GRBK - Green Brick Partners

[accutronman]

Interesting real estate play which also has Dan Loeb and David Einhorn involved. Stock has been on a tear this week. Overview analysis: http://brooklyninvestor.blogspot.com/2015/02/green-brick-partners-inc-grbk.html

[Tim Eriksen]

based on a quick glance it looks more like a SOTP trap to me.  Earnings aren't very high and now they have to add substantial interest costs. 

[constructive]

Other builders have gotten quite a bit cheaper over the past year so I don't think GRBK looks like a great relative value. KBH looks pretty cheap to me.

[mateo999]

Speaking of home builders, does anyone have any opinions on TMHC?

[folivera13]

Deleveraging transaction. Greenlight and Third Point will both participate.  The debt to capitalization will decline to 8% and management is targeting 40% going forward (according to the S3).  Lots of room for more land acquisitions.  Also management stated that target IRRs for their real estate deals are 20% (also in the S3).  Einhorn is Chairman.  The situation is interesting.

 

http://www.prnewswire.com/news-releases/green-brick-partners-inc-announces-proposed-offering-of-common-stock-300102903.html

[thepupil]

this company looks really expensive relative to Forestar, which incidentally is an owner of residential real estate projects in Texas and Georgia (just like Green Brick).

 

I can see why they are raising equity. I think the Greenlight Third Point halo is strong and this stock is super expensive.

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/for-forestar-group/msg223499/#msg223499

 

$335MM for $187MM (1.8X) of equity at Green Brick, 46% of equity is the deferred tax asset which is worth at most 1X book. So to solve the old "implied writeup of asset value" equation let's asusme tax a asset is worth the full value (1X book)

 

0.46 * 1 + 0.54 * (X) = 1.80

 

0.54X =1.34 ,  X = 2.54

 

So the market is giving full credit on the tax asset and then is saying they've made a 150% profit on their land purchases (which according to the Brooklyn investor piece were pretty recent). That may be the case but it seems a bit aggressive, right?

 

This just doesn't look like a substantial company to me to command the kind of EV it does.

 

 

[folivera13]

Thanks for the perspective. The problem with your view that you are paying a 80% premium on the assets GRBK purchased is that it ignores the capitalization of the business. Pre-equity offering yes you are paying 1.8x book, but the debt to capitalization was 49%.  So the assets don't need to appreciate as much to justify the premium.

 

Yes- you are betting on the management team and if you dig into the CEOs background he has been successful in the past, has skin in the game and is a very diligent investor (there are snippets on him in Einhorn's book).

 

Post the equity offering, GRBK will have ~8% debt to capitalization and will trade at about 1.5x P/B. Not cheap on the surface, but given the 40% debt to capitalization target you have basically 30% of the market value in incremental capital for further deals. Management is targeting high IRRs and I believe they will be patient and smart about how they deploy capital.

[thepupil]

EDIT: my original math was wrong now that I think about it more. I don't know what kind of bass backwards logic got me to use that equation to figure out the implied up move of the land but it's wrong. It's still a big implied gain, but it's not 150%.

 

Original:

Pre-equity offering, I think you are paying at least a 150% (not 80%) premium to what they paid for the real estate because the DTA (and cash) is worth (at the absolute most) book value since the DTA is just the undiscounted value of future tax savings. Typically investors have a higher discount rate than 0, so when you haircut the DTA, you are paying even more. In my post I did the nifty algebra problem to solve for 150% premium to what they paid.

 

 

 

If the land was worth far more than they paid, I would expect to see very high gross margins. I see 20-25% over the past 3 years and 28% in the most recent Q. I see nothing on the income statement to indicate hidden value on the balance sheet. There could be high margin projects not yet begun or monetized that are worth more than book, but given how much of the book was purchased recently, I doubt it. I could be wrong here.

 

I agree that raising money at large premiums to book value and NAV builds value per share. So they'll raise the $170MM and have $360MM of equity and a $480MM market cap, 1.3X book, much better than 1.8X.

