Green Brick Partners, Inc. (GRBK)

So here's an interesting situation.  Some people just have a knack for getting out of bad situations.  I remember when Leucadia got out of their WilTel.  It was a disaster, but they got out at break-even and walked away with a big tax asset.  It sort of reminds me of a silent movie scene where Chaplin or Keaton walks away and a grand piano crashes onto the sidewalk where they stood only moments before.

And here's Einhorn's great escape.

Biofuel Energy Corp
Greenlight and Third Point are both listed as large shareholders in the original S-1 in 2007 so were pre-IPO investors (along with Cargill) of the original BioFuel Energy.

Anyway, this has been a disaster, going from an IPO price of $10.50 down to less than $1.00 in a year and then to $0.25 not soon after that (there was a 1/20 reverse split in 2012).

Greenlight owned around 11.85 million shares after the IPO, valuing the stake at $124 million.  I don't know what his cost was (5 million of the shares had a cost basis of $5/share, 2.5 million were bought on a concurrent private offering on the IPO so presumably cost $10.50, and I don't know what the class B shares cost).   There was a rights offering at $0.56/share in 2010 where I think Greenlight spent $17 million or so bringing up shares owned to 43 million.   And then there was a 1/20 reverse split bringing shares owned by Greenlight to 2.2 million shares.

Anyway, adjusting for the 1/20 reverse split, the $5/share cost translates to $100/share.  The $10.50 IPO price becomes $210, and the $0.56/share they paid for more shares in the 2010 rights offering translates to $11.20/share to the comparable current price of $7.00.

So on this basis, it's hard to say that Greenlight is going to walk away from this at break even.

Anyway, this deal happened at around the time Pacific Ethanol (PEIX) was soaring; Bill Gate's investment company was an investor.   I looked at it then but wondered why it was such a great business; both input and output prices were beyond their control and there clearly was no moat at all (not to mention some very smart people saying what a stupid idea using ethanol for energy was). For Greenlight/Third Point, the plan was probably to just build some ethanol plants and flip them to the public (which they did successfully up to there).

Either way, it's a tiny position for these guys.  It was a nice 'punt' on a popular theme at the time.

Here's a description of BioFuel's business from one of their filings:

BioFuel Energy Corp.BioFuel Energy Corp. was incorporated as a Delaware corporation on April 11, 2006, to invest solely in BioFuel Energy, LLC (the “LLC”), a limited liability company organized on January 25, 2006, to build and operate ethanol production facilities in the midwestern United States. From June 2008 through November 22, 2013, the Company operated two ethanol production facilities located in Wood River, Nebraska, and Fairmont, Minnesota, that produced and sold ethanol and its related co-products. The Company’s ethanol plants were owned and operated by the operating subsidiaries of the LLC, which were party to a Credit Agreement (the “Senior Debt Facility”) with a group of lenders. Substantially all of the assets of the operating subsidiaries were pledged as collateral under the Senior Debt Facility. On November 22, 2013, the Company’s ethanol plants and all related assets were transferred to certain designees of the lenders in full satisfaction of all outstanding obligations under the Senior Debt Facility. Following the disposition of the ethanol production facilities, we are a holding company with no substantial operations of our own. Our headquarters are located in Denver, Colorado. 

At June 30, 2014, the Company retained approximately $8.1 million in cash and cash equivalents. As of June 30, 2014, the Company also retained federal net operating loss (“NOL”) carryforwards in the amount of approximately $181.3 million, which have been fully reserved against.

BIOF basically became a shell company with a tax asset and some cash, and they got a delisting notice from NASDAQ.

And here's the company that it bought (owned mostly by Greenlight):

JBGL
JBGL is a real estate operator involved in the purchase and development of land for residential use, construction, lending and home building operations. JBGL Capital, LP and JBGL Builder Finance LLC were each formed under the laws of the State of Delaware. JBGL Capital, LP was formed in 2008 and JBGL Builder Finance LLC was formed in 2010. Affiliates of Greenlight provided a majority of the initial capital for both entities, with the Brickman Parties providing the remaining capital. 

