Smith Douglas Homes Corp. (NYSE:SDHC) is one of the fastest-growing public homebuilders in the United States, focused on designing, constructing, and selling single-family homes in some of the most desirable markets in the Southeastern and Southern regions of the country. The company employs an efficient land-light, production-focused, and conservatively leveraged business model, which has resulted in a compelling combination of strong home closing gross margins, construction cycle times, and returns.

Business Overview

Smith Douglas' communities are primarily targeted towards entry-level and empty-nest homebuyers, offering an attractive value proposition by providing a personalized home buying experience at affordable price points. With the goal of becoming one of the most dominant homebuilders in the Southeastern and Southern United States, the company intends to grow operations within its existing footprint and expand into new markets where it can effectively implement its business strategy and maximize profitability and returns.

Financials

During the first quarter of 2024, Smith Douglas generated pre-tax income of $21.4 million, or $0.33 per diluted share. Home sales revenue came in at $189 million on a 13% increase in deliveries, while new orders totaled 765 on a sales pace of 3.6 homes per community per month. The company's cancellation rate remained low at 10.6% during the quarter. These results came in over the high end of the company's prior guidance, as its teams effectively sold and closed homes amidst favorable homebuilding conditions in its markets.

Market Conditions

Smith Douglas continues to benefit from low levels of existing housing supply and positive demand drivers, including healthy job creation, in-migration, and new household formation. The "lock-in effect" from higher mortgage rates has pushed a greater percentage of buyers into the new home market, which the company believes will be in place for some time, creating a real opportunity for homebuilders to gain market share.

Strategy

The company's focus on the more affordable segments of the market, with an average sales price of $334,000 for the quarter, is reflected in its strategy of catering to entry-level buyers and empty-nesters who are looking for customizable homes at an affordable price point. This approach has not only resulted in strong volume growth over the years but also healthy profitability, as evidenced by the company's homebuilding gross margin of 26.1% for the quarter.

Smith Douglas employs a land-light strategy, with 95% of its lots controlled via option agreements at the end of the first quarter. Through its strong relationships with land bankers, land sellers, and developers, the company strives to acquire lots on a just-in-time basis, allowing it to turn its inventory more quickly and focus on what it does best - building and selling homes. This strategy also enables the company to use its capital more efficiently and mitigate some of the risks associated with land development.

Operational Efficiency

The company's build times in the quarter were in line with expectations at approximately 60 days. Through its SMART Builder ERP system and its team construction process, Smith Douglas strives to set standards of excellence for homebuilding efficiency, which it believes is a key differentiator. The net result of the company's affordable product focus, land-light strategy, and proprietary building process is a return on equity profile that ranks at the high end of its public builder peer group.

Recent Developments

Smith Douglas has begun to expand its geographic footprint this quarter, contracting for lots in Central Georgia, Houston County (which includes Perry and Warner Robins), and Chattanooga, Tennessee and surrounding submarkets. The company plans to initially leverage its expansive Atlanta division operations as it builds out its teams in these new markets until it eventually drives enough scale to create separate divisions. Smith Douglas' integration of its recent acquisition, Devon Street Homes in Houston, is progressing well, with the team embracing the company's way of doing business.

Outlook

Looking ahead, Smith Douglas expects its second quarter home closings to finish between 600 and 625 homes, with an average sales price between $335,000 and $340,000 and gross margin in the range of 25.5% to 26.5%. For the full year 2024, the company reiterates its prior guidance of projected total home closings between 2,600 and 2,800 homes, with an average selling price ranging between $338,000 to $343,000 and home closing gross margin between 25.75% and 26.75%, inclusive of any purchase accounting adjustments from the Devon Street acquisition.

Smith Douglas' SG&A expense ratio is expected to be in the range of 13.75% and 14.25% for the full year 2024, which includes approximately 4.2% for internal and external sales commissions. The primary risks to the company's projections are around its ability to maintain sales pace and bring new communities and lots online, as well as macroeconomic factors primarily around jobs, inflation, and interest rates.

Liquidity

As of March 31, 2024, Smith Douglas had over 14,000 total controlled lots, an 82.3% increase compared to the first quarter of 2023. True to its land-light operating philosophy, only 693 of these controlled lots were owned and unstarted, meaning that 95% were either work in process or under option. The company finished the first quarter with $33 million in cash and no borrowings under its $250 million revolving credit facility, providing ample liquidity to execute on its growth strategy.

Conclusion

In conclusion, Smith Douglas Homes Corp. is a well-positioned affordable homebuilder, leveraging its efficient land-light model, proprietary construction processes, and focus on entry-level and empty-nest buyers to drive strong profitability and returns. The company's expansion into new markets, successful integration of acquisitions, and healthy backlog and liquidity position it well to capitalize on the favorable long-term demand trends in the housing market.