Earnings Call Transcript - SDHC Q1 2026

Operator, Operator

Hello, everyone. Thank you for joining us, and welcome to Smith Douglas Homes First Quarter 2026 Earnings Call and Webcast. I will now hand the conference over to Joe Thomas, SVP of Accounting and Finance. Joe, please go ahead.

Joe Thomas, SVP, Accounting and Finance

Good morning, and welcome to the earnings conference call for Smith Douglas Homes. We issued a press release this morning outlining our results for the first quarter of 2026, which we will discuss on today's call and which can be found on our website at investors.smithdouglas.com or by selecting the Investor Relations link at the bottom of our home page. Please note, this call will be simultaneously webcast on the Investor Relations section of our website. Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating goals and performance are forward-looking statements. Actual results could differ materially from such statements due to known and unknown risks, uncertainties and other important factors as detailed in the company's SEC filings. Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be found in our press release located on our website and our SEC filings. Hosting the call this morning are Greg Bennett, the company's CEO and Vice Chairman; and Russ Devendorf, our Executive Vice President and CFO. I'd now like to turn the call over to Greg.

Greg Bennett, CEO & Vice Chairman

Good morning, and thank you for joining us today to review our results for the first quarter of 2026 and provide an update on our operations. Smith Douglas Homes generated $4.3 million in pretax income for the quarter, net income of $0.06 per share. We delivered 624 homes, which came in at the high end of our guidance range, while home closing gross margin exceeded expectations at 19.6% on a GAAP basis. For the quarter, we generated 981 net new orders, up 28% from a year ago and a new quarterly record for the company. While order activity remained choppy throughout the quarter, we experienced a sequential improvement in our sales pace each month of the quarter, culminating in a sales pace of 4 homes per community in the month of March. Financing incentives continue to be a key selling tool as buyers remain motivated to own a home, provided they can secure a monthly mortgage payment that fits their budget. We are encouraged by the price elasticity we experienced during the quarter as incremental adjustments in pricing led to an uptick in demand. We view this as an indicator that underlying demand remains intact across our markets despite broader macroeconomic uncertainty. From an operational standpoint, we remain focused on a pace-over-price philosophy, which means maintaining a consistent cadence of starts, driving efficient inventory turns and moving toward a more presale-oriented backlog. Our average build time was 57 days during the quarter, consistent with the prior period, and we continue to view our ability to deliver homes quickly and reliably with an offering of home choice and personalization as a key competitive advantage. Our land-light strategy also remains central to how we operate. By relying on third-party lot developers, we're able to allocate capital efficiently and maintain flexibility through varying market conditions. We believe this approach positions us well to manage risk while continuing to scale the business. We also made progress on our growth initiatives during the quarter. Community count expanded to 108 active communities across our markets, up 24% from a year ago, and we continue to ramp operations in our new markets such as Dallas, Chattanooga, Greenville and the Alabama Gulf Coast. Our experience in Houston continues to demonstrate that our operating model translates well beyond our legacy footprint, and we remain focused on executing a disciplined and opportunistic expansion strategy over time. As we move through the spring selling season, we are encouraged by sales orders generated during the quarter, which helps rebuild backlog and provide momentum heading into the second quarter. We have continued to see encouraging traffic and order activity early in the second quarter, although demand remains variable week-to-week. We will continue to evaluate pricing and incentives at the community level and adjust as needed to maintain the pace required to support our operating model. While macro conditions remain dynamic, employment trends have been relatively resilient, and we continue to see motivated and engaged buyers in our markets. We believe our focus on attainable pricing, personalization and value puts us in a good position to compete for these buyers and drive market share gains over time. Finally, I'd like to thank all of our team members for their hard work during this quarter. We challenged everyone to focus on getting off to a strong start this year, and our results this quarter showed they were up to the challenge. With that, I'd like to turn the call over to Russ, who will provide more color on our financial results this quarter and give an update on our outlook.