JBGL Capital (its land development business) and JBGL Builder Finance (its builder operations business) and their affiliates are engaged in all aspects of the homebuilding process, including land acquisition and development, entitlements, design, construction, marketing and sales of various residential projects in master planned communities, primarily in the high-growth metropolitan areas of Dallas and Fort Worth, Texas (“DFW”) and Atlanta, Georgia. 

JBGL currently owns or controls approximately 4,300 home sites in prime locations in the DFW and Atlanta markets. JBGL considers prime locations to be supply constrained lots with high housing demand and where much of the surrounding property has already been developed. JBGL management believes that it is a leading land developer in its markets. JBGL develops lots for both public company builders and large privately held builders. JBGL also owns 50% controlling interests in several builders and provides construction financing for approximately 900 homes annually.

The purchase price was $275 million; $191.8 million in cash (partly funded by a $150 million loan from Greenlight and $70 million from their rights offering) and 11.1 million shares of stock (priced at $7.49/share).   After all is said and done, Greenlight owns 49.9% of GRBK.    The value of GRBK is up, but most of that increase in value came from the rights offering and new stock issued to Greenlight.

JBGL was basically funded by Greenlight to invest in the real estate business in 2008 to take advantage of a distressed industry.  It is run by James Brickman, a long-time friend of Einhorn:

James R. Brickman — Mr. Brickman is the founding manager and advisor of each of JBGL Capital LP, since 2008, and JBGL Builder Finance LLC since 2010. Mr. Brickman is responsible for all major investment decisions, capital allocation, strategic planning and relationships with JBGL’s builders and lead investor. Prior to forming JBGL in 2008, Mr. Brickman was a manager of various joint ventures and limited partnerships that developed and built low- and high-rise office buildings, multi-family and condominium homes, single-family homes, entitled land and supervised a property management company. He previously also served as Chairman and CEO of Princeton Homes Ltd. and Princeton Realty Corporation, which developed land, constructed custom single-family custom homes and managed apartments it built. Mr. Brickman has over 37 years’ experience in nearly all phases of real estate construction, development and real estate finance property management. He received a B.B.A. degree and M.B.A from Southern Methodist University.

Here are the financials of JBGL before the deal from the BIOF rights offering prospectus:

		Three Months Ended June 30,								For the Six Months Ended June 30,								For the Year Ended December 31,
		2014				2013				2014				2013				2013				2012				2011				2010				2009
REVENUES:
Sale of residential units		$	55,048,744			$	37,829,298			$	104,685,088			$	64,958,699			$	168,591,201			$	50,105,030			$	9,085,785			$	864,822			$	—
Cost of residential units			(41,219,387	)			(28,358,191	)			(78,611,754	)			(49,401,195	)			(122,616,113	)			(39,642,357	)			(7,921,806	)			(491,628	)			—
Gross profit on sale of residential units			13,829,357				9,471,107				26,073,334				15,557,504				45,975,088				10,462,673				1,163,979				373,194				—
Sale of land and lots			10,794,690				8,881,770				24,167,258				14,512,393				33,734,513				22,927,080				6,184,206				8,905,967				2,508,650
Cost of land and lots			(8,141,006	)			(5,984,826	)			(17,909,072	)			(8,580,118	)			(21,512,814	)			(15,256,065	)			(3,982,602	)			(5,540,845	)			(1,724,781	)
Gross profit on sale of land and lots			2,653,684				2,896,944				6,258,186				5,932,275				12,221,699				7,671,015				2,201,604				3,365,122				783,869
Interest and fees			305,660				783,757				680,120				1,678,610				3,542,174				7,124,339				2,558,159				137,698				—
Other income			427,732				1,417,600				480,154				1,849,694				1,400,418				3,771,839				1,636,099				225,524				553
			17,216,433				14,569,408				33,491,794				25,018,083				63,139,379				29,029,866				7,559,841				4,101,538				784,422
EXPENSES:
Salaries and management fees – related party			3,213,424				2,079,708				6,747,392				4,227,840				11,266,351				4,370,845				1,886,509				927,736				—
Selling, general and administrative			2,491,408				890,383				4,772,977				2,178,237				6,623,437				3,311,734				1,183,762				1,147,042				566,312
Other expenses			647,077				153,471				953,976				284,576				606,210				404,673				35,737				3,332				—
			6,351,909				3,123,562				12,474,345				6,690,653				18,495,998				8,087,252				3,106,008				2,078,110				566,312
Net income before taxes			10,864,524				11,445,846				21,017,449				18,327,430				44,643,381				20,942,614				4,453,833				2,023,428				218,110
State tax expense			—				59,000				337,790				209,500				327,481				230,411				34,089				41,888				—
Net income			10,864,524				11,386,846				20,679,659				18,177,930				44,315,900				20,712,203				4,419,744				1,981,540				218,110
Less: net income attributable to non-controlling interest			3,454,819				3,772,067				5,921,453				4,471,692				12,308,734				3,517,911				56,382				—				—
Net income attributable to controlling interest		$	7,409,705			$	7,614,799			$	14,758,206			$	13,646,238			$	32,007,166			$	17,194,292			$	4,363,362			$	1,981,540			$	218,110

