United Homes Group, Inc. Q2 FY2024 Earnings Call

Good morning, and welcome to United Homes Group's Second Quarter 2024 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.

Thank you, Erin. Good morning, and thank you, everyone, for joining us for a review of our second quarter results and an update on our operations. United Homes Group continues to pursue a strategy of acquiring lots in a capital-efficient manner in building out its homebuilding platform in high-growth Southeastern markets while selling and delivering homes that cater to the more affordable segments of the market. Lots owned and controlled at the end of the second quarter totaled roughly 9,300, giving us a nice pipeline of lots to pursue a growth strategy and scale our operations. Over 95% of these lots are controlled via option agreement or land banking arrangement, which allows us to reduce a large part of the risk and upfront costs associated with land acquisition and development. We've been working diligently over the last several quarters to cultivate a network of counterparties that will help facilitate our land bank strategy, and we believe that network is now in place. We feel that focusing on the business of building and selling homes rather than development of land is a more effective and sustainable path to enhanced returns for us and our industry. The second quarter of 2024 was a period of transition for our company as we said about consolidating recent acquisitions, rationalizing our workforce, and reorienting our product offerings in some markets. While we believe the actions we took during the quarter will be beneficial to our company over the long term, they did have an adverse impact on some of the aspects of our results this quarter. This does not alter our long-term outlook for the company or diminish our enthusiasm we have for the markets we're in. We have ambitious goals for our company, and we felt that setting the right foundation upon which to grow was an important step to take this quarter. We continue to see positive homebuilding fundamentals in our markets characterized by steady job growth, low levels of inventory, and consistent in-migration patterns. We remain committed to growing our homebuilding presence throughout the Southeast through a combination of M&A and organic growth. We continue to seek out potential acquisition targets to add to our existing homebuilding footprint, provided they meet our underwriting criteria. We believe we are the acquirer of choice for small local builders due to our southeastern roots and our appreciation for keeping the operations and workforce of the acquired companies intact. As we look for the back half of 2024, we remain focused on starting and selling homes to meet our delivery goals for the year while closing homes we already have in backlog. We ended the quarter in a strong financial condition and continue to see a bright future ahead for our company. I look forward to executing on our strategy and building on our company's legacy of homebuilding excellence. With that, I'd like to turn the call over to Shelton who will provide more detail on our operations this quarter.

Thank you, Jack. We delivered 337 homes in the second quarter of 2024, generating revenue of $109 million. Our operations in the Midlands contributed to the highest number of deliveries to the total, followed by our upstate and coastal operations. Home sales gross margin came in at 17.9% on a GAAP basis or 20.9% on an adjusted basis, while adjusted EBITDA was $7.7 million for the period. Our gross profit margins were again weighed down by sales concessions as buyers utilized rate buydowns and other mortgage incentives to offset the impact of higher rates. We generated 323 net new home orders for the quarter and had 59 active communities opened for sale at the end of the period. On a year-over-year basis, our net new orders were flat overall, but our coastal operations posted order growth of 59%, and our upstate operations generated order growth of 44%. We continue to see improvements on the construction side of the business as building materials and labor availability improved during the quarter. We have been proactively rebidding projects to ensure we are getting the most competitive pricing for our stick and brick costs and expect to generate some real savings from these efforts. In addition, lumber costs have been trending down recently, which will be a tailwind for margins in the coming quarters. The rising lot costs and other variables may offset these gains. Overall, I would characterize current marketing conditions as healthy but uneven, with traffic and sales incentives fluctuating with movements in interest rates. We continue to see engaged and motivated buyers in our markets who want to buy a home, provided it meets their lifestyle and budgetary needs. Our company has been one of the preeminent homebuilders in our markets for decades, and we plan on maintaining and building on that reputation as we expand throughout the Southeast.

