Smith Douglas Homes (SDHC) Q1 2026 earnings call transcript

Good morning and welcome to the earnings conference call for Smith Douglas Holmes. We issued a press release this morning outlining our results for the first quarter of 2026, which we will discuss on today's call and which can be found on our website at investors. smithdiglist. 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 the 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. Actful 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. Additionally, reconciliations of non-gap financial measures discussed on this call to the most comparable gap 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 are Executive Vice President and CFO. I'd now like to turn the call over to Greg.

Good morning and thank you for joining us today to review our results for first quarter of 2026 and provide an update on our operations. Smith Douglas Homes generated $4.3 million in free tax income for the quarter, net income of $0.6 per share. We delivered 624 homes, which came in at the hand of our guidance range. While home closing gross margin exceeded expectations at 19.6% on a gap basis. For the quarter, we generated 981 net new orders, about 28% from a year ago, and a new quarterly record for the company. While order activity remained choppy throughout the quarter, we experienced the sequential improvement in our sales base each month for the quarter culminating in a sales base of four homes per community in the month of March.

Finance and incentives continue to be a key selling tool as buyers remain motivated to own a home provided they can secure a monthly mortgage payment that fits their budget. We're encouraged by the price of last 50 we experienced during the quarter as incremental adjustments and pricing led to an uptick in demand. We view this as an indicator that underlying demand remains intact across our markets despite broader economic uncertainty. From an operational standpoint, we remain focused on pace over price philosophy, which means maintaining a consistent cadence that starts driving efficient inventory turns and driving towards a more pre-sale oriented backlog. Our average build time was 57 days during the quarter, consistent with prior periods, and we continue to view our ability to deliver homes quickly and reliably with an offering of home choice and personalization as a key competitive advantage.

Our land light strategy also remains central to how we operate. Our line on third party law developers were able to allocate capital efficiently and maintain flexibility through varying market conditions. We believe this approach positions us well to manage risk while continuing to scale the business. We also make progress on our growth initiatives during the quarter. Community count expanded to 108 active communities across our markets about 24 percent from a year ago, and we continued around operations in our new markets such as Dallas, Chattanooga, Greenville, and Alabama Gulf Coast. Our experience in Houston continues to demonstrate that our operating model translates well beyond our legacy footprint, and we remain focused on executing a discipline and opportunistic expansion strategy over time.

As we move through the spring selling season, we're encouraged by sales orders generated during the quarter, which helps rebuild backlog and provide momentum heading into the second quarter.

We have continued to see encouraging traffic and order activity early in the second quarter, although demand remains variable week to week. We will continue to evaluate pricing and incentives at community level and adjust estimated to maintain the pace required to support our operating model. While macro conditions remain dynamic, employment trends have been relatively resilient, and we continue to see motivated and engaged buyers in our markets.

We believe our focus on attainable pricing, personalization, and value put us in a good position to compete for these buyers and drive market share gains over time. Finally, I'd like to thank all of our team members for the hard work during this quarter. We challenged everyone to focus on getting off to a strong start this year, and our results this quarter showed they were up to the challenge.

With that, I'd like to turn the call over to Russ, who provide more color on our financial results this quarter, and give an update on our outlook.

Thanks Greg, and good morning. I'll highlight our results for the first quarter, and then conclude my remarks with an update on what we are seeing so far this year, and our outlook for the second quarter. We finished the first quarter with 206.4 million in revenue on 624 closings at the high end of our guidance range, with an average sales price of 331,000. Our home closings gross margin was 19.6% on a gap basis, and adjusted home closing gross margin was 20.3%, which adds back impairments, interest in cost of sales, and purchase accounting adjustments. During the quarter, gross margin benefited by 170 basis points from the reduction of land development accruals on the closeout of several communities.