During the 3Q 2014 conference call, Brickman elaborated on what's different about GRBK:

Our management is very much aligned with our shareholders.  Greenlight Capital is a 49.9% shareholder and my family owns 8.4% of the equity of Great Brick Partners.  Over the last couple of weeks, I’ve received a few questions regarding differences in my ownership percentage in SEC filings compared to the 8.4%.  That is due to some of my family’s ownership being held in the names of my adult children.  Our family in total still owns 8.4%. 

Our goal is to provide superior risk-adjusted returns to our shareholders.  We will accomplish this by focusing on the long-term and not giving too much weight to near-term financial results.  Analysts wanting to see a smooth, linear progression of GAAP earnings quarter-to-quarter may be disappointed.  For example, about 25% of our assets or $75 million is invested in two large neighborhoods that have been under planning and development for two years and have not yet produced any revenue.  We anticipate that both these neighborhoods will come online in 2015. 

Our business model is different than most large public builders.  We are a land development company that also buys controlling interest in local builders, and we make profits in three ways.  First, most of our lots are not owned by our local builders, but by Green Brick.  Green Brick sells lots to these builders at high rates of return.  Second, Green Brick makes first lien construction loans at above market interest rates to our builders.  If our builders can turn their inventory efficiently, their interest cost as a percent of revenue is approximately 4%, which is still typical of most public builders.  Green Brick should make a mid-teen unleveraged return on equity before profit sharing with our builders. 

Third, we do receive profit on lot sales and loans before a builder receives any profit.  Because our builders share the last residual tranche of profit, in other words, sale proceeds from a home, our builders are highly motivated to operate efficiently.

...and later he elaborates:

First, we believe we operate in two of the best housing markets in the country.  Dallas has the best job growth in the country, and Atlanta is the sixth best.  We believe that both of our markets are staged for significant growth.  Large corporations such as Toyota and State Farm are relocating their national headquarters near where we own most of our Dallas lots.  We evaluate every geographical area continuously, but we will not expand into new markets unless we believe they will provide significant future value for our shareholders.
 
  Second, we have some of the best prime lots in supply constrained sub-markets in Dallas and Atlanta.  Two of our largest investments have been in the planning and development process for about two years.  We anticipate that the Village of Twin Creeks in Allen, Texas and Bellmoore Park in Johns Creek, Georgia will deliver their first homes in 2015, but will not be big contributors to our operating results until the second half of the year.  To learn more about these neighborhoods, please visit our website at greenbrickpartners.com.
 
  Three, for our strong operating partners, real estate is a very local business.  We aim to find the very best builders in every geography we enter, and we have award-winning operating partners in the Dallas and Atlanta regions that have been in the business in those markets for decades.  We help our builders with strategic land purchases, product design, capital allocation, and planning, but we leave the day-to-day operations to our builders.
 
  Four, we aim to build a better product and offer it at a fair price to our customers.  We offer niche product designs in both Atlanta and Dallas that appeal to downsizing homeowners and younger professionals, but stay in the affordable range of $350,000 to $600,000 with most of our product line.  Our historical results show that our strategy has been successful, and we will continue to refine it as we move to open even larger planned communities that we’ve just discussed.  