Thank you, Jack and Shelton. Good morning. For the second quarter of 2024, net income was $28.6 million, which included a change in fair value of $32.1 million, primarily related to the accounting for 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 on reaching certain stock price hurdles and can never result in a cash expense for the company. For the six months ended June 30, 2024, net income was $53.6 million, which included a change in fair value of $58.4 million, primarily related to the accounting for potential earnout liabilities. Revenue for the second quarter of 2024 was $109.4 million compared to $122.1 million for the second quarter of 2023. Revenue for the six months ended June 30, 2024, was $210.3 million compared to $216.9 million for the six months ended June 30, 2023. Home closings during the second quarter of 2024 were 337 homes compared to 385 homes in the second quarter of 2023. Home closings for the six months ended June 30, 2024, were 648 homes compared to 713 homes for the same period in 2023. Average sales price during the second quarter of 2024 was approximately $341,000 for 299 production-built homes. This compares to an average sales price of approximately $313,000 during the second quarter of 2023 for 376 production-built homes. As Shelton mentioned, our net new orders during the second quarter of 2024 were 323 homes compared to 341 homes in the second quarter of 2023. Net new orders for the six months were 707 homes compared to 730 homes in 2023. Our backlog at the end of the second quarter was 248 homes with a value of approximately $81.2 million. Gross profit and gross profit margins for the second quarter 2024 were $19.6 million and 17.9%, which decreased from $23.9 million and 19.6% from the second quarter of 2023. The decrease was primarily driven by higher levels of incentives, purchase price accounting adjustments from acquisitions, and other nonrecurring expenses. Adjusted gross profit margin was $20.9 million for the three months ended June 30, 2024. This decreased from 21.4% in the second quarter of 2023 and is due largely to the company continuing to offer attractive sales incentives to home buyers. SG&A expense in the second quarter of 2024 was $19.6 million. Adjusted for one-time transaction fees, non-cash stock-based compensation expense, and severance, adjusted SG&A was approximately $16.1 million or 14.7% of revenue for the second quarter. As of today, we have 59 active communities, up from 53 as of Q2 2024. As of June 30, 2024, we had approximately 9,300 lots under control from our land development affiliates and third parties as well as our land bank partners. We had $25 million in cash and $55 million of availability on our credit facility as of June 30, 2024, resulting in total liquidity of $80 million. That concludes our prepared remarks. Operator, please open up the line for questions.

Thanks. Good morning, guys. Hope you are doing well.

Good morning, Carl.

Jack, can you talk a little bit about your absorptions? I think you're running a little less than two a month. We had affordable product in one of the great markets in the country right now. What's the strategy for improving those over the course of the next year or so? You've mentioned something about product repositioning. Maybe you can give us a little more detail on that?

Yes. Thanks, Carl. Thanks for the question. And I'm going to apologize in advance if we're a little choppy with the storm; a couple of us are in a couple of different locations this morning but we're all here and we'll do our best. We are running about Q2 on an adjusted basis. That's up from Q1 last quarter. You are absolutely correct. We think the right number is something in the high threes, low fours. Like most things, our portfolio of communities is a bell curve; we've got communities that are running upwards of seven, eight a month, and we've got others that are below the average. So really focusing on the slower-moving communities. Is it product? Is it price? Is it competitive landscape? And really targeting those slower-moving communities on a biweekly basis across the management of committee and division heads and that sort of thing. But it's not a one size fits all. It's definitely looking at where we stack up side-by-side, encouraging our team throughout the ranks that we are as a public company pace versus price; we're leaning much more towards pace. And so it's tactical things like pricing and positioning. It's cultural; things like you're changing the mindset and getting people pushing more on the sales side as well. I don't know, Shelton or Keith, you guys have anything to add to that. It's not a magic bullet.

All right. I appreciate that. Thanks, Jack. And then two more. I think if I got it right, the lot count under control, it was down 10% or so, certainly by more than the delivery volume is up. So can you talk a little bit about that? And also maybe chat a bit about how the land market feels and looks to you right now as well as the acquisition market, too. Thanks.

Sure. On the land side, the pipeline 9,300; let's maybe divide that a third, a third, a third. A third is close to being ready to go or finished, one-third is in process, and one-third is controlled but further out, as you understand. We are tightening the filter really at the top of the funnel. We're asking all of our division heads and our land folks to really tighten up and take a hard look at the deals that we're bringing in. We're still acquiring land. We're still very active there but really sharpening the pencil on the front end and making sure that the best deals are coming through, focusing on margin, focusing on absorption pace. We've made some investments and continue to make some investments on that front end targeting both in terms of hires, services, and technology to really bring a more quantitative approach to that land underwriting process. And I'd say we're probably in the fourth inning of really getting that to where we would all like it to be. So I think that moving lots is really part of that. Lots are our lifeblood, and we have to be very careful not to move in the opposite direction. If our deliveries jumped up by 10% or 15%, that lot pipeline, the year's control kind of goes down and moves kind of quickly. So we want to be very focused there. We have the lots we need for 2025 and a fair amount for '26. We're continuing to push our guys to add deals but we're also really raising the standard on what they're bringing in the door. And then the second question, I'm sorry...

