Leadership

Wall Street To Post-IPO Smith Douglas: 'Welcome To The Show'

At first blush, equity research analysts gave Bradbury, Bennett, Devendorf, and their team a warm Wall Street welcome for starting their first act as a public homebuilder on a solid peer-beating footing.

Leadership

Wall Street To Post-IPO Smith Douglas: 'Welcome To The Show'

At first blush, equity research analysts gave Bradbury, Bennett, Devendorf, and their team a warm Wall Street welcome for starting their first act as a public homebuilder on a solid peer-beating footing.

March 20th, 2024
Wall Street To Post-IPO Smith Douglas: 'Welcome To The Show'
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Just after Smith Douglas Homes became 2024's first company to IPO on the New York Stock Exchange this past January, Moelis & Company Managing Director Robert Crowley reflected on the moment this way.

I'm excited for the Smith Douglas guys," Crowley tells The Builder's Daily. "Anytime a homebuilder goes public, it's kind of an event. It's one of those cool milestones in the industry where founder-led companies since the beginning of time can and have gone public, starting their life as small caps. Then, they can become the next D.R. Horton or Lennar. They can have that dream and work for it. That's how those leading companies started."

It took Smith Douglas Homes founder Tom Bradbury and operational leader and chief strategist Greg Bennett 14 years and a last-stretch speed bump to reach the right moment to go public. They may or may not have Horton or Lennar in mind as the focus of what they're now striving for. The way they phrase it, no competitor of any size or success stands as their North Star. Rather, they say, their singular focus is on "building a sustainable legacy homebuilding business that will thrive for years to come."

In that context, Bradbury, Bennett, and Executive VP/CFO Russ Devendorf brought an "A Game" – in both financial and operational performance and their ability to address Wall Street investment analysts' challenges and queries on operational and financial metrics and guidance – to account to their newest big cohort of customers: Shareholder owners.

A highlight-reel of full-year results, compared with 2022 looked like this:

  • Net new orders increased 22.8% to 2,368
  • Backlog homes increased 18.3% to 912
  • Sales value of backlog homes increased 20.1% to $310.7 million
  • Home closings increased 4.4% to 2,297
  • Revenue increased 1.2% to $764.6 million
  • Net income of $123.2 million, down 12.3%
  • Debt-to-book capitalization of 26.6%
  • Net-debt-to-net book capitalization of 21.1%1

The Company had 69 active communities on December 31, 2023, compared to 53 a year prior. The cancellation rate was 10.5% for 2023 versus 10.9% for 2022.

At first blush, equity research analysts gave Bradbury, Bennett, Devendorf, and their team a warm Wall Street welcome for starting their first act as a public homebuilder on a solid footing.

SDHC’s 27.4% GM was the third strongest 4Q GM performance in the HB group and exceeded the group average by +350 bps. Net, 4Q Homebuilding Op Profit of $32M beat our $26.5M estimate by +21%. Clearly, SDHC is coming out of the gates swinging following their recent IPO," wrote Wolfe Research senior housing equity analyst Truman Patterson.

Now comes the hard part: A sustainable legacy homebuilding business that will thrive for years to come.

The Smith Douglas operating context is this:

  • Demand and its potential to replenish is strong.
  • Affordability and its potential for damaging demand is a wild card.
  • Interest rates may now be on course to ease on word that the Fed's holding to a plan for three rate cuts in 2024.
  • Homebuilders' reign as residential real estate's sole source of desirable home supply may wind down as resale inventory listings swell.
  • Input costs – namely for timely access to land despite growing competition for land concentrated in the Southeast and Texas – are a moving target.

Greg Bennett and Russ Devendorf handled their first quarterly performance analysts conference call with grace and aplomb, covering off on many of these contextual matters.

For the big picture take on what drives their operating teams, they left it to their founder, who's always had a way with words--both eloquent and down-to-earth.

Here, Tom Bradbury speaks of team members, whether they're working for a privately-held firm or a newly-christened public enterprise:

I am blessed to have the opportunity to work with such professional and caring group of individuals. They are the key to our success and the heartbeat of our culture, which is defined by our mission, vision and value statement in what we call our house. We aim to enhance people's quality of life with every home we build and everything we do from our associates, our homebuyers, our business partners and all Smith Douglas associates embrace the saying, good, better, best. You never let it rest till the good is better and the better is best."

Managing at that threshold, from private operator to public organization, Greg Bennett asserts the team will remain true to a DNA and set of principles that pre-date the IPO.

I want to emphasize that we run our company with a long-term focus and not in a manner that prioritizes meeting external quarterly projections. Homebuilding is not a linear business. Often, what may benefit the company in the short term may not be beneficial in the long-term goals of the company. We have been and will continue to be focused on creating value for stakeholders over the long-term and hope to attract investors with similar mindsets."

Here's how Bennett and Devendorf responded to analysts' questions about some of the critical challenge and opportunity areas facing builders, private and public.

On M&A and Land Acquisition

Russ Devendorf

The easiest path for growth is in our existing footprint. There's plenty of opportunity in our markets to gain market share, especially with the additional capital and putting that to work. We're seeing a lot of new deals come through our investment committee every week, so that's very positive. On the flip side, from an M&A perspective, there are a lot of opportunities out there. We see a lot of things come across our desk. But, we're not just going to jump on something to grow top line. It's got to be the right fit for us. We're focused on the southern half of the U.S. We'd love to fill in adjacent markets that fit our strategy. If we see something we like, we're going to go after it. But right now, the present opportunity is just within our existing markets."

On Risk To Plan

Russ Devendorf

The pressures that we're seeing, and we continue to see this when we see new land deals coming through investment committee, is it's primarily on the land cost side. That's where there's a ton of competition, builders are pushing. You can see what's happening just in the M&A market, right? Folks are looking to grow and so that's where the land compression or the margin compression will where we coming from. So, if I had to tell you that number, from 28.3% to our estimates going into next year, I'd say it will all be on that land line item."
Also, there's a lot of municipality delays with plats, even with some of our developers just getting lots online. Outside of market risk, just bringing lots online is the biggest risk to our plan. There is one community that I think will take 20 homes out of our plan because the developer was supposed to deliver at the end of this quarter, but now, it's probably going to be end of second quarter, best guess. That unfortunately impacts closings this year. So, we see a little bit of movement there. On the other hand, we are looking for finished lots, seeing what we can do this year to kind of backfill some of that.

Land Costs

Greg Bennett

What we're seeing more in land is it's become somewhat of a bidding game. It's really hard to predict the cost because every deal out there goes out to bid and then you just hope to get in there. On the material side of things, we're seeing enough demand that I think our pricing will trend with any of the costing issues. They've been minor. Our costs have stayed relatively predictable and pretty true to what we've seen historically there in a more normal market.

ASPs and Incentives

Greg Bennett

Our incentives are down noticeably. We have our model, which is a presale build-to-order model. Our incentives tend to evolve around where we have a cancellation, where we do need to start a spec unit that we focus those dollars and move those spec units. We've seen a downward trend on incentives and have seen the trend more toward taking some pricing opportunities."

ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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