Green Brick Partners 2021 Investor Day

Today's conference will include forward-looking statements. These forward-looking statements involve estimates and assumptions which may be affected by risks and uncertainties in the company's business as well as other external factors which could cause future results to materially differ from those expressed in this presentation. For a more detailed discussion of these and other risks and uncertainties applicable to the company, we encourage you to see the company's most recent annual report on Form 10-K filed with the Securities and Exchange Commission, in addition to the forward-looking statements included in our press release related to our Q2 2021 results issued on August 3, 2021.

Thanks, Jim. Hi, I'm David Einhorn, President of Greenlight Capital and Chairman of the Board of Green Brick Partners. I won't get into all the background that resulted in Jim and I meeting and becoming partners, but the most direct answer about how an investment manager in New York City became partners with a builder developer from Dallas is because Jim is capable, honest, hard-working, and today surrounds himself with people that share these values. For those that love these details about the early stages of our relationship, I wrote about them in 'Fooling Some of the People All of the Time.' I started working with Jim in 2002, mostly on stuff related to Allied Capital and its subsidiary Business Loan Express. At the time, Jim had plenty of time on his hands. In 2008, when the national real estate market collapsed, Jim proposed that we start a distressed real estate equity fund and later a second fund that would lend money to builders. In 2009, JBGL Capital, which stood for Jim Brickman Greenlight, was formed, and later JBGL Builder Finance LLC. Jim and his family owned about 10% and Greenlight entities owned about 90%. These funds had no debt. The original game plan was to buy distressed income properties cheaply, hold these investments for a few years, and sell at a huge gain, just like Jim saw so many smart investors do in the Texas real estate collapse and recovery in the late 1980s and 90s. However, this time was different because the problem was national and not regional in scope, and interest rates were so low. The banks were given a pass by the regulators and were not forced to sell at the bottom most of the non-performing assets on their books. The one asset class that the banks did not want to own was land, particularly land that needed additional capital to convert into finished lots, particularly when it was owned by financially weak builders. For obvious reasons, the banks also didn't want to make construction loans to low or no net worth builders. So with Jim's strong background in home building, land development, and lending, JBGL was able to easily fill this gap and began actively buying land and lots and loans on land or lots that the banks didn't want. Some experienced builders were in financial distress, so JBGL lent the money and took controlling ownership. By 2013, the market had turned up. We had a great lot position and owned controlling interests in now very profitable builders. However, the builders needed permanent capital. JBGL was not structured to be a permanent vehicle. In January 2014, I suggested we sell JBGL to a public shell company I was previously involved with that had some tax losses, but this would require Jim to run a public company. Jim's response was an immediate yes, based on our long history together and a new challenge. My response was, 'You might want to think about that for a few days. Running a public company has a lot more red tape and a lot more hassles than running a private fund.' Thankfully, he didn't reconsider. On October 27, 2014, we rolled the two JBGL funds into a renamed public company called Green Brick Partners Inc. in a reverse recapitalization, with the stock opening at $7.49 a share. We were able to use the predecessor's $180 million of tax losses to grow Green Brick Partners without paying taxes for the first few years. Despite Jim's insistence on low leverage, our results since going public have been fantastic. Our revenue has more than tripled and pre-tax earnings are up about six times in just over five years. This growth translates into a 28% compounded growth in revenue and a 44% compounded growth in pre-tax earnings since 2015. Over that same period, our stock price has increased about threefold. As you can see by the 60% year-over-year revenue growth and the 55% year-over-year growth in earnings per share we just announced for our second quarter of 2021, our growth rate is actually accelerating. Housing demand has shifted. Before the pandemic, demand for single-family housing was weak. Grown-up children were moving into their parents' basements. If they had to move out, they preferred to rent rather than to own. The pandemic has caused that trend to reverse. There is now a shortage of single-family detached housing that may take years to satisfy. Land development and getting permits takes time. There's no way to satisfy the new demand, which is even more acute in the growth markets where we do business. Green Brick Partners has achieved a critical mass. If you look at our income statement, revenues and gross profits are rising rapidly, and we're able to grow and leverage SG&A so that the earnings grow faster than the revenues. When you hear from our team today how we strategically position the company, I think you're likely to agree that the best may be yet to come. The takeaway I want to leave you with today is that Jim is one of the most quietly persistent, capable people I've ever met, and we now have a culture of people that think like him. Our company's attention to detail, research capabilities, and broad knowledge of real estate is how we cautiously expanded into some of the very best markets in the nation as we grew, and how we will continue to expand into new markets as we grow. Our subsidiary builders all have decades-long relationships and in-depth knowledge in the markets where they build, which is why we have such a fantastic land and lot position. Our operating ability has now matured to where we operate and build homes like the best-run large cap builders. We're particularly thrilled with the growth of our wholly owned entry-level and value proposition subsidiary, Trophy Signature Homes, which we believe will produce scalable growth into multiple markets over the next several years and really take us to the next level. Jed and Rick will discuss Trophy in detail later. Our company's persistent competitive nature and focus on getting the job done is why Green Brick has been such a wonderful investment and should be a winner going forward. Indeed, yesterday we reported $1.02 in earnings per share, which is more than a 30% annualized return on equity, and even better, Jim said he expects this to grow over the rest of the year. And of course, only operating in the best markets in the country—Dallas-Fort Worth, Atlanta, Florida, and Colorado—is icing on the cake. Now I'll turn the conversation back to Jim to tell you more about Green Brick Partners.

Well, yeah, I mean the thing is, succession planning is very important, but our current leadership is also very important. And the thing that I know is that you've already practiced retiring once, and since you already have had that experience, you'll be in no rush to do that again. So I think we're going to be set for a good amount of time with the current setup.

