Business Overview and History
United Homes Group, Inc. (NASDAQ:UHG) is a leading homebuilder focused on delivering quality, affordable homes to buyers across the Southeast United States. With a strong presence in high-growth markets like South Carolina, North Carolina, and Georgia, UHG has established itself as a trusted name in the industry, known for its innovative designs, community-centric approach, and commitment to customer satisfaction.
UHG was founded in 2004 with the vision of providing attainable housing options to a wide range of homebuyers. The company began its operations in South Carolina, focusing on constructing single-family residential homes in the state’s Upstate, Midlands, and Coastal regions, as well as establishing a smaller presence in Georgia. Over the years, UHG has grown by expanding its market share in existing markets and by expanding into contiguous markets in North and South Carolina.
Prior to 2023, UHG’s business historically consisted of both homebuilding operations and land development operations. In 2023, in anticipation of a business combination, UHG separated its land development operations and homebuilding operations across separate entities. This allowed UHG to focus on its core homebuilding business and adopt best practices associated with ownership and control of land, lots, and production efficiency.
In March 2023, UHG completed a business combination with DiamondHead Holdings Corp., a blank check company. This transaction allowed UHG to become a publicly traded company under the name United Homes Group, Inc. The business combination provided UHG with additional capital to fund its growth initiatives, including strategic acquisitions.
Today, UHG constructs a diverse range of residential products, including entry-level attached and detached homes, first-time move-up attached and detached homes, and second move-up detached homes. The company’s average sales price of $320,000 for production-built homes in the third quarter of 2024 highlights its focus on the more affordable segments of the market, where demand remains robust.
Leveraging a land-light strategy, UHG partners with third-party land developers and land bank providers to acquire finished lots, allowing the company to maintain a capital-efficient approach while still delivering high-quality homes. As of September 30, 2024, UHG had approximately 8,600 lots under control, including those owned or controlled by related parties, as well as lots the company expects to secure through option contracts.
Financial Performance and Liquidity
For the nine months ended September 30, 2024, UHG reported revenue of $328.9 million, a 8% increase compared to the same period in 2023. Despite the challenging market conditions, the company delivered 1,017 homes during this period, up from 996 homes in the prior year. Net income for the nine-month period was $46.2 million, which included a $50.7 million gain related to the change in fair value of derivative liabilities.
The company’s gross profit margin for the nine months ended September 30, 2024, was 17.7%, a decrease from 19.1% in the prior-year period. This decline was primarily due to higher costs of sales, including increased sales incentives and amortization of purchase price accounting adjustments related to recent acquisitions. Adjusted gross profit margin, which excludes the impact of these factors, was 20.7% for the nine-month period, only a slight decrease from 21.2% in the prior year.
For the most recent quarter (Q3 2024), UHG reported revenue of $118.64 million, representing a significant year-over-year growth of 35.2%. This increase was primarily attributable to an increase in production-built home closings and an increase in average sales price of production-built homes. However, the company reported a net loss of $7.34 million for the quarter, compared to net income of $150.84 million in the prior year period. This decrease was primarily due to a $157.49 million change in the fair value of derivative liabilities, partially offset by an increase in gross profit.
Operating cash flow (OCF) for Q3 2024 was $5.71 million, which was also the same as the free cash flow (FCF) for the quarter. This represents a slight improvement in cash generation compared to the previous year.
For the full fiscal year 2023, UHG reported revenue of $421.47 million, net income of $125.06 million, OCF of $28.22 million, and FCF of $28.06 million.
As of September 30, 2024, UHG had $25.82 million in cash and cash equivalents and $63.17 million of available capacity under its $220 million Syndicated Credit Agreement, resulting in total liquidity of $89.0 million. The company’s net debt position was $91.8 million, providing a strong financial foundation to support its growth initiatives.
UHG’s balance sheet remains solid, with a current ratio of 1.89 and a quick ratio of 0.39 as of September 30, 2024. The company’s debt-to-equity ratio stood at 7.16, reflecting its capital structure and use of leverage to support growth initiatives.
