United Homes Group, Inc

Good morning, ladies and gentlemen, and welcome to the United Homes Group third quarter 2023 earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, November 10, 2023. I would now like to turn the conference over to Alan Hutto. Please go ahead.

Good morning and welcome to the United Homes Group third quarter of 2023 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 and 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 security 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 balance. Hosting the call today are United Homes Group's Chief Executive Officer, Michael Geary, President Jack Maschenko, Chief Operating Officer, Shelton Twan, and Chief Financial Officer, Keith Feldman. With that, I'd like to turn the call over to Jack.

Thanks, Alan. Good morning, everyone. Michael has graciously handed over conference call ratings to me, but he is here to participate in the Q&A and more than happy to answer any questions you may have. I've been with United Homes Group for almost four months now and really have enjoyed getting to know everyone in the organization and setting the company on a course towards fulfilling the vision that we've had for the company since initially working with Michael and the team as their investment banker over two and a half years ago. Our goal is to expand our highly profitable returns-focused business model across the Southeast through organic growth and accretive acquisitions, private builders. The company has a track record of success building homes at affordable price points in both South Carolina and Georgia. We believe this success can be replicated in a number of other markets. Michael has proven to be a great operator during his decade-long career in home building and has established a strong reputation within the industry in the region. We believe the combination of his hands-on industry experience and local market knowledge, my capital markets background, and extensive networks of industry contacts across the housing ecosystem gives United Homes Group a distinct advantage in our efforts to grow the home building operations. To that end, we've closed two deals since our last earnings call, Herring Homes in Raleigh, North Carolina, and Rosewood Communities in the upstate region of South Carolina. The Herring acquisition marks our first initial foray into the attractive Raleigh-Durham market, while Rosewood solidifies our already strong presence in Greenville and Clemson markets. In both instances, we're retaining the acquired company's leadership and employees, and believe we've given them a platform to achieve greater success than was possible in smaller independent builders. We continue to look for and identify acquisition targets that meet our underwriting criteria and appear to be a good fit for our organization. We hope to announce and close additional deals in the near future. Driving our ambitions to expand are a number of positive macro factors that build wealth for the home building industry. There continues to be a significant lack of existing home supply, thanks in large part to the lock-in effect caused by higher mortgage rates. Homeowners are reluctant to put their homes on the market and lose favorable financing terms associated with their existing loans. This is a result of a significant market share for home builders as respective buyers seek alternatives to the existing home market. This is especially true at the more affordable price points where inventory shortfalls are most pronounced. Given the delta between the average mortgage rate for existing homeowners and today's prevailing rates, we believe this lock-in effect will persist for some time. Supplementing the favorable supply dynamics is a healthy and resilient domestic economy. GDP growth in the third quarter of 2020 is estimated to be roughly 4.9%. and employers continue to add jobs in a healthy club. We're also starting to see signs of moderating inflation, which has compelled the Federal Reserve to suspend and potentially end current rate hikes. Economic gains continue to be made in our existing and target markets throughout the southeast. Job and population gains have been a steady driver of household formation, giving home builders a nice tailwind for future growth. Given the favorable business climate and relative affordability associated with our region, we expect these gains to continue. Finally, our ability to buy down mortgage rates for our buyers is a competitive advantage versus both the existing for sale market and against smaller private competitors. With a strong fundamental backdrop, a proven and scalable operating model, and a seasoned leadership team, United Homes Group is one position to achieve its long-term goal of becoming a significant player in the key home building market throughout the Southeast. Michael's team have done a great job setting the foundation for what we want to accomplish. I look forward to working alongside them to take our company to greater heights. With that, I'd like to turn the call over to Shelton, who will provide more detail on our operational performance for the quarter. Shelton?