Russ Devendorf, Executive Vice President & CFO

Thanks, Greg, and good morning. I'll highlight our results for the first quarter and then conclude my remarks with an update on what we are seeing so far this year and our outlook for the second quarter. We finished the first quarter with $206.4 million in revenue on 624 closings at the high end of our guidance range with an average sales price of $331,000. Our home closings gross margin was 19.6% on a GAAP basis and adjusted home closing gross margin was 20.3%, which adds back impairments, interest and cost of sales and purchase accounting adjustments. During the quarter, gross margin benefited by 170 basis points from the reduction of land development accruals on the closeout of several communities. Our margins continue to reflect the use of incentives and targeted pricing adjustments to support affordability and maintain sales pace. During the quarter, closing costs, price discounts and the cost of forward commitments totaled 730 basis points, which compared to 430 basis points in the year‑ago period and 680 basis points sequentially from the fourth quarter of 2025. Selling, general and administrative expenses for the quarter were $35.9 million or approximately 17.4% of revenue, up $2.9 million compared to the same period last year, reflecting continued investment in our growth markets as well as the impact of lower average sales price. Pretax income for the quarter was $4.3 million, resulting in net income of $0.06 per share. Given the nature of our Up‑C organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas Homes Corp. and the noncontrolling interest of Smith Douglas Holdings LLC. Because a significant portion of our earnings is attributable to LLC members and not taxed at the corporate level, the income tax impact reflected in our financial statements can differ from more traditional C corporations. For that reason, we also present adjusted net income, which assumes a blended federal and state effective tax rate of 26.6% as if we operated as a fully public C corporation, which we believe provides a more meaningful comparison to peers. For the quarter, adjusted net income was $3.2 million compared to $14.7 million in the same period last year. Turning to orders, we generated 981 net new home orders during the quarter, an increase of 28% versus the year‑ago period. We ended the quarter with 869 homes in backlog with an average sales price of $332,000. In addition to backlog, we also had 42 home reservations at the end of the quarter. These reservations allow our buyers to take advantage of buying a built‑to‑order home while also benefiting from a guaranteed mortgage rate when they close. We expect most of these reservations to convert to new home orders in the second quarter. Turning to the balance sheet, we remain in a strong financial position. We ended the quarter with $28 million of cash and $68.5 million of total debt with approximately $195 million available under our revolving credit facility. Our debt‑to‑book capitalization was 13.6% and net debt to net book capitalization was 8.5%, reflecting our continued conservative approach to leverage. Our land‑light strategy remains a core component of our operating model with the majority of our lots controlled through option agreements, allowing us to maintain flexibility and deploy capital efficiently. As Greg previously mentioned and I explained on our fourth quarter call, I want to reiterate that our pace‑over‑price philosophy continues to guide how we manage the business. In the current environment, our focus remains on maintaining absorption and inventory turns even if that requires some pressure on margins in the short term. We believe maintaining sales pace allows us to preserve market share, generate cash flow and continue investing in our community pipeline, which ultimately drives scale and stronger returns over the full housing cycle. From a broader macro perspective, the housing market continues to operate in a challenging environment, driven primarily by affordability pressures and elevated mortgage rates. Recent economic data has been mixed and geopolitical developments continue to contribute to uncertainty. We are also monitoring labor market trends closely as employment remains a key driver of housing demand. Our capital allocation priorities remain unchanged. We will continue to prioritize investing in our land pipeline and community growth while maintaining a conservative balance sheet, and we will also remain opportunistic with share repurchases. During the first quarter, we began executing on our share repurchase authorization and continue to repurchase shares into the second quarter. Including repurchases completed in April, we have repurchased approximately $10 million of stock at an average price of $13.28 per share. We believe these repurchases represent an attractive and disciplined use of capital without limiting the financial flexibility to support our long‑term growth strategy. For the second quarter, we currently expect closings between 725 and 800 homes, average sales price between $325,000 and $330,000 and gross margin between 17% and 17.5%. Given the continued variability in demand conditions, we are not providing full‑year guidance at this time. We believe the primary risk to our outlook remains tied to macroeconomic conditions, including mortgage rates, consumer confidence and employment trends. That said, we believe our affordable product offering, land‑light strategy and disciplined operating model position us well to continue gaining market share over time. With that, I'll turn the call over to the operator for instructions on Q&A.

Operator, Operator

Your first question comes from the line of Michael Rehaut with JPMorgan.

Nick Kalra, Analyst, JPMorgan (on behalf of Michael Rehaut)

It's Nick Kalra on for Michael. I wanted to start by asking on the gross margin piece. You called out some moving pieces, but I would really appreciate any extra color that you have either on the incentive environment and pricing considering ASPs for the first quarter were toward the lower end of your guide, as well as on the cost side. Any color you can provide on construction costs, labor, etc., would be really helpful.

Russ Devendorf, Executive Vice President & CFO

Guidance on a GAAP basis came in at the high end and we had a 170 basis point benefit related to land development accrual reversals. When we close out communities, we typically reserve in land development for any costs that may come in over the next three to six months; some communities closed out late last year and those accruals reversed in the quarter. If you back out that 170 basis points, our margin would have been roughly 18.1%, which still was in the high end of our guidance range. Regarding additional costs, as I mentioned, there were 730 basis points impacted by closing costs, incentives for forward commitments and price discounts. To remind everyone, price discounts and forward incentives reduce revenue, which lowers ASP, while closing costs run through cost of goods sold. That metric was up sequentially and year‑over‑year. From a direct cost perspective, we are seeing some benefit; direct costs are a bit better year‑over‑year. The larger driver of margin pressure remains lot costs. Lot costs as a percentage of revenue are up about 300 basis points versus last year, reflecting higher bases from land deals entered into over the last couple of years.

