Smith Douglas Homes Q2 2024 Earnings Report

Smith Douglas Homes EPS Results

• Actual EPS: $0.40
• Consensus EPS: $0.37
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: N/A

Smith Douglas Homes Revenue Results

• Actual Revenue: $220.90 million
• Expected Revenue: $208.02 million
• Beat/Miss: Beat by +$12.88 million
• YoY Revenue Growth: +21.70%

Smith Douglas Homes Announcement Details

• Quarter: Q2 2024
• Date: 8/14/2024
• Time: Before Market Opens
• Conference Call Date: Wednesday, August 14, 2024
• Conference Call Time: 8:30AM ET

Smith Douglas Homes (NYSE:SDHC), together with its subsidiaries, engages in the design, construction, and sale of single-family homes in the southeastern United States. It also provides closing, escrow, and title insurance services. The company sells its products to entry-level and empty-nest homebuyers. Smith Douglas Homes Corp. was founded in 2008 and is headquartered in Woodstock, Georgia.

Smith Douglas Homes Q2 2024 Earnings Call Transcript

Key Takeaways

• Q2 financial outperformance: Pretax income of $25.9 million ($0.40 per diluted share), 653 home closings (up 17% year-over-year) and a 26.7% home closing gross margin all came in above guidance.
• Robust demand: Net new home orders reached 715 (17% growth year-over-year) amid low existing inventory, healthy job gains and stable migration trends across all divisions.
• Raised full-year outlook: Now projecting 2,650–2,800 home closings (up 50 at the low end), average selling price of $339,000–$343,000 and gross margin of 26.0%–26.75%.
• Land control strategy: 96% of unstarted lots are under option agreements to mitigate land risk and maintain 3.5–5.5 years of supply, though lot costs may trend higher in an upward market.
• Strong balance sheet: Ended Q2 with $17 million in cash, zero revolver borrowings, a debt-to-capitalization ratio of 1.1% and $220 million of available credit.

Presentation

[Operator]

Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Smith Douglas Homes second quarter of 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question again, press star and one. I would now like to turn the call over to Joe Thomas, Senior Vice President of Accounting and Finance. You may begin.

[Joe Thomas, SVP of Accounting and Finance at Smith Douglas Homes]

Good morning, and welcome to Smith Douglas's earnings conference call. We issued a press release this morning outlining our results for the second quarter of 2024, which we will discuss on today's call and can be found on our website at investors.smithdouglas.com, or by selecting the Investor Relations link at the bottom of our homepage. Please note this call will be simultaneously webcast on the Investor Relations section of our website. Before this call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating goals and performance, are forward-looking statements. Actual results could differ materially from such statements due to known and unknown risks, uncertainties, and other important factors as detailed in the company's SEC filings. Except as required by law, the company undertakes no duty to update these forward-looking statements.

[Joe Thomas, SVP of Accounting and Finance at Smith Douglas Homes]

Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be found in our press release located on our website and our SEC filings. Hosting the call this morning are Greg Bennett, the company's CEO and Vice Chairman, and Russ Devendorf, our Executive Vice President and CFO. I'd now like to turn the call over to Greg.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Thanks, Joe, and welcome to the team. As we announced last month, Joe is our new Senior Vice President of Accounting and Finance, taking over from Eddy Kleid, who has transitioned to a role of Division President for the company's newly established Central Georgia division. Joe comes to us from Bank of America, where he provided investment banking services to a number of clients and played a key role in our initial public offering earlier this year. We're thrilled to have Joe as part of the team and expect great things from Eddy in his new operational role. Turning to our second quarter results, Smith Douglas reported pre-tax income of $25.9 million, which translates to $0.40 per diluted share for the quarter.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

