Smith Douglas Homes (SDHC) Q4 2025 earnings call transcript

Good morning and welcome to the earnings conference call for Smith Douglas Homes. We issued a press release this morning outlining our results for the Fourth Quarter and Full Year 2025, which we will discuss on today's call and which can be found on our website at investors. smith. gov. 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. 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.

Additionally, reconciliation 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. Posting the call this morning, our Greg Bennett, the company's CEO and Vice Chairman, and Russ Davendorff, our Executive Vice President and CFO. I'd now like to turn the call over to Greg.

Good morning. Thank you for joining us today. We go over our results for the Fourth Quarter of 2025 and provide an update on our operations here early in 2026. Smith Douglas Homes delivered 780 homes in the Fourth Quarter, resulting $260 million in revenue. Home closing growth margin came in at 19.9%, and that income for the quarter was 17 million, or 39 cents per deluded share. For the full year 2025, we delivered 2908 homes, a record for our company, and produced earnings of $1.19 per deluded share. Despite a difficult demand environment across much of the industry, we were still able to grow deliveries during the year, which we believe reflects the strength of our operating model and the discipline of our teams in the field.

Overall, we're pleased with our performance to close out the year as our delivery total in growth margin came in above our previously guided range. We generated 532 net new orders for the Fourth Quarter as self-conditions remain choppy in the year. While maintaining self-paced remains important to us, we chose to remain disciplined in how aggressively we've pursued sales during the quarter as a combination of seasonal, slowness, and aggressive year-end discounting from competitors created a difficult selling environment. Spires continued to weigh the benefits of home ownership against their concerns over affordability, which remains a persistent challenge for the buyers despite our leading price points. Finance and incentives remained an important tool in alleviating those concerns and solving for monthly payments that our buyers need.

So far this year, we've seen encouraging uptick in traffic and our order activity relative to the Fourth Quarter's level, and continue to act with managing incentives at community level in order to support the sales pace. While we are optimistic that this improvement can carry into the spring selling season, the man continues to remain somewhat inconsistent from week to week. If we wait to see how the remainder of the spring selling season unfolds, we continue to fine-tune our operations in each of our markets through our discipline approach to our business. Company-wide build times came in at 57 days for the quarter, which includes our Houston Division, where we make great strides in implementing our team philosophy in aligning the local trades and subcontractors to our streamline building process.

We have significantly improved our cycle times in Houston since entering the market via acquisition in 2023, and beardest proved that our discipline approach to home building can be replicated in markets outside of the historical south-eastern footprint. Our long-term goal is to continue to grow volume and gain market share via targeted investment through our footprint and opportunistically in new markets as we believe scale is a key driver of success in this business. We know that our path to higher volumes will not be linear, but instead will reflect the natural ebbs and flows of the housing cycle. As we've discussed before, we operate the business with a long-term mindset focused on maintaining pace and positioning the company for growth through the cycle, rather than managing the business around short-term quarterly outcomes.

The rest will expand on that philosophy in more detail in his remarks. Spearhead, many of the company's growth initiatives will be Scott Bowles, our new regional president for the south-east. Scott's been with the company since 2017, and most recently served as our Atlanta Division president, where he's instrumental in expanding their presence and profitability in this key home building market. We look forward to Scott making a similar impact in his new expanded leadership role. While near-term conditions remain uncertain, the long-term outlook for housing remains compelling as the United States continues to face a structural housing shortage. Our focus remains on building affordable homes and markets experiencing strong population growth and job creation. Our value proposition includes the level of personalization that many builders do not offer at our price point, combined with the bill of time that few competitors can match.

We remain disciplined when it comes to land ownership and leverage, and believe that that combination of affordability, operational discipline, and a conservative balance sheet positions us well for long-term success. Our strategy remains straightforward, maintaining discipline through the cycle, protect our production engine, and continue to expand our community-based and attractive markets. We believe this approach positions us well to continue game market share over time.

Finally, I'd like to thank all of our team members for their continued hard work and commitment to our company's goals. With that, I'll turn the call over to Russ.