Well, sure. I'd love to. You know, a number of years ago, we were in a board meeting and the company was, in my judgment, not earning its cost of capital. And I said we really need to earn our cost of capital, otherwise we're not even worth book if we don't earn a reasonable return on equity. And Jim and the management team really have taken this to heart. And what's happened since then is at each time, not only has our return on capital improved, we're constantly benchmarking how we're doing. So first, you know, we started doing better than the other small cap companies, and then the mid cap companies, and then the larger ones that Jim didn't think were operated so well. And now we're at the point where our performance metrics are now really right there, equal with the top tier, despite the fact that we're still at a lower scale. And it's a real credit. And watching how Jim views the competition and how the management views the competition has, I think, really inspired and motivated the company to perform.

Sure. Look, it's really, really difficult to figure out when to buy back stock in this company and when not. And the reason is that the unlevered returns on capital that the business is able to achieve are so attractive that we have to compare it to a stock buyback. If you have a company that's earning a low return on capital and it's trading at a low value, it makes a lot of sense to return the capital to the shareholders. But here we are with a relatively low amount of leverage and a fairly heavy land burden and earning a 30% return on equity that seems poised to grow. So I think the preference of the company is, because the returns on invested capital are so high, to explore all of the opportunities that have high returns on capital. And to the extent that there's still some capital that's left over that works out within our leverage targets—and we're very conservative in terms of the financial leverage that we're willing to take—and the stock is cheap, then it makes sense to buy some stock back in the market. But the goal really here is to grow the company, and the company has demonstrated that it is a good user of capital.

Well, look, I think it's very interesting because for the first many years that we've been in business, the trick has been enough demand for the houses and how many can we sell, and can we get reasonable margins and turn the inventory and get the asset turns. And what shifted in the last year or so is now the question is how many houses can we manufacture and build, over what time frame, and at what cost. And so we've moved from basically being a company that's limited by demand to a company that's limited by our internal capabilities to execute. And there's lots of things that can go wrong or cause costs to go up—labor, supplies, materials, and whatnot. But I'm very confident that we're going to execute successfully in those areas. So what ultimately is a concern? It has to be what happens if the macro economy turns in a major way such that we go back to having to find enough demand for what we're doing. And the most likely cause of that would be much higher interest rates or something like that. But I don't think a little bit higher interest rates are going to do it. It would really take a kind of a sea change, I think, to drive the demand low enough that we're back into that nature of our business.

Well, it's a very high quality problem to have.

Hello and welcome to our operating strategy segment. I'm Jed Dolson, Chief Operating Officer and Executive Vice President of Green Brick Partners. As Jim mentioned earlier, in this segment we will be showcasing our strategic advantages and demonstrating why Green Brick Partners offers a compelling investment. I would like to go over four key operational areas and how we foresee them fitting in our vision for accelerated growth. First, I would like to give a brief overview of how we are planning our growth through our land pipeline. We believe our land and lot runway is the best of all public builders, with a significant concentration in the high growth markets of Dallas-Fort Worth and Atlanta. Our strong geographic footprint should provide meaningful downside protection in a recessionary economy and significant selling power in today's booming market. We currently have in excess of 21,000 lots owned and controlled, with over 14,000 of those lots under development, with an additional 1,800 lots anticipated to be finished over the next six months and 4,600 lots to be completed in 2022. We feel our lot runway is primed for continued double-digit growth. Our lots are located in high demand suburban areas where we could sell to third parties in excess of a 25% gross margin. Despite many requests to do so, that is not our plan. Our land and lot pipeline has grown over the last five and a half years at an annual rate of 32%, placing Green Brick in a position to continue growing closings at a double-digit pace for the next few years, independent of expansions into new markets. Despite our move to more outlying markets, we have continued to maintain robust margins on land development, and due to strong pricing and execution, we're currently running well ahead of our minimum underwriting expectations. All of our new neighborhoods are underwritten at a 20% or greater unleveraged rate of return and more than 20% gross margin, without assuming any home price escalation, construction cost savings, or ancillary revenue from our financial services businesses. By working with other large public home builders and land developers through joint development and joint venture arrangements, we have been able to share costs and take advantage of larger deals that might otherwise have been too large for us alone. In outlying Texas suburban markets, we continue to capitalize on our reputation and decades-long relationships to participate in special tax districts such as Public Improvement Districts and Municipal Utility Districts. These districts are created to provide public improvements, infrastructure, and services such as water, sewer, and storm water drainage in areas where city services are either not yet available or require improvement. The district is typically financed through revenue bonds which are paid off through taxes levied on residences in a given district. For developers, this poses a significant strategic advantage as they are reimbursed for development costs once the neighborhood has created a taxable value. This next slide really puts our growth of land and lots in perspective of our public peers. With the demand for land and lots at its highest in decades, we successfully utilized our strong relationships in our markets to grow our lots owned and controlled by 133% over the past 12 months. During this time, our land acquisitions team added a total of approximately 16,000 gross lots to our lots owned and controlled, while maintaining the same underwriting standards that have led to Green Brick's success to date. One particularly compelling thing I would like to note is that our very high net income return on average equity in the second quarter of 30.2% was achieved despite the fact that our industry-leading investment in new land and lots will not produce revenue until 2022 and beyond. This rapid growth in our land pipeline is the strongest of any public builder and is a clear example of Green Brick's capacity to quickly and efficiently source land in our markets. We believe our core markets still have remarkable opportunities for growth, but we continue to evaluate expansion into new markets. With nearly 57,000 single-family starts in DFW and 30,000 in Atlanta, our subsidiary builders have the markets to significantly expand and capitalize on this demand. As we announced last May, we're actively working with Challenger Homes to source land in the Denver area to fuel Trophy Signature Homes' expansion. We also remain optimistic that Trophy's value-oriented, scalable model would be successful in other Texas markets like Houston or San Antonio. Our biggest strategic advantage when it comes to land is that each of our building subsidiaries have local operators with decades of experience in their respective markets and are also supported by our corporate land team, one of the best in the industry. Additionally, our in-house engineers, corporate analysts, and underwriters provide significant support to our local home building operations. Next, I wanted to briefly touch on our purchasing. Later in the program, there will be an opportunity to participate in a live Q&A with our directors of purchasing across our brands as well as our National Director of Purchasing, but I would be remiss not to at least mention how integral our cohesive purchasing program has been to our growth. After achieving the required scale to get the attention of national vendors, Green Brick now has a successful national purchasing program. In addition to resulting in millions of dollars in cost savings, it has provided us with preferred supply and the security of price protection across our brands. In our year-to-date 2021 results, this program has resulted in roughly 70 bps improvement in home building gross margin. Our participation in these programs makes us a preferred customer and critically improves our purchasing power and leverage to manage current supply constraints. Additionally, our corporate oversight and cross-training uses the lessons learned at various subsidiaries to make improvements quickly and efficiently across all our purchasing teams. These efforts accumulate in stronger bottom line results that help us stand out from our peers. As many of you know from our prior quarterly calls, in addition to offering a large array of home types and price points, Green Brick Partners offers financial services to coordinate and enhance the home buying experience. This includes our two 49% owned mortgage joint ventures, Green Brick Mortgage and B Home Mortgage, as well as our wholly owned national title operations, Green Brick Title. In addition to providing ancillary income, these services create a one-stop shop solution for our buyers and eliminate many of the stressors that come with purchasing a new home. This all-inclusive approach results in cross-channel revenue capture including mortgage, title, home building, and residential management service operations. Finally, an area where we continue to improve by leaps and bounds is our operating systems. We have a corporate team that maintains a rigid, standardized accounting, construction, purchasing, and production platform used by all of our builders. This allows our local operators the best possible operating systems and enables our corporate office management and finance teams to consistently evaluate each of our subsidiaries to see what is working best. Additionally, we work continuously with our software developer behind our ERP system to augment the existing efficiencies and make ongoing investments into our software. For example, after completing the implementation of Express Pay with one of our subsidiary builders, we realized an 80% improvement in efficiencies with our accounts payable team. Due to its success, we are currently in the process of replicating this to our other builders. Another great example is a new master project that our IT team is currently working on that will soon be rolled out at our Trophy Signature Homes brand. This will enable us to build and roll out new communities much more efficiently and forecast costs much faster than we have been able to do in the past. In closing, the most important takeaway I want to leave you with is that we have the land pipeline, operating systems, and people to grow our top line and bottom line results. There's been a lot of discussion in the marketplace about land and opportunities and prices of land. What opportunities is Green Brick seeing across our builders?

