Transcript
Good morning ladies and gentlemen and welcome to the United Homes Group Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Thursday, March 14, 2024. I would now like to turn the conference over to Erin Reeves McGinnis, General Counsel for United Homes Group. Please go ahead.
Good morning, and welcome to the United Homes Group fourth quarter and full year 2023 earnings call. Before the call begins, I would like to note that this call will include forward-looking statements within the meaning of the federal securities laws. United Homes Group cautions that forward-looking statements are subject to numerous assumptions, risks, and uncertainties which change over time. These risks and uncertainties include but are not limited to the risk factors described by United Homes Group in its filings with the Securities and Exchange Commission. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and you should not place undue reliance on these forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise except as may be required under applicable securities laws. Additionally, reconciliations of non-GAAP financial measures and comparable GAAP measures can be accessed through the company's website in its SEC filings. Hosting the call today are United Homes Group President, Jack Micenko; Chief Operating Officer, Shelton Twine; and Chief Financial Officer, Keith Feldman. With that, I'd like to turn the call over to Jack.
Thanks, Erin. Good morning and thank you for joining us today as we review our fourth quarter and full year 2023 results, and provide an update on current market conditions. United Homes Group made great strides in 2023 by executing on several strategic initiatives that we believe will set us on the path to becoming a large-scale production home builder in the Southeast United States. We're pleased with what we've accomplished during the year and believe that we're in a much better place, both financially and operationally today than we were a year ago. Here's a brief recap; some of the highlights from the year. In the spring of 2023, Great Southern Homes and Diamond Head Holdings closed their business combination, resulting in the formation of United Homes Group, a land-light home builder focused on building single-family homes at affordable price points. The goal is to take Great Southern Homes' proven track record of success and replicate it in other high growth markets across the Southeast through acquisitions, small private builders, and a more efficient approach to land acquisition and development. Upon the close of this transaction, we immediately set out to put our capital to use. In August, we announced the acquisition of Herring Homes in Raleigh, North Carolina, and quickly followed up with the acquisition of Rosewood Communities in the upstate region of South Carolina in October. The Herring acquisition marked our initial foray into the attractive Raleigh-Durham market, while Rosewood solidified our already strong presence in the Greenville, Spartanburg, and Clemson markets. Subsequent to the end of the year, we announced the third acquisition of Creekside, which has a strong presence in the coastal area of South Carolina. Similar to Herring and Rosewood, Creekside fits nicely into our land-light strategy and affordable product focus. Our teams have already done a great job integrating these acquisitions into our existing home building platform, and we look forward to their positive contributions in 2024. We continue to actively pursue other acquisition opportunities that will fit our company from an operational and cultural standpoint while remaining disciplined in our underwriting standards. With respect to our land acquisition and development efforts, we remained active in 2023, fortifying our existing market presence with a pipeline of new lots. We strive to remain as land-light as possible, with the goal of minimizing the risk associated with carrying the land as well as the capital needed to hold it on our balance sheet. Throughout the year, we expanded our relationships with land bankers, giving us more avenues through which we can employ this strategy. By controlling land via third parties, we can utilize our capital more efficiently and focus our efforts on creating value by doing what we know best, which is building and selling homes. We remain focused on the more affordable segments of the market, as evidenced by our average closing price for production homes of $316,000 for the full year of 2023. We believe that the lack of affordable resale home inventory will be a prevailing issue for some time, and the entry-level buyer cohort will continue to make up a good portion of demand. We are, however, starting to broaden out our product portfolio to appeal to more potential buyers, with the expectation that the existing home market will begin to thaw at some point. In summary, United Homes Group exited 2023 with a lot of momentum. We successfully integrated the two smaller home builders into our operation at the start of the New Year. We also improved our land banking capabilities and maintained the land-light focus on keeping our balance sheet in great shape. As a result, we believe United Homes Group is well-positioned to build on our successes in 2023 and into the future. Now, I'd like to turn the call over to Shelton, who will provide more detail on our operational performance in the quarter.
