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Green Brick Partners Inc  (NASDAQ:GRBK)
Q1 2019 Earnings Call
May. 03, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone and welcome to Green Brick Partners' Earnings Call for the First Quarter Ended March 31st, 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 and 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 Thurday, 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.

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

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 web page at greenbrickpartners.com. At the top of the web page, please click on investors and 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'm pleased that we had the best first quarter in our Company's history with a 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 growing through a tougher market. Best of all around 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 home builder brand Trophy Signature Homes is off to a great start and we expect continued momentum into the second half of 2019.

Please look to Slide 5. Two of the best markets in the country are 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 6, you can see that Dallas continues to be the Number 1 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 7 demonstrates what we mean by A-rated sub-markets. John Burns Real Estate Consulting has published maps of our Dallas and Atlanta metropolitan areas, where they have designated grades on sub-markets of most desirable A markets, through most affordable F markets, based on a variety of subjective factors such as quality of schools, proximity of jobs, the existence of infrastructure for quality of life.

We have taken those maps and overlaid the locations of our Green Brick communities with green dots. As you can see, the preponderance of our communities are in the very best A lots, our more desirable sub-markets. What the prior graphs do not tell you is how supply constrained most prime A locations still are. Green Brick owns or controls over 5,800 lots in the Dallas metroplex and almost 1,000 lots in Atlanta, primarily in A locations. Some markets have under a two-year supply of lots, meaning these lots are currently under-supplied. We think that bodes well for the future. Slide 8, takes a closer look at our Company growth story of the annual revenues and the related investment in land and land development. I look at the chart and you can see the direct correlation between our growth and total lots owned and controlled with resulting growth in our annual revenues.

Over the last 12 months, we've grown our total revenues by 31% and our total lots owned and controlled by 34%. Slide 11, further highlights our significant diversification efforts. I want to thank the entire Green Brick team for their hard work and great results.

Next Jed Dolson, President of the Texas Region, will discuss growth drivers and diversification efforts. Sorry Jed, for interrupting your day in the sun here. Go ahead, Jed.

Jed Dolson -- President of Texas Region

Thanks, Jim. Green Brick, is truly one of the best growth stories in the public homebuilder space. Take a look at Slide 9, titled growth drivers. The chart shows the growth in the last 12 month home closing revenues from Q1 2017 to Q1 2019, is 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 31st, 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%.

During the 12 months ended March 31st, 20 19, we increased our number of units started by 41% versus the 12 months ended March 31st, 2018 with an increase to 1,644 units started. In fact, we have already, we have averaged starting over 410 units per quarter from Q2 2018 through Q1 2019. As of March 31st, 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 low -- 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 Homes in 2018 we have entered Florida and specifically, the age-targeted segment. After 11 months GHO has already -- is already 13% of consolidated homebuilding revenues over the last four quarters. During the second half of 2019, we will see our first closings from Trophy Signature Homes, offering entry level price points and affordable first time move up price points. Over the over the last four quarters we grew in three states with 19% growth in Texas, 10% growth in Georgia and 13% of new revenues from our acquisition of GHO Homes in Florida.

Slide 12 demonstrates that our range of homes and diversified buyer banks have grown our revenues and provided stable earnings by not concentrating on any one home buyer segment. We now address five distinct customer segments which all experienced strong revenue growth into Q1 2019. Our Top 3 customer segments saw growth over the last 12 months ranging from 11% to 56%, but please remember what you saw back on Slide 8. Most of our communities are located in desirable A sub-market locations. The additional move to include different consumer segments and product types are part of Green Brick's long -term strategy to diversify offerings and limit risk without reliance on consistently growing sales, prices or a single group of home buyers.

Next Rick Costello, our CFO will discuss our first quarter results in more detail.

Richard A. Costello -- Chief Financial Officer

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 2019 versus Q1 of 2018 and year end, 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 home started up 41%. The dollar value units in backlog increased by 36% year-over-year. Our portion of pre-tax income was up 12.7% for the quarter and our net income was up 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 homes, 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 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 $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 approximately $307.5 million, an increase of 36% from March 31, 2018. At March 31, the average sales price of those homes in backlog was approximately $467,000, an increase of 1.6% compared to the prior year.