No, Jed, great question. Appreciate that. Just before I jump into the question, I would like to thank everybody for joining us today. Certainly means a lot to our team here that you're taking your time out here today to join us and hopefully learn a little bit about our Green Brick operating team, as well as addressing a few questions related to our land and operating strategy here on the front end. Just to kind of drive right into the question, I want to point out first we look to acquire creative land positions for all our team builders. You know, Trophy is our only single-family detached builder that serves our entry-level buyer, which of course is a very hot segment of the market currently today. Long term, Trophy is going to plan on primarily building homes ranging from the 200s to 500s, which will really give them the chance to offer product to a wide range of buyers. And that gives them the ability to underwrite deals that maybe some of our other team builders wouldn't consider. Now that Trophy's really started to achieve some scale in this marketplace, we're really starting to see that business produce outsized returns, and while they're minimizing incremental corporate overhead and adding communities as well as home deliveries, I think all of those are primary reasons why we're seeing a shift to the land allocation towards Trophy. And so conversely, when we have a lot of land that we've entitled over the years in what we would call A locations, how hard is it to find new lot positions or even existing lot positions in those A locations? It's getting extremely tight right now. But with Trophy kind of moving to the periphery, as we see those opportunities pop up on the infill kind of A location still, we are able to act quickly, make efficient decisions, and allocate those potentially to one of our other team builder partners.

Okay, let's switch over to IT. The pandemic taught us all how to use our internet and iPads better than we had pre-pandemic, definitely. Can you provide some context about what opportunities Green Brick found as a result of the pandemic?

Definitely, Jed. So just a little background: our IT department contains our business applications team, which is made up of our residential experts for the applications and systems that our partner home builders use on a day-to-day basis. Going back to our acquisition of GHO Homes in 2018, that team developed a standard operating model which we now use across all of our subsidiary partners, and we've continued to maintain that model diligently throughout the pandemic and Trophy's rapid growth. Thanks to all of these efforts, we've been able to quickly adapt to all of the constraints of the pandemic, and it even allowed us to recognize a 23% growth in revenue from 2019 to 2020, despite the 4% decrease in headcount we experienced during that same time period. And now with the unprecedented first six months of 2021 that we've seen so far this year, we've had to rapidly scale our headcount beyond those 2019 and 2020 numbers. And due to Trophy's growth and thanks to all of the efforts we've made since 2018, we have and continue to believe that we will continue to recognize operational efficiencies as we continue to scale in size.

Thanks, Randall. Okay, Bobby, shifting back to land. You know, this year and even more recently, it feels like we've been saying no to a lot of land deals with rising land prices. Luckily, we were fortunate to get out ahead of the curve. We have about 21,000 lots we own or control. Can you talk a little bit about what opportunities we're seeing and what the right inventory level for us is?

