Q1 2024 United Homes Group Inc Earnings Call

Participants

Erin Mcginnis; General Counsel, Company Secretary; United Homes Group Inc

John Micenko; President; United Homes Group Inc

Shelton Twine; Chief Operating Officer; United Homes Group Inc

Keith Feldman; Chief Financial Officer; United Homes Group Inc

Carl Reichardt; Analyst; BTIG LLC

Presentation

Operator

Good day, everyone and welcome to the United Homes Group First Quarter 2024 Earnings Call. (Operator Instructions) Please note this call may be recorded. And I will be standing by, should you need any assistance.
It is now my pleasure to turn the conference over to Erin. Please go ahead.

Erin Mcginnis

Good morning and welcome to United Homes Group's first quarter 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. 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.

John Micenko

Thanks, Erin. Good morning, everyone. United Homes Group made progress on a number of fronts in the first quarter of 2024 as we continue to pursue our goal of becoming one of the premier homebuilders in the Southeastern United States. With a focus on affordability, a land-light operating strategy and a strong track record of homebuilding success, United Homes is poised to grow beyond its existing footprint for both strategic M&A and organic growth.
We continue to see a favorable homebuilding landscape in our markets, thanks to a lack of home inventory in the resale market, continued strong job growth and household formation. Both companies and families continue to migrate to cities and throughout the Southeast, creating a need for new housing and we plan on capitalizing on this trend for years to come.
As we've stated in the past, M&A will be a key driver of our expansion into new markets. We feel we have a competitive advantage over our peers in our Southeastern roots and our willingness to retain the acquired company's personnel following the transaction.
We've already executed a number of acquisitions, most recently in Creekside Custom Homes which closed in the first quarter and further expanded our presence into the coastal region of South Carolina. The integration of Creekside and the other acquired builders are progressing nicely, and we are excited to have them as part of our team. We are constantly evaluating possible deals in our markets and hope to add more builders to our platform this year, provided they are a good fit to our company from a financial and cultural perspective.
We ended the first quarter with just over 11,000 lots owned and controlled, giving us a great runway for future growth. We remain committed to securing our land capital in a capital-efficient manner for the use of options agreements and land banking arrangements. We feel that offloading much of the costs associated with land development will allow us to focus on our core competency of building and selling homes.
Our land-light efforts got a real boost in the first quarter with our entry in a strategic partnership with a large land banking partner. In closing on our initial transaction with that partner, we also then entered into a definitive agreement for a newly created land fund just this week which Keith will speak to in his commentary later. Overall, I'm pleased with our market positioning at the end of the first quarter and remain excited about the opportunities that lie ahead.
We made further progress towards long-term goal of becoming a premier homebuilder in the Southeastern US while maintaining a focus on new home affordability. We ended the quarter with a sold backlog of 262 homes which represented a 39% increase over the first quarter of 2023, and which should lead to strong cash flow generation in coming quarters.
We also maintained a strong balance sheet with over $28 million in cash and $63 million of undrawn revolver capacity under our credit facility. As a result, I believe United Homes Group is well positioned to achieve our goals for 2024 and beyond.
Now I'd like to turn the call over to Shelton, who will provide some more detail on operations this quarter.

Shelton Twine

Thanks, Jack and good morning to everyone. United Homes delivered 311 homes in the first quarter of 2024, generating home sales revenue of $101 million. Our midlands division was the biggest contributor to our delivery total, followed by our upstate and coastal divisions. Construction cycle times have returned to pre-pandemic levels as we saw a real improvement in the availability of labor and materials as compared to last year. We believe this year-over-year improvement in cycle time, along with our 39% unit backlog increase in the quarter, will lead to strong cash flow generation in the coming quarters, as Jack mentioned.
We sold 384 homes during the quarter on a sales pace of 2.6 per active community per month. Following the close of the first quarter, we generated 118 new net orders in April which was fairly consistent with March, a signal that demand trends are staying positive as we move through the spring selling season.
Financing incentives remain an important selling tool at our communities as they help buyers secure a monthly payment that fits within their budget. We began the year at elevated incentive levels but were successful in dialing it back as the first quarter progressed. We are optimistic this downward trend in incentive levels will continue but much of it will depend on the trajectory of interest rates from here.
We continue to see motivated, engaged and engaged buyers in our markets thanks to the lack of available supply and the steady flow of new jobs and people into the region. Our cancellation rate during the quarter was 10%, a level that implies that prospective buyers who move forward with their purchase remain committed and confident in their decision through the home buying process. Overall, we saw solid demand in traffic trends at our communities throughout the first quarter and this carried into April.
We continue to strike a balance between price and pace to achieve our desired return goals and deliver homes in a timely manner. We have a healthy pipeline of lots which will allow us to fulfill our delivery goals for 2024 and beyond and an affordable product focus that meets the needs of most entry-level buyers in our markets in terms of quality and value. While we still have a lot of work to do to become the large-scale southeastern builder that we want to be, I believe we are on the right track to achieve that goal.
With that, I'd like to turn the call over to Keith, who will provide more detail on our financial results this quarter.