Our margins continue to reflect the use of incentives and targeted pricing adjustments to support affordability and maintain sales pace. During the quarter, closing costs, price discounts, and the cost of forward commitments totaled 730 basis points, which compared to 430 basis points in the year ago period, and 680 basis points sequentially from the fourth quarter of 2025. Selling general and administrative expenses for the quarter were 35.9 million, or approximately 17.4% of revenue, up 2.9 million compared to the same period last year, reflecting continued investment on our growth markets, as well as the impact of lower average sales price. Pre-tax income for the quarter was 4.3 million, resulting in net income of 6 cents per share. Given the nature of our up-sea organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas Home's Corp and the non-controlling interest of Smith Douglas Holdings, LLC. Because a significant portion of our earnings is attributable to LLC members and not taxed at the corporate level, the income tax impact reflected in our financial statements can differ from more traditional C corporations.

For that reason, we also present adjusted net income, which assumes a blended federal and state effective tax rate of 26.6%, as if we operated as a fully public C corporation, which we believe provides a more meaningful comparison appears. For the quarter, adjusted net income was 3.2 million compared to 14.7 million in the same period last year.

Turning to orders, we generated 981 net new home orders during the quarter, an increase of 28% versus the year ago period. We ended the quarter with 869 homes in backlog, with an average sales price of 332,000. In addition to backlog, we also had 42 home reservations at the end of the quarter. These reservations allow our buyers to take advantage of buying a built-to-order home, while also benefiting from a guaranteed mortgage rate when they close.

We expect most of these reservations to convert to new home orders in the second quarter. Turning to the balance sheet, we remain in a strong financial position. We ended the quarter with 28 million of cash and 68.5 million of total debt, with approximately 195 million available under our revolving credit facility. Our debt to book capitalization was 13.6% and net debt to net book capitalization was 8.5%, reflecting our continued conservative approach to leverage.

Our land-like strategy remains a core component of our operating model, with the majority of our lots controlled through option agreements allowing us to maintain flexibility and deploy capital efficiently. As Greg previously mentioned, and I explained on our fourth quarter call, I want to reiterate that our pace over price philosophy continues to guide how we manage the business. In the current environment, our focus remains on maintaining absorption and inventory turns, even if that requires some pressure on margins in the short term. We believe maintaining sales pace allows us to preserve market share, generate cash flow, and continue investing in our community pipeline, which ultimately drives scale and stronger returns over the full housing cycle. From a broader macro perspective, the housing market continues to operate in a challenging environment, driven primarily by affordability pressures and elevated mortgage rates.

Recent economic data has been mixed, and geopolitical developments continue to contribute to uncertainty. We are also monitoring labor market trends closely, as employment remains a key driver of housing demand. Our capital allocation priorities remain unchanged. We will continue to prioritize investing in our land pipeline and community growth while maintaining a conservative balance sheet, and we will also remain opportunistic with share repurchases. During the first quarter, we began executing on our share repurchased authorization and continue to repurchase shares into the second quarter. Including repurchases completed in April, we have repurchased approximately $10 million of stock at an average price of $13.28 per share. We believe these repurchases represent an attractive and disciplined use of capital without limiting the financial flexibility to support our long-term growth strategy.

For the second quarter, we currently expect closing between 725 and 800 homes, average sales price between 325,000 and 330,000, and gross margin between 17 percent and 17.5 percent. Given the continued variability and demand conditions, we are not providing full-year guidance at this time. We believe the primary risk to our outlook remained tied to macroeconomic conditions, including mortgage rates, consumer confidence, and employment trends. That said, we believe our affordable product offering, land-like strategy, and discipline operating model position us well to continue gaining market share over time.

With that, I'll turn the call over to the operator for instructions on Q&A.

Came in at the high end of guidance on a gap basis, and we had 170 basis points, as I mentioned, that in the way land development works. So when we close out communities, we typically have a reserve in land development for anything that over the next three to six months may come in from a cost perspective. We had closed out some communities in the fourth quarter towards the end of last year. Those are rules that we had got reversed in the quarter. So that contributed to 170 basis point positive impact to margin. So if you back that out, we would have been right around I think 18.1 percent, which I think still was right in line with guidance during the high end of our guidance range.

