Good afternoon, everyone, and welcome to Green Brick Partners Earnings Call for the First Quarter Ended March 31, 2019. Following today's remarks, we will hold a question-and-answer session. As a reminder, this call is being recorded and will be available for playback. A slideshow supporting today's presentation is available on Green Brick Partners website, www.greenbrickpartners.com. Go to Investors & Governance, then click on the option that says Reporting, and then scroll down the page until you see the First Quarter Investor Call Presentation. The Company reminds you that during this conference call, it will make various forward-looking statements within the meaning of the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements with respect to revenues, earnings, performance, strategies, prospects and other aspects of the business of Green Brick Partners are based on current expectations and are subject to risks and uncertainties. A few factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements. Please read the cautionary statement regarding forward-looking statements contained in the Company's press release, which was released on Thursday, May 2nd, and the risk factors described in the Company's most recent annual and quarterly filings with the Securities and Exchange Commission. Green Brick Partners undertakes no duty to update any forward-looking statements that are made during this call. Today, the Company will be referring to pre-tax income attributable to Green Brick as a percentage of homebuilding revenues, pre-tax income as a percentage of average invested capital, EBITDA, net income return on equity and adjusted homebuilding gross margin, which are non-GAAP financial measures. The reconciliation of adjusted homebuilding gross margin to homebuilding gross margin are contained in the earnings release that Green Brick issued yesterday. I would now like to turn the conference call over to Green Brick's CEO, Jim Brickman. Please go ahead, sir.

Hi, everybody. With me is Rick Costello, our CFO; Jed Dolson, the President of our Texas Region; and Summer Loveland, our CAO. I want to thank everybody for joining the call today. As the operator mentioned, the presentation that accompanies this earnings call can be found on our webpage at greenbrickpartners.com. At the top of the web page, please click on Investors & Governance, then click on the option that says Reporting, and then scroll down the page, until you see the First Quarter Investor Call Presentation. I'll give everybody a second to open the presentation. I am pleased that we had best first quarter in our Company's history with the 33.3% increase in homebuilding revenues, record first quarter home closings, and a record $12.6 million net income attributable to Green Brick, which was up 12.5% year-over-year. Though the competitive market pressures remain, our business model demonstrated its strength, and we are going through a tougher market. Best of all, we’re on track to achieve moderate, pre-tax income growth in 2019, while maintaining one of the most solid balance sheets in the industry. Finally, our newest homebuilder brand, , Trophy Signature Homes, is off to a great start and we expect continued momentum into the second half of 2019. Please flip to slide five. Two of the best markets in the country are our core markets of Dallas and Atlanta. During the last 12 months, Dallas and Atlanta continued to be two of the largest markets in terms of generating job growth. On slide six, you can see the Dallas continues to be the number one new housing market in the nation, adding about 34,500 starts. Atlanta is the fourth largest market and our Challenger Homes affiliate operates in Colorado Springs, part of the sixth largest market. Slide seven demonstrates…

Thanks, Jim. Green Brick is truly one of the best growth stories in the public homebuilder space. Take a look at slide 9, labeled Growth Drivers. The chart shows the growth in the last 12-month home on closing revenues from Q1 2017 to Q1 2019, it's 56% over that two-year period. Even more impressive is our setup for the future. On a year-over-year basis, our backlog grew 36% to $308 million as of March 31, 2019. During the last 12 months, we also increased our lots owned and controlled by 34% and grew the average number of selling communities by 42%. Through the 12 months ended March 31, 2019, we increased our number of units started by 41% versus the 12 months ended March 31, 2018, with an increase to 1,644 units started. In fact, we have averaged starting over 410 units per quarter from Q2 2018 through Q1 2019. As of March 31, 2019, we had 1,170 units under construction, an increase of 54% year-over-year from the end of 2018. So, Green Brick has the backlog, the construction starts, the level of units under construction and the lot inventory to sustain further dynamic growth. On slide 10, we highlight the diversification of our product offerings. In 2018, we significantly increased our focus on townhome communities, thanks to years of planning, land acquisition and development. In fact, we've grown our townhome revenues 69% over the last 24 months, which is even higher than our robust single-family growth rate of 47% in the last 24 months. Over this period, this has helped us to maintain affordability while offering a high quality product. Over the last two years, our average sales price has risen by only 1.8% in total. Slide 11 further highlights our significant diversification efforts. With our purchase of GHO…