Keith Feldman

Thank you, Jack and Shelton, and good morning. For the first quarter of 2024, net income was $24.9 million which included a change in fair value of $26.4 million, primarily related to the accounting for potential earnout which will fluctuate in 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.
Revenue for the first quarter of 2024 was $100.8 million compared to $94.8 million for the first quarter of 2023. Home closings during the first quarter of 2024 were 311 homes compared to 328 homes in the first quarter of 2023. Average sales price during the first quarter of 2024 was $335,000 for 286 production-built homes. This compared to an average sales price of $314,000 during the first quarter of 2023 for 294 production-built homes.
As Shelton mentioned, our net new orders during the first quarter of 2024 were 384 homes compared to 389 homes in the first quarter of 2023. Our backlog at the end of the first quarter was 262 homes with a value of approximately $78.7 million.
Gross profit and gross profit margin for the first quarter of 2024 was $16.1 million and 16% which decreased from $16.8 million and 17.7% for the first quarter of 2023. This decrease was driven by a few items, purchase accounting adjustments related to the sold inventory that we acquired from Rosewood and Creekside and increased interest expense on finished inventory. Excluding these items, adjusted gross profit and adjusted gross profit margin were $20.6 million and 20.4% compared to $19.2 million and 20.2% in the first quarter of 2023.
SG&A expense in the first quarter of 2024 was $17.1 million. Adjusted for onetime transaction fees and noncash stock-based compensation expense, adjusted SG&A was approximately $14.3 million or 14.2% of revenue for the first quarter.
As Jack mentioned, we made significant progress this quarter on our land-light initiatives by moving approximately $17 million of finished lots to a large land banking partner. This strategy will allow us to continue to be efficient with our balance sheet capital and take down lots as we are starting new homes. Additionally, we entered into a definitive agreement for newly created land funds for a total amount of up to $150 million which will provide capital for future land development into finished lots in our core markets.
As of today, we have 63 active communities, up from 52 as of Q1 2023. As of March 31, 2024, we had approximately 11,000 lots under control from our land development affiliate as well as some third parties. We had $29 million in cash and $63 million of availability on our credit facility as of March 31, 2024, resulting in total liquidity of $92 million.
That concludes our prepared remarks. Operator, please open up the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Carl Reichardt, BTIG.

Carl Reichardt

First, Keith, excluding the purchase accounting impact and the higher interest rate impact on gross margin, can you talk about the travel from last year, the improvement in gross margin and what drove that ex those items?

Keith Feldman

Yes. Carl, yes, so if you look at the adjusted gross profit, it was marginally higher. And it was really -- we have incentives this year as we did last year but the lumber cost really has come down from last year to this year, right? So remember, at the beginning of last year, we had high lumber costs in our inventory and we burned through that. So that gave us a little bit of an uplift in adjusted gross margin. And then we have incentives which are similar to last year but probably trending up a little bit.

Carl Reichardt

Okay. And then Jack, you've been there for I think three quarters now, if I've got it right. Can you talk about the acquisition environment as you look at it today versus, say, what it was nine months ago? And how does potential forward deal flow look, given that obviously, a lot of other builders are looking but at the same time, you guys have a value proposition for potential targets that might be very different? So maybe just flesh that out, I'd appreciate it.

John Micenko

Yes. Sure, Carl. Thanks for the question. A couple of things. To most of the industry observers, it's no secret that M&A activity has picked up. There have been, I don't know, Carl, on my account, four or five deals involved public companies in the last six or nine months. There's a deal in Texas, at least one in Tennessee, Indiana, a couple of others. So the velocity is picking up. We, as you'd expect, took a look at many of those. We look at most of the transactions that are in the marketplace. The broker community certainly understands our strategy and we're one of the calls.
We've got to look at a couple of other things that we've got to look at: the market, the geography, the footprint, the size, the consideration. We'd like to use our equity as much as we can, structure our cash and our capital, because we have to keep the M&A or the organic engine going just as much as the M&A side. Definitely more activity. Valuations, we don't get a ton of color on them. You can back into it, when some of our peers filed the transactions and evaluations, not surprisingly, have increased.
And then the last thing for us that's really important is we always need to go into these with a solution for the land ahead of time. The land-light strategy for us is non-negotiable. So if it's a traditional builder with a lot of lots in the balance sheet, we need to have a solve for that. And when we go back to some of the prepared comments, having that strategic partner now in place on the land bank side and beyond that, multiple conversations with a number of providers, I think positions us well at the point of sale to address that early and more efficiently going forward.
But more deal valuations are up, and I don't see that really slowing down. We were out at the Builder 100 Conference this week, and you may have seen we were fortunate to win the Builder of the Year award this year, so we were out accepting that. And a lot of discussion around M&A at that conference. And so I think the color there suggests we're going to see more of the same for the foreseeable future.

Carl Reichardt

Great. And I meant to say congrats on Builder of the Year, too. I really appreciate the color, guys.

Operator

(Operator Instructions) It appears that we have no further questions at this time. I will turn the call back to management for closing remarks.

John Micenko

Thank you, everybody, for calling in this morning. Appreciate your interest in United Homes Group and look forward to updating everyone as we continue to progress and grow our company. Thank you.

Operator

And this does conclude today's program. Thank you for your participation and you may disconnect at any time.