Nick Kalra, Analyst, JPMorgan (on behalf of Michael Rehaut)

Got it. Helpful. And then on anything you could provide? I think you mentioned in your prepared remarks that demand is still looking a little choppy week‑to‑week. Any color you can provide on that, either on a sequential basis, just a couple of weeks in, but relative to March? Or anything you could provide on April to date, that would be helpful from a demand perspective.

Greg Bennett, CEO & Vice Chairman

Yes. Thanks for the question. We're seeing seasonal traffic. We had strong traffic through March. April has been a slight decline, but still seasonally good. As we've gone through spring break and other disruptions, traffic has held pretty steady, maybe down 6% to 8% from what we were seeing earlier.

Operator, Operator

Your next question comes from the line of Mike Dahl with RBC Capital.

Stephen Mea, Analyst, RBC Capital (on behalf of Mike Dahl)

You've actually got Stephen Mea on for Mike Dahl today. I was hoping we could talk a little bit about the SG&A side of things. I totally understand you are in a growth phase and there are lifecycle charges as you're opening new divisions and getting heads in place. I was wondering if you could give us a little more of an overview on where you are in those lifecycle stages. Is that cost base going to keep ramping, or is that something that might start to moderate in the coming quarters? A qualitative overview would be helpful.

Russ Devendorf, Executive Vice President & CFO

Sure. As a percentage of revenue, SG&A should start to moderate because, in gross dollars, the increase was only $2 million to $3 million. Part of the percentage increase reflects lower ASPs, which reduces revenue. As I mentioned earlier, increased incentives, forwards and price discounts push ASP down and thus increase SG&A as a percentage of revenue. We did open new divisions: Dallas was a new division last year, Chattanooga was divisionalized, and we're opening the Gulf Coast, where we hope to have some sales in the next few months. That brought fresh G&A hitting the books without corresponding volume yet. This reflects our continued growth and scaling. When revenue comes through, the SG&A percentage should moderate. Greenville and Central Georgia are relatively new divisions too, and we've been expanding footprint to drive additional scale. So it's largely a timing issue.

Stephen Mea, Analyst, RBC Capital (on behalf of Mike Dahl)

No, totally makes sense. I appreciate the response. Secondly, understanding you're not providing full‑year guidance, if there's anything you can share on areas where you may have more visibility — for example, your thoughts on pace or cadence of community counts, or how you're thinking about incentives within the guide — that would be helpful going forward.

Russ Devendorf, Executive Vice President & CFO

We are not providing full‑year guidance given the environment. We have internal targets, but we don't think it's prudent to provide full‑year guidance now, particularly for margin or income, which are wildcards. We will continue to push pace. We feel good coming off March; we beat internal expectations on sales due to additional price discovery in communities and focused sales execution in the field. The increase in backlog should set us up for a stronger back half of the year in closings. On community count, as I mentioned previously, we were expecting anywhere from 10% to 20% growth for the year, which you can translate into closings in your models. We're focused on growing closings year‑over‑year and have internal targets, but we prefer not to provide full‑year guidance at this time.

Operator, Operator

Your next question comes from the line of Trevor Allinson with Wolfe Research.

Trevor Allinson, Analyst, Wolfe Research

First one is on your expectation for vertical costs going forward. Obviously, oil and fuel prices are up, and some building product materials have announced price increases. What are you expecting for vertical costs going forward? And are you taking on any of these price increases from manufacturers, or have you been able to push back?

Greg Bennett, CEO & Vice Chairman

Thanks for the question. We've been fairly successful in pushing many of those increases off. Our costs are down year‑over‑year. If the fuel situation stays higher for longer, we could face fuel surcharges and related impacts, but we remain diligent in managing costs and efficiency every day. The market is not allowing for broad price increases to buyers, and we convey that to our trade partners and suppliers: we don't have the ability to pass through price increases, so we are holding a firm line on costs where possible.

Trevor Allinson, Analyst, Wolfe Research

Okay. Makes sense. I appreciate that color. On your lot portfolio, the majority of your lots are held off‑balance sheet. Can you talk about what portion of those lots are held by land bankers, and shed light on the structure of your land bank agreements in terms of deposit rates, option maintenance fees, and your ability to walk away from deals that no longer pencil?