Thanks, Jed. And thank you all for joining us today to review our 2019 first quarter financial results. First, let's review slide 13 where I'm going to start with the highlights and then move into the details. For Q1 ‘19 versus Q1 of ‘18 and those year-over-year comparisons, here are some key operational metrics. Net new orders increased by 2.3% for the quarter. Home deliveries increased by 38% with home sales revenues up by 33% for the quarter. Year-over-year, as Jed indicated, homes under construction are up 54% with some started up 41%. The dollar value of units in backlog increased by 36% year-over-year. Our portion of pretax income was up 12.7% for the quarter and our net income was 12.5% for the quarter over the same quarter of 2018. Now, for some more details. For the first quarter, the number of net new home orders was 444, an increase of 2.3% compared to the first quarter of 2018. Green Brick closed 368 homes for the quarter, 38% more than the first quarter of 2018. Homebuilding revenues were $161.6 million for the quarter, an increase of 33% over the first quarter of 2018. By the way, it was only surpassed by Q4 of last year. Similarly, total revenues grew 31% over Q1 of ‘18 to a $168.6 million in Q1 of ‘19. The average sales price or ASP of homes delivered, was about $432,700 for the quarter, down 4% from Q1 of 2018. Now, most of this decline in ASP of closed units for the Q is because of product mix and the addition of GHO Homes whose homes are at lower price points than our other builders. At March 31, 2019, our builder operations segment had a backlog of 658 sold but unclosed homes with a total value of…

Okay. Thanks, Rick. In summary, our team did a really a great job of managing pace versus price to generate the best first quarter net income and backlog in our history. Unlike most peers, our neighborhood count is accelerating. Assuming decent weather, we should grow from 76 communities on January 1, 2019 to 92 communities by either the end of the year or the first quarter of 2020; that’s very significant growth. And this 21% community growth is being accomplished, as Rick just showed you, while maintaining the very conservative balance sheet. We now also have the most homes under construction in our history. Operationally, we are seeing house margins improve and the benefits for our standardized operating system utilized by all of our builders. Our business is now scaled to our title and mortgage business are expanding rapidly and profitability with little risk. Our entry level first time move-up/value builder Trophy Signature Homes is off to a great start and should be a significant part of our earnings growth story that we expect to replicate in other homebuilding markets. I want to again thank the entire Green Brick team for their hard work and great results. I’ll now turn the call back to the operator.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Michael Rehaut with JP Morgan. Please go ahead. Your line is open.

Hey. This is actually Maggie on for Mike. First question, I was just hoping you could talk a little bit more about the incentives that you were pushing over the quarter. Could you give us an idea of how those trended month-by-month, and maybe how you’re thinking about incentive levels in the second quarter?

Yes, sure. This is Jim, and anyone else from the management team can chime in with me. Like most builders, we increased incentives. Again, this is as much art and science trying to figure out the best way to match pace versus price. The quarter’s over. In April, we’re actually seeing increased interest on the demand side and we’re starting to see cost savings on the construction side. But bear in mind, these things -- a home that we sell today is probably closing in the third quarter of the earliest and the fourth quarter. So, this is a lagging indicator that we’ll probably not see impact on financial statements until later on in the year.

Our absorption in January was probably much like Q4, it wasn’t real strong. But, our absorption picked up starting in February. And like we said on our last call, that absorption pace really resembled 2017 versus the accelerated absorption rates that we saw the first half of 2018. So, a lot more like 2017.

I think the other thing that we and probably every builder experiences as we open new communities, it's always slower in sales to start up a community then when you're in that real time period, and as we grow more communities. Our absorption rate goes down a little bit, because we're opening so many new communities relative to most of the peers you probably bench us against.

Okay. So, looking into the second quarter and the rest of the year, do you think that your -- these kind of slightly elevated incentive levels will continue and continue to pressure margins like they did in the first quarter?