And then from just some additional costs, as we mentioned, there's 730 basis points that were impacted by, like I said, not impairments, closing costs, the incentives for forward commitments, so the cost there, and price discounts. And just to remind everybody, the price discounts and the forward incentives, that's a reduction to revenue.

So ASP, that kind of drives ASP down a little bit, and then closing costs run through our costs of goods. So that was, that was up sequentially, as I mentioned, and a beer over a year. And then, you know, from a, just from a cost perspective, you know, we're actually getting some benefit on the direct cost side. So that's coming in a little bit better year over year. But the big, the big driver still for us in kind of margin degradation is the lot cost. So lot costs were, as a percentage of revenue, it's up about 300 basis points versus last year. So that's just the impact of, you know, the, the higher basis for, for land deals that we, we entered into the last couple of years.

Got it helpful. Thank you. And then, on anything you could provide, you know, I think you mentioned any prepared remarks that demand is still looking a little choppy week to week. Any, any clear you can provide on that, either on a sequential basis, you know, just a couple weeks in, but relative to March or anything you could provide on April to date, that'd be helpful from a demand perspective.

Yeah, thanks for the question. We, you know, we're seeing seasonal traffic. And we had good strong traffic through March, April has been a slight decline, but still seasonally good. You know, so we've gone through all the spring break and all the disruptions there, it's held pretty steady. Might be down. Oh, six, eight percent over what we were seeing earlier.

Got it. Super helpful. I appreciate it guys. I'll pass on. Thanks.

Sure. I was hoping we could talk a little bit on the SGA side of things. I totally understand y'all are in big kind of growth phase and there's, you know, life cycle charges and there's you're opening up your new divisions and kind of getting all heads in place in there. I was just kind of wondering if you could give us a little more of an overview on where you are in that life. Far in those life cycles are good. Keep branding. There's not something that might start to moderate a little bit in the coming quarters. It's been an all-fated overview there. Thanks. Sure. Yeah, I think as a percentage of revenue, it should definitely start to moderate because when you look at the gross dollars, we were only up to $3 million in that range.

So it's more a reflection of, you know, our ASP is coming down. And again, part of that is, you know, increase incentives. Like I mentioned, forward, forwards and price discounts are pushing that ASP down. And so it's pushing that top line revenue. So some of that percentage increases is because of the top line revenue. But, you know, it is, you know, the gross dollars, you know, the increase is actually not that bad in my, you know, from our perspective, because we did open, as you recall, so Dallas was a new division last year. We divisionized Chattanooga. We're opening up the Gulf Coast, which we hope to have some sales here in the next few months.

And so we've got a lot of, you know, new fresh G&A that's hitting the books without any volume. And so that, again, just reflects our continued, you know, growth and scale. And so when you start to see, you know, some of that revenue come through, I think it'll, it'll moderate, right? You know, and again, even if you go back a couple of years, Greenville's a fairly new division, we centralized, we divisionalized central Georgia. And so we have expanded the footprint, you know, again, in the drive for additional scale. So it's just, you know, it's kind of a timing thing.

Sure. Yeah, we, we don't like to give full year now. I mean, maybe as we, as we fit and wrap up the second quarter and we're kind of halfway through the year, we will give some more clarity. I mean, it's not like we don't have, you know, our internal targets. It's just, just given the environment, we just don't think it's prudent to, to provide any, you know, full year guidance. I mean, again, especially, especially when it comes to margin or income, I mean, that's, it's, it's such a wild card. You know, we're going to continue to push pace.

We feel pretty good, especially coming off of March and, and the quarter. I mean, we had a really good beat, you know, exceeded our internal expectations on, on sales. You know, that's a reflection of us doing, you know, some additional price discovery in our communities, really driving our sales folks, you know, credit to them in the, in the field for really pushing, pushing on pace. And so it turned out to be a good quarter in sales, which obviously the, the increase in backlog is going to, you know, set us up for, you know, hope, hopefully it starts to set us up for the back half of the year in terms of closings. I think I mentioned on the last call, you know, we were, we were expecting anywhere from, you know, 10 to 10 to 20 percent in community count growth for the year.