Just on acquisition, how does that environment feel and look to you now?

It's busy. You've seen it. A number of our large public competitors have announced deals. There are books out. There are conversations being had. As you can imagine, we're getting shown many of them that fit from a size or a geographic standpoint; it seems like we're getting looks at things that don't fit our size and geographic footprint. But the market is robust, and I think you've seen some of that announced. So we continue to look at acquisitions. I think we've tightened the filter there as well. I don't think we want to look into transactions that are maybe projects or things that aren't really consistent with either the product or the market dynamics of where we're at. We've, as you can imagine, taken the time on a very small percentage of deals over the last year that have been shown to us and we've spent time on an even smaller amount. So our conversion rate from deals we've got in the door or NDAs we've signed is well inside of 10%. So we're seeing a lot. The volume has picked up certainly since the first quarter. And I think it's really the same story on the seller side. It's not as much a bank issue. It's not as much a lender issue. It's a lot availability, lot replacement issue for a lot of these sellers. They're reluctant to sell through their lot because it's really, really hard to replace it.

I appreciate the answers. Thanks, Jack. Thanks, fellows.

Thanks, Carl.

Hi, guys. Two questions this morning. One, where do you guys think you're at on the integration of the acquisitions you've made to date? And then lastly, does the strategy change at all on a go-forward basis with rates coming in a bit?

Chris, in response to your first question, we currently have three deals in progress. The Coastal transaction, specifically Creekside, which was our latest closing, is the most advanced and has been the easiest to handle from an operational product perspective. We have successfully managed most of their inventory and launched communities under our product line and brand in that region. And so I think that one is probably furthest along, I would say, 85%, 90% of the way there. Their team came over very seamlessly; their founder is running our land operations, acquisition operations in that market. Herring was our first deal back in August a year ago. We've got five communities going on up in Raleigh, and that was a little bit more of a delay because the product set is very different. We're focused on an affordable product. We've got our communities open now, and we're underway there. Rosewood, I say that when we did in October of last year, different product type; we're still working through getting their trades aligned with ours, their costs in line with ours. That's also going to be the biggest opportunity. I'd say we're probably halfway, 60% through integrating there. But they're very, very happy with their product, very happy with the demand trends. They are very happy with what their forward pipeline looks like from a land side for us. Their team is pretty well integrated from an operational standpoint. I think there's some more to come there on the cost side that should benefit us over time. On the change in interest rates, I think, at a high level, we're still focused on the first buyer, first-time move-up buyer. That is absolutely an affordability issue. Certainly, rates will come down. Home prices are still up. So trying to meet the market with an affordable product, targeting the right price point to meet that affordability issue but maintaining value perception at the same time. I mean, that's a constant focus. Value engineering has always been a core part of the culture here; that's certainly the focus as well. We are continuing to buy down interest rates. We're continuing to monitor the market daily to make sure we're comparable to where our competitors are. The market has moved down. We are offering a 5.99 buy-down; we've moved down to 4.99 as the market has moved lower. And that's for quick finish, quick close homes, and that's a line item that we budget for. A couple of benefits: we are seeing, like I said before, some improvement in input costs, particularly lumber. We've been proactive in going out to our trades and renegotiating terms, and so I do think starts in July and August generally should have a little bit of a better margin profile than starts earlier in the year. The cost of buy-down rates has decreased as overall rates have fallen. One notable change is that we are observing more individuals opting for closing cost assistance rather than a reduced rate. Their mindset seems to be that they can refinance later, as rates are expected to continue declining. Consequently, we are presenting them with this incentive, letting them choose how to use it. Recently, we have noticed a trend towards utilizing more of the funds available and reducing the emphasis on buy-down rates.

Great. Thanks.

Thanks, Mandeep. I just want to thank everybody for their interest in United Homes Group. We look forward to updating you on our progress at a number of investor conferences scheduled over the coming quarter and look forward to talking again soon. Thank you.

This concludes today's call. You may now disconnect.