No. This is Jed. So, we're seeing less spec packages from every builder for the most part across the industry, regardless of what geography. So, our competitors are putting less units out; we're putting a few less units out but growing or top-line by more communities. So, we actually see -- we think we’ve hit the bottom at least for a while on incentives.

And something else, Maggie, that's happening there with the slower level of starts and competitors not having the strong community growth, there is less product out there for the construction trades and also the houses are smaller, because a lot of builders are -- really run to the smaller product. So, that's one of the release on construction costs and why we're able to bring some of those costs down simply because the labor force has less square footage in total to build.

Tim Daley from Deutsche Bank, please go ahead. Your line is open.

So, I guess, my first question is, so strong community account growth expectations, and as well appreciate the guidance for the net income or the pre-tax income to be up modestly year-over-year. So, just curious, if you guys could kind of provide a bit more color on what you mean by modest. Is that low-single-digits, mid-single-digits and as well, as if you could help us understand the moving parts underpinning these expectations in terms of operating margins, obviously, given the restatement of the commissions, kind of there’s probably going to be some more movement in the SG&A and gross margin. But just kind of operating margins and any other kind of puts and takes if you could provide? That'd be very helpful.

Tim, I can answer your -- first part of your question and that is that we are too modest to describe modest. So, we really can't get into that. Rick or Jed, you might want to field the second part of these questions.

I think, you'll see, when you do the math that the moving of the commission expense down to SG&A, doesn't have a huge impact. Our range of commission expense from 2017 through -- all the way through now, it's anywhere from 4.0% to 4.4%. And I think it's probably been a lot more consistent at around 4% as we move forward and fully have GHO in all of our numbers. This is all within our expectation, because we knew we were going to have great top-line growth and we knew we were coming into some separate margin regions. I think, we're probably going to be skewed more heavily towards Q3 and Q4 based on our backlog. Last year, we had so many new homes put into backlog in Q1 that that really pumped Q2 from a top line perspective that we don't have as much of now. But, our pace has been very consistent from a start standpoint at just over 400 a quarter. So, I think, you'll see that be a good measure metric going forward from a top line standpoint.

That's very helpful. And then, I guess, just thinking about kind of the product mix and the impact on absorption. So, absorptions were down a bit more than the homebuilding group average so far this quarter. Obviously, this is up against a really tough comp in 1Q last year. But, was there any other kind of mix shifts that we should be thinking about as we head forward in the rest of the year? Obviously, comps ease a bit into the back half. But obviously, just with Trophy Signature coming in and obviously GHO getting lapse, if you could help us with sort of directional absorption pace, that would be great.

We’ve seen absorption, this is Jim, pick up a little this year. I mean, this month in April, we hope it continues. I think, the more relevant thing, when you are looking at Green Brick versus peers that are having stable community growth or in some cases negative community comp growth, our investment in these -- significant growth in our new communities, that investment is already on our balance sheet right now. If we're just starting, these -- all that money that's on our balance sheet is not enough -- there is really any returns until much later this year or into 2020. So, we think our metrics are looking really great relative to peers. But, if you really anticipate how you have to frontload these investments in these communities and the lagging time in these communities to prove financial results, we think investors will be very pleased in 2020.

All right, good. And then, if I could just kind of ask one more here. So, saw the announcement of the Trophy Signature model getting opened a couple of days ago, so congratulations on that. But just kind of could you help us to understand any kind of new incremental news out there about this new product type, maybe you guys are targeting new markets or just kind of any update? And then, as well, start pace up 41% year-over-year, very impressive. How many of those were Trophy Signature, if you could provide that?

Very of those were Trophy Signature just because the communities -- this is Jed. Communities that Trophy is going in were not yet open. As of today, Trophy is selling in two communities that we just started right at the first of this month. So, most of the growth was organic growth through our other divisions.

Yes. Trophy is a kind of a case study what I was just talking about growing community count. Jed, what do we have, 1,300 owned and -- yes, option lots, many of which are owned. We’ve made the investment in Trophy. We haven't seen any current returns on that, yet we made good return metrics for Green Brick and we think that Trophy is going to be very accretive to our business in 2020 when all of these communities start hitting full stride.