Thanks, Jack. Net new orders for the third quarter of 2023 grew 55% year-over-year to 272 on a sales base of approximately two homes per community per month. We saw strong order activity throughout the quarter. The traffic levels did taper off as the quarter progressed, which we attribute to the concurrent rise in interest rates, and normal seasonality. This relative softness carried into October as traffic and order trends mirrored the levels we experienced in September. Fortunately, we have several sales tools at our disposal to offset the rise in mortgage rates and help customers achieve a monthly mortgage payment that fits their needs. We also have one of the most affordable product profiles of any public home builder, with an average sales price of $316,000 on closings in the third quarter. We delivered 283 homes and generated $88 million in revenue for the quarter. Our adjusted gross profit margin was 22.1%, which was up from the second quarter of 2023, but down on a year-over-year basis, reflecting that higher level of incentives needed to close homes. We expect the use of our incentives to remain elevated in the fourth quarter as we and others within the industry strive to hit year-end delivery goals and get our communities ready for the start of the spring selling season next year. We saw continued improvement in building conditions during the third quarter as cycle times on homes closed came down 33 days compared to the second quarter of 2023. Supply chain conditions have improved materially from last year, leading to better labor and material availability and easing of cost pressures. Looking ahead to 2024, we believe we can get back to pre-COVID build times in the next two to three months, which will be a huge positive for our inventory turns and operating cash flow generation. Overall, we feel good about our home building operations as we head into the end of the year. We continue to see an active engaged home buying population in all markets. Despite the higher mortgage rate environment, thanks to our affordable home offerings and the positive fundamental tailwinds that Jack mentioned. We are rapidly integrating our recent acquisitions into our home building platform and expect them to be key contributors to our growth and profitability over the long run. We have a great runway for growth with over 9,000 lots owned or controlled as of today and a strong pipeline of acquisition targets that can potentially help us achieve our expansion goals. As a result, we are very optimistic about the long-term prospects for our company. Now I'd like to turn the call over to Keith, who will provide more detail on our financial results this quarter and give an update on our outlook.

Thank you, Jack and Sean, and good morning. For the third quarter of 2023, net income was $151 million, which included a change in fair value of $150 million, primarily related to the accounting for the 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 and upon reaching certain stock price hurdles and can never result in a cash expense for the company. Revenue for the third quarter of 2023 was 87.7 million compared to 111 million for the third quarter of 2022. Home closings during the third quarter of 2023 for 283 compared to 343 in the third quarter of 2022. Average sales price during the third quarter of 2023 was 316,000 for 268 production-built homes. This compares to an average sales price of 315,000 during the third quarter of 2022 for 336 production-built homes. Our net new orders during the third quarter of 2023 were 272 compared to 175 in the third quarter of 2022, representing a 55% increase. Our backlog at the end of the third quarter was 282 homes with a value of $85.9 million. Net new orders in October 2022 were 118 homes, up from 61 in October 2022. Gross profit for the three months ended September 30th, 2023 was $17.4 million. Adjusted gross profit, which excludes the impact of capitalized interest and cost of sales, was $19.4 million. Adjusted gross profit as a percentage of revenue for the three months ended September 30th, 2023 was 22.1%, an increase of 74 basis points from the prior quarter. I reported SG&A expense in the third quarter of 2023 was $13.6 million. After elimination of one-time transaction fees and non-cash stock-based compensation expense, adjusted SG&A was $12.1 million, or 13.8% of revenue. Adjusted book value excluding the non-cash derivative liability on our balance sheet was $93.3 million. And with our land light strategy, none of our book value is comprised of raw land or development. As of today, we have 63 active communities, which includes our recently closed Rosewood communities and Herring Homes acquisitions. As of now, we have approximately 9,000 lots under control from our land development affiliate, as well as some third parties. Our balance sheet is solid with $81 million in cash as of September 30th. And as of September 30th, we had $49 million of availability on our credit facility, resulting in total liquidity of $130 million. Overall, we are in attractive markets with desirable product sets and available liquidity for growth, which positions us well for future growth. That concludes our prepared remarks. Operator, please open up the line for questions.

Thank you, sir.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. Again, that's star followed by the number one. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift your handset before pressing any keys. Again, ladies and gentlemen, should you have a question, please press star followed by the number one on your touchstone phone. We have our first question coming from the line of Chris Flam from Tall Pines Capital. Please go ahead.

Good morning, guys. Good morning. We have a couple questions. Good morning. Can you guys discuss a little bit about the two acquisitions, the multiples paid and how you guys thought about that and then also moving forward what you guys are seeing in terms of evaluations?