Tax asset
And here's the tax part of all of this (BIOF):

3. Deferred Tax Asset
As of June 30, 2014, the Company had a $63.4 million deferred tax asset related to its NOLs. For accounting purposes, a valuation allowance is required to reduce a deferred tax asset if it is determined that it is more likely than not that all or some portion of the deferred tax asset will not be realized due to the lack of sufficient taxable income. The Company’s financial statements currently provide a full valuation allowance against our deferred tax asset due to the Company’s historical operating losses and, in accordance with applicable guidance in connection with the preparation of the pro forma financial statements, we have not adjusted this valuation allowance. As a result, the deferred tax asset is not set forth on our historical or pro forma balance sheet.

 The NOLs do not begin to expire until 2029. Our ability to utilize our NOLs will depend on the amount of taxable income we generate in future periods. Based on JBGL’s 2013 and year-to-date 2014 taxable income results, management expects that JBGL should generate sufficient taxable income to utilize substantially all of the NOLs before they expire. The Company will evaluate the appropriateness of a valuation allowance in future periods based on the consideration of all available evidence, including the generation of taxable income, using the more likely than not standard.

Since JBGL netted $32 million in 2013, this DTA should be utilized.   Maybe they reverse the valuation allowance soon.  This would add around $2.03/share to the BPS of GRBK.   Of course, this is an undiscounted figure.  If you assume that they can use up the DTAs in six years, you can give it a 30% discount (using a 10% discount rate); in that case the DTA would be worth $1.42/share. 

Book Value per Share

So what is GRBK worth?  From the September 2014 prospectus, the pro forma tangible book value per share was around $4.13/share.   But this was based on certain assumptions about the price of BIOF stock on or around the closing date.  

There's a reason I posted this whole section below: 

From the Prospectus dated September 19, 2014:

The following table sets forth the accretion calculations:

		As of June 30, 2014
		Biofuel Energy Corp. Actual				Pro Forma Combined(1)
		(in thousands, except per share amounts)
Tangible assets		$	8,841			$	345,867
Tangible liabilities			(1,406	)			(216,554	)
Net tangible assets		$	7,435			$	129,313
Divided by shares outstanding			6,238				31,346
Net tangible book value per share		$	1.19  (a)			$	4.13	(b)

Pro Forma Combined Balance Sheet
As of June 30, 2014

		BioFuel Energy Corp. Actual				JBGL Actual				Pro Forma Adjustments				Pro Forma Combined
		(in thousands)
Assets
Cash and cash equivalents		$	8,054			$	17,113			$	61,735	(a)		$	86,902
Restricted cash							2,009								2,009
Accounts receivable							366								366
Inventory:
Completed home inventory and residential lots held for sale							42,776								42,776
Work in process							133,175								133,175
Undeveloped land							61,103								61,103
Investment in direct financing lease							6,389								6,389
Property and equipment, net			57				1,494								1,551
Notes receivable, net							3,800								3,800
Earnest money deposits							5,600								5,600
Other assets			730				1,166				300	(b)			2,196
Total assets		$	8,841			$	274,991			$	62,035			$	345,867
Liabilities and equity
Accounts payable		$	47			$	9,628			$				$	9,675
Accrued expenses			1,359				8,141								9,500
Customer and builder deposits							11,249								11,249
Borrowings on lines of credit							20,102								20,102
Notes payable							16,028				150,000	(c)			166,028
Total liabilities			1,406				65,148				150,000				216,554
Commitments and contingencies
Equity
BioFuel Energy Corp. stockholders’ equity:
Preferred stock
Common stock			54								259	(d)			313
Class B common stock			8								(8	)(e)
Less common stock held in treasury			(4,316	)							4,316	(f)
Additional paid-in capital			191,056				199,058				(271,899	)(g)			118,215
Accumulated deficit			(171,789	)							171,789	(g)
Total BioFuel Energy Corp. stockholders’ equity			15,013				199,058				(95,543	)			118,528
Noncontrolling interest			(7,578	)			10,785				7,578	(h)			10,785
Total equity			7,435				209,843				(87,965	)			129,313
Total liabilities and equity		$	8,841			$	274,991			$	62,035			$	345,867

 You will notice that the book value per share is calculated by using "Total equity" of $129.313 million.  Usually, to calculate BPS, you would not include noncontrolling interest.  It is included sometimes in these offering documents because what was noncontrolling interest before the deal might be converted into(or assumed to be) common post-deal (that's the case with, say, SHAK).  But here, I couldn't find any explanation. 