Scott Schrier with Citi, please go ahead. Your line is open.

I wanted to ask a little bit more on the incentives. I am curious, if you could potentially break that out by region on a year-on-year basis and see how they trended versus some of your brands. And we've heard some talk about higher inventory due to 4Q ‘18 specs in certain markets. Can you speak to the extent that this might have impacted your business?

Yes, a little bit, not probably as granularish as you wanted, Scott. But, we saw -- in Atlanta, we didn't see the margin compression that I guess some of our peers saw in Atlanta. That's pretty much held its own. Where we saw the most margin compression was really in our townhome business in Dallas, which is a decent sized business here. It was twofold. We got -- we should have been more aggressive in selling spec homes in the third and fourth quarter of 2018. They got pushed into 2019, and that's never good thing to have a neighborhood where you have more specs than you want. And the second thing is that we have found that the consumer was having choices, maybe not in the A location where we’re building a townhouse, but they were having options of moving into smaller footprint homes and B locations, and some people were doing that. We think that's leveled now. And really, we just had a great month of sales in townhouses in Dallas. We just hope it continues in May.

And then, so, more on the attach products as we go forward. They've been -- or recently they've picked up as a percentage of your home deliveries. Should we expect that to be more of a tailwind for ROE growth, given I'm assuming they have higher asset turned associated with them.

Well, it's really interesting. It's a little bit more confusing than that. For example, one of our communities that we just opened up is called Pratt Stacks in Atlanta. It's a unique infill community right outside the heart of downtown Atlanta. That is not a fast turnover community. It's a four-storey mid-rise townhomes. And that's a much slower turn community. But, I was just in Atlanta last week, and haven't even sheet-rocked units. We have 28 homes under construction and we've presold about 20 of them. But again, that's going to be a longer cycle thing, a longer cycle product, but the margins are good and it looks like demand is great.

And then, one more. If you could talk about maybe the timing and progression of your goal to raise leverage a little bit toward the 35% number.

Jed, you can talk about that a little. I think Trophy is going to be a big component of that.

Yes. We don't break revenue growth out by builder. But I could -- we expect Trophy to go from probably 50, 60 closings this year to 250 next year, at least. So, you can kind of do the map and figure out how much more capital we'll be putting out. And to do that we’ll be modestly raising debt of our community count growth whereas Trophy was zero communities as of the beginning of the year. Probably by Q3, we'll have six active selling communities in Trophy. And when they start selling, that means that we’re like within 60 days of closing houses. So, that means that -- by the time we start selling, we actually have a lot of inventory, a lot of whip in the ground. So, it’ll be a substantial investment, once you start seeing those communities pop open.

[Operator Instructions] Your next question comes from Carl Reichardt with BTIG. Please go ahead. Your line is open.

I wanted to ask Jim or Rick, if on the community count, sort of plans for the year and getting to above 90 by year-end or Q1, is the progression of that over the course of the next three or four quarters pretty even or is there a front end or back end load in the community count?

It's fairly even, as we go from quarter-to-quarter. But again, it's rare to have land development complete on time because of the vagaries of weather. So, that could stretch out a little bit longer, and that could affect what that flow is. But, whether it happens over the next three quarters or four quarters, it should be relatively even, based on what our builders’ plans are.

Carl, our goal was to have all 92 of them open this year but we thought we'd better give us some slack after experiencing the worst rains in Atlanta history, to push that back into -- some of it into Q1 of 2020.

And then, let's go back to Trophy Signature for a second. There is a couple of different ways to think about first time customers. And it's barebones, quick turn, fast spec, small houses, or you're looking at a little bit more of a built-to-order, model maybe an opportunity to customize. So, there is a couple of different ways to go at that customer. How are you thinking -- where does trophy sort of fit in that bucket in terms of how you get to that first time buyer?

Carl, this is Jed. It's going to be more of the former. I am sure you're familiar with Meritage's LiVE.NOW product. We by year end will be in at least two if not three Meritage communities as a side by side builder with our version of Live.NOW.