Thanks, Jack. And good morning to everyone. Net new orders for the fourth quarter came in at 294, representing an 8% increase over the fourth quarter of 2022. Demand picked up at the start of the New Year as we generated 260 net new orders in total for the months of January and February combined. We have seen good traffic trends at our communities and improved buyer confidence, as evidenced by our lower cancellation rates of 10.1% for the quarter and 6.2% for the first two months of the year. Incentives remain a key selling tool, particularly ones that drive affordability; we have been able to raise base prices at a handful of communities that have been experiencing above average absorptions. We closed 387 homes in the fourth quarter, which was flat on a year-over-year basis. We made a concerted effort to ramp up our starts during the quarter to ensure we had enough homes in production ahead of the coming spring selling season. We started 308 unsold homes during the quarter, which was a 75% increase over last year. We continue to see healthy demand for move-in ready homes and we're well-equipped to meet this demand as we move through the spring. Cycle times came down during the quarter and we are now back to building homes in roughly three months’ time. The shorter cycle times will greatly improve our inventory terms and help us get homes closed in a more timely manner. We're constantly looking for ways to take costs out of the business and improve our processes, a mindset that has been part of our organization from the beginning. Overall, we feel good about current market conditions. The spring selling season is off to a solid start, and we are seeing a steady flow of motivated and engaged buyers come through our communities. Affordability remains an issue for some buyers, but we have several incentive tools that can help address that. The availability of labor and materials has improved greatly compared to last year, leading to shorter cycle times and better visibility into our operations. We're very optimistic about the long-term health of our existing markets and look forward to expanding our homebuilding footprint as we execute our growth initiatives. With that, I'd like to turn the call over to Keith, who will provide more color on our financial performance.
Thank you, Jack and Shelton, and good morning. For the fourth quarter of 2023, net loss was $67 million, which included a change in fair value of $69 million, primarily related to the accounting for the potential earnout, which will fluctuate on our financial statements each quarter based on our ending stock price. This earnout will be paid only in common shares upon reaching certain stock price hurdles, and can never result in a cash expense for the company. For the year ended December 31, 2023, net income was $125 million, which included a change in fair value of $116 million, primarily related to the accounting for the potential earnout liabilities. Revenue for the fourth quarter of 2023 was $117 million, compared to $115 million for the fourth quarter of 2022. Revenue for the year was $421 million, compared to $477 million in 2022. Home closings during the fourth quarter of 2023 were 387 homes, compared to 389 homes in the fourth quarter of 2022. Closings for the year were approximately 1,400 homes, compared to approximately 1,600 homes in the prior year. Average sales price during the fourth quarter of 2023 was $320,000 for 338 production-built homes; this compares to an average sales price of $300,000 during the fourth quarter of 2022 for 371 production-built homes. Average sales price for the year was $316,000 for approximately 1,300 production-built homes; this compares to an average sales price of $296,000 during 2022 for approximately 1,500 production-built homes. As Shelton has mentioned, our net new orders during the fourth quarter of 2023 were 294 homes, compared to 271 homes in the fourth quarter of 2022. Net new orders for the year were approximately 1,300 homes, compared to approximately 1,260 homes in 2022. Our backlog at the end of the fourth quarter was 189 homes, with a value of approximately $58 million. Net new orders in January and February of 2024 were 260 homes, up from 242 homes in January and February of 2023. Gross profit for the fourth quarter of 2023 was $22 million, and gross profit for the full year 2023 was $80 million. Adjusted gross profit, which excludes the impact of capitalized interest and purchase accounting adjustments, and cost of sales was $25 million for the fourth quarter and $90 million for the year. Adjusted gross profit margin for the fourth quarter was 21.8%, and for the year, adjusted gross profit margin was 21.4%. SG&A expense in the fourth quarter of 2023 was approximately $18 million; adjusted for one-time transaction fees and non-cash stock-based compensation expense, adjusted SG&A was approximately $17 million or 14% of revenue for the fourth quarter. As of today, we have 63 active communities, which include our recently closed Rosewood and Creekside acquisitions. As of December 31, 2023, we have approximately 9,000 lots under control from our land development affiliate, as well as from third parties. We had $57 million in cash and $24 million of availability on our credit facility as of December 31, 2023, resulting in total liquidity of $81 million. That concludes our prepared remarks. Operator, please open up the line for questions.
Our first question comes from the line of Carl from BTIG. Please go ahead.
So I had a couple for you. Shelton, first you talked a little bit about having some pricing power in a few communities. I wondered if you could expand a little bit on that. Was there a particular location or price point where you saw that power? And sort of an adjacent question is how are you looking at your lower price product performance from a sales traffic turnover rate perspective and your higher priced product? And has there been any alteration or differences as you've started the new year?
Yes. On the first question, we're starting to see some communities, primarily in the Midlands and in the Upstate, where we are starting to see some price increases; so that's a positive. On the lower-priced product, we are seeing good margins in all of that product. And in terms of the way we utilize our forward commitment on our incentive piece, that’s been really good in terms of keeping our conversion rates high, and relatively low on the cancellation side because again, that's such a short window on the forward commitment piece tied in with what we're selling as completed inventory. So that’s where we're very optimistic again, in getting those turns and managing that cancellation rate.