JBLG announced 3Q earnings and there is another pro-forma balance sheet as of September 2014 filed in an 8-K: 

Pro Forma Combined Balance Sheet

As of September 30, 2014

		BioFuel Energy Corp. Actual				JBGL Actual				Pro Forma Adjustments				Pro Forma Combined
		(in thousands)
Assets
Cash and cash equivalents		$	7,081			$	7,445			$	25,362	(a)		$	39,888
Restricted cash							1,987								1,987
Accounts receivable			5				81								86
Inventory:
Completed home inventory and residential lots held for sale							42,772								42,772
Work in process							155,215								155,215
Undeveloped land							58,447								58,447
Land not owned under option agreements							3,547								3,547
Investment in direct financing lease							5,930								5,930
Property and equipment, net			51				1,667								1,718
Earnest money deposits							7,183								7,183
Other assets			1,693				1,593				(928	)(b)			2,358
Total assets		$	8,830			$	285,867			$	24,434			$	319,131
Liabilities and equity
Accounts payable		$	26			$	14,074			$				$	14,100
Accrued expenses			2,050				10,220				(1,975	)(c)			10,295
Customer and builder deposits							11,397								11,397
Obligations related to land not owned under option agreements							3,547								3,547
Borrowings on lines of credit							25,344								25,344
Notes payable							12,352				150,000	(d)			162,352
Total liabilities			2,076				76,934				148,025				227,035
Commitments and contingencies
Equity
BioFuel Energy Corp. stockholders’ equity:
Preferred stock
Common stock			54								259	(e)			313
Class B common stock			8								(8	)(f)
Less common stock held in treasury			(4,316	)							4,316	(g)
Additional paid-in capital			191,056				201,781				(308,206	)(h)			84,631
Accumulated deficit			(172,393	)							172,393	(h)
Total BioFuel Energy Corp. stockholders’ equity			14,409				201,781				(131,246	)			84,944
Noncontrolling interest			(7,655	)			7,152				7,655	(i)			7,152
Total equity			6,754				208,933				(123,591	)			92,096
Total liabilities and equity		$	8,830			$	285,867			$	24,434			$	319,131

Using the updated total equity amount of $92 million and the same method used in the prospectus (so don't blame me for including noncontrolling interest!), BPS would be $2.94/share.    Adding back the $2.00/share in DTA would give us BPS of $4.94/share or using a discounted $1.40/share DTA would give us a BPS of $4.34/share.  That gives us a valuation of 1.4x or 1.6x BPS.

In the merger proxy, there is a valuation analysis of comps, which is always fun to look at: 

Selected Public Companies Analysis

Duff & Phelps compared certain financial information of JBGL to corresponding data and ratios from the following seventeen publicly traded companies that Duff & Phelps deemed relevant to its analysis:

•

Beazer Homes USA, Inc.

•

D.R. Horton, Inc.

•

Hovnanian Enterprises, Inc.

•

KB Home

•

Lennar Corporation

•

M.D.C. Holdings, Inc.

•

Meritage Homes Corporation

•

NVR, Inc.

•

PulteGroup, Inc.

•

Standard Pacific Corp.

•

Taylor Morrison Home Corporation

•

The Ryland Group, Inc.

•

Toll Brothers, Inc.

•

TRI Pointe Homes, Inc.

•

UCP, Inc.

•

WCI Communities, Inc., and

•

William Lyon Homes

Although none of these companies is directly comparable to JBGL, Duff & Phelps selected these companies for its analysis based on their relative similarity to JBGL. For purposes of its analysis, Duff & Phelps used certain publicly available historical financial data and consensus equity analyst estimates for the selected companies. This analysis produced valuation multiples of selected financial metrics which Duff & Phelps utilized to estimate the equity value of JBGL.

The tables below summarize certain observed trading multiples and historical and projected financial performance, on an aggregate basis, of the selected public companies as of June 6, 2014. The estimates for2014 and 2015 in the tables below with respect to the selected public companies were derived based on information for the 12-month periods ending closest to JBGL’s fiscal year ends for which information was available.