Operational Initiatives and Strategic Expansion
Under the leadership of new interim CEO Jamie Pirrello, UHG has been focused on driving growth, lowering direct costs, and managing overhead. The company has launched several initiatives to update its product offerings, rebid direct costs, and tightly control its overhead spending, all aimed at generating positive operating leverage and improved gross margins.
In addition to its organic growth efforts, UHG has been actively pursuing strategic acquisitions to expand its geographic footprint and strengthen its market position. In January 2024, the company completed the acquisition of Creekside Custom Homes, LLC, a South Carolina-based homebuilder, for $12.7 million. This transaction allowed UHG to further expand its presence in the coastal region of South Carolina, particularly in the Myrtle Beach area.
Earlier in 2023, UHG also acquired Rosewood Communities, Inc., a South Carolina-based homebuilder, for $24.7 million. This acquisition has helped the company establish a stronger foothold in the Upstate region of South Carolina. The integration of these acquisitions onto UHG’s homebuilding platform has been a key focus for the company, as it works to capitalize on the positive housing fundamentals in its markets.
UHG operates in two main reportable segments: South Carolina and Other. The South Carolina segment, which is the company’s largest, generated $114.65 million in revenue for the three months ended September 30, 2024, an increase of 30.9% compared to the prior year period. This growth was primarily driven by an increase in production-built home closings and a 1.4% increase in the average sales price of production-built homes closed during the quarter.
The Other segment, which includes operations in Raleigh, North Carolina and mortgage operations through a joint venture, generated $4.41 million in revenue for the same period, up from $343.92 thousand in the prior year. This significant increase was largely due to the expansion into the Raleigh market through the acquisition of Herring Homes, LLC in August 2023.
Risks and Challenges
Like other homebuilders, UHG is exposed to various risks and challenges, including macroeconomic factors such as rising interest rates, inflationary pressures, and shifting consumer demand. The company’s ability to navigate these market conditions and adapt its strategies accordingly will be crucial to its long-term success.
Additionally, UHG’s land-light strategy, while capital-efficient, relies on the continued availability and affordability of finished lots from third-party land developers and land bank providers. Disruptions in this supply chain or changes in the competitive landscape could impact the company’s ability to acquire suitable land for its homebuilding operations.
The homebuilding industry is also highly competitive, with UHG facing challenges from both national and regional homebuilders. The company’s ability to differentiate its product offerings, maintain its focus on affordable housing, and provide exceptional customer service will be critical in securing market share and driving profitability.
Outlook and Conclusion
Despite the near-term headwinds facing the housing market, UHG remains optimistic about the long-term growth prospects in its core markets. The company’s land-light strategy, focus on affordable housing, and strategic acquisitions position it well to capitalize on the strong demand for new homes in the Southeast United States.
Under the leadership of Jamie Pirrello and the experienced management team, UHG is actively implementing initiatives to drive operational efficiency, improve profitability, and enhance shareholder value. With a solid financial foundation, a diversified product portfolio, and a commitment to customer satisfaction, UHG is poised to continue its trajectory as a leading homebuilder in the region.
Looking ahead, UHG expects incentives to remain elevated for the rest of 2024 due to the current mortgage rate environment and the seasonal slowdown typically experienced in the fourth quarter. The company is focused on several strategic initiatives, including updating product offerings to be more competitive and in-demand, rebidding direct costs to drive down expenses, tightly managing overhead spend, leveraging land banking and developer relationships to keep land off the balance sheet, and improving inventory turns by selling completed spec homes more quickly.
With 55 active communities as of September 30, 2024, up from 53 a year earlier, UHG continues to demonstrate its commitment to growth and expansion in its target markets. The company’s focus on entry-level and move-up homes, combined with its land-light strategy, positions it well to navigate market volatility and capitalize on the long-term housing demand in the Southeast United States.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.