Carl, I would say we were able to see some price increases in around 10% to 15% of our communities in the first quarter. That was a refreshing change, probably the first time we've seen that in three or four quarters.
All right, that's helpful. Thanks, guys. And then can you talk a little bit about your plans for community count expansion in 2024? You don’t need to give specifics, but do you have a rough sense of X acquisitions, how you might be looking to grow the business from a store count perspective in this coming year?
Yes. Without giving guidance on an organic basis, I think we would be comfortable talking about a high single digit, low double digit organic store count increase for the full year 2024 versus full year 2023.
Is that percentage or number of stores, Jack?
Percentage of the number of stores.
Thank you. My final question is about acquisitions. It seems like the environment is mixed right now. We’ve noticed some activity and heard that some private builders are evaluating their capital structures and land positions, considering their future. I'm interested in your observations on the current situation. Does it seem like a more favorable environment for deals now compared to six to nine months ago, or is there less activity? Additionally, how is this impacting pricing?
Like homebuilding, there is a lag between when discussions take place or contracts are signed and when the home or transaction is actually completed. The challenges faced last year, particularly the significant increase in rates, prompted more discussions. However, it’s unclear how many of these discussions have converted into actual closings, both for the conversations we've had and the deals we've observed being marketed; there have been some actively marketed assets in 2023 that have drawn attention. Yet, many discussions and assets have not yet reached completion. Sellers appeared to have a greater willingness to negotiate last year due to the challenging environment we experienced. Nonetheless, it’s evident that the situation has improved noticeably since January. Historically, individuals who were considering a sale six to nine months ago might now feel more optimistic about their businesses this spring. It's a mixed situation; we continue to engage in regular discussions and ongoing introductory conversations. We aim to be considered when a potential seller is ready to move forward. It’s important for them to understand our unique value proposition as an alternative when they choose to sell their business.
Right. I appreciate that, Jack. Thanks so much, guys. Nice to talk to you.
Our next question comes from the line of an unidentified speaker. Please go ahead.
What are you guys seeing in terms of just overall gross margins for this year versus last year, just with current market dynamics out there?
We are comfortable with our margin outlook, which we anticipate will be flat year-over-year. Last year, we finished with an adjusted margin slightly above 21%, around 21.5%. While build costs have moderated, and lumber prices have decreased, we have offset some of those savings with financing costs. Financing incentives are part of our business, similar to other expenses like windows or lumber; we must remain competitive in the market. As a SPEC builder, these incentives primarily apply to homes expected to be completed within the next 60 to 90 days, which constitutes a significant portion of our operations and contributes to affordability. We continuously monitor the impact of these incentives on a weekly basis and buy in different tranches. This financing situation represents a considerable headwind of about 400 to 600 basis points on our top-line margins. If interest rates were below 7%, our margins could potentially reach the 26% to 28% range, assuming all other factors remain constant. However, it's important to recognize that if rates decrease, some cost reductions will be balanced by increased expenses on materials. Currently, financing has the most significant impact on our fully loaded margins, and I would expect this to hold true for most builders as well.
Okay, great. One last question. Are there any plans to increase the credit facility? And if so, what type of leverage are you guys comfortable with as a company?
I'll answer the first part of that and I'll let Keith kind of weigh in on the second part. But I don't think we would look to increase our credit facility standalone today, given our capacity, absent an M&A transaction would acquire it. I don't think the leverage would increase per se; we would just be adding incremental volume and assets and EBITDA. I don't think we have an appetite to increase our leverage ratios outside of our working capital lines; I don't see subordinated debt or other straight debt. We've got the $80 million out today on the convertible note; I don't think we would see that number increase. We have a saying, your debt kills cyclical businesses, and we're not looking to be over-levered on a line itself and some of the covenants and ratios. Keith, you want to chime in?
Yes. I mean, we look at it more on a debt to book value. So I think we're comfortable at like, you know, two times. Like Jack said, we're not looking to over-lever; we're looking to delever over time. But I think around two times, on a debt to GAAP basis or debt to book value basis seems reasonable to us considering where we are today.
There seems to be no further questions at this time. I'd now like to turn the call back over to Mr. Micenko for final closing comments.
Well, thank you everybody for participating in our fourth quarter call, and we look forward to updating you on the progress we make through the balance of the spring selling season in a few months on our first quarter call in May. Thanks, everybody. Have a great end of the week and weekend.
Thank you, Sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line. Have a lovely day.