Yeah, Jed, I'll kind of answer that from a different perspective, or really kind of how we manage to our underwriting. Our goal is to deliver the best risk-adjusted returns in our industry. We're going to continue to underwrite deals to our strict underwriting standards, which is meeting a 20% unlevered return as well as exceeding a 20% gross margin. But we're recognizing now that the market is getting tighter and deals are quite frankly just getting harder to pencil. As you just mentioned, we've built a great lot position up over the course of the last year and really have been able to source what I would consider creative land to get us to our internal debt-to-capital ratios of a cap of 35%, which I know Jim had touched on earlier today. But we are expecting that leverage to gradually work down for the remainder of this year.

Great. Randall, I know one question I get asked all the time from peers is, 'Are you guys virtual? Are you back in the office?' So do you want to talk about what that looks like at Green Brick?

Yeah, definitely. So 2020 came with its challenges, and thanks to our unique decentralized structure, we really didn't have many challenges moving to a remote work-from-home environment at our various business units, departments, and even unique individual situations. Part of the pandemic, our sales and construction teams were already working remote from their subdivisions, and it was not very challenging for us to extend those capabilities into our purchasing, accounting, and other back office teams. So another question I get asked often is, 'Are you guys going to eventually go to a virtual sales platform if there's another pandemic?' Yeah, that's an interesting topic. Today, we really haven't invested too heavily in a virtual sales platform, at least on the IT side. We definitely have the capability to make virtual sales and have made some virtual sales so far this year, but our position is that a new home is their biggest purchase they're going to be making at that time in their lives, and it's our experience that they would rather walk our models and work with our experienced and skilled sales agents prior to signing on a contract at home.

Okay, thank you, Bobby. You know, in Dallas-Fort Worth, if you read the paper, everybody says we have less than a year's supply of finished lots out there. And as we talked with our competitors, everybody's pacing sales and starts so they don't run out of lots. Everybody has geared up and there are more lots on the horizon. So do you want to kind of tell the investors what our deliverable pipeline of lots looks like in the next 12 to 24 months?

Sure. I think really I'll kind of take it even a little closer to that. In the next six months, we're expecting about 1,800 lots to deliver to our team builders, and over the course of 2022, I think that number jumps up to approximately 4,600 lots. So we're very well positioned to maintain the growth that we've been seeing thus far and looking forward to continuing on that path.

Okay, great. Another question we got from the audience today is: 'Do we sell homes to investors and build-to-rent guys?'

I'll take that one. We don't discriminate against investors, but we don't actively seek out investors either. So it's not uncommon, as we're selling homes, to see some for-rent signs pop up in our neighborhood, but it's not something that we actively pursue.

Another question... Bobby and Randall, looks like we're out of time. Thank you for your time and insight. Next up we have Rick Costello, our CFO, who will be covering our capital planning and strategy. Thank you, guys.

Thank you. Thank you. Hi, I'm Rick Costello, CFO for Green Brick Partners, and I will be leading our Investor Day segment related to our capital structure and strategy. I'd like to begin this segment by highlighting the tremendous growth Green Brick has accomplished over the past five and a half years. As Jim mentioned earlier, our 2020 revenues are over three times our 2015 revenues, while our pre-tax income attributable to Green Brick is up double that, showing six times higher from 2015 to 2020. Based on our results for the 12 months ended June 30, 2021, our compounded annual growth rates in total revenues and pre-tax income sit at 28% and 44%, respectively, which is truly remarkable. Our outsized growth in pre-tax earnings was made possible through our efforts to scale our business efficiently. At Green Brick, we encourage every employee to maintain a business owner mentality and take ownership of each dollar spent. In fact, our SG&A leverage reached an all-time low this quarter of 9.1% of total revenues. Our work to minimize overhead costs has resulted in a 28% decline in SG&A per home delivery over the past five years and has allowed our company to minimize overhead costs as we increase revenues, accelerating our pre-tax growth in excess of top-line results. The growth we have achieved to date was only possible thanks to the diligent underwriting and careful acquisition of our superior lot position. As Jed discussed earlier, the growth in our lot position is unrivaled in our industry, as demonstrated by our 32% compounded annual growth rate over the past five and a half years. Our growth in lots owned and controlled is a leading indicator for future revenues, as each lot under development or contracted through an option agreement should convert to a potential home closing. With our total lots owned and controlled up 133% in the past 12 months alone, we believe Green Brick has a clear capability to continue our current growth trajectory. We believe our dramatic improvement in lot position can lead to sustained double-digit growth in units delivered for the next three years, assuming demand remains strong. To finance our tremendous growth, Green Brick uses a combination of short-term credit facility lines and long-term senior notes to finance land acquisition, land development, and the construction of our homes. As you can see from the table on your screen, we have some of the best lending names in the nation as our capital providers. Our relationships with these providers, coupled with our low risk profile and propensity to keep our debt to capital at or below 35%, enable us to maintain both short-term facilities and long-term debt at low rates compared to those of our peers. Of note, our most recent long-term private notes were issued at a low fixed rate of 3.25% because our participants underwrote Green Brick as investment grade. Next, I would like to briefly discuss our capital structure cycle and illustrate how we marry our unique capital position with home building. In this slide, we illustrate our capital structure and how it grants us the flexibility to be opportunistic to acquire new land and lots and grow our business. We begin with the expansion of our lot pipeline. Acquisition of land and lots are funded through short-term lines of credit. This results in growth of units under construction and subsequently increasing revenues. Upon reaching $150 to $175 million in credit facility utilization, we initiate a private placement of senior long-term notes at favorable low fixed rates. As you can see in the third step of our cycle, proceeds from these notes are then utilized for repayment of the short-term lines of credit. In the last step, the cash flow from our high margin home closings in turn funds the replacement of our lot pipeline. This cycle provides us with the financial flexibility to remain opportunistic on land and lot acquisitions.