		REVENUE GROWTH																RETURN ON TANGIBLE EQUITY								EPS GROWTH																EBITDA GROWTH																EBITDA MARGIN
		3-YR CAGR				LTM				2014				2015				3-YR CAGR				LTM				3-YR CAGR				LTM				2014				2015				3-YR CAGR				LTM				2014				2015				3-YR CAGR				LTM				2014				2015
High			88.0	%			197.6	%			76.2	%			92.8	%			15.4	%			25.1	%			130.6	%			179.5	%			77.1	%			118.0	%			166.9	%			167.4	%			295.8	%			52.4	%			11.2	%			14.0	%			19.9	%			19.7	%
Low			7.5	%			10.5	%			-0.2	%			11.5	%			-39.0	%			-4.1	%			17.1	%			-18.1	%			-0.6	%			9.5	%			9.8	%			39.5	%			-0.8	%			4.4	%			0.6	%			4.7	%			6.1	%			5.6	%
Mean			23.0	%			45.3	%			27.7	%			24.8	%			0.9	%			8.8	%			61.3	%			99.3	%			33.9	%			37.7	%			77.0	%			99.4	%			85.6	%			25.2	%			5.9	%			10.0	%			12.9	%			13.1	%
Median			21.0	%			38.3	%			25.9	%			19.7	%			4.3	%			7.9	%			53.0	%			97.6	%			30.1	%			29.2	%			61.5	%			92.0	%			58.3	%			22.8	%			6.3	%			11.2	%			12.2	%			13.4	%
JBGL			N/A				193.1	%			14.4	%			50.4	%			7.2	%			9.5	%			N/A				N/A				5.0	%			42.7	%			N/A				110.6	%			1.8	%			40.9	%			15.1	%			19.0	%			16.9	%			15.8	%

STOCK PRICE AS A MULTIPLE OF

TANGIBLE BOOK VALUE

LTM EPS

2014 EPS

2015 EPS

High

3.96x

25.8x

24.1x

37.5x

Low

0.70x

8.6x

10.7x

9.8x

Mean

1.69x

18.3x

16.6x

13.8x

Median

1.66x

19.2x

15.9x

12.0x

METRIC		SELECTED MULTIPLE RANGE
2014 Net Income			14.0x – 15.0x
2015 Net Income			10.0x – 11.0x
Book Value as of April 30, 2014			1.40x – 1.50x

CAGR — Compounded Annual Growth Rate

EPS — Earnings Per Share

LTM — Last Twelve Months

Source: Bloomberg, Capital IQ, SEC filings

Both the mean and median P/B ratios of these home-builders is around 1.7x.  So it looks like GRBK, pro-forma the deal, is trading a little lower than other builders. 

Greenlight Loan

Greenlight loaned GRBK $150 million to complete this deal.

Interest and Repayments
Amounts drawn under the facility will bear interest at 9.0% per annum from October 27, 2014 through the first anniversary thereof and 10.0% per annum thereafter, and the Company will have a one-time right to elect to pay up to four consecutive quarters’ interest in kind. The facility will have no amortization but is subject to mandatory prepayment with 100% of the net cash proceeds received from the incurrence of certain debt by the Company or the issuance of any equity securities. Voluntary prepayments of the facility will be permitted at any time. All prepayments made prior to October 27, 2016 will be subject to a 1.0% prepayment premium.

So this is another lever to enhance value at GRBK.  On the conference call, Brickman said they will do whatever they can to refinance this. 

Low Cost Land

Also, GRBK bought some cheap land during the crisis in 2008, 2009.  Brickman said that they bought a lot of their land a long time ago so they should benefit from that going forward.  I have no doubt that is true, but I was curious and looked at the land inventory figures on the GBRL balance sheet.  

Here it is again, from above:

Their "inventory" back in 2009 and 2010 was only $10-12 million compared to $243 million as of June 2014.  But sure, more of current inventory is going to be developed land and homes (versus, probably a lot of raw land back in 2009/2010).  Undeveloped land inventory was $58 million in June 2014.  $10-12 million doesn't sound like all that much even if it's raw land at distressed prices.  Maybe they were really, really distressed. 

