Smith Douglas (SDHC) Q1 2026 Earnings Transcript

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Date

Wednesday, Apr. 29, 2026 at 8:30 a.m. ET

Call participants

• Chief Executive Officer — Greg Bennett
• Chief Financial Officer — Russ Devendorf
• President — Joe Thomas

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Takeaways

• Pretax Income -- $4.3 million reported for the quarter.
• Net Income per Share -- $0.06 for the period, reflecting the Up-C structure allocation.
• Revenue -- $206.4 million on 624 home closings, achieving the high end of internal guidance.
• Net New Orders -- 981, a 28% increase, representing a company quarterly record.
• Home Closings Gross Margin (GAAP) -- 19.6% for the quarter.
• Adjusted Home Closings Gross Margin -- 20.3%, after excluding impairments, interest, and purchase accounting adjustments.
• Gross Margin Tailwind -- 170 basis points provided by reversal of land development accruals from community closeouts.
• Total Incentives/Discounts Impact -- 730 basis points of revenue, up from 430 basis points the previous year and 680 basis points in the prior quarter.
• SG&A Expense -- $35.9 million, or 17.4% of revenue, up $2.9 million due to growth-market investment and lower ASPs.
• Adjusted Net Income -- $3.2 million, compared with $14.7 million in the same period last year using a 26.6% tax rate for comparability with C corporations.
• Average Sales Price (ASP) -- $331,000 on closings; backlog ASP at quarter-end was $332,000.
• Backlog -- 869 homes, plus 42 home reservations anticipated to convert in the following quarter.
• Community Count -- 108 active communities, up 24%.
• Cash and Debt -- $28 million in cash and $68.5 million in total debt; $195 million available under the revolver.
• Debt-to-Book Capitalization -- 13.6%; net debt to net book capitalization at 8.5%.
• Q2 2026 Guidance -- Closings expected between 725 and 800 homes; ASP between $325,000 and $330,000; gross margin targeted at 17%-17.5%.
• Land Acquisition Structure -- 30% of optioned lots with land bankers (with 10% deposits and walkaway fees), 40% with developers, remainder with land sellers (usually small deposits).
• Share Repurchases -- Approximately $10 million repurchased at an average price of $13.28 per share, including transactions completed in April.
• Build Time -- Cycle time averaged 57 days, said to be consistent with prior periods.
• Sales Pace -- Accelerated during the quarter, with 4 homes per community in March.
• Spec/Presale Mix -- Weekly average close to 40% presale, 60% spec; 70%-80% of spec sales secured before drywall stage.
• Use of Rate Locks -- Move to a 3.99% 5/1 ARM and ongoing offering of 4.99% 30-year fixed rate, with more buyers selecting the fixed incentive.
• Lot Cost Pressure -- Lot costs as a percentage of revenue increased 300 basis points year over year and are expected to remain elevated for at least a couple of years, despite recent moderation in land pricing for new deals.
• Operational Focus -- Management reiterates a "pace over price" strategy to drive inventory turns and maintain market share, even if margin pressure persists near term.
• Market Activity and Expansion -- Ramping up recently entered markets such as Dallas, Central Georgia, Greenville, and the Alabama Gulf Coast; Houston division is described as having capacity to double current volume over five years.
• SG&A Moderation -- Expected to moderate as a percent of revenue as new divisions scale and community count increases further.

Summary

Smith Douglas Homes (NYSE:SDHC) highlighted a new quarterly record in net new orders of 981, supporting a strategic focus on sales pace across expanded markets. Current quarter adjusted net income fell sharply to $3.2 million from $14.7 million, attributed to higher use of incentives, increased lot costs, and investments in geographic expansion. Citing an uncertain demand environment, management issued only second-quarter guidance with a 17%-17.5% gross margin expectation, representing a sequential step down due to persistently elevated lot costs and stable to modestly higher incentives.

• Russ Devendorf emphasized that "Our margins continue to reflect the use of incentives and targeted pricing adjustments to support affordability and maintain sales pace."
• Recent share repurchase activity totaled approximately $10 million, described as "an attractive and disciplined use of capital without limiting the financial flexibility to support our long-term growth strategy."
• Greg Bennett noted that April sales traffic was "maybe down of 6% to 8% over what we were seeing earlier," suggesting ongoing near-term demand variability.
• Management stated, "Given the continued variability in demand conditions, we are not providing full year guidance at this time."
• Community count growth has expanded the company’s geographic footprint but was accompanied by increased SG&A investment prior to full sales volume ramp.

Industry glossary

• Up-C Organizational Structure: A structure where the public company and existing operating LLC allocate profits differently, impacting reported GAAP net income and taxes.
• Forward Commitments: Builder-funded interest rate locks or concessions offered to buyers prior to closing to enhance affordability and drive sales volume.
• Land-Banker: Third-party financier that purchases lots and provides options to builders, often with upfront deposits and walkaway fees, reducing builder land risk.
• Spec Home: Home constructed by a builder before securing a contractual buyer, intended for quicker delivery to market.
• Presale: Home sale secured by contract prior to vertical construction, often correlating with higher builder margins and increased buyer customization.
• R-Team: Smith Douglas Homes’ internal metric for an operational construction team responsible for about 208 home starts annually per team.

Full Conference Call Transcript

Greg Bennett: 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 pretax income for the quarter, net income of $0.06 per share. We delivered 624 homes, which came in at the high end of our guidance range, while home closing gross margin exceeded expectations at 19.6% on a GAAP basis. For the quarter, we generated 981 net new orders, up 28% from a year ago and a new quarterly record for the company.

While order activity remained choppy throughout the quarter, we experienced a sequential improvement in our sales pace each month of the quarter, culminating in a sales pace of 4 homes per community in the month of March. Financing 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 are encouraged by the price elasticity we experienced during the quarter as incremental adjustments in pricing led to an uptick in demand. We view this as an indicator that underlying demand remains intact across our markets despite broader macroeconomic uncertainty.

From an operational standpoint, we remain focused on pace over price philosophy, which means maintaining a consistent cadence of starts, driving efficient inventory turns and driving towards a more presale oriented backlog. Our average build time was 57 days during the quarter, consistent with prior period, 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. By relying on third-party lot developers, we're 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 made progress on our growth initiatives during the quarter. Community count expanded to 108 active communities across our markets, up 24% from a year ago, and we continue to ramp 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 disciplined and opportunistic expansion strategy over time. As we move through the spring selling season, we are 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 the community level and adjust as needed 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 will provide more color on our financial results this quarter and give an update on our outlook.

Russ Devendorf: 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 GAAP basis and adjusted home closing gross margin was 20.3%, which adds back impairments, interest and 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. Pretax income for the quarter was $4.3 million, resulting in net income of $0.06 per share.

Given the nature of our Up-C organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas Homes Corp. and the noncontrolling 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 to peers.

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-light 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 repurchase 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 closings between 725 and 800 homes, average sales price between $325,000 and $330,000 and gross margin between 17% and 17.5%.

Given the