Thanks Greg. I'll highlight our results for the fourth quarter in full year, and then conclude my remarks with our outlook for the first quarter. We finished the fourth quarter with 260 million in revenue, a 9% decrease over the year ago period, on 780 closings, with an average sales price of 334,000. Our home closing growth margin was 19.9% compared to 25.5% in the fourth quarter of 2024. Excluding impairment charges and interest in cost of sales, our adjusted growth margin was 21% for the quarter. Incentives as a percentage of base prices average approximately 6.8% during the fourth quarter, up roughly in 70 basis points sequentially, reflecting our efforts to maintain sales pace in a challenge of affordability environment.

SG&A expense for the quarter was 36 million for approximately 13.8% of revenue compared to 14.9% of revenue in the fourth quarter of 2024. Pre-tax income for the quarter was 16.9 million compared to 30 million in the prior year period, reflecting the impact of increased incentives and closing cost assistance used to support affordability and maintain sales pace in a net income for the quarter was 17 million. Given the nature of our up-sea organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas Homescore and the non-controlling interests of Smith Douglas Holdings LLC. Because a significant portion of our earnings is attributable to LLC members not taxed at the corporate level, the income tax impact reflected in our financial statements can differ from more traditional sea corporations.

For that reason, we also present a Justinette Income which assumes a 24.6% blended federal and state effective tax rate as if we operate it as a fully public sea corporation. Adjusting that income was 12.8 million for the fourth quarter compared to 22.7 million in the same period last year.

For the full year 2025, we delivered 2,908 homes, representing a 1% increase over 2024 and marking another record year for closings for the company. Revenue for the year was 971 million, essentially flat with the prior year as the modest increase in closings was offset by a lower average sales price of 334,000 compared to 340,000 in 2024. Home closing gross margin for the year was 21.8% compared to 26.2% in 2024. Excluding impairment charges and interest in cost of sales, our adjusted gross margin was 22.3%. The margin compression year over year was primarily driven by increased incentives and closing cost assistance used to support affordability and maintain sales pace in what has been a challenging housing environment over roughly the past 18 months.

SG&A expense for the year was 139.8 million or approximately 14.4% of revenue compared to 14% in 2024. Pre-tax income for the year was 70.9 million compared to 116.9 million in 2024 and adjusted net income was 53.5 million compared to 88.1 million in the prior year. Importantly, despite the difficult demand environment across the housing sector, we were able to grow closings during the year while many builders across the industry experienced declining volumes.

We believe this reflects the strength of our operating model and our ability to maintain sales pace while continuing to expand our community base. Net new home orders for the year were 2,726 homes, a 3% increase compared to 2024, with an average order price of 333,000.

We ended the year with 512 homes in backlog, with an average sales price of 337,000 representing a backlog value of approximately 173 million. Our active community count increased 28% to 100 communities compared to 78 communities at the end of 2024, reflecting continued expansion across our footprint. Total controlled lots increased 14% to approximately 22,300 lots, with the vast majority controlled through option contracts consistent with our land light strategy, which provides flexibility while allowing us to grow in our attractive southern markets.

Turning to the balance sheet, we ended the year with 12.7 million in cash and 44.1 million of notes payable. Total equity was 444 million and our debt to book capitalization was 9%. On a net basis, net debt to net book capitalization was 6.6%, reflecting our continued conservative approach to leverage and maintaining a strong balance sheet as we continue to grow the platform. Before discussing guidance, I'd like to spend a moment discussing our pace over price operating philosophy, which is a central part of how we manage the business through the housing cycle. Our production model is designed to operate at a steady, consistent pace with relatively short construction cycle times and strong pre-sale orientation. That production engine is the core of our operating model, and protecting that engine is what ultimately drives long-term value creation.

Homebuilding is inherently cyclical, and during periods of weaker demand, we believe the right strategy is to prioritize absorption and inventory turns rather than maximizing price in the short term. In practical terms, that means we may intentionally accept some margin compression during downturns in order to maintain sales velocity and keep homes moving through the pipeline. Maintaining volume stability allows us to preserve market share, convert inventory, and continue investing in future communities and land opportunities as land prices reset.