We have great capacity now that we have five very solid relationships with insurance companies and investors through the club deal that we closed in the first quarter for $125 million at a fixed rate of 3.25% over seven years. When we underwrote that deal with the investors, we actually asked them what their indicated interest was, and that deal was more than two times subscribed. So I think it's really going to come down to allowing ourselves the time, the visibility, as I suggested before, on our line of credit. Once that gets to a sustainably high level of $150 to $175 million, that's when we move into doing our next deal. We're in constant communication with them, so it's a very good set of circumstances for us.

Actually, all of the companies, including Securian, Bearing, Voya, and Hartford, they follow what Prudential initially did, which was really active underwriting of us. When we first met Prudential and dealt with the local office here in Dallas, it was a long process for them to really do a deep dive on us. And at that time, when we did the club deal, Prudential underwrote us as investment grade, and the whole group continues to do that from an internal standpoint. So it was a process that resulted with Prudential closing our first deal in 2018 for $75 million. Then we did a follow-up deal a year later in 2019 for $37.5 million at 3.35%. After that, we started discussing what to do next, and it was getting a little heavy for them to go with themselves. So through their Atlanta team, they helped structure a club deal in which they brought four other investors that they commonly do deals with. Really, they only had to go out and speak to a very small number to raise the interest. So it became a deal in which Prudential structured the transaction. There's not a lead like Flagstar is the administrative agent, but they all followed and conformed to the same set of documents. So we know that every deal that we do into the future is going to contain the same terms and conditions, which is great. So we're proving ourselves with Prudential, and now we're proving ourselves with our new investors. One of the most important takeaways that I want our audience to really understand about Greenbrick is that relationships do matter. They matter not only internally but in external relationships with lenders like Prudential. We're just thrilled to have really solid relationships with some of the premier lenders in the country.

Well, we've got $237.5 million of long-term debt that has staggered maturities that go out generally four to seven years. And then we've got a credit facility that is administered by Flagstar. Flagstar is a major participant in that; it has $265 million of total commitments. So then you add on our small secured facility with Inwood National Bank, which is a long-term relationship here for Jim. We've got $300 million total available commitments. And so right now, as of the end of the second quarter, we've got $170 million of availability. We obviously utilized a good portion of that in Q2 when we spent $180 million in land and lot acquisitions. But we also think that as we go through the rest of the year, we'll probably taper down our debt to capital a little bit and really can sustain that with the amount of flexibility that we have right now. It's really a best practice to be able to borrow up and pay down, borrow up and pay down. So it's a great facility. Our current pay rate is under 2.7%, which is phenomenal. And we have an evergreen renewal in it where every December we get to go back to all the participants in it, which is Huntington Bank along with Flagstar. We now have Veritex in that facility, as well as City, JPMorgan, and Goldman Sachs, where we will extend it this December such that as of December 15th, the new maturity date would be three years out from there. So we get plenty of advanced notice as to any maturities, which leads into our next question we've got from the audience: What is the right amount of debt for the company?

Well, how do we manage that? Our total debt as it sits right now gives us less than a 35% debt to capital, which is our own structured requirement. But how we've always set it up is that our work in process on our homes under construction — the typical relationship that we see every quarter when we measure it — we have about twice as much cost in WIP as we do in outstanding debt. And that's really where we want to be. We want to have our most easily convertible asset to cash, which is our homes under construction, far exceed the amount of debt. So our interest coverage is fantastic. And we would like that level of 30 to 35% debt to capital. If you look at our charts in our investor presentation from yesterday, we are one of the lowest leveraged of all the small and mid-cap builders. So we think where we're running is appropriate for the risk that we're taking.

Absolutely. Two things happen when you do a land bank situation. Number one, you're giving up the extra margin that we can achieve in our strong markets from land development. Our land development profits as a portion of our average selling price is 5% based on the percentage of frequency of doing self-developed lots. You give that up if you do off-balance sheet financing. And worse, which is balancing of risk, and we choose to take that in moderate proportions by not doing that.

The margins look great. Really, a lot of our backlog has grown over the last — for the fourth quarter last year, the first quarter of this year — and that was a time frame in which we were increasing prices very heavily, from 9% to 25% per builder brand. So it's looking very strong at this point. We think our backlog is a little larger than we want it to be right now, which is why we're metering sales. We especially with Trophy and CBG as a townhome builder, we really want to have more spec inventory. Unfortunately, that's about all the time we have for this segment. I'd like to pivot to one of the most anticipated segments that we get lots of questions on, and that's purchasing bottlenecks, supply chain. This is going to be led by Jack Wilkins, our National Purchasing Director.

Hi, I'm Jack Wilkins, National Director of Purchasing at Greenbrick Partners. I recently joined Greenbrick from a top 10-15 home builder, and I'm excited to add my knowledge and expertise to the company's rapid growth trajectory. Today I'll be moderating a panel with some of the best purchasing professionals in the industry from several of our subsidiary home builders. Before jumping into our first question, I'd like to stress that our purchasing teams across all our subsidiary builders have adapted like never before to mitigate today's unprecedented supply chain issues. Thanks to Greenbrick's strong back office support, industry-leading information systems, and superior relationships with our suppliers, we've been able to successfully meet these challenges head on. A significant part of Greenbrick's success is due to our local and national relationships with our suppliers. Due to the high density and scale of our core markets in Atlanta and Dallas-Fort Worth, we've been able to utilize these relationships to obtain preferred customer status and prioritize order fulfillment above our peers. This program has added millions through volume rebates to our bottom line results and significantly improved our overall company returns. Lastly, our best-in-class purchasing team has been critical in navigating the current supply issues, and I'm thrilled you'll get a chance to hear from them today. So without further ado, I'll let our panelists introduce themselves, and then we'll move on to the first question. Erin, would you like to begin?