 

They'll pay off the loan to Greenlight (unless Greenlight changes the terms of the loan which requires that they use any equity proceeds to pay off the loan) and be basically unlevered. Your argument is  effectively "they will delever with this equity offering, which will allow them to re-lever and deploy 1/3 of market value in high return projects". If they deploy $160MM and make 100% pretax on it that would add $105MM to equity (since you'd write down the tax asset as you used her up). That would get you to the current market cap.

 

Just doesn't seem to work to me. not to mention this is a texas real estate play and oil just went down. I own forestar so I am bearing that risk but it has lots of problems and shitty management (activist are working on this) and a much lower multiple so I feel like I'm getting paid to take that risk). Here I don't think you are getting paid. I feel you are getting monetized by smart people. After all this is a net de-risking (assuming loan terms unchanged) for Greenlight and a raising of capital on generous terms by Green Brick.

 

[thepupil]

So the right way to think about it is ( i made some egregious math / calc errors earlier) is

 

pre-offering

$30MM of cash and deposits

$87MM DTA

$289MM Real estate

$409MM assets

$221MM total liabilities

$187MM equity

 

$335MM market cap. if we don't haircut the tax asset, the $148MM of difference between market value and book implies a 50% increase in the value of the land/lots/homes/what have you purchased ($148MM / $289MM). If you haircut the tax asset by 50%, , it's a 65% implied increase.

 

post offering, assuming all proceeds pay down debt

$30MM cash and deposits

$87MM DTA

$289MM Real Estate

$409MM assets

$51MM total liabilities

$358MM equity

 

$480MM market cap, difference between market cap and book of about $120MM implies 41% increase in value of real estate purchased with no haircut of tax asset.

 

well now that I established myself as a mathematical idiot, i'll reiterate the same point. I don't see any reason why the current book is worth significantly more than market cap and even if they deployed a lot of dough at great rates (100% pretax after all costs), it only gets you to the current stock price.

[folivera13]

Attached is the screen shot for some math I did as well. My main point is that if you believe in the management team the valuation is not that bad. They can now raise first lien bank debt incrementally for new investments which will be much cheaper than the Greenlight term loan. The balance sheet is your ultimate margin of safety and the balance sheet is very strong going forward. This year management believes they should earn around $30mm pre tax.

[thepupil]

Well it looks like we agree on the math after my initial stupidity.

 

I guess where we disagree is the balance sheet providing "ultimate margin of safety". I just don't see that. 

 

In the 10/2014 VIC writeup, there was a rough calculation of liquidation value which got to $6.7 / share which had lot sales at about double their cost. The assumptions don't seem overly bearish. Now if they raise a ton of money at $10+ that will pull liquidation value up, but not quite to the current price. That analysis pulls forward like 10 quarters of last q's gross profit.

 

I realize they may make more money per lot by building the homes their so the upside is not limited to just writing up their lots to market value.

 

My point is this does appear to be a bet on management and good conditions in homebuilding/real estate continuing (which i think is a risk, particularly in texas) given that you don't appear to be buying at any real discount to NAV/liquidation. It seems to have everything going for it and trades at a premium and management is raising equity in a massive offering. Given this is a cyclical biz prone to massive swings, I just don't like that set up. 

 

$30MM pretax is good. So if they do year in year out that they'll use up the tax asset in 5 or 6 yrs you don't have to discount it too much. But this isn't a business you can really put a multiple on because earnings just represent the conversion of owned lots / homes to sold homes so you have to then reinvest in new projects to replenish them.

 

I think we both agree that the re-investment of earnings and deals going forward will be the main driver of value and shareholder returns and the valuation "isn't that bad" to use your own words. With a homebuilder / lot owner, i think that's a really tough bet to make. But if you are right, the upside can be huge (see NVR over time).