We closed 653 homes during the quarter, which was above our stated guidance and represents a 17% increase over second quarter of 2023 and generated $220.9 million in home closing revenue. Home closing gross margin also came in above guidance at 26.7%. That's a combination of solid demand, stable pricing, and cost containment, resulting in better margin performance than we had forecasted. Net new home orders for the quarter came in at 715, representing a 17% year-over-year increase. We continue to experience a favorable operating environment in our markets, highlighted by low level of existing home inventory, healthy job growth, and stable in-migration.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Demand trends were fairly consistent across our divisions, thanks to our new home offerings, which we believe hit the sweet spot of our market in terms of price, customization, and value. It's no secret there's a real need for quality, affordable housing in this country, and we pride ourselves on being a leader in providing solutions to meet these needs. Another aspect of our business we take great pride in and have spoken about previously is our operational efficiency. Home building is a very competitive industry, and success often comes down to how well you execute. From the very beginning, we instill a culture of discipline and accountability at Smith Douglas. We constantly look for ways to improve our operations, from the way we underwrite land deals, to the way we procure labor and materials, to how we build and sell homes.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

We feel this is one of our main differentiators and is demonstrated by our cycle time remaining in line with our expectations at approximately 60 days outside of our Houston division, which we continued to successfully integrate into the Smith Douglas operating model and is fully migrated on our IT system. We also feel this efficient cycle time has helped reduce our cancellation rate, which was 11.8% for the second quarter. The final pillar of our operational focus is our land life strategy. We are home builders first and foremost, which means we view land as a necessary component of our business rather than something for speculative investing. We also know land and land development is one of the most costly and unpredictable aspects of this business.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

As a result, we have made it a priority to eliminate as much of the land risk from our operations as possible by tying up land with option agreements and seeking to take ownership of lots on as close to a just-in-time basis as possible. At the end of the second quarter, 96% of our unstarted controlled lots were controlled via option agreement. While this land acquisition strategy can result in higher lot cost in an upwardly trending market, we feel it serves as an insurance policy against potential downturns.... It also allows us to deploy our capital more efficiently and generate better returns. Overall, we feel good about the current state of our operations. We believe we have the right strategy in place in the right markets to allow us to grow our home building operations beyond what they are today.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

The macro environment remains positive, and there continues to be a real desire for homeownership in this country. Our balance sheet is in great shape, and we have a solid momentum as we head into the second half of the year. As a result, we believe we are well positioned to achieve our goals for this year and beyond. With that, I'd like to turn the call over to Russ, who will provide more detail on our performance this quarter and give an update on our outlook for the year.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Thanks, Greg. I'm going to highlight some of our results for the second quarter and conclude my remarks with our expectations and outlook for the third quarter and full year for 2024. As Greg mentioned, we finished the second quarter with $220.9 million of revenue on 653 closings for an average sales price on closed homes of $338,000. Our gross margin was 26.7%, and SG&A was 14.4% of revenue, which includes a true-up for annual incentive bonuses that accounted for 30 basis points of the total. Pre-tax income was $25.9 million, with net income of $24.7 million for the quarter.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Given the nature of our Up-C organizational structure, our reported net income reflects an effective tax rate of 4.4% on the face of our income statement. This income tax expense is primarily attributable to the income related to the 17.3% economic ownership of our public shareholders that is held by Smith Douglas Homes Corp. and Smith Douglas Holdings, LLC. Our adjusted net income, which is a non-GAAP measure that we believe is useful, given our organizational structure, is $19.4 million for the quarter and assumes a 25% blended federal and state effective tax rate as if we had 100% public ownership operating as a Subchapter C corporation.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

We believe adjusted net income is a useful metric because it allows management and investors to evaluate our operating performance and comparability more effectively to industry peers that may have a more traditional organizational and tax structure. You can find more information about our structure and income taxes in the footnotes of our financial statements. Our net income for the quarter included a one-time charge of $1.2 million, related to a purchase accounting adjustment for the true-up of the expected earn out payment related to our Devon Street acquisition that will be paid early next year. This expense is included in other expenses on our income statement. We finished the first quarter with over 15,800 total controlled lots, an increase of 81% over the second quarter of 2023, and just over 12% from the first quarter of this year.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Our corporate investment committee, which meets every week to review and approve new land deals, continues to remain busy as we focus on increasing market share and driving scale throughout our existing footprint. We expect our lot supply to stay within a targeted range between 3.5-5.5 years of supply, calculated based on our forecasted closings over a rolling twelve-month period. We finished the second quarter with 1,173 homes in backlog, with an average selling price of $345,000 and an expected gross margin on those homes of approximately 26%. We finished the quarter operating out of 75 active selling communities, versus 70 at the end of the first quarter.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Looking at our balance sheet, we ended the quarter with approximately $17 million of cash and no borrowings under our $250 million revolving credit facility and $344.6 million of total members and stockholders' equity. Our debt to book capitalization was 1.1%, and our net debt to net book capitalization was -4.1%. We had approximately $220 million available on our unsecured credit facility and are well positioned to execute on our growth strategy, as Greg previously mentioned. Now, I'd like to summarize our outlook for the third quarter and full year for 2024.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