Let's introduce and review some of our key growth metrics on a last 12-months basis. Regarding sales, net new orders for the last 12 months stand at 14,007 homes up 16% from 12,010 homes at the end of Q1 of '18. Again our backlog is up 36% year-over-year. For Q1 of 2019, Green Brick had an average of 78 selling communities, a year-over-year increase of 42%. Regarding lots inventory, the number of lots owned and controlled has grown to just under 8,500 lots, up from about 6,300 lots from the year ago period for an increase of 34% as of March 31, 2019. And this was accomplished despite starting almost 16,050 homes in the last 12 months. Homes under construction increased 54% to 11,070 units as of March 31 compared to 760 units as of March 31, 2018. In the last 12 months as referred to we started 16,044 homes versus 11,066 homes as of March 31, 2018, an increase of 41%.

During Q1, our homebuilding gross margin declined to 20.8% for the first quarter of 2019 from 25.9% for Q1 of 2018. First, please note that we have reclassified our sales commission expenses from cost of residential units to SG&A expense to be more readily comparable with the majority of our peers. Prior year amounts were also restated but this does not affect net income in any period. Sales commission expense was 4% of revenue in Q1 of 2019.

Second, our decline in gross margin percentage during Q1, 2019 is attributable primarily to increased incentives to customers to promote sales pace. This is where it's critical to understand the corresponding decrease in income allocated to our non-controlling builder partners. From Q1 of 2018 to Q1 of 2019, our non-controlling interest declined by 2.4%, which is approximately half of the gross margin decline. Our business model was established to incentivize our builders by sharing income after Green Brick earns lot profits and a high rate of return on our capital allocated to each builder. When there is margin compression which impacts the profitability of one of our builders, that builder shares in the margin to decline to the extent of their last in the waterfall interest of typically 50%. So only half of any house margin decline is incurred by Green Brick partners. Our business model is working as demonstrated with these strong results.

Now move to Slide 14, which demonstrates our performance as measured against our peers. The chart begins on the left with two critical measures of pre-tax income performance. Pre-tax income takes into consideration building margins as well as operating expenses. As you can see pre-tax income as a percentage of revenues or our pre-tax margin stands at 10% even for the last 12 months, this puts us far above our small cap and mid-cap peers. The middle measure is adjusted pre-tax income performance based on return on total invested capital. Again, Green Brick's return of 10.5% for the 12 months stands heads and shoulders above our small cap peers and as reflected on pre-tax income, ROIC and comfortably higher than our mid-cap peers. Most important of course is the bottom line net income. Green Brick's 2019 EPS for Q1 was $0.25 per share, an increase of 13.6% over Q1 of '18. Our net income return on equity stands at 11.7% for the 12 months ended March 31, 2019, which is in-line with our mid cap and small cap peers. In-line, OK, but let's consider Slide 15, for the rest of the story.

And as shown on Slide 15, our return on equity has been accomplished despite keeping one of the lowest net debt to capital rates of any public builder. We have been able to grow rapidly while increasing our financial leverage through low interest rate revolving lines of credit. As of March 31, 2019, we have continued that gradual increase to the point where our net debt to capital ratio where net debt is debt minus cash has increased to 27.5%.

Note that other peer builders have leveraged to an average of 39%, but look more closely at the chart, the slide shows that the seven builders on the left side or the wrong side of the chart are all small cap and mid cap builders. But net debt to capital ratios of those seven peers ranges from 37% to 62% for an average of 48%. So they're accomplishing a return on equity that's similar to our return on equity but with over 75% more financial leverage than as Green Brick.

I'll now turn the call back over to Jim to wrap up our part of the call prior to opening things up to Q&A. Jim?

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

Okay, thanks Rick. In summary, our team did a really 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 1st, 2019 to 92 communities by the 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 a 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 standardized operating system utilized by all of our builders. Our business is now scaled to where our entitled and mortgage business are expanding rapidly and profitably with little risk. Our entry level of 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 Brrick team for their hard work and great results. I'll now turn the call back to the operator.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions) Your first question comes from Michael Rehaut with JPMorgan. Please go ahead. Your line is open.

Maggie Wellborn -- JPMorgan -- Analyst

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?