 

 

 

http://www.valueinvestorsclub.com/idea/GREEN_BRICK_PARTNERS_INC/129410

Lots owned as of 6/30/14: 3,517

Sale Price per lot: $100,000 (Dallas/Atlanta home prices are actually higher since 6/30/14)

Gross Proceeds: $351,700,000

Less: Book Cost: $194,278,246

Book Profit: $157,421,754

Taxed @ 40%: ($62,968,702)

NOL offset: $62,000,000

Cash Taxes: ($968,702)

Net Cash Proceeds: $ 350,731,298

Plus assumed cash balance: $30,000,000

Less Debt: ($170,000,000)

Net Liquidation Value: $ 210,731,298

NLV Per share: $ 6.72 (Pro forma shares post rights and JBGL acq 31.3M

[folivera13]

I agree with you on many of your points. The time to make the big money was during the special situation moment involving the rights- now it's not a mega bargain. Now it all depends on the future and managements ability.

 

I disagree is on the Texas real estate negativity. They are concentrated in Dallas and Atlanta- so it's not an all in bet on Texas. Also- I don't believe Dallas is that vulnerable to oil prices. For example Toyota and State Farm recently relocated their HQs to the Dallas area- near most of the company's lots in the area. Good discussion thepupil.

[folivera13]

Good article on the housing market in the U.S.  Brings bullish case into light for builders like GRBK (small with strong balance sheets and looking to expand).

 

http://on.wsj.com/1MjrtGK

 

Key quote

"During times of weak inventory, home builders normally ramp up construction. But though construction picked up this spring, the national pace of building single-family homes in June amounted to just 49.7% of the annual average from 2001 to 2003, which the National Association of Home Builders considers the latest normal housing market.

Aside from a lack of demand in recent years for entry-level for-sale housing, a major reason for the tepid construction is a persistent lack of financing for small and midsize builders. The Federal Deposit Insurance Corp. estimates that outstanding loans by FDIC-backed institutions for home construction totaled $53.6 billion in the first quarter. That figure has climbed steadily from its nadir in early 2013, but it remains 71% below its peak of $186.3 billion in early 2008.

 

Financing has been particularly difficult to land for small builders and developers, which collectively account for most U.S. home construction. The 10 largest publicly traded U.S. builders, which are the few that are truly national in scope, accounted for only 27% of new homes sold last year, according to the National Association of Home Builders."

[thepupil]

wow, have i been wrong or what?

 

this thing is up 45% from the offering price and now sports a $700MM market cap...

 

I really don't get it.

 

1.9X book w/ no haircut to the tax asset, most of the assets acquired relatively recently...

 

The Greenlight/Third Point halo is strong with this one.

[folivera13]

There is a lot to like except the high multiple in my humble opinion.

 

Concentrated investments in Dallas/Ft. Worth and the Atlanta area. Two locations with strong housing trends. Dallas is especially interesting with low inventory and high housing demand. They have more exposure to Dallas.

 

The Company's backlog is over $100mm at an average price per home over $400k. Management states that cancelation rates should be between 15-20%- which means that at least $80mm worth of houses should be delivered soon.

 

In addition the Company is actively looking to expand into new geographies. They have stated before that they are willing to use equity to make acquisitions (the high multiple makes this attractive).

 

GRBK has almost zero net debt, conservative accounting, no goodwill/intangibles. The CEO and his family have a big investment in the Company. Einhorn is Chairman. The runway could be very long for GRBK to grow and expand.

 

Again the multiple is high which is a risk- hopefully management can use this to its advantage.

[thepupil]

I hear you on all the positives.

 

At the risk of being repetitive, the discrepancy between this and FOR is amazing (I recognize there should be a difference in valuation because GRBK is clean, debt free, not losing money, has well aligned instead of shitty management, but FOR's management and capital structure can be changed).

