Description

Investment Thesis

Green Brick's inventory of land in Dallas and Atlanta, primed for development by their internal home builders, is unreplaceable. The surge in pent-up demand from millennials reaching the home buying age and preferring suburbs / second tier cities to city core / first tier cities is a continuation of a trend that started 3-5 years ago but has accelerated through the pandemic. Although GRBK’s stock is up significantly since its pandemic lows, we see 60% upside as a result of a structural shift in demand and a misunderstanding of the advantage of GRBK's land bank position. A strong industry outlook is accompanied by industry leading gross margins and return on equity, while the valuation remains at a discount to peers. 

Business Overview

GBRK is a land developer and home builder. They acquire and develop raw land which includes entitlement and land readiness - grading, sewage, roads, and lot plan among other things. This process takes about 3 years given the complexities around zoning and permitting. Then, GBRK sells the finished lots to either their fully owned home builder partners or to other third-party homebuilders. GRBK’s 6 fully-owned home builders are located in the central region, which includes high growth U.S. metropolitan areas of Dallas, Texas (69% of sales) and the South East which includes Atlanta, Georgia, as well as the Vero Beach, Florida (31% of sales). They also own a noncontrolling interest in a builder in Colorado Springs, Colorado. Housing permits data from the US Census Bureau consistently ranks the Dallas (#2 in 2020) and Atlanta (#6 in 2020) metropolitan areas in the top 10 most active markets in the country. The Dallas and Atlanta markets contribute to the majority of GRBK’s profits.

Green Brick's differentiating business strategy comes from its ability to combine its legacy land acquisition and development expertise with homebuilding operations to maximize profitability. While many national builders purchase developed land or manage their land inventory through lot options, GRBK acquires and develops its own land, which it then can distribute to its builder partners. GRBK doesn't have the scale of the large home builders, but land development and home building is a localized market and they have local relationships and market share in Atlanta and Dallas. As a result, GRBK's sales carry industry leading gross margins and ROE above peer median.  

It can be argued that there are trade-offs to a homebuilder being asset light through a housing cycle (through purchase of developed lots or through ownership of lot options), in rapidly growing but supply constrained markets like Dallas and Atlanta, a healthy landbank provides a competitive advantage. GRBK's current land bank of ~11,000 units provides a clear growth runway for the next 5 years. GRBK's consensus EPS growth for 2021 is at the high end of the homebuilder universe range. 

Additionally, before the pandemic, Green Brick launched a growth initiative in Dallas targeting a lower cost niche which caters to first time home buyers. While they offer some higher priced homes that sell for $4-600k, we believe GRBK's growth opportunity lies in their offerings in the $2-300k range through their new brand Trophy Signature homes and CB Jeni Lifestyle.

Macro overview  -- Natural increase in demand …

There are two major trends driving overall demand. The first is related to millennials entering the home buying age and the second is a return in homeownership rates to previous averages.  

The first trend is purely driven by demographic shifts of this large generation. Millennials, at 66.7 million people, are a much larger generation than baby boomers at 59 million people. The chart below shows the population in light blue compared to the home ownership rate per age cohort in the dark blue column. As the large millennial population increases into its home buying years, the baby boomers advance into older age, but generally still own their home. The oldest baby boomers (65-70 years old) are still 10+ years away from their nursing home years and never mind the trend of in-home care increasing home ownership rates into 75 years+.   

Second, homeownership rates for the 35-39 age cohort of 57% are nearly 10 points lower than the historical average home ownership rate for this age cohort at 66%. Not only do we have a large demographic shift, but this generation has largely put off home ownership. Any reversal to historic norms would result in a large supply/demand imbalance in the industry for multiple years.  

… accelerated by COVID …

In 2020, the coronavirus pandemic created a perfect storm in the homebuilding industry, where low interest rates and a decade long constrained supply of housing were met with increased migration trends out of urban areas. This trend was already underway but the pandemic accelerated it. From 2010 to 2015, Tier 1 cities such as NYC, LA and Chicago all saw net migratory inflows as jobs, post-financial crisis, were centered in large cities. Combined with delayed home buying among millennials because of depressed savings levels post-recession, single-family home ownership rates fell to all-time lows. This began to shift in 2015, as migratory patterns led to a growing exodus from Tier 1 cities into Tier 2 cities and the suburbs. COVID dramatically accelerated this trend. Lasting changes in attitude regarding WFH by both employers and employees, as well as the proliferation of WFH technologies, should allow these migratory patterns to continue post-pandemic. For example, in 2021, Dallas already leads the country in net migration trends and Atlanta is ranked at #4. 