We anticipate our third quarter home closings to finish between 725 and 775 homes, at an average sales price between $340,000 and $345,000, with gross margin in the range of 26%-26.5%. For the full year 2024, we are projecting total home closings between 2,650 and 2,800 homes, an increase of 50 closings to the low end of our prior guidance. We expect our average selling price to range between $339,000-$343,000, and our home closing gross margin to finish between 26%-26.75%, which is a 25 basis point increase to the low end of our prior guidance.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Additionally, we continue to expect our SG&A expense ratio to be in the range of 13.75%-14.25% for the full year, which includes approximately 420 basis points for internal and external sales commissions. We believe the primary risks to our projections are around our ability to maintain sales pace and bring our new communities and lots online. As I have mentioned on prior calls, we continue to see some delays with municipalities on permitting and plots. Macroeconomic factors, primarily around jobs, inflation, and interest rates, could also have unforeseen impacts to our numbers. With that, I'd like to turn the call over to the operator for instructions on Q&A.

[Operator]

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Our first question comes from the line of Michael Rehaut with JPMorgan. Your line is open.

[Andrew Azzi, VP of Equity Research at JPMorgan]

Hi, thank you for taking my questions. This is Andrew Azzi on for Mike. I was just hoping to maybe get some more granularity on and an update on community count growth and how you're thinking about it as we go through the year and maybe any initial thoughts for next year. Thank you.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Hey, Andrew. Yeah, from a community count perspective, and I think we've stated this before, we expect to end somewhere, you know, maybe 2 or 3 more communities higher than where we're at at the end of the quarter. You know, somewhere in the 70, probably 76-79, 80 range. So we'd expect it to grow a little bit. I mean, it's. There's some communities that are coming offline, just, you know, from exceeding sales. And then we're hoping to, again, bring some of our communities, you know, online, you know, on time or a little bit faster. You know, we are experiencing, as I mentioned, some plat delays.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

So that's where we would expect, and then into next year, we haven't really provided any guidance yet, but, you know, maybe on the next quarter, we'll give some updates on communities as well as kinda sales and closings for next year.

[Andrew Azzi, VP of Equity Research at JPMorgan]

Thanks, Russ. And then maybe if we could drill down a little bit on your demand trends over the last few months, any kind of progression you can give us, or, how the, how the sales pace is coming through the door, maybe versus your expectations?

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Yeah, I'll take that one then. Our current trends are, you know, probably slightly off from typical seasonality. We're still seeing a lot of demand. The last few weeks have been good, although, you know, you've got the typical seasons with school starting. We just had a storm move through, you know, a lot of our coastal—I mean, a lot of our Carolina divisions, and had some interruptions with those sorts of things. So it's kinda hard to pinpoint some of that, but I think seasonality is maybe just a little soft, but those trends are the same.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah, just to add on to that, as Greg mentioned, we also had you know, Houston got hit pretty hard with a storm during the quarter, but as you would expect, I mean, you can see absorptions trended down a little bit. When you looked at our monthly net sales through the quarter, April and May were actually about flat in terms of their sales. I think we were at, you know, 246 and 253 in May, and then June tailed off a bit, you know, for the balance. So we again, that was that's kinda your typical seasonality, but also I think there was you know, some weather factors in there.

[Operator]

Your next question comes from the line of Rafe Jadrosich with Bank of America. Your line is open.