Hi, I'm Erin Martin, Director of Purchasing for CBG, the largest townhome builder in Dallas-Fort Worth, and Normandy Homes, a move-up single-family builder in DFW.

I'm Troy Caldwell, the CEO of The Providence Group in Georgia. TPG is a move-up and townhome brand in Atlanta.

I'm Todd Stern, Vice President of Purchasing for Trophy Signature Homes here in Dallas-Fort Worth. Trophy is Greenbrick's scalable, value-oriented, move-up and entry-level single-family home brand.

And I'm Roger Hollingworth, Director of Purchasing for Center Living Homes here in Dallas-Fort Worth. We specialize in urban and suburban infill and also specialize in cutting-edge architecture and design.

All right, with that, we'll get started with our first question. First question: What type of changes have you made in your homes to avoid supply chain delays and mitigate increased cycle times driven by today's economic climate? Erin, do you want to take that one?

Absolutely. So what we've done at CBG is to limit our upgrade and selection requests because CBG is a townhome builder. We're moving more to an inventory model. We've also collaborated with our trade partners to aid in prioritizing our job schedules, similar to a centralized scheduling, to mitigate some of the delays we're seeing.

Troy, do you have something you want to add?

Yeah, at The Providence Group, we source multiple manufacturers and building methods where possible to ensure material availability. For example, our floor systems are designed to be built with either I-joists or open web. We prefer to use I-joists, but in the event that I-joists are not available, we can easily switch over to open web to make sure we can continue with our framing crews and keep production going. Further, with appliances, if Whirlpool were to be backordered on a refrigerator, we can easily switch over to an equally spec'd product from Frigidaire or GE.

Yeah, like Troy said, some of the things we do are the same. We allow for substitutions to be used for materials to keep homes moving. We've also expanded our subcontractor base. We've gone to using wall panels and trusses to help reduce cycle times. That really helps us.

All right, so next question: With the cost of lumber trending down, how quickly do you expect to see reduced cost reflected in your future home closings? Todd, let you take that one.

Sure. We have seen lumber prices decline 35 to 40% from the peak. We're not really going to speculate on what they're going to do for the rest of the year. We've also seen some price increases in flooring and labor has increased, but those price increases have mostly been offset by the decreases in lumber.

Yeah, we're seeing the same thing. It's in our living rooms.

All right, so next question: Are you seeing suppliers increase production capacity to meet current demand? I'll answer this one. I just left a national purchasing meeting with probably 25 or 30 manufacturers involved, and yes, they're all striving to increase production capacity. But there are a lot of constraints from labor to raw materials that the manufacturers face, and it's not something that happens overnight. So yeah, the manufacturers are working to increase production capacity, but it takes time.

So next question: What kind of benefits have you seen from having a wide range of national purchasing contracts with your larger suppliers? Let Troy take this one.

Yeah, with over 20 national accounts, we're able to have materials specifically set aside for our building partners. While some smaller private guys may have to find new manufacturers if the material is not available, in the event that a spec material is unavailable, our relationships allow us to get free upgrades that come at no cost to us or, more importantly, to our homeowners. On top of that, our relationships with these contractors allow us to get price protection that gives us visibility to what our costs will be for up to a year in some cases.

All right, next question: How do you select product supply companies? We're going to let Roger take this one.

Yep. So I believe this question came from a supply company, so it was kind of a two-part question. It also included a labor component as well. But it's pretty simple. With Jack at the helm working out these national agreements for us, he gets to pre-screen those vendors to determine if they have adequate capacity and can service our accounts. Then we can, as a team, get together and find the ones that make the most sense and use those supply companies for us. Now the labor component of it — labor is really driven by which market you're in, and it's hard to address that in a broader perspective. So I can tell you that labor in the DFW market is relatively strong, so I can speak to that market.

All right, so any other comments, guys? All right, so we'll go into the next one. Can you provide examples of how sharing best practices and working with other Greenbrick builders has improved operational efficiencies? I think Erin's got some good examples of these.

So we were inspired by Trophy Signature Homes' simplified living business model to quickly launch our own CBG X business model. CBG X is a package-driven business model where buyers are limited to a curated list of design selections, so that has greatly helped our business. We've also, with Greenbrick's growth, been afforded the opportunity as a group, as a purchasing group, to collaborate and adapt to the market conditions locally. In Dallas, Trophy and Center and myself share some of the same vendors, so it makes a bigger impact on our buying power as well as our service over the competition.

And we thought in the Atlanta market we would have a lot of pushback with going to packages, but with the different buyer profile that we have out there, we've rolled it out successfully in a lot of our townhome packages. And buyers are accepting it. It takes a lot of anxiety out of the buying portion of the home. That's worthwhile. And the collaboration has been really helpful. Like, we all buy from the same people, and we share our lumber prices, which helps us out immensely.

That's right. Sharing from the whole group and having this amount of expertise and products that we can all play on is truly exceptional in the industry. It really is.

All right, so we'll move on. What are we doing to ensure that our vendors prefer working with us? We're gonna let Todd answer that one.

