United Homes Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 7 speakers on the call.

Operator

Thank you for standing by. My name is Mandeep, and I'll be your operator today. At this time, I'd like to welcome everyone to the United Homes Group Second Quarter 2024 Earnings Call and Webcast. All lines being placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

I would now like to turn the call over to Erin Reeves McGinnis, General Counsel. You may begin.

Speaker 1

Good morning, and welcome to United Homes Group's Q2 of 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. 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.

Speaker 1

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 discussed on this call to the most directly comparable GAAP measures can be accessed through the company's website and in its SEC filings. Hosting the call today are United Homes Group's 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.

Speaker 2

Thank you, Erin. Good morning and thank you everyone for joining us for a review of our Q2 results and an update on our operations. United Homes Group continues to pursue its strategy of acquiring lots in a capital efficient manner and 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 or controlled at the end of the Q2 totaled roughly 9,300 giving us a nice pipeline of lots to pursue growth strategy and scale our operations. Over 95% of these lots are controlled via option agreement or land banking arrangement, which allow us to reduce a large part of the risk and upfront cost associated with land acquisition and development.

Speaker 2

We've been working diligently over the last several quarters to cultivate a network of counterparties that will help facilitate our landline strategy. We believe that network is now in place. We feel the focusing on the business of building and selling homes rather than the development of land is a more effective and sustainable path to enhance returns for us and our industry. The Q2 of 2024 was a period of transition for our company as we set 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.

Speaker 2

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 is important steps 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 and 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.

Speaker 2

We believe we are acquirer of choice for small local builders, doing our southeastern roots and our appreciation for keeping their operations work towards some of the acquired companies intact. As we look to the back half of twenty twenty four, we remain focused on starting and selling homes to meet our delivery goals for the year, while closing homes we already have in backlog. 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.

Speaker 2

Shelton?

Speaker 3

Thank you, Jack. We delivered 337 homes in the Q2 of 2024, generating revenue of $109,000,000 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 $7,700,000 for the period. Our gross profit margins were again weighed down by sales concessions as buyers utilize rate buy downs 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 open for sale at the end of the period.

Speaker 3

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 got better during the quarter. We have been proactively rebidding projects to make sure we are getting the most competitive pricing for our stick and brick cost and expect to generate some real savings for 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 cost and other variables may offset these gains.

Speaker 3

Overall, I would characterize current market 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. Now I'd like to turn the call over to Keith, who will provide more detail on our financial results for the quarter.

Speaker 4

Thank you, Jack and Sheldon, and good morning. For the Q2 of 2024, net income was $28,600,000 which included a change in fair value of $32,100,000 primarily related to the accounting for potential earn out, which will fluctuate on our financial statements each quarter based on our ending stock price. This earn out 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 6 months ended June 30, 2024, net income was $53,600,000 which included a change in fair value of $58,400,000 primarily related to the accounting for potential earn out liabilities. Revenue for the Q2 of 2024 was $109,400,000 compared to $122,100,000 for the Q2 of 2023.

Speaker 4

Revenue for the 6 months ended June 30, 2024 was $210,300,000 compared to $216,900,000 for the 6 months ended June 30, 2023. Home closings during the Q2 of 2024 were 337 homes compared to 385 homes in the Q2 of 2023. Home closings for the 6 months ended June 30, 2024 were 6.48 homes compared to 7.13 homes for the same period in 20 23. Average sales price during the Q2 of 2024 was approximately 341,000 for 299 production built homes. This compares to an average sales price of approximately 313,000 during the Q2 of 2023 3 76 production built homes.

Speaker 4

As Sheldon mentioned, our net new orders during the Q2 of 2024 were 323 homes compared to 341 homes in the Q2 of 2023. Net new orders for the 6 months were 707 homes compared to 7 30 homes in 2023. Our backlog at the end of the second quarter was 248 homes with a value of approximately $81,200,000 Gross profit and gross profit margin for the Q2 2024 was $19,600,000 17.9 percent, which decreased from $23,900,000 19.6 percent from the Q2 of 2023. The decrease was primarily driven by higher levels of incentives versus price accounting adjustments from acquisitions and other non recurring expenses. Adjusted gross profit margin was $20,900,000 for the 3 months ended June 30, 2024.

Speaker 4

This decreased from 21.4 percent in the Q2 of 2023 and is due largely to the company continuing to offer attractive sales incentives to homebuyers. For the 6 months ended June 30, 2024, gross profit and gross profit margin was 35,700,000 dollars 17%, which decreased from $40,700,000 18.8 percent from the 6 months ended June 30, 2023. Similar to the Q2, this decrease was primarily driven by higher level of incentives, purchase price accounting adjustments from acquisitions and non recurring expenses. Adjusted gross profit margin was 20.7% for the 6 months ended June 30, 2024, a slight decrease from 20.9% from the 6 months ended June 30, 2023. This is due largely to the company continuing to offer attractive sales incentives to homebuyers.

Speaker 4

SG and A expense in the Q2 of 2024 was 19,600,000 Adjusted for one time transaction fees, non cash stock based compensation expense and severance, adjusted SG and A was approximately $16,100,000 or 14.7 percent of revenue for the 2nd quarter. During the 6 months ended June 30, 2024, SG and A expense was $36,700,000 and adjusted SG and A expense was $30,400,000 or 14.5 percent of revenue. 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 $25,000,000 in cash and $55,000,000 of availability on our credit facility as of June 30, 2024, resulting in total liquidity of $80,000,000 That concludes our prepared remarks.