Also, in the cash flow statements from 2011 to 2013, cash used to purchase inventory was $23 million, $98 million and $96 million.  So that's a lot of inventory building in the past two years even, accounting for a large portion of inventory on the balance sheet. 

Check out the cash flow: 

COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2013, 2012 and 2011

		2013				2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	44,315,900			$	20,712,203			$	4,419,744
Adjustment to reconcile net income to net cash used in operating activities:
Depreciation expense			291,857				53,289				8,142
(Increase) decrease in:
Restricted cash			(1,063,160	)			(320,095	)			—
Accounts receivable			(333,226	)			624,021				(100,979	)
Inventory			(96,206,138	)			(98,154,339	)			(23,245,952	)
Earnest money deposits			(1,982,640	)			(1,309,366	)			—
Other assets			(981,731	)			130,858				(182,088	)
Increase (decrease) in:
Accounts payable			4,137,339				4,257,636				220,900
Accrued expenses			3,956,032				1,156,370				192,234
Customer and builder deposits			(1,444,530	)			9,150,720				1,154,600
NET CASH USED IN OPERATING ACTIVITIES			(49,310,297	)			(63,698,703	)			(17,533,399	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in direct financing leases			—				(13,284,446	)			—
Proceeds from sale of direct financing leases			3,168,000				1,767,150				—
Issuance of notes receivable			(4,200,840	)			(17,788,385	)			(35,276,206	)
Repayments of notes receivable			11,916,940				32,317,672				18,103,264
Acquisition of property and equipment			(687,115	)			(490,784	)			(26,444	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			10,196,985				2,521,207				(17,199,386	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from lines of credit			39,000,000				28,203,718				4,675,000
Proceeds from notes payable			21,462,727				22,876,514				5,102,796
Repayments of lines of credit			(28,336,229	)			(24,609,454	)			(1,725,000	)
Repayments of notes payable			(16,309,273	)			(5,152,371	)			(2,178,790	)
Contributions from controlling interest members			57,285,535				41,500,000				29,847,500
Contributions from non-controlling interest members			1,756,417				1,214,766				424,587
Distributions to controlling interest members			(19,477,755	)			(1,028,437	)			(357,130	)
Distributions to non-controlling interest members			(6,749,083	)			(2,789,978	)			(31,298	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			48,632,339				60,214,758				35,757,665
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			9,519,027				(962,738	)			1,024,880
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			7,164,397				8,127,135				7,102,255
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	16,683,424			$	7,164,397			$	8,127,135
Cash paid for:
Interest		$	496,574			$	345,584			$	23,695
State income taxes		$	664,880			$	137,620			$	10,344

So anyway, there is probably a lot of low cost inventory on the books, but there is also a lot of inventory recently acquired. 

Liquidation Value

Also, there is a view that their owned lots are worth a lot more than the balance sheet value.  This is probably true, particularly for the stuff bought in 2008, 2009 etc.  But maybe not so much for what was recently acquired.  A lot of private equity and others have been running around buying up land since the crisis, right? 

Anyway, I think the idea is that they have been selling developed lots for $100,000/lot and they own 3,517 plots.  That comes to around $352 million.   First of all, the problem with this is that the lots sold are developed.  Land developers buy raw land, develop it, and then sell it.  It does cost money to develop land (zoning, clearing, septic/utilities etc.)

Here is the breakdown of their inventory as of September 2014:

  Completed home inventory and residential lots held for sale:   $43 million
  Work in process:  $155 million
  Undeveloped land:  $58 million 

But let's just say the lots are worth $352 million.  Add cash as of September 2014 of $40 million and then deduct $188 million in total debt and we get around $204 million.  With 31.3 million shares outstanding, that comes to $6.52/share  Add $2.00/share in DTA and you get $8.52/share.  Add $1.40/share in DTA and you get 7.92/share.  (The balance sheet is posted above so you can do your own variations of this).   This doesn't take into account any tax that may have to be paid on gains in sale of the lots nor does it take into account possible costs to develop the raw inventory.  

I have my reservations about this sort of valuation because of the potential development costs not included and other assumptions (that each plot is worth $100,000), but it can be a sanity check.  