Importantly, this is not about managing the business for a single quarter. We are managing the company for full cycle value creation. When the cycle eventually improves, the ability to maintain volume and continue investing during the downturn often leaves the stronger margins and higher cumulative earnings over time. From an operational standpoint, our current environment is not constrained by production capacity. Our construction engine is operating near optimal levels.

The primary challenge today is aligning sales absorption with that production capacity, which is why maintaining pace remains a priority. Because of that dynamic, we continue to evaluate pricing and incentives week to week at the community level. And incentives remain an important tool to support affordability and ensure we maintain the sales pace necessary to keep our production engine operating efficiently. The bottom line is that we are protecting the production engine because that is what compounds value over the housing cycle. While demand conditions remain variable week to week, the early year improvement in absorption is a positive signal as we move into the spring selling season. At the same time, we continue to evaluate pricing and incentives carefully across our communities and we will adjust them as needed to maintain a pace supportive of our operating mob.

From a broader macro perspective, the housing market has been operating in what we would characterize as a recessionary environment for roughly the past 18 months, primarily driven by affordability pressures and higher mortgage rates.

Looking ahead, the macroeconomic environment remains uncertain. Recent economic data has shown mixed signals and geopolitical developments continue to create volatility across global markets. We are also monitoring labor market trends closely, including last week's employment report, which shows some signs of job softness. With a labor market remains generally healthy, employment trends are an important driver of housing demand and something we will continue to watch carefully.

Finally, given the recent performance of our stop, we believe the current valuation presents an opportunity to opportunistically repurchase shares on our existing buyback authorization. With that said, I want to reiterate that 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. However, when market conditions allow and we believe our shares are trading below intrinsic value, share repurchases can represent an attractive and disciplined use of capital.

For the first quarter of 2026, we currently expect closings between 575 and 625 homes. Average sales price between 330,000 and 335,000 and gross margin between 17.5% and 18%. Given the continued variability and demand conditions, we are not providing full year guidance at this time. We believe the primary risks to our outlook remain tied to broader macroeconomic conditions, including mortgage rates, consumer confidence, and employment trends.

We are confident that our competitively priced product portfolio, land-light approach, efficient operational framework, and growing community footprint will enable us to further increase our market share in the future. I'd now like to turn the call over to the operator for instructions on Q&A.

Sure. It really followed traditional seasonal patterns. So January, a little bit slower, picked up in February, and the last couple of weeks here to begin the month of March, trended even a little bit higher. So trending in the right direction, our community count is up pretty good year over year. We were roughly 28% year over year on a per community basis. It's slightly down year over year. But some of that is just also the way we count communities. So I don't have the exact number, but we've got several communities in that 100 community count number that don't yet have full models and we're pre-selling. So I wouldn't necessarily look or consider so much kind of the absorption pace year over year.

I think it still feels pretty good, even though the absolute numbers may look a little flatish or even down on a pace. But again, like I said, that's more about I think just the way we're counting communities a little bit. But yeah, the trends so far for spring selling season have continued to move up. But like we said in the prepared remarks, it's inconsistent. We don't see enough of weekly trends yet to say, hey, things are great. But so far so good.

Yeah. I think there's a lot of similarities in our mark markets. And they all seem to be pacing and as Russ spoke to our trending seasonality, it seems to be pretty consistent across all those markets. We've got some new markets just starting off that as he said, we've got models that are not yet open, that we're counting a number of those markets will be at the same pace as well.

Yeah. Thanks for the question. So remember, a lot of what we were selling in Q4 is going to close in Q1. So we lean a lot heavier into incentives in 4Q. With some of the uptick that we're seeing, you know, in traffic and, you know, it's, and again, don't get me wrong. I mean, we are seeing an uptick, you know, sequentially, but it's the traditional spring selling season that we've hit.