Yeah, we really do try to cultivate a positive relationship with our vendors and trades here at Greenbrick. Some of the things we try to do: we make sure we do weekly payments for the vendors, which ensures them the money to keep going. We try to strive to make sure our job sites are safe, clean, and ready to go. We really try to practice good scheduling, which means they can get in, get out, move on to the next job, maximize their profits. And I think we really try to make a good effort to just have a reputation of being a good partner, a good business partner for all of our people.

Absolutely. Be somebody they want to work for. Yes, the easy pay system referenced earlier.

Yes. All right, so now we've got some submitted questions. This is a three-parter. Can you discuss the trade base in Atlanta, how you use it to find subs, and are you short any? And can you discuss material shortages in other markets? I'm going to let Troy take over the Atlanta stuff because that's his backyard.

So the trade base in Atlanta, as it is across the country, is strained. But as Warren alluded to earlier in his piece about The Providence Group, we have over the last couple decades built strong relationships with a lot of vendors in the Atlanta market. And frankly, they're dedicated to us and willing to do whatever they have to do, whether it be to cut loose some of their smaller private guys that are taking up some of their workload so they can focus on The Providence Group.

And I'll address the material shortages. So the material shortages are widespread across all markets. They vary by market. We're affected just like everyone else. The positive aspect is we do have a lot of national relationships, and we kind of use those national relationships to help leverage that we get maybe first dibs on products in some cases. And it also helps that we get some feedback from some of the manufacturers, so we are aware some issues may be coming that maybe some of the other smaller builders may not. And I think that's been beneficial. You guys got any comments?

I think Troy and Troy nailed it with just having those long-term established relationships with those trade partners over many years and treating them well over those many years. They stick by the ones that have taken care of them, and that's helped us out tremendously here.

Absolutely. And with what you said, Jack, having the protection on the national accounts has been a huge help. Yes. So the next one I've got is probably for everybody, and we'll just kind of work our way down the table starting with Roger. So what type of eco-friendly or energy-efficient products are used in your homes, and are you seeing that buyers are willing to pay a premium for more environmentally friendly homes? So we'll start with Roger on this one.

Yeah, I believe the buyers really do see a value in it. I'll just be very frank: I own a Center Living home, and I'm in it, and it is extremely efficient. Utility bills are low, and I believe in the product that we put on the ground. There are so many different things that you can do to get more energy efficient using technology behind it. Just an example: we use smart thermostats so that I can control my thermostat from the office and make sure that the temperature is right. And one of the things that we're actually piggybacking off of what Trophy has been doing is foam insulation in our homes. That's just a couple of examples.

Yeah, at Trophy, we really don't have options, so everything we do in our homes is included. But we do a lot of energy efficiency and smart home features. We have a smart home package that comes in every home. We do tankless water heaters, which means you're going to have an endless supply of hot water. Foam insulation — for us, that means your attic is going to be much more comfortable, and in Texas, that's a big deal. We do smart thermostats, smart garage door openers. And as the market's changing, we're trying to be forward-thinking. We're just transitioning some of our standard features to where we're going to be including electric car chargers very soon. We do LED disk lights, that's home automation energy savings as well.

Again, a lot of the same. We're putting in the LED disk lights in all of our homes. We're offering video doorbells for enhanced security with the alarm system, wireless garage door openers, wireless locks at the front door. The amount of options that are out there today are really endless, and we're able to provide those to all of our buyers.

We just recently got into a community that has a smart home package standard in our homes with a video doorbell, several other Wi-Fi capable features. It becomes a connected home for the home buyer. So new technology, especially in this climate where a lot of people are working from home, it's a big deal.

Absolutely. And I would say one thing that Trophy's doing that the homeowner doesn't see, but that's unique to Trophy, is Trophy's doing panels — panelization where the walls are already pre-assembled at a factory, so there's less waste on the job site. Trophy's rolled that out, and it's been going pretty well. You rolled that out about four or five months ago?

Yeah, it's been very successful. We've rolled it out to a substantial number of communities for their core product. It's cut down on build time, cut down on theft, cut down on shortages. It's been a big game changer for us.

All right, so we're going to move on to the next question. Do your teams work remotely today, and what other impacts has COVID had on managing your personal department? So we'll start with Erin real quick.

It's been a challenge, obviously, going from an office setting to remote. We had to figure out things really quickly during COVID — Zoom meetings and making sure everybody's doing their work from home. But our team is doing great. Most of us have a hybrid work schedule where our employees come into the office or are remote as well. It's been challenging but pretty good, high efficiency.

Yeah, I think we all know that COVID is being addressed differently in different parts of the market. So while CBG has been working remotely for some time now, the Atlanta office has been in the office frankly the entire time. So I don't know how Trophy and Center Living are handling theirs.

For Center Living Homes, we have a very small office, and so it was important for us to protect the company, making sure that we had management-level decision makers, especially in the beginning when we didn't know what it was going to turn into, how sick people were becoming. And then it became obvious that this was a really big deal and people were getting very sick. We made a conscious effort to separate purchasing management and always be separate from each other. So we had that redundancy built into the organization, just making sure that we were going to be able to function properly.

All right, so I've got a new one here. Can you talk about the lumber savings you're seeing today and in more detail? Roger?

Oh, lumber. What a little thing to talk about. The lumber savings is here. It's been trending down. But Todd alluded to it: we don't have a crystal ball, and it's difficult for us to tell you what it's going to do next month, the month after, and what it's going to do by the end of the year, because lumber kind of does what lumber does. I could tell you right now it's down, and it's down exactly what Todd was saying earlier. So I'll say this: lumber went up dramatically last year. I don't look at it market by market; I look at it as a wholesale country because I'm looking at it a little differently. I can say this: the lumber wholesale pricing is back down to approximately what it was this time last year, which is pretty much averaged where it's been in late summer year over year. Now where it's going to go from here, you really don't know. And if I could project that, I probably wouldn't be working here. But the decreases have been significant. Todd, what have you seen since May as far as decreases?