 

FOR

33.6MM shares +7MM from tangible equity units = 40.6MM shares =

$531MM market cap+$344MM of net debt=$875MM

 

FOR:    $875MM EV

GRBK: $710MM EV

 

GRBK's assets:

$300MM of real estate

$85MM  DTA

 

 

FOR's assets:

We own directly or through ventures approximately 111,000 acres of real estate located in 11 states and 14 markets. Our real estate segment secures entitlements and develops infrastructure on our lands, primarily for single-family residential and mixed-use communities. We own approximately 87,000 acres in a broad area around Atlanta, Georgia, with the balance located primarily in Texas.

 

$603MM of real estate

$289MM of oil and gas (let's count this at 0, but this includes royalties 590,000 mineral acres owned in fee)

$76MM of real estate JV's

$65MM deferred tax asset

$8MM book value of timber (100,000 acres worth $1000-$1500) = $100MM-$150MM

$894MM, using $150MM for timber and $0 for oil and gas.

 

You can pay $710MM for Green Brick and get $300MM of real estate on which they are making 30% gross margins building homes and selling lots.

 

Or you gan pay 23% more ($165MM) more for Forestar and get 126% more real estate assets (on which they make the same margins, look at the profitability of FOR's RE segment, also abut 1/4 and growing of RE revenue is recurring from buildings), you also get $150MM of timber and a free call option on oil and gas. It's important to note that FOR's assets have been built over a period of many years (in some cases decades) and the GAAP book value understates actual value considerably; this is true across a number of projects and acres, not just the timberland.

 

I should note that for all the talk of FOR's high overhead, GRBK's at $12MM / year is about the same relative to the asset size.

 

Basically, GRBK should issue stock to buy FOR's real estate. GRBK has a very expensive stock and is focused on Texas and Atlanta RE just like FOR. The geographic overlap is striking and it would give FOR a chance to call its high cost debt and get rid of FOR management for good.

http://investor.forestargroup.com/phoenix.zhtml?c=216546&p=irol-EventDetails&EventId=5198522

 

I realize my affinity for cheap and hairy is showing here, but I really feel like the management premium in GRBK is too much and the discount at FOR is too big. You have similar economic risks in both (although FOR has higher Houston concentration, which probably makes it more prone to oil and gas).

 

More broadly, I feel like the market is just so quick to assign very high premium valuations to companies with halos around them, even if they operate in what i would deem low quality cyclical businesses (like homebuilding). Meanwhile, hair and messiness is very much discounted.

 

[folivera13]

Good stuff thepupil- FOR does look interesting.

 

I don't believe it should not be an apples to apples comparison to GRBK though.  I think the halo effect is not that high for GRBK- I like having Einhorn as a steward of capital but the real driver is Brickman- which few actually know anything about him.

 

FOR has oil and gas assets (including unproved assets), a hotel and a large part of its "real estate, net" is undeveloped.  Additionally debt to equity is 65%.  In order to actually make money on a material portion of its real estate it actually has to invest additional capital and you are taking the risk on the oil price (which could also provide a nice upside).  I'm not familiar with the management team, it could be a big opportunity but you need the right management in their because you could easily fumble on the opportunity if they don't invest appropriately.

 

GRBK makes money by selling lots and lending to its homebuilders and then participating in the final product by owning 50% in each homebuilder.  Most of the real estate is either developed or in the process of being developed.  They have unlevered IRR targets and a focused team.  As I said last post, a third of its real estate is already in backlog and the reinvestment opportunity is high.  Is the multiple high? Yes, if they can't grow into it relatively quickly or find a way to take advantage of it. But I don't think FOR and GRBK are that comparable based on assets and how they are managing them.

[thepupil]

1) what's the risk of oil and gas if you mark it at $0 and they aren't going to put more $ into it. I marked it at $0 to make the asset bases more comparable and because I'm unequipped to analyze it, so I like using $0 (I think negative value is too punitive).