Russ Devendorf, Executive Vice President & CFO

Sure. Of the total lots under option, about 30% are with land bankers, about 40% are with developers, so roughly 70% are with those two groups, and the remaining 30% are deals still with the underlying land seller under varying stages of due diligence and with small deposits. For land banker deals, on average we put down about a 10% deposit, and there is typically a walkaway fee, often another 10% if you exit the option. We disclose these arrangements in our filings. On new land bank deals, we generally do not cross‑collateralize. For some finished lot bank situations where we take bulk takedowns on active communities, we may place lots into a finished lot bank and could cross‑collateralize within a division, but we do not view that as a material issue. Overall, the structures are straightforward.

Operator, Operator

Your next question comes from the line of Ryan Gilbert with BTIG.

Ryan Gilbert, Analyst, BTIG

On the 2Q '26 margin guidance, can you talk about how much of the step down is from higher incentives in the quarter versus higher lot costs, or if there's anything else we should call out?

Russ Devendorf, Executive Vice President & CFO

We're assuming incentives are roughly flat sequentially, perhaps up or down 10 to 20 basis points. The percentage of forwards in use has been consistent. The step down is more a function of ASP, which is probably impacted by forwards, and lot costs. Lot costs are trending higher year‑over‑year and are about 300 basis points up versus last year, so lot costs are a significant driver. There is some variability in vertical costs; we've done a good job year‑over‑year holding average stick and brick costs down, but that could vary.

Ryan Gilbert, Analyst, BTIG

Got it. Can you update us on what you're seeing in terms of spot land prices for deals you're signing today? If you are getting any relief on pricing, how long would that take to flow through into your income statement?

Russ Devendorf, Executive Vice President & CFO

Land prices are starting to moderate; we've been noting this for the last few quarters. We're seeing more negotiating leverage and a shift from a seller's market to more of a buyer's market in some areas. New deals that we put under contract will typically take about 18 months to flow through, because of roughly a year of development followed by several months of vertical construction. So any moderation in lot costs will not materially affect margins for a couple of years. When we went public, we knew lot costs were increasing because of deals we had executed. Now you're beginning to see that reverse a bit. This is why our pace‑over‑price approach is important: if we continue to move inventory through the pipeline, we won't be stuck with higher land bases and can take advantage when land bases reset. That is how we are thinking about it. One last point: this is part of the reason we think it's a reasonable opportunity to enter some of these new markets. We're able to start fresh there and take advantage of some of these reset land bases.

Ryan Gilbert, Analyst, BTIG

Got it. Yes, that makes sense. Just one more for me. It seems like you and other public builders and the industry overall based on the starts number earlier this morning, there seems to be a reacceleration in starts. How does inventory look in your markets, and are you seeing any impact from the recent increase in starts volume?

Russ Devendorf, Executive Vice President & CFO

We haven't seen anything materially different from our divisions. Some builders' spec counts are down year‑over‑year and they may be starting more as a result of better sales. We had better sales than expected in the first quarter, so our starts will be up. From a pure inventory standpoint, we're not seeing any real impact so far.

Operator, Operator

Your next question comes from the line of Natalie Kulasekere from Zelman & Associates.

Natalie Kulasekere, Analyst, Zelman & Associates

Could you talk a little bit about how your incentives trended as the quarter progressed? I know you said it was 730 basis points for the quarter on average, but was March higher than January and February, and did you have to push incentives to achieve the pace of four sales per community?

Russ Devendorf, Executive Vice President & CFO

I don't have the exact month‑by‑month numbers on me. Keep in mind the 730 basis points includes incentives and discounts that relate to forward commitments booked mostly in Q3 and Q4 of last year that are hitting the books now. Regarding incentives on sales during the quarter, as we ramped up pace and pushed on price discovery, we saw incentives increase a bit, but we were pleasantly surprised that it wasn't a huge hit. The results suggest some price elasticity: modest pricing adjustments drove increased volume.

Natalie Kulasekere, Analyst, Zelman & Associates

All right. What share of your closings this quarter were driven by spec sales? And where are you in terms of shifting to a more presale‑heavy business?

Russ Devendorf, Executive Vice President & CFO

Presales are a major focus because presales typically drive higher margins and fit our model of personalization and quick turns. We've been averaging roughly 40% presale to 60% spec on a weekly basis, but importantly, we're seeing an uptick in contracts on spec homes before they hit what we call the 'line in the sand'—before drywall stage. That is critical because forward commitments and rate locks longer than about 60 days are often cost prohibitive. Incentives are a key part of payment affordability for buyers. So as long as we can get contracts before drywall stage, that's positive. Today we're doing a good job: probably 70% to 80% of homes are sold before drywall stage, and our spec inventory has been coming down. Driving more presales is a priority going forward.