EBITDA Valuation
In the conference call, Brickman said that they don't want to give guidance, but there was guidance with respect to JBGL in the prospectus.  In the above table, JBGL revenue growth is expected to be +14.4% in 2014 (already more than 20% year-to-date through September) and +50.4% in 2015.   EBITDA margin is expected to be 16.9% in 2014 and 15.8% in 2015.   These aren't official guidance to investors so maybe we shouldn't lean too hard on them.  Merger proxies often have projections that management uses to evaluate deals etc.

Anyway, 2013 revenues were around $200 million for JBGL in 2013 (just adding the home sales and land sales).  Assuming this grows +14.4% for the full year 2014 and then +50.4% in 2015, that gets us to revenues of around $344 million.  And put a 15.8% EBITDA margin on that and we get 2015 expected EBITDA of $54 million.

With the stock trading at around $7.00/share,  that's a market cap of $219 million.  Add $188 million in total debt and $7 million in noncontrolling interest less $40 million in cash we get $374 million in EV.   That values GRBK at 6.9x EV/EBITDA.   At 10x EV/EBITDA, the stock would be at $11/share; this is excluding cash and DTA.

You can do the same sort of exercise using earnings, but I thought EBITDA would be easier.  For earnings, you can just add back the losses generated by the old Biofuel, which should roll off to zero.  But with noncontrolling interest, taxes and whatnot, I figured just looking at the EBITDA would be easier.

You can get to EPS using the EBITDA above, but the trick would be figuring out what the deduction for noncontrolling interest would be; it doesn't seem to be a linear relationship.

Conclusion

So this is kind of interesting.  Housing hasn't really recovered as many assumed it would.  Buying into sectors that have been down and out for a long time are usually a better idea, I think, than jumping into something when the down cycle may have just begun.  For example, crude oil is down a lot in the past few months, but I don't know if jumping in now would be a great idea.  If there is something interesting, of course, it's always a good idea to get in and the lower the price, the better. 

But what I mean is that sometimes the best investments are found not after an immediate crash/collapse, but after an extended period of time after the bust.  Sort of like when Loews was buying unwanted rigs.  The energy industry was down and out for a long time.  I think the rig count has been going down for years at that point when L started scooping up unwanted rigs. 

The recent rush into energy by private equity funds and others seems to have come after the crash of crude from $150/barrel.  And the natural gas investments increased a bunch when gas prices collapsed.   

Some cycles are really long so it may take years for these investments to pan out. 

In this sense, housing is interesting because it's been on it's back for a few years now. 

Is GRBK the right way to play it?  I'm not sure. 

But what I do think is interesting is that it is sort of an owner/operator situation.  Greenlight owns 49% and Brickman owns 8.4%.   The 49% ownership pretty much guarantees that GRBK will be run with smart capital allocation (or at least an attempt at that). 

It is a special situation in that it is a reverse merger (or back-door listing), not that that works out all the time (very often it doesn't).  It's an opportunity to invest in a private deal that Greenlight invested in for a reasonable price.   It's true that the previous JBGL owners cashed out $192 million (mostly Greenlight), but Greenlight still has more than $100 million in GRBK stock (and a $150 million loan yielding 9%; they paid $25 million for 5 million shares in the rights offering last year and accepted 8.5 million newly issued shares valued at $64 million as part of the deal). 

Einhorn called this a win-win deal.  But of course it is.  It's a win for Einhorn because he cashed out of JBGL, and it's a win for Einhorn because he found a solution to the "Biofuel problem" and avoided delisting and will be able to realize the DTA. 

Current and future investors might win too.  They do have two large developments at a higher price point than previous ones that will come online that should fuel growth for a few years.

I played with some numbers above, but I don't know if I got everything right (or anything!); it's a messy situation.  But that's why it's an interesting one, right?  Particularly, the EV/EBITDA seems quite low (but it does assume 50% sales growth in 2015 which may or may not happen!).  There is something to be said about the low noncontrolling interest on the balance sheet versus the high amount of income deducted for them; this may distort the EV/EBITDA too.

On the other hand, the market may just not be discounting a 50% growth in revenues for 2015, which admittedly may or may not happen.

All we got from Brickman on the conference call is that there are two big, new developments that will feed growth for years to come (that opens in 2015).

Stay tuned!