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

Yeah, sure I'll -- this is Jim, and anyone else in the management team can chime in with me. Like most builders, we increased incentives. Again it's -- this is as much art of science trying to figure out the best way to match pace versus price. The quarter is over. In April, we're actually seeing increased interest on the demand side and we are 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 at the earliest in the fourth quarter. So this is a lagging indicator but we'll probably not see really impact financial statements until later on in the year.

Richard A. Costello -- Chief Financial Officer

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

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

I think, the other thing that we and probably every builder experiences is we open new communities, it's always slower (inaudible) to start up a community than when you're in that little time period. And as we grow more communities, our absorption rate goes down a little just because we're opening so many new communities rather than most of the periods you probably bench us against.

Maggie Wellborn -- JPMorgan -- Analyst

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

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

No.

Jed Dolson -- President of Texas Region

This is Jed. 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 our top line by more communities. So we actually see, we think we've hit the bottom at least for a while on incentives.

Richard A. Costello -- Chief Financial Officer

And something else Maggie that's happening there with the slower level of starts and competitors not having the strong community growth, if there's 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 reliefs 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.

Maggie Wellborn -- JPMorgan -- Analyst

Okay. Thank you.

Operator

Tim Daly from Deutsche Bank. Please go ahead. Your line is open.

Timothy Daley -- Deutsche Bank -- Analyst

Hi, everyone. Thanks for the time.

Richard A. Costello -- Chief Financial Officer

Hey, Tim. Thanks for being on the call.

Timothy Daley -- Deutsche Bank -- Analyst

Of course. So I guess, my first question is so strong community count 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, if you could to help us understand the moving parts underpinning these expectations in terms of operating margins, obviously given the restatement of the commissions, kind of just probably going to be some more movement in 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.

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

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

Richard A. Costello -- Chief Financial Officer

I think, the you'll see when 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 is anywhere from 4% to 4.4%. And I think it's probably be a lot more consistent at around 4% as we move forward and fully have GHO and all of our numbers.

This is all within our expectation, because we knew we were going to have a great top line growth and we knew we were coming into some tougher margin regions. I think we're probably going to be skewed more heavily toward 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 up now. But our pace has been very consistent from a start standpoint at just over (ph) 400 a quarter. So I think you'll you'll see that be a good measure going forward from a top line standpoint.

Timothy Daley -- Deutsche Bank -- Analyst

Right. Now 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 really tough comps in Q1 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 you know obviously just with Trophy Signature coming in and obviously, GFO, GHO getting lapped, if you could help us out with some sort of directional absorption pace, that would be great.

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

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're looking at Green Brick versus peers that are -- if they are having stable community growth or in some cases negative community count growth. Our investment in these -- significant growth in our new communities that investment is already on our balance sheet right now. We're just starting these houses, these -- all of that money that's on our balance sheet is not going to produce really any returns until much later this year or into 2020. So, you know we think our metrics are looking really great relative to peers but if you really anticipate how we front, how you have to front load these investments these communities and the lagging time in these communities to pretty financial results, you know, we think investors will be very pleased in 2020.

Timothy Daley -- Deutsche Bank -- Analyst

Alright, great. And then if I could just kind of ask one more here. So I saw the announcement of the Trophy Signature Model getting opened a couple days ago. So congratulations on that. But just kind of could you help us 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, you know, start pace up 41% year-over-year. Very impressive. How many of those were Trophy Signature, if you could provide that.

Jed Dolson -- President of Texas Region

Very few of those were Trophy Signature, just because the communities -- this is Jed, the communities -- the trophies 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 that --- most of the growth was organic growth through our other divisions.

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

Yeah. Trophy is a kind of a case study what I was just talking about doing community count, Jed, what do we have 1,300 owned -- and owned and option lots, many of which are owned. We 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.

Timothy Daley -- Deutsche Bank -- Analyst

Great. Thanks for the time. Appreciate it.

Jed Dolson -- President of Texas Region

Thanks Tim.

Operator

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

Scott Schrier -- Citi -- Analyst

Hi, good afternoon. I wanted to ask a little bit more on the incentives. I'm 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 4Q18 specs in certain markets. Can you speak to the extent that this might have impacted your business?

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

Yeah, a little bit, not probably as granular-ish 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 two-fold; 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 A location where we are building a townhouse but they were having options and 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.

Scott Schrier -- Citi -- Analyst

Got it. And then so more on the (ph) attached 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.