Yeah, sure. So two deals announced since we spoke last, Herring and Raleigh. That's really not a valuation discussion. That was more of a team left out in some lots. We had an opportunity to pick up an operational team of 12, 15 people and some inventory that we highlighted in our release. So the multiple there really wasn't when it was more of a team lift out. And we're excited about what they can bring to our platform in 2024 from a development standpoint. I'll let Keith chime in on Rosewood. I think we paid around four times EBITDA for the Rosewood business. We'll get a few deliveries this year. Again, more focused on 2024 there, but being, I think, diligent on valuation. I think your other part of your question there was where have multiples gone? You know, I think, I don't think we've seen a significant change in seller evaluation appetite. I do think we've seen increased interest and engagement from sellers and from conversations we've had over the last six to nine months, you know, in some of the, you know, at least in the near term. So sellers more engaged, getting more callbacks. More robust conversations, valuations are kind of where we were a year ago.

Keith, anything to add? No, I think that covers it, Jack. I mean, like Jack said, Rosewood was slightly under four times on evaluation, from an evaluation perspective, and it added to our upstate communities and growth in the upstate, as well as expanding our product set over there.

Yeah, I think the real takeaway for Rosewood is the product diversification raises our you know, raises our average sales price, more of a trade-off product, more of a option opportunity product. We'd like to bring that into some of our other markets, you know, diversified products that will allow us to go after larger land deals. That'll obviously help organic growth. So there's, I think there's a little bit of a multiplier effect because of that product set added to our portfolio.

Got it. Great. Thanks. And the liquidity you guys have, it looks like, you know, you have that 130, not counting Rosewood. The pipeline versus liquidity, how do you guys feel about that moving forward? Do you think you're going to need a little more of the credit facility? You can issue stock or how you guys think about, I guess, the pipeline versus the liquidity and how you plan on paying for acquisitions in the future, seeing that it looks like you've been doing cash up to this point.

Yeah, I think Our intent and our hope is to do a combination of stock and cash. You know, the conversations, prospectively, probably have a little more stock around the conversation than the deals that have been announced. You know, but we have to sort of tie into what the seller's expectations and wants are. You know, we talk about liquidity every week, both from running the business, putting starts on the ground next year, as well as acquisitions. We talk about having some dry powder, you know. So it's really a balance. And, you know, Chris, these conversations, they ebb and flow. You know, LOI negotiations take time. You know, deals fall in, deals fall out, deals come back to us. So it's tough to sort of handicap any one given deal. In our liquidity position, I tell you, I think we could probably – potentially double our size with the capital we have before we have to think about, in terms of deal structure, before we have to go out to the capital markets. I don't know, Keith, do you want to add to that?

Got it. Yeah, Chris, you know, Jack covered it well. And, you know, clearly with $130 million of liquidity, we have liquidity for some additional deals, you know, without even the stock consideration that Jack talked about. Okay, great.

You know, I'll just ask one last question, then I'll jump back in the queue. Can you give us a quick update on the BTR side of the business and also the mortgage business that I assume might be doing pretty well in this environment?

Yeah, so the mortgage business, we are buying down rate to our buyers. We've seen about a 78% capture rate, not surprisingly, given that incentive. I think we're in the middle of the fairway competitively across our markets. It costs us money. It's incentive dollars, but it's important in this environment. It's the cost of doing business. So we're happy there. We're happy with the profitability there. We are always looking at trying to make that a bigger part of the business, whether it's looking at title, whether it's expanding our relationship. I think we'd like to be bigger in mortgage, and I think we can get there through incremental acquisitions. So, you know, we're looking at the cost of money versus the incentive every week and we're in a good cadence there from an operational perspective. On the BTR side, we are active. We've added a head of BTR. We're looking at it as its own division. We've had calls and meetings with some of the top private and public owners of single-family rental homes across the country. We continue to have those. We are looking for purpose programmatic built deals. We will disclose and guide to those when the time is right because they are large and we have visibility there. We continue to sell a small handful of units in case-by-case basis to renters or to single-family rental companies as all the publics do. But it's my hope and plan that we would carve out the BTR sales starts and closings to investors when that gets critical mass. Great. Thanks, guys. Appreciate it. Thanks.

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Jack Mishenko for final closing comments.

Thanks, everybody, for dialing in this morning and your interest in the United Homes Group. And we look forward to updating you in the near term as we continue to make progress on our long-term strategic plan. Happy Veterans Day to everybody.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.