 

2) I think a big portion of FOR's asset value is very comparable. $321MM of the ~$600MM of RE is entitled, developed, and under development projects, they are selling 1000's of lots per year, FOR's RE segment is a combination of GRBK like activities and multi-family development and ownership of multi-family properties and some other stuff. The Green Brick like stuff is actually very similar in size to Green Brick ($300MM ish of assets). Sure timber, and hotels, and multi-fam aren't comparable but remember the EV is almost the same and you get all that other stuff thrown in to diversify and de-risk you. That $100MM to $150MM of timber is going to be sold and switched to recurring RE.

 

3) as long as there isn't a liquidity issue, the fact that FOR has debt and GRBK doesn't does not make GRBK's lots magically worth more or earn higher margins. FOR has a $300MM undrawn revolver (which should tell you something about the relative size of the asset base, would a bank ever give GRBK a $300MM revolver on its assets?). Debt free does not deserve a valuation premium (and in many other instances gets a discount for a sub optimal balance sheet).

 

3) every RE company has unlevered IRR targets and a focused team...Just looking at the results of Green Brick's history, it just looks like a normal homebuilder that happened to buy some land a few years ago and now they are making a normal homebuilder margin on that land.

 

I really don't see what's so special about Brickman and GRBK  other than they have a capital markets hedge fund darling halo. The story is nice and clean and perfect and one of the appeals of the stock is its high valuation to make deals. Anyways, now i'm getting really repetitive.

 

I just want to say there is a pretty close comp out there that is a lot messier but costs like 1/2 as much and is undergoing change and that GRBK strikes me as a bit of a promotional story stock that is a very small portion of two big sexy hedge fund's balance sheet. I don't mean promotional in like a fraud-y sense, just in like a "hey David Einhorn is behind this one and that gives me confidence" sense.

 

I'm sure GRBK will now use its expensive equity to create heaps of value and make me look like a dunce once again, and I'm definitely not going to short it to hedge my FOR.

 

[folivera13]

FOR does not seem to be a homebuilder too right? GRBK is also a homebuilder, vertically integrated in the land acquisition, development, lot sales, construction lending, and final sale of houses.  It controls 50% of all its builders and controls each entity- but also finance the lot purchases of its homebuilders (they sell their developed lots to their own builders).  Believe this integrated model is part of what people like because they can expand into new areas by buying lots and niche/local builders.

 

I agree with you- they should use their equity to the advantage of shareholders!

[folivera13]

Investor Presentation from Credit Suisse Conference

GRBK_-_CS_Conf_9-16-15.pdf

[thepupil]

http://finance.yahoo.com/news/einhorns-green-brick-property-venture-144304413.html

 

Now maybe we're getting interesting, at a nice discount to the most recent substantial capital raise.

 

EDIT:

 

But still above pro-forma, post offering  equity.

 

Market cap is still $390MM and they own $290MM of real estate at cost plus the $90MM or so DTA. Still not too interesting on an asset based margin of safety basis.

[folivera13]

A lot more interesting now indeed! COO of builder operations quit or was fired last week per 8K and management 2015 estimates were reduced.  This team and structure is going to be in the for long haul so book value or below should be a substantial bargain.

 

[KinAlberta]

http://finance.yahoo.com/news/einhorns-green-brick-property-venture-144304413.html

 

Now maybe we're getting interesting, at a nice discount to the most recent substantial capital raise.

 

EDIT:

 

But still above pro-forma, post offering  equity.

 

Market cap is still $390MM and they own $290MM of real estate at cost plus the $90MM or so DTA. Still not too interesting on an asset based margin of safety basis.

 

“Due to a number of factors including weather, new community development, labor shortages and an extended building cycle pushing back closings in its core markets, the company is amending its previously disclosed 2015 guidance,” Green Brick Chief Executive Officer James R. Brickman said in the filing.

 

"labor shortages"!!!!!

[folivera13]

Clark Street Value Post: http://clarkstreetvalue.blogspot.com/2015/11/green-brick-partners-update-guide-down_17.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed:+ClarkStreetValue+(Clark+Street+Value)&m=1

 

[folivera13]

You were right thepupil. Now its trading at less than 0.8x book.