[Rafe Jadrosich, Managing Director at Bank of America]

Hi, good morning. It's Rafe. Thanks for taking my question. I wanted to ask on Devon Street in Houston, can you talk a little bit about what the margins are for that division compared to sort of the legacy business, and how you're seeing the progress there in terms of integrating them?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah. So just to take the last part of it, integration is going as good as we could have expected. I think as we've mentioned on last quarter, we had continued to kinda migrate systems, getting them into the Smith Douglas way of doing business, and that has continued. I think as of today, we are totally 100% migrated onto our system. We've had our team meetings out there. So again, we've continued to. We've turned over the brand, right? So the brand was turned over pretty early. We are building out some of the legacy, you know, homes, the, you know, floor plans, but we've already started to integrate our models. We're doing more of the Smith Douglas, you know, marketing, you know, CRM.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

So everything's on track, and you know, really a shout-out to that team. I mean, they've been you know, phenomenal. I think maybe we've lost one person you know, in the last year, so we just hit our one-year anniversary. But extremely great team, and it's been a great acquisition for us, and I think they're gonna exceed you know, the closings that we had projected for them for this year. And then just in terms of margins, as good as we could have expected as well, they're hitting the mid-20s you know, 25% you know, gross margin, and I think that's consistent you know, with their legacy business, and probably a little bit higher than we would have expected, to be honest.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

I think because we were gonna try and push a little more volume than they had done in the past, and we thought that was gonna come a little more at the expense of margin. But yeah, it's been good. The first half of the year, the first quarter was great. You know, sales and demand was great, but I also think, you know, again, they followed a little bit of the typical seasonal pattern, you know, in the second quarter. But yeah, it's going well.

[Rafe Jadrosich, Managing Director at Bank of America]

That, that's really helpful. And then, just you raised the low end of the gross margin outlook. Can you talk about what's driving that increase, and what are you assuming for stick and brick cost and land inflation for the second half of the year?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

So we raised it because margins have been coming in better for our sales in second quarter. So it's just really a function of we've been able to raise prices in excess of cost inflation, and that's really more on the direct cost side. You know, our land cost is really what's driving, you know, year-over-year land cost is what's driving the margin erosion, right? I think our land costs maybe it's up about 300 basis points as a percentage of revenue versus last year. But that's the big driver. I don't have the percentages in front of me.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

I mean, maybe, you know, we can talk offline, but it's all in the land costs, which is driving that margin erosion. But, as I mentioned, our backlog—our margin in backlog is about 26%. So, through the first half of the year, I think we were, what? 26.5% through the first six months, and with backlog at 26%. Yeah, I think, you know, that 26%-26.75% is a pretty, pretty safe range.

[Rafe Jadrosich, Managing Director at Bank of America]

Great. Thank you. That, that's helpful.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Sure.

[Operator]

Your next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is open.

[Mike Dahl, Managing Director of Equity Research at RBC Capital Markets]

Hey, thanks for taking my questions. Russ, maybe just to follow up on that comment on backlog margins. I think coming out of the gates, you know, you've been giving a range, you know, plus or minus around where your current backlog margin sits. And if I heard you correctly, if your current backlog margin's at 26, you're guiding 26%-26.5% for 3Q. So you're not really necessarily assuming like incremental erosion at the low end. Maybe just help us understand kind of how you're thinking through, you know, whether it's mix or otherwise, what's gonna deliver in 3Q versus that backlog margin.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah, it's more mix related. I think you've got, you know, just the way it's trending, I think you're, you've got a little bit higher gross margin probably hitting in Q3 than Q4, if I recall correctly. So I think that's it. It's just more of a mix. And, you know, we're pretty baked in terms of kind of, you know, trying to get to that low-end closing number. You know, when you look at our closings plus our backlog scheduled to close this year, and that assumes that, you know, nothing falls out, right, from a cancellation standpoint. I mean, we feel pretty good about getting to that 2,650.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

You know, we're getting to a point in the year where, you know, maybe, maybe we've got another month or so of where we can sell and close in the, in the year. And, you know, we kinda. We just need to see how the margin trends, you know, continue. You know, we've got some specs in the ground that also can close this year. And, you know, part of that's just, you know, how much discounting are we gonna have to do maybe to move some of those specs. So that's why, you know, that's the reason for the range. You know, even though we're at, you know, 26.5% for the year and backlog's at 26%, I think there's some mix in there.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

And then, you know, it just depends on, you know, maybe what we can move some of these, these specs at and, and what some of the demand trends in the next month will look like and, and how we can hold margin.