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

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 we are -- I was just in Atlanta last week and we're in this -- we haven't even sheet rocked units. We have 28 homes under construction and we've pre-sold about 20 of them. So -- but again, that's going to be a longer cycle thing -- a longer cycle product. But the margins are good and it looks like the demand is great.

Scott Schrier -- Citi -- Analyst

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

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

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

Jed Dolson -- President of Texas Region

Yeah, well I mean, we don't break revenue growth out by builder, but I could, you know we expect Trophy to go from you know, probably 50, 60 closings this year to 250 next year at least. So you can kind of see the map and figure out how much more capital we'll be putting out and to do that will be modestly raising debt of the -- 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 we're -- by the time we start selling, we actually have a lot of inventory, a lot of whip the ground. So we'll be a substantial investment once you start seeing those communities pop open.

Scott Schrier -- Citi -- Analyst

Great. Thanks a lot.

Operator

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

Carl Reichardt -- BTIG -- Analyst

Thanks. Hi guys. I wanted to ask Jim more -- if 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 3 or 4 quarters pretty even or is there a front end or back end load in the community count?

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

It's fairly even as we go from quarter to quarter but again it's you know, 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 the Q1 of 2020.

Carl Reichardt -- BTIG -- Analyst

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

Jed Dolson -- President of Texas Region

Carl, this is Jed. It's going to be more of the former. I'm sure you're familiar with meritorious, Live Now product who by year end will be in at least 2 if not 3 maritime communities as a side by side builder with our version of live now. In Carl, the other thing that's active a lot of the lot inventory a lot of the community count growth that 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 were often in locations which are going to be not a first time home buyer but a first time move up buyer. It's 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.

Carl Reichardt -- BTIG -- Analyst

Okay. Thanks Rick. And if I can squeeze one more in just on the townhome side, again sort of looking at the customer the -- 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?

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

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 for finding divorce As -- and other kind of buyers that are you know seeking out the school. So it's unbelievably diverse type buyer, a much more so than our Trophy type homebuyer.

Carl Reichardt -- BTIG -- Analyst

Okay, thanks, Jim. I appreciate it. Thanks guys.

Operator

Bill Dezellem with Tieton Capital. Please go ahead your line is open.

Bill Dezellem -- Tieton Capital -- Analyst

Thank you. I had a couple of questions. The first one relates to your lot prices, would you discuss the increase that you're 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.

Jed Dolson -- President of Texas Region

Yeah. This is Jed. So you know as Jim mentioned in some of these sub-markets like Alpharetta and Atlanta or you know a our 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.

Bill Dezellem -- Tieton Capital -- Analyst

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, that all other things being equal that would be a squeeze on margins?

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

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 deal monetizing their product to lower the construction costs to maintain margin.

Jed Dolson -- President of Texas Region

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's a -- with 70-75% of homes delivered being from our existing inventory, it's, it's not such a dynamic increase as you would think.

Bill Dezellem -- Tieton Capital -- Analyst

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

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

First of all this is Jim, our cancellation rates are very low, around 15%, so that doesn't that 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 his buying a home so that might be responsible for some of the uptick but it's still we have very low cancellation rates.

Jed Dolson -- President of Texas Region

Yeah,and it may have been up a year-over-year from 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 that's that means that they can actually afford more than perhaps if they came in the sales office in Q4.

Bill Dezellem -- Tieton Capital -- Analyst

Thank you and then one more follow up as a point of ignorance. Again what, what would you consider a normal environment cancellation rate if that, 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 so that may have helped, but is there a normal seasonality there?

Jed Dolson -- President of Texas Region

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 a contract to time of delivery.

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

And we -- you know 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.

Bill Dezellem -- Tieton Capital -- Analyst

Great. Thank you all for the perspective.

Jed Dolson -- President of Texas Region

Thank you.

Operator

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.

Duration: 46 minutes

Call participants:

James R. Brickman -- Co-Founder, Chief Executive Officer and Director

Jed Dolson -- President of Texas Region

Richard A. Costello -- Chief Financial Officer

Maggie Wellborn -- JPMorgan -- Analyst

Timothy Daley -- Deutsche Bank -- Analyst

Scott Schrier -- Citi -- Analyst

Carl Reichardt -- BTIG -- Analyst

Bill Dezellem -- Tieton Capital -- Analyst

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