Yeah, like I said earlier, about 35 to 40%. With lumber at its peak, it was really expensive, which was causing a lot of theft, which was the reason we moved to wall panels because it radically cut down on any theft. But yeah, it's about 35 to 40%. The wall panels and the stick — I'm just glad it's coming down. It's making it a lot easier for us to build homes with those prices.

Okay, so I think I've got maybe time for one more question really quickly. Let me look here. In your earnings call, you mentioned moving to larger communities. Do large communities make purchasing teams' job easier or harder? Aaron, we'll start with you on that one.

Absolutely, they make it easier. The larger they are, it spans over time. If you think about it, you're setting up one community that's going to last a lot longer than setting up multiple smaller communities. So it definitely makes our job a lot easier if it's a large community.

I think on the purchasing side, being able to negotiate contracts, absolutely it does. But sometimes, for a master-planned community in Atlanta, it's not just all single-family homes; it's not just all townhomes. It's single-family, it's townhomes, it's condos, it's a rec center, it could include apartments. It can get pretty dramatic the bigger the community gets.

So I think we're ready to wrap things up here, and I'd like to thank our panel for taking time out of the day to be here. Thank the shareholders for joining us. Our record results over the past years are the culmination of years of diligent planning and hard work by our subsidiary builders and corporate team. We believe that outstanding results achieved this quarter are just the first step in Greenbrick's remarkable growth story, as the company is on track to materially exceed $1 billion in revenues this year. As such, we are confident our shareholders should continue to see the benefits of the synergistic integration of our culture and operating scale in some of the best housing markets in the country for years to come. As we wrap up our event, we want to take the last 15 minutes to answer some of the questions that have been coming in. Joining me for our last Q&A of the event are Jed Dolson, our COO and Executive Vice President; Rick Costello, our CFO; and David Einhorn, President of Greenlight Capital and Chairman of the Board of Greenbrick Partners. Through our final questions here, first: Can you provide or quantify the improvement in operational financial efficiency of the larger communities, and how do you balance that with the concentration of lots in a given area? Jed, this is your turf.

Sure. You know, we really look at it — we run a financial model on every prospective project we do, and we look at what the absorption rate is. So if we think a community can sell 50 homes a year, we're probably going to want to buy a two- to three-year supply. We have some much bigger projects, but we feel like we have bought those at a very low cost basis, and it doesn't cost us very much carry to hold on to those. We think those assets will remarkably appreciate over time.

Yeah, absolutely. We love it when we find a three-phase project when we can sell out of that with one model.

Yeah, that's a really good point you made. And one of the things I want to highlight for investors: some of them are concerned about diversification or a concentration in Dallas. Well, Dallas is one of the most diversified economies in the country to start with. Secondly, what do we have, 56 neighborhoods now in Dallas, or something in that number? The lawyers are probably panicking I'm throwing the wrong number out, but I think that's very close. So we have unbelievable market real-time feedback on many price points, many products. I think we're the fourth largest builder in units in the largest housing market, maybe the second largest in revenue. So we have an unbelievable data point and feedback loop that allows us to underwrite all these price points very quickly. And Rick and his finance team and Jed and his operational team really do a great job on that.

Yeah, it's actually gotten easier to underwrite projects and to run our business as we've gotten larger.

We are not considering doing the same. And that's probably not that popular on Wall Street. But we talked earlier in the segment that to go land-light, you're going to pay private equity returns on capital to somebody. They're not going to do that for free. And these land bankers are really smart people, so they're going to take — if they're going to take that risk, somebody's paying for it, and it comes out of margin. That's one of the reasons our margins are so high. The second reason is that when you start relying on lot developers, they're really not lot developers in business anymore that they don't need land bankers. And we can control our own destiny and know that we can control our own destiny. It's one less third party to rely on. So no, that's not really part of our strategy.

Yeah, I say everybody. Most public builders call all the time. Jed, can you give me some lots?

Yep.

Well, interest rates are still low. We've done sensitivity analysis with our mortgage joint ventures over what people can afford. Sticker shock is much more of an issue than affordability right now in terms of people buying homes. But there's a huge amount of buyers that can pay higher interest rates and buy more house than they're buying right now, even though prices have rapidly escalated.

Yeah, look, the way that I look at it is we had a housing bubble that went from about 2004 to 2008, and the country overbuilt maybe 2 million houses. And then the last 13 years we've underinvested in housing, and cumulatively maybe it's 2 million underinvested. And so now we're catching up, and we're just at average. We're not even rebuilding the excess demand. It could easily take a half a decade or longer to make up for the underinvestment that's happened in housing. And in markets like where we are, it just seems — it almost feels like it's limitless. So it's a question for the company here: how well can we execute, how much land can we buy, how fast can we get it entitled, and how effective can we get in the construction? And that process is slowed down, which makes it tougher. That gives us just a ton of visibility for a multi-year period of growth that might look an awful lot like the last five years.

Yeah, we have, but I'm happy to answer that again. We've said no to a lot of deals this year. We're going to continue to say no. We were just shown a deal yesterday where our cost basis right next door is $39,000 a lot — a paper lot, not finished lot, finished lot — and we were pitched a deal at $68,000. So we're continuing to say no until we get further through our lot supply. So we're going to be very opportunistic. I think we are going to execute better than our peers. I think, as we mentioned before, we think our land book is superior to every one of our peers. So we look forward to the results that are going to come in the near future.