And Carl, the other thing that's active, a lot of the lot inventory, a lot of the community count growth that you'll see in 2019 already made lots where we've been able to find available lot inventory so that we could gear up their operation. And because of the location of those lots, we’re often in locations which are going to be not a first time home buyer but a first time move up buyer. It's a little bit of a different story? And it is a story in which the Trophy product will be made already -- ready to go and not offered for sale until you're 45 days to 60 days away from closing on the house. So, it's basically, here it is, your options are already included. So, that's our strategy. And it should -- even in the first time move-up buyer, it should be an excellent value proposition.

And then, if I can squeeze one more in just on the townhome side. Again, sort of looking at the customer who you're targeting that product to, is it in general a sort of in between the first time move-up and the entry level buyer type or downsizes or how do you sort of think about your target customer for townhome product in Dallas and Atlanta?

Well, because of the -- because we are really in A location markets, we have a very broad buyer; it's partly barbell where you'll have an affluent millennial buyer and a move down buyer. But because our neighborhoods are also located in A locations that are typically the top school districts, we’re finding divorcees and other kind of buyers that are seeking out the school. So, it's unbelievably diverse type buyer, a much more so than our Trophy type homebuyer.

Bill Dezellem with Tieton Capital, please go ahead. Your line is open.

I had a couple of questions. The first one relates to your lot prices. Would you discuss the increase that you are experiencing there? And I know that you mentioned that the home price decline is largely mix related and the adding of GHO. But, if there's anything relative to lot prices increasing and home prices decreasing, that's interesting kind of -- incorporate that in the answer if you would please.

So, as Jim mentioned, in some of these sub-markets like Alpharetta and Atlanta or a real infill market in Dallas, like downtown Dallas, we may be seeing some slight increase in lot price just because of the very limited supply and lot of demand to be there. But for the most part, we think lot prices have stabilized.

And, apologies for the ignorance in this question. But, would it be fair to understand that as -- if lot prices are up and home prices are flat that all other things being equal that that would be a squeeze on margins?

It would be, except one thing is taking place that you haven't considered, and that is that builders are reengineering and redesigning their product and really deamenitizing their product to lower the construction costs to maintain margin.

And the other dynamic that you have is that we typically buy the dirt and develop the land into finished lots. So, the sales price for a lot of our builders’ lots is from us. So, in that regard, we're getting 100% of the lot profit. So, there is a -- with 70% to 75% of homes delivered being from our existing inventory, it's not such a dynamic increase, as you would think.

And then, lastly, the cancellation rate ticked up in the quarter. Would you discuss that? And the reasons that you are sensing are behind that, and just the implications whether it's a worry or not, and how to think about it please?

First of all, this is Jim, our cancellation rates are very low, around 15%. So, that doesn't make us nervous. Any tickup can occur because when the market got more competitive and if competitors offered additional incentives, you can lose a customer to a competitor that was under contract that you thought was buying a home. So that might be responsible for some of the uptick, but it's still we had very low cancellation rates.

Yes. And it may have been up a year-over-year from 10% to 15%, but in Q4 of last year, the cancellation rate was 22%. So ,it's actually dropped down significantly. You’ve had a lot of price discovery going on and rate discovery with our customers, whereas rates had gone up and all of a sudden they couldn't qualify. But, now, rates have reversed and have come down substantially. And thus that means that they can actually afford more than perhaps if they came in the sales office in Q4.

Thank you. And then, one more follow-up as a point of ignorance, again. What would you consider a normal environment’s cancellation rate, if that 15% is really quite a good one? And then, secondarily, is there seasonality tied to that cancellation rate that would lead to it declining? And I recognize that you just said that maybe the incentives were a little less appealing from competitors this quarter. So that may have helped. But, is there any normal seasonality there?

This is Jed. We would -- I'd say 20% is our peer's average cancellation rate, so we're below our peers. I would say seasonality, probably not. It would be more tied to a potential uptick in interest rates from time of contract to time of delivery.

And as Trophy gets going, there may be some just natural increases in cancellation rates, just because those are first time buyers. But that will be taking place not in the next two quarters, probably down the road, if it occurs at all.

Thank you. We have now reached the end of our question-and-answer session. And this does conclude today's conference call. Thank you for your participation. And you may now disconnect.