[Mike Dahl, Managing Director of Equity Research at RBC Capital Markets]

Yeah. Okay, that's helpful. And then, back to the comments that both you and Greg made around the demand trends. I want to make sure I'm clear. I think, Greg, you talked about current trends below typical seasonality. Then Russ, when you added your comments, you talked more specifically about April, May, and June. So I wanted to clarify, and Greg, when you're talking about current trends, is that, you know, what you've seen in July and August to date, that you've referenced still being below typical seasonality?

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

That's correct. Yeah, we're back closer to seasonality, but we're, so our leading indicators is our traffic and our lead generation, and it's slightly below where we would expect typical seasonality. And that is current July-

[Mike Dahl, Managing Director of Equity Research at RBC Capital Markets]

Okay

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

... and August numbers.

[Mike Dahl, Managing Director of Equity Research at RBC Capital Markets]

Got it. Okay, appreciate that. Thank you both.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yep. Thanks, Mike.

[Operator]

Your next question comes from the line of Sam Reid with Wells Fargo. Your line is open.

[Sam Reid, Senior Analyst at Wells Fargo]

Thanks, guys. I wanted to do a quick follow-up on Devon Street here. Just maybe talk through where cycle times today fit in Houston relative to your current core operations, and then maybe kind of help us bridge sort of the path to getting to something more consistent with your core business. Thanks.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Yeah. So, Sam, thanks for the question. We're benchmarking right now all of our trends and our cycle time in Houston. We had some legacy, some of the master-planned communities where we had a little harder time changing product over the- we've just got plugged up over the last, you know, month or so, and we've got all of the units now in the system. And probably over the next couple of weeks, we'll be able to benchmark all the cycle times there. They're... You know, if I'm guessing, without putting numbers on it, we're probably in the mid-high 70s today. We're doing a great job there on cycle time, but we've now got schedules in place on everything, and our team's in place. We've launched those meetings.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Tom and I have been in person there to their trade meetings, and, as Russ said, things are going great with all the transitions. So now it's a matter of being able to set benchmarks moving forward. We would hope by the end of the year to be near our numbers that if we looked across all of our footprints today, we're in that high 50s, 58, 59-day cycle time.

[Sam Reid, Senior Analyst at Wells Fargo]

No, thanks, Greg. That's helpful. Then, one question I had just on mix here. I mean, I know you guys predominantly build to order, but, you know, there is some spec in your business. You know, just kind of curious, you know, kind of how that spec mix looks into the second half of the year. Just mindful of, you know, potential incentives on those specs, so curious what the mix looks like. Thanks.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

You know, our specs. So we've always had some specs, and I don't know that it's that much different than typical. So, you know, we operate and focus as a manufacturing business. We make more, we lose less at full capacity. If we hit a stated slot and we don't have a presale ready, we'll start a home. Our WIP as a percent of WIP, I think we are at about 3% of our homes are at drywall that are spec homes. So it's a small, small sampling. I think the most of those we are able to get moved and sold prior to... And we call it a line in the sand. When we look at around drywall, that is still we can convert that sale, it still closes on its original scheduled time.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah, the other thing, Sam, I would add is, in sitting here today, I'm just looking at the numbers. We've got, as of this week, we only had 45 finished specs, and that was pretty evenly distributed through our divisions. We track spec count by community. Every week, we kind of look at that and see what the sales trends are. But to Greg's point, I mean, we're trying to keep the machine going, and we'll start adjusting price to meter pace to get for our teams, kind of that one a day.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

And then when you look at specs, so the one thing to keep in mind, so specs are up year-over-year, you know, probably just, maybe about, it's about 200 versus last year. Now, half of that, over half of that comes from Houston. So you got to remember, Houston's probably more of a spec market, and in that market, and primarily because you're competing with, we're competing, I think about 70% of our communities are in master plans, where you've got four or five other builders, and it's just kind of the way you've got to compete there. So we've got a little more spec in Houston. We are, you know, as Greg pointed out, I mean, we're getting them integrated, the Smith Douglas way of doing things.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

We are focused more on trying to get them a little more presale, but I think specs in Houston are always going to be kind of part of that business when you compare it to our other markets.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

And for us, one note to add there, too: a spec home for us becomes a spec the day we identify, the need to go into permitting. So we identify within our system very early if it's got to be a spec because of a lot of elongated permitting cycles.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

That's right.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Yeah.

[Sam Reid, Senior Analyst at Wells Fargo]

No, guys, that's very helpful. Thanks so much.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Sure. Thanks, Sam.

[Operator]

Your next question comes from the line of Jay McCanless with Wedbush Securities. Your line is open.

[Jay McCanless, Managing Director of Equity research at Wedbush Securities]

Hey, good morning, everyone. So Russ, talking about the gross margin, I think you said probably higher in 3Q versus 4Q. I guess, is that all land costs, or are you all expecting maybe a little more competitive pressure from some of the larger builders going into year-end?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah, it's, it's... I mean, that's the gross margin on, on our closings, right? So a lot of that's just baked, so it's just kind of mix and, and just, you know, timing of what's going to close, and I think that's just a reflection of, you know, where we've, where we've just seen, you know. So those closings, the margins that's going to close, in the back half of the year, you know, you think that that was sales that was kind of, you know, end of first quarter, in the second quarter. So it's just, I think it's just where we've seen costs, you know, it's just as we move through, communities, just in terms of mix, it's, it's mostly land costs. So it's really just kind of, you know, just more timing of what's, what's closing.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

You know, if that answers your question, it's... I don't think you can glean anything into, you know, how that translates into what we think our sales necessarily are going to be or kind of what we think in terms of future discounting. That's just more of, you know, what our backlog is showing for sales that we've already, you know, made.

[Jay McCanless, Managing Director of Equity research at Wedbush Securities]

But I guess, yeah, and that makes sense because I'm assuming that's when mortgage rates were higher, et cetera, you probably had to do a little more on the buy down side.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Uh, yeah.

[Jay McCanless, Managing Director of Equity research at Wedbush Securities]

I guess, could you talk about what you're having to do for incentives now, and what are you seeing from some of the larger builders?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah, I would say, and Greg can jump in, too, but it's pretty consistent with what we've seen in the first half of the year or, you know, first quarter. You know, we're still offering kind of a your choice incentive for our buyers. The incentive, you know, percentage hasn't changed too much, and it's. I'd say most have still been taking a credit towards closing costs versus actual buy downs.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

We did a, we did a forward, in, in one of our markets where, you know, we just did a small, you know, maybe a $2 million forward contract in, in buying a rate down, and it took us, I think, a couple of months to actually fill it because our buyers were, like I said, taking more of a that closing cost incentive. And I believe it's, you know, a lot of folks just feel like, "Hey, let me take the credit now because ultimately I'm going to refi, you know, my mortgage in a couple of years," just, you know, because the expectation is for rates coming down.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Yeah, that's accurate. Jay, good morning. And I would say, you know, our incentives are, you know, 1.5%-2% range on average, currently.

[Jay McCanless, Managing Director of Equity research at Wedbush Securities]

... Gotcha. And then just the last question I had, thinking about Devon Street in Houston, I guess how, given that you've passed the one-year mark there, I guess, how comfortable are you with potentially looking at other expansions? And do you feel like with our team, the learnings you've had so far, that you could implement this into another existing organization? Or do you feel like you need some more time to evaluate?

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

I think the implementation has gone great, and I don't have any doubt or reservations about how well this is going to continue to go with Houston. I think, you know, now it's evaluating, you know, growth within that market, and then the timing for when, you know, we may step out and expand beyond Houston there. But there's no, you know, no immediate need to look at any of those type of transactions. I think, as we've stated in the past, our greatest opportunities are in our current divisions and expanding as we have with our land across all those markets.

[Jay McCanless, Managing Director of Equity research at Wedbush Securities]

Okay. Great. Thanks, guys. Appreciate it.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Thank you, Jay.

[Operator]

As a reminder, if you'd like to ask a question, please press Star and the number one on your telephone keypad. Your next question comes from the line of Alex Barron with Housing Research Center. Your line is open.

[Alex Barron, President at Housing Research Center]

Yes, good morning. Thank you, gentlemen. I wanted to ask about the Houston division. You know, orders were 149 in the first quarter, 98 in the second quarter. Can you talk a little bit about which of those two is more likely to be a run rate right now, and what, I guess, what happened from one quarter to the next?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah, look, I think it's, you know, in Houston, I still think it's kind of seasonal trends. So, you know, the first quarter was probably better than we expected, but I think it just kind of seasonal, and now you're getting into, you know, second quarter, you kind of hit summer months, you know, school's starting to get out. So I don't—I can't sit here and say that it wasn't, you know, just following a normal trend. So we did see a little bit of an uptick in cancellations in Houston in second quarter, but I can't say if that's, you know, just anything more than just a little bit of a blip or just kind of typical.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Again, this was our first year, our first, you know, first half year with Houston ourselves, so, you know, we're still just kind of, you know, feeling out the market, seeing kind of how we fit there. But no, I think everything, like we've said, is going real well, better than we had anticipated, and I think, just from our internal projections, as we look for the full year in Houston, I think they're going to exceed our internal projections, so.

[Alex Barron, President at Housing Research Center]

Okay, great. And, as far as your land position, I mean, it's been going up pretty, pretty aggressively. Do you feel like you're just seeing opportunities right now, or you're just trying to get ahead of expected growth?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah, we're seeing, as I mentioned, our corporate investment committee is very busy. We're seeing, you know, anywhere from one to four or five deals a week that the divisions are presenting to us. So we're very active. I mean, the market is still very competitive, right? I mean, but we are getting our fair share of deals. As we mentioned during the roadshow, you know, one of our main goals here with raising the capital is to continue to drive scale through the operations, you know, specifically outside of Atlanta. You know, Atlanta, we're a top three builder in Atlanta, so you know, we've been focusing on really driving scale in other markets, but we're seeing, you know, a lot of great deals in Atlanta.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

I mean, just across the footprint, as we mentioned on the last call, you know, we started pushing up into Chattanooga, so we've put, I think we've put another couple of deals under contract in Chattanooga, so we continue to push north there. So there's some more opportunity. You know, with the transition, we just, you know, we mentioned with Eddie, you know, our VP of Finance, that just transitioned into a central Georgia DP role, you know, a newly created division. So we're looking to, you know, further expand our footprint out from Atlanta into, you know, more middle Georgia. So, you know, these are just, you know, more opportunities that we're seeing. So yeah, we're being opportunistic.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

We've seen, and just the last thing I will say is you know, we continue to see M&A opportunities come across our desk, but, you know, honestly, I think, you know, we're just taking a wait-and-see approach there. You know, it's got to be at the right price, it's got to be at the right fit. You know, I think things are... You know, things aren't cheap. You know, again, I think both on the land side and the M&A side, I think things are expensive, but, yeah, look, we're still getting our fair share of land deals.

[Alex Barron, President at Housing Research Center]

Okay. Best of luck. Thank you.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

All right. Thanks, Alex.

[Joe Thomas, SVP of Accounting and Finance at Smith Douglas Homes]

There are no further questions at this time. I will now turn the call back over to Greg Bennett.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Thank you. Thanks, everyone, for joining on our quarterly call. Hope everyone has a great day, great week.

[Operator]

This concludes today's conference call. You may now disconnect.

Participants

Executives

• Greg Bennett, CEO and Vice Chairman
• Joe Thomas, SVP of Accounting and Finance
• Russ Devendorf, EVP and CFO

Analysts

• Alex Barron, President at Housing Research Center
• Andrew Azzi, VP of Equity Research at JPMorgan
• Jay McCanless, Managing Director of Equity research at Wedbush Securities
• Mike Dahl, Managing Director of Equity Research at RBC Capital Markets
• Rafe Jadrosich, Managing Director at Bank of America
• Sam Reid, Senior Analyst at Wells Fargo