBRL document contained in Exhibit 101).
* Filed with this Annual Report on Form 10-K.
** Submitted electronically herewith.
† Management Contract or Compensatory Plan.
# The Company hereby undertakes to furnish a copy of any omitted schedule or exhibit to such agreement to the SEC upon request.
ITEM 16. 10-K SUMMARY
None.
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 6, 2020.
Green Brick Partners, Inc.
/s/ James R. Brickman
By: James R. Brickman
Its: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated below.
Signature
/s/ James R. Brickman
James R. Brickman
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Date
March 6, 2020
/s/ Richard A. Costello
Richard A. Costello
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
/s/ Elizabeth K. Blake
Elizabeth K. Blake
/s/ Harry Brandler
Harry Brandler
/s/ David Einhorn
David Einhorn
/s/ John R. Farris
John R. Farris
/s/ Kathleen Olsen
Kathleen Olsen
/s/ Richard S. Press
Richard S. Press
106
Director
Director
Chairman of the Board
Director
Director
Director
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
Southgate Homes, The Village at Twin Creeks
Allen, Texas
107
108
Mailing Address
2805 Dallas Pkwy Suite 400
Plano, TX 75093
Website
www.greenbrickpartners.com