So it's a good trend, right? It's moving in the right direction. But we continue to monitor it on a division by division and community basis. And so we're looking where we can maximize some margins, pull back on incentives, but then again, we're not going to sacrifice pace. And so as long as we continue to get the pace, then we'll, you know, that's going to be our, where we decide to moderate, you know, incentives. And so, yeah, we're looking probably sequentially at about, you know, 100 and 150 basis points just in the closings. But again, you know, it's, and when you look at what we're doing from an incentives on sales, you know, I think it's, you know, we're seeing a similar, similar trend from Q4 to Q1 and kind of the incentives.

But the one thing I would add is, you know, forward commitments, the cost of forwards has come down with the rate environment. So that's good. And that that'll help us, you know, a bit. But we're also looking at, you know, just, just reducing or discounting, you know, base, base prices, you know, to get, you know, to get an attractive number out there. For us, it's definitely about, about payment. You know, we are seeing with our, with our new communities coming online that the average sales prices are, are, are coming down. And so that's, you know, we're, we're also looking at bringing some smaller product online. And so that's also impacting a bit of the sales price and, and margins.

But, you know, at the end of the day, we are focused on getting, getting a pace. And as Greg and I mentioned on the prepare remarks, operationally, things are, things are running very smoothly. You know, we want to keep our trades busy. You know, that's, we think that's a competitive advantage. Keeping pace, keeping trades busy. But, you know, in order for us to keep building, we've got to keep selling. And, and so again, we're going to, we're going to continue to monitor it, you know, from an incentive seat, you know, whatever we can do to keep that pace. And we really want to get back to a pre-sale orientation. You know, this market has been really very speck-heavy.

It reflects a lot of what our competitors are doing. We're still not seeing resale competition come back in any meaningful way. You know, traditionally, resales are always our biggest competitor, but that's, that's, you know, not the case. But, yeah, so we're, you know, it's, it's still hand-to-hand combat. Hopefully that gives you a little bit more.

Yeah, that, and then everything. Yeah, so, so just to to be clear, what we're counting in that 6.8 is closing costs incentive, price discounts, and revenue. So they show, as an offset to revenue, closing costs are sitting in cost of sales, but we, we add those up to give you a 6.8 number.

Yeah, the biggest driver, you know, we, we, we fully expect to continue to get SG&A leverage. You know, obviously that's part of pushing scale, but, but right now we've got, we've got a few things pushing SG&A higher where we're not getting the, the kind of a matching revenue. So when we've opened up our new divisions, so we've got, you know, G&A, SG&A costs coming through and Dallas, Fort Worth, Greenville is still getting off the ground. We opened up Gulf Coast, and then we've divisionalized a couple of, we took it, Atlanta, Atlanta was getting too big. And so we've divisionalized Chattanooga out of the Atlanta division, and then about 18 months ago, we divisionalized Middle Georgia.

So we've got a little bit more G&A, SG&A running through the business as we've continued to expand the footprint that once we, once we get up and running at full capacity in those divisions, we should start to see, you know, better overhead leverage.

Yeah. Yeah. Yeah. You know, you, you, you hit it on, on the head. You're, you're hitting a, a very, uh, you know, uh, uh, good pain point for us. We, uh, we, we more than, um, in prior year, we more than, um, hit target on bonuses. So our, our incentive compensation was higher in the prior year. And then this, this year, uh, we, we did not, uh, yeah, hit target. And so, um, it was about half of, uh, you know, what, what our target incentive comp. So, you know, good, that's a good point. I think, you know, kind of to Mike's and I probably didn't address it 100% accurately. But yeah, we, we, um, we had some incentive cop come down.

Um, but then the offset to that was, uh, was the new, new divisions that were not, um, fully operational.