Operator, Operator

Your next question comes from the line of Rafe Jadrosich from Bank of America.

Rafe Jadrosich, Analyst, Bank of America

Just to follow up on gross margin: it's good to see backlog stabilize and step up. Gross margin was sequentially flat in 1Q. Can you help me understand the accrual callout you had and bridge on a like‑for‑like basis from 1Q to 2Q?

Russ Devendorf, Executive Vice President & CFO

Yes. We had about a 170 basis point benefit because we reversed some land development accruals related to closeout communities. Our policy is to ratchet down accruals over three to six months after closeout in case of any straggler costs. That 170 basis points was a benefit to margin. We also had some impairment in the quarter; strip that out as well. The impairment accounted for about 70 basis points of negative impact to margin. When you strip out those items, and look at adjusted margins in the filing, you'll see the noise removed. Sequentially, we're calling for about a 50 basis point decline in margin from Q1 to Q2 when you strip out the noise. If you see any confusion after reviewing the filing, we can walk through details.

Joe Thomas, SVP, Accounting and Finance

Seventy.

Rafe Jadrosich, Analyst, Bank of America

Okay, that is helpful and makes sense. On the SG&A side, given the dollars have stepped up as you expand communities and move into new markets, of the markets you operate in today, which would you consider to be at scale and which are still below long‑term expectations?

Greg Bennett, CEO & Vice Chairman

I'll take that. We're still in the early stages in Greenville, Dallas‑Fort Worth and the Gulf Coast. Chattanooga has made a lot of growth strides in the last year. Central Georgia is still building scale as it spun out of Atlanta without a large community count. So markets still building scale include Central Georgia, Greenville, Dallas‑Fort Worth and the Gulf Coast.

Russ Devendorf, Executive Vice President & CFO

To add, we target a minimum of two R‑teams per division, roughly 208 starts per team, so about 416 starts to be minimally efficient. Some legacy divisions like Charlotte and Nashville have not reached that minimum yet. We want to get to at least two R‑teams in each division, and in many cases closer to three R‑teams. Raleigh could be closer to 600 closings, Charlotte can get there, Nashville should be 400 plus. Atlanta and Houston are two of our largest markets by permit count; Atlanta should be close to a 1,000 unit run rate. Houston is making progress and doing 400 plus closings now, but it should be double within five years given the market size. Alabama is performing well, with Birmingham and Huntsville roughly around 600. We have work to do scaling some legacy divisions, and new divisions are getting going. When you look at G&A relative to community count increase — community count was up 24% while G&A was only up $2.9 million in gross dollars — that shows relatively efficient growth.

Operator, Operator

Your next question comes from the line of Jay McCanless from Citizens Bank.

Jay McCanless, Analyst, Citizens Bank

We've seen press that affordability in larger cities is worsening, which may be forcing some migration out. Are you seeing better demand in your smaller markets by absorption or traffic versus larger markets like Raleigh and Atlanta?

Russ Devendorf, Executive Vice President & CFO

Alabama has done really well and we consider demand there strong relative to markets like Houston. Alabama markets didn't experience the same post‑COVID spike as some other markets, so we've been operating in that environment consistently. Outside of Alabama, nothing in our footprint really sticks out materially. Our markets are focused in the Southeast and central U.S. by design, and generally they're performing as expected.

Greg Bennett, CEO & Vice Chairman

I'll add that in‑migration to some larger metro locations is down, and you can feel that. Smaller markets are less sensitive to that trend.

Jay McCanless, Analyst, Citizens Bank

Got it. And on ARMs, are you still pushing adjustable rate mortgages? Are they having good success with customers, and what was your ARM percentage this quarter?

Russ Devendorf, Executive Vice President & CFO

We shifted toward the end of the quarter and into April from a 4.99% incentive on a 30‑year fixed to offering a 3.99% 5/1 ARM. We're offering both products and are marketing the 3.99% 5/1 ARM; a lot of that acts as a traffic driver and gives sales flexibility. Buyers can qualify based on the 3.99% payment, which helps affordability. We're trying to compete at that level and offer buyers options. We're seeing usage of the 4.99% offer as well; it's still being taken by many buyers.

Operator, Operator

We have reached the end of the Q&A session. I will now turn the call back to Greg Bennett for closing remarks.

Greg Bennett, CEO & Vice Chairman

Thank you for joining us on our Q1 results call. I hope everyone has a great day.

Operator, Operator

This concludes today's call. Thank you for attending. You may now disconnect.