Speaker 4

Operator, please open up the line for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from the line of Carl Reichardt with BTIG. Please go ahead.

Speaker 5

Thanks. Good morning, guys. Hope you're doing well. Good morning, Karl.

Speaker 4

So Jack, can you talk

Speaker 5

a little bit about your absorptions? I think you're running a little less than 2 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'd mentioned something about product repositioning, maybe give us a little more detail on that.

Speaker 2

Yes. Hey, 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.

Speaker 2

Yes, we're you are absolutely correct. We think the right number is something in the high 3s, low 4s. Like most things, our portfolio of communities is a bell curve. We've got communities that are running upwards of 7, 8 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 really a biweekly basis across the management committee and division heads and that sort of thing.

Speaker 2

But it's not a one size fits all. It's definitely looking at where we stack up side by side, encouraging our team really throughout the ranks that we are as a public company pace versus price, we're leaning much more in the pace. And so it's tactical things like pricing and positioning. It's cultural things like changing the mindset and getting people pushing more on the sales side as well. I don't know if Shelton or Keith, you guys have anything to add to that.

Speaker 2

It's not a magic bullet. There's no singular strategy. It's really blocking and tackling at the community level.

Speaker 4

All right. Appreciate that. Thanks, Jack.

Speaker 5

And then, 2 more. I think if I've got it right, the lot count under control was down 10% or so, certainly by more than the delivery volume was 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.

Speaker 2

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, a third is in process and a third is control, but it's 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 really take a hard look at the deals that we're bringing in. We're still acquiring land.

Speaker 2

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 and services and technology to really bring more quantitative approach to that land underwriting process. And I'd say we're probably in the 4th inning of really getting that to where we all would like it to be. So I think that move in lots is really part of that.

Speaker 2

We 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 that year is controlled 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 of 2026. 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.

Speaker 2

And then the second question, I'm sorry.

Speaker 5

Just on acquisition, how that environment feels

Speaker 4

and looks to you now?

Speaker 2

It's busy. You've seen it. Number of our large public competitors have announced deals. There are books out. There are conversations being had.

Speaker 2

As you know and 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 in our geographic footprint. But the market is robust and I think you've seen some of that in the announcement. So we continue to look at acquisitions. I think we've tightened the filter there as well.

Speaker 2

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, we've walked or we've taken a spent time on a very small percentage of deals over the last year that I've been here that have been shown to us and we've spent time on even a smaller amount. And so our conversion rate from deals we've got in the door, NDAs we've signed, and we do look at everything. I mean, we've learned from that as well, as well inside of 10%. So we are we're seeing a lot.

Speaker 2

The volume has picked up certainly since Q1. 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.

Speaker 2

They're reluctant to sell through their lot positions. It's really, really hard to replace it. And I think to just jog my memory to your other question, the land environment is as competitive as it's ever been. We're starting to see some pricing benefit on some of the input costs and we're getting some pricing back from the trades. Land is not one of those areas.

Speaker 2

Land continues to increase in price and competitiveness.

Speaker 4

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

Speaker 2

Thanks, Paul.

Operator

Our next question comes from the line of Chris Plame with Tall Pines Capital. Please go ahead.

Speaker 6

Hey, 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?

Speaker 2

Hi, Chris. On the first question, I would say so let's 3 deals. I would say the coastal transaction Creekside, which was the most recent closing, is probably the furthest along. That was really the cleanest from an operational product standpoint. So we've worked through a majority of their inventory and we've opened communities under our product set and our brand in that market.

Speaker 2

And so I think that's that one's 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 5 communities going on up in Raleigh and that was a little bit of a more of a delay because the product set is very different.

Speaker 2

We were focused on affordable product. We've got our communities open now and we're underway there. Rose, what I say, that one we did in October of last year, different product type. We're still working through getting their trades aligned with ours, their costs aligned with ours. That's also going to be the biggest opportunity.

Speaker 2

I'd say we're probably halfway 60% through integrating there. But they're very happy with their product, very happy the demand trends. They're very happy with what their forward pipeline looks like from a land side for us. And that 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.

Speaker 2

On the change in interest rates, I think at a high level, we're still focused on the 1st buyer, 1st 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, trying to target product for the right price point to meet that affordability issue, because maintaining value perception at the same time, I mean, that's the constant focus. Value engineering, it's always been a core part of the culture here.

Speaker 2

That's certainly the focus as well. We are continuing to buy down interest rate. 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.

Speaker 2

We've moved down to a $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.

Speaker 2

We've been proactive in going out to our trades and renegotiating terms. And so I do think starts in July 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 come down as rates have come down. The one thing I would say that's a little bit of a change is we are seeing more people take closing cost dollars and maybe not the rate and maybe their perspective is, I can refinance, the rates are ultimately coming down, I can refinance at some point in the future. So they're taking more we're going to them saying, look, you've got this incentive, choose it how you may.

Speaker 2

We've recently seen a pivot to taking a little more of the dollars and a little bit less of the buy down rate. So we're monitoring that very much as well.

Speaker 6

Okay, great. Thanks.

Operator

That concludes our Q and A session. I will now turn the call back over to Jack Matanko for closing remarks.

Speaker 2

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.

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Earnings Conference Call
United Homes Group Q2 2024
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