Yeah. Uh, we're, we're definitely seeing, um, land costs increase in 26 from, from a, from what we expect in our budget and closing now. Again, that's, that's because we're closing on stuff, um, that, that's got a basis that, you know, in, in acquisitions that we've had over the last two, three years, right? So, so you're still got some higher costs flowing through there. Um, that said, you know, any deals, and again, we, we look at this on a, on a deal-by-deal basis, you know, we look at our takedowns, uh, we go back to developer partners where we can and try and, you know, renegotiate because look, it's, um, uh, no, no doubt, um, when, when we did some of these deals, uh, the market was different.

I think our developers understand that, uh, and, and so in some cases we are able to, uh, to renegotiate. So, we are seeing more of that happen. Um, Joe's going to kind of look at the costs, but I, I, you know, giving you a, maybe a specific number in what we think, um, land costs as a percentage of revenue will look like, uh, in 26, but it, it'll, it'll be up slightly.

Um, and then just on, on new deals, new acquisitions that we're seeing, we're definitely seeing a reset, uh, happen. Um, you know, we, we love it to happen faster and we love it to happen at keep our discounts, but, uh, folks are getting more realistic. Um, so we are, we are starting to see a reset and, and again, that's why, you know, and we, we talk about continuing to push pace. Um, because if we're not, if we're not outselling and moving inventory, well, then we're, we're not out buying and, and we're not going to be taking advantage of, you know, the price reset, right? So that's why we think it's real important to, uh, to continue to push pace through this cycle.

Um, because, you know, it'll, it'll, will continue to keep our market share, not to mention, um, you know, we should expand market share through the downturn. And then when things, uh, things get better and they will get better, uh, through the cycle, um, when we come out the other side, we'll, we'll have increased that market share and then we should be the, you know, get a benefit for, uh, you know, the, the pricing power that we'll get in the, in the margins coming back out the other side. So, um, it is important for us to, to continue the, you know, work it like an assembly one.

Sure.

Yeah. So, ideally, we'd love to have everything, you know, under construction pre-sold, right? That's, that's what we want to get back to. And, and the reason for it is, um, you know, having a pre-sale orientation really gets you, um, a higher value on, on those homes from your buyers, right? Because when those buyers select, you know, to, to go via pre-sale, they're putting in options that they want. We're not having a discount as much. And so, um, we're trying to push more pre-sales. That said, uh, given the environment, um, you know, specs are probably running about, um, you know, half of our, of our current inventory. Uh, but that's okay. You know, the biggest thing is, is, uh, even though we counted as a spec, we were, we're putting those under contract.

We're not getting a ton that are going, you know, past, you know, completion or certainly past 30 days completion. Uh, and we're, we're really pushing to get those sold before what we call line in the sand or when we, um, you know, pretty much drywall stage. So, but, but again, that goes back to the fact that, you know, we really run it more like an assembly line. Like production is our, um, production is, is the most important where we keep that running. And so we're, we're trying to match sales pace with that production and just keep it moving. So we've got the, um, you know, as we look, as we look forward to 2026. So, you know, even though our backlog and pre-sales are, are down, not where we want them.

Um, our, our inventory is, is right where we need them to be. And, and so, you know, productions, you know, even though we, we'd like a higher percentage of pre-sale, you know, we've got to keep that, that machine going to hit, um, you know, some of the growth targets that we expect 2026. So, um, a little elevated, but we continue to chop away at that pre-sale versus spec, um, balance.

Yes. So, thanks for the question. We are almost always first looking to do lot, finish, lot, take down. Um, those, those, uh, opportunities are still out there. Uh, you know, secondly, we'll go to our land bank partners and, and, and structure the deals and, and, uh, in a rate of different manners. But I, I would think, you know, if we look to land and add a little color to, to some of Russ's earlier comments, we're seeing softening and opportunities in some of the AD locations that historically for affordability. Maybe we didn't get opportunities there or they just didn't solve for our, our price points, you know, and then the CD type locations or, you know, very, they're getting shopped around a lot because there's not a lot of demand in those locations.

So, you know, we're focused on better locations, focused on terms and then where we need to, uh, engage our land bank partners.

Thanks Ryan.

Thanks everyone for joining our call today as we discussed our cue for results. Hope everyone has a great day.