… coming out of a historically lower period of under supply …

Meanwhile, there has been a chronic undersupply of homes since the 2008 financial crisis. Inventory is at an all-time low. Currently both Dallas and Atlanta sit at 1.6 months of inventory, almost 5 months less than what is considered a balanced real estate market nationwide.  

Dallas:

Atlanta:

Even with the recent uptick in homebuilding activity over the past year, housing starts since the financial crisis are averaging at around 1m units per year, 30% lower than 50 year average of ~1.4m a year from 2000-2009.   

… created a perfect storm. 

Putting together the demographic shifts and migratory trends, we see strong single family housing demand over the next 5 to 10 years. Within the housing universe, we believe GRBK is best positioned to capture this growing demand given its exposure to the fastest growing markets. Our recent channel checks with builders in Dallas and Atlanta suggest the strength in 2020 has continued into 2021.  

Long term differentiated strategy

The recurring theme in all of our checks has been that builders have record backlogs, but lot development is not keeping up with home sales. Lot shortages are widespread, and builders have been bidding up lot prices in the most desired locations. This trend is favorable for GRBK and represents GRBK's defining advantage over its competitors over the next 2-3 years. GRBK has nearly $470m of land and lots developed or under development on their balance sheet, much of it for their launch of communities under the Trophy Home and CB Jeni brands. We have heard from competing builders that GRBK was able to secure great land positions early and now will reap the reward during the lot shortage. Anecdotally lot prices in some communities in which GRBK builds have gone up 20-30% y/y. The lot position today provides GRBK with a clear runway to grow its Trophy brand to 1500-1700 units per year in 2022-2023 from ~500 units in 2020.  

In the face of rising land prices, homebuilders are scrambling to obtain lots to develop for their pipeline or are paying up for the developed lots at the cost of their future margins. GRBK on the other hand has secured the lots they need for the communities they intend to build through 2023. They can also opportunistically sell excess lots to other homebuilders to take advantage of the rising prices driven by scarcity to desired locations. 

Valuation 

In our base case, we believe GRBK can grow book value to over $1bn by 2022 year end. Much of the growth comes from the launch of 16 new communities with 2,400 units sold in Dallas over the next two years as part of the Trophy Homes Brand roll-out. 

Our 2-year assumptions also reflect GRBK acquiring ~10,000 lots and selling $56m of developed lots at 25% gross margins, which is conservative given the supply/demand dynamics highlighted above.. 

We model no multiple expansion from GRBK's current 1.8x P/BV ratio. Given GRBK's leading ROE position and growth, we think this is conservative. 

Latest developments

Greenbrick Partners originated from David Einhorn's (Greenlight Capital) investment in a real estate investment firm called JBGL Capital. As one of the legacy owners of the business, Greenlight Capital's stake in the business as of year-end 2020 was just under 50%. Late last year, GRBK filed a shelf for 24m of common shares to be sold by Greenlight. In late January 2021, GRBK launched a secondary offering to offer 6m shares which equates to ~11% of total shares outstanding, and the transaction was priced at $20.95/share. Post transaction, GRBK represents 23% of David's fund, their largest holding today. While further secondary offerings or open market sales could weigh on the price in the short term, we believe it will ultimately provide further liquidity for the stock and garner new interest in the name from the investor community.

Risks

• Interest rates - Rising interest rates could impact country-wide demand for homes but given the growth tailwind from migratory patterns into GRBK's core markets, we think GRBK is more shielded from this risk compared to its national homebuilder peers.  

• Unemployment in GRBK's core markets - unemployment is a leading indicator of home sales. We believe this risk is mitigated by the tailwind of population and corporate migration to GRBK’s core Dallas and Atlanta markets. As it is, more and more companies are relocating to the Dallas and Atlanta region and on a comparative basis of large Tier 2 and Tier 3 cities, Dallas and Atlanta have better than most unemployment rates.  

• Supply chain disruptions (lumber, labor or appliance shortages) - lumber price have more than doubled in the last year due in part to tariffs on Canadian lumber and exacerbated by facility shut-downs due to COVID. While homebuilders have thus far successfully offset this inflation through price increases, any hiccup in demand could expose GRBK and homebuilders broadly to this risk.

Catalyst

• Unit sales outperformance, driven by Trophy preferential location and price point 

• Earnings outperformance vs. consensus expectations

• Greenlight ownership overhang is alleviated