And so you can kind of translate that into, you know, what you might expect or as you, you run your model, what you might expect for, for closings. But clearly we're, we're, we're focused on growing closings year over year. So we've got some, some pretty good internal targets, but you can kind of back into the numbers based on what I just told you.

That's the logical. Thanks. Thanks for all your talk. Sure.

Yeah, thanks for the question. We, we've been very successful in, you know, pushing a lot of those increases off. We, we're, you know, our costs are down year over year. We know that if this fuel situation stays higher for longer, we're going to get, you know, hit with fuel surcharges and some of those things. But we, we show up diligent every day to work on our cost and our efficiency. So we'll continue to do that. And, you know, the market's not allowing us price. And, you know, that message is, is going through to our, our trade and our suppliers to say, look, you know, we don't have ability to, to take price. And so we can't pass that through.

So we're holding a pretty tough line on that.

Sure. So of the total portfolio, we have about 30% of our lots under option are with land bankers. Then there's about 40% of our lots under option are with developers. And so they're 70% and then the balance, the other 30% are still deals that are with the underlying land seller. So where we have a contract that we may be in various stages of due diligence, but we, we control it with, you know, varying deposits. And usually those are pretty small, but just from a, from a land bank perspective and a structure perspective. So we are pretty much on average, it's about a 10% deposit that we have with, with the land bankers. And then there's typically like a walk away fee that if you bust out of the option, then you pay another 10% walk away fee.

And that's, that we disclose that in, in our financials. But we, we don't, on all of our new land bank deals, we do not cross collateralize. We have some finished lot bank where we'll, where we'll stick some lots when we have some bulky takedowns on active communities that will put into a finished lot bank. And we may, you know, within a division cross collateralize, but, but honestly, it's that that's, we don't, we don't view that as any, any real issue. So it's pretty, pretty simple, the way we, we think about it.

It's, we're assuming the incentives are probably about flat sequentially, you know, maybe up, up or down 10, 10, 20 basis points. We're, we're still seeing the same. And it's been pretty consistent. We're seeing the same percentage of forwards, the use of forwards. So that's, that's probably, you know, pretty consistent. But then it's really, you know, I think there's a little step down in ASP, you know, that, that again is probably coming from the forwards, but it's, it's a lot cost, you know, again, I think a lot cost you're going to continue to see that trend year over year where that's, you know, about 300 basis points up. So it's a lot cost is driving it.

And then, you know, part of the variable in there is, you know, how much to the earlier question what Greg said, you know, how, how much are we able to hold on, you know, vertical costs right now? We've done a pretty good job year over year. The average sticks and bricks costs are far down a bit. But, you know, there's some variability there.

Yeah, we're, it's, it's starting to turn. I think we've been mentioning this for the last couple quarters. We're definitely seeing land prices start to moderate. We're starting to feel like we, we have more negotiating power, right, starting to flip from a seller's market to a buyer's market. And that, that, you know, obviously any new deals that we put under, under contract, you know, in the typical fashion, you know, excluding, you know, where we can pick up some finish lots from others that have walked. But, you know, it takes 18 months to, to flow through typically, right? Because you've got development for a year and then you've got, you know, several months of vertical construction. So it takes some time.

So we don't expect, we don't expect the increase in lock costs to moderate for at least a couple of years, right, at any material level. And we, when we went public, we knew we were, we were, we were guiding everybody. I mean, lock costs were going up just because we knew what we were doing deals at. But now you're starting to see that reverse a little bit. But that's also, as we talked about on our call and our pace over price philosophy, that's why it's real important for us to continue to move inventory through the pipeline so that we don't, we don't get, you know, gummed up with these lots, we can continue to move the pipeline so we can start taking advantage of a reset in, in land basis, land, land prices.

And so that's kind of how we're thinking about it.

There hasn't been anything that we've seen materially different or that we're hearing from our our divisions. I know some of the builders, I mean, I think, I think when you look year over year, a lot of the, the public's spec counts are down. You know, they may be starting, you know, and that could just be relative to maybe some, some better, you know, slightly better sales. I mean, we had better, better sales than expected in this first quarter. We were a pretty good. So obviously our starts are going to be up. But no, from a, from an overall pure inventory standpoint, not, not seeing any, any real impact there.

And then, you know, from incentives on sales through the quarter, yeah, I would just generally say that as we ramped up our pace and, you know, pushed for a little bit more price discovery, you know, we probably saw it up a little bit. But honestly, we were, I think we were pleasantly surprised that it didn't, it wasn't, it wasn't a huge hit, but it does show that there is some, you know, price elasticity, it does, you can see it ties into, you know, increase in volume, so.

Yeah, I mean, that's, that pre-sale is a huge, a huge driver or a huge focus of ours, because, you know, traditionally, you're going to make more money on pre-sales. And, you know, because of our business model, we really focus on personalization and choice for our buyer, and we have a quick, quick turn, you know, from a cycle time perspective. So really for us, we're trying to drive that message to the divisions, you know, and, and, because we do think that ultimately that's going to help drive higher margins, but it also gives our buyers a different buying experience. And when you go to some other entry level builders that are more, you know, how you get, you know, vanilla chocolate strawberry type of, type of choice.

But we've been averaging, you know, it's probably still, you know, 40, 60 pre-sale versus spec every, every week. But, but more importantly, we're, we're getting the contract, we saw an uptick in, in getting a sale on, on a spec home before it hits what we call line in the sand. So kind of before it hits drywall stage. So that's really today very important because, you know, we're still using forward commitments incentives. And, you know, the, the interest to, to put an interest rate lock out there for more than 60 days is almost cost prohibitive. So the incentives are still a big driver for, for some of these buyers in figuring out payment.

So even if we have those starts, you know, as long as we're within kind of 60 days and they can get some choice before we hit drywall stage, you know, getting that, that sale before drywall stage is important. So we're, we're doing a pretty good job there. I'd say we're probably 70, 80 percent before drywall stage is, is got a sale. And our spec inventory has been, been coming down. So, you know, it's, it's still a battle, but that's, you know, that's our focus is, is driving more pre-sale going forward.

Sure.

Sure. Sure.

So, if you, so we, we had 170 basis points roughly of a, of a benefit because we reversed some land development accruals on closed out communities. So, these were several communities that closed out in kind of Q3, Q4. And so, our, our internal policy is, you know, we keep, we start to rack it down accruals over, you know, three to six months, just in case there's any, any stragglers or any, any costs out there once we close the community.

And so, that was 170 basis points to margin. So, basically, if you just look operationally, take our, take our margin for the quarter, back out 170 basis points, and that's kind of where you, you would start with your, you know, your gross margin to take out the noise. You know, we had a little bit of impairment in there. So, you know, strip that out. I think that was 30, I don't know how many basis points that that accounted for. 70 basis points. So, there were 70 basis points of impairment that was a negative impact to margin. You know, again, you want to strip that out. So, when you, when you see our, when you see our filing, you'll be able, and I think it's in, it's in the notes, it's in the back half of the press release, but when you, when you look at the adjusted margins, you'll be able to, to see some of that stuff.

So, that's why when you, when you strip out all the noise, I think sequentially we're basically calling for about a 50 basis point decline in margin from Q1 to Q2. And again, we, there was a lot there, but we can walk through any detail if it's, if once you see the numbers, it's, you have any, any confusion.

That's right. Yeah.

Yes. Thanks, right. I'll take that. We, we're in still infancy, I would say, in Greenville, with the same in Dallas, Fort Worth, Gulf Coast, you know, and we're kind of over that hump in Chattanooga. May log growth started there in the last year. And then Central Georgia would be another that we're still building scale in. It's just kind of spent off of Atlanta, but without any real community camp, if we, we've spun that off. So those are, again, not the scale would be Central Georgia, Greenville, Dallas, Fort Worth, and Gulf Coast.

Yeah. And the only, the, what I'd add to that as well as while we have, you know, we always are targeting a minimum of two, what we call our teams, you know, and that's, that's roughly 208 starts per, per our team. We want to have a minimum to our teams in every division. And so we're, we're not quite there in a couple of our legacy divisions, like Charlotte, you know, it's Nashville. We're, we're not there yet. So at a minimum, we want to get there. And then that's just the minimum, but we really feel like in some of those legacy divisions, we, we should be closer to three R teams, 600 closings, specifically Raleigh.

I do think Charlotte can get there 600 plus. We're not there yet. Nashville should be, you know, 400 plus. And then obviously Atlanta and Houston right now are, you know, too, too big, you know, from a, from a permit count, right, to the largest markets that we're in. Atlanta, because we peeled out Chattanooga, which was really kind of North, you know, Georgia pulled back a little bit, but again, Atlanta proper should be, you know, close to a thousand, you know, units on a, on a run rate. And then Houston for us, you know, we entered that. We're making a lot of good strides in getting them. What I would say is like Smith Douglas sized, you know, from a, from a turns and, and they've been great.

But you know, we're only doing 400 plus, you know, plus or minus closings there. I mean, that, that should be double, right? Within five years, you know, we need to, I mean, that's such a big market. We've had some headwinds, but that should be double. And then, you know, what's really shining for us is, is our Alabama division. You know, they're, they're at pretty good scale between Birmingham and Huntsville, you know, kind of plus or minus 600. So we've got some work to do in scaling up some of the legacy divisions. But like Greg said, you know, a lot of these, these new ones are just getting going. But that's, that's why you see the GNA, right?

When you look at the GNA relative to the community count increase, right, our community count was up 24%. And our GNA was only up 2.9 million on gross dollar basis. So, to me, that's pretty efficient.

Yep.

Yeah, look, Alabama has done really well, you know, Birmingham Huntsville relative to a Houston, for instance. Yeah, we've seen, you know, some better demand trends. And again, you know, Texas is its own animal. So yeah, I think it's also just, we're so used to in the Alabama markets, you know, they didn't have the kind of, you know, spike up, you know, post COVID. I mean, it was good, but it wasn't like you had some of these other markets. So it's, I almost feel like we're just used to hand-to-hand combat there. And, and, you know, it's, it's just the way we operate. So yeah, we saw some better demand there. But it's, they're outside of that, like there's nothing that I would say really sticks out with our footprint.

I think we're in some pretty good markets, you know, kind of in the southeast and central USs, which is, you know, that's by design. But nothing, nothing really that I can say sticks out. I don't know, Greg, if you, you know, the only thing Jay, I'll add to that is the in migration and some of the bigger metro locations we're in is down. I mean, that's been ordered a lot. And so, you know, you feel that a little more in some of the smaller markets are not as sensitive to that.

Yeah, we, we shifted really towards the end of the quarter and into April, we moved from a 4.99 incentive that we were kind of marketing across the footprint, you know, 30 or fixed. We moved to a, just to change it up a little bit and the costs were kind of almost in line. We moved to a 3.99, 5.1 arm towards the end of the quarter and, you know, really into April and if you go to our website, I think that's what you'll see at the, at the top of the page. So, we're offering, we're really, we're still offering both. We're marketing the 3.99 and a lot of that is, a lot of it really is, it's more a traffic driver, but it's also designed to give our, our salespeople as much flexibility, right, when, because with a 3.99, 5.1 arm, the, the buyers can qualify off of that payment that, that calculates off the 3.99.

So, you know, for our buyer, that's definitely helpful. So we kind of give them some, some optionality there, but, you know, it's, we're just trying, you know, seeing what the market's doing, you know, trying to at least, you know, compete at that level and give, give buyers as much, um, affordable options as, as possible. And we're seeing more usage of the 4.99. Yeah, 4.99, the fit, 30-year fixed, 4.99 is probably taking the most of, of the incentive.

Okay, got it. Great. Thanks guys. Appreciate it. Yep.

Thanks, Jane.

Thank you for joining us on our Q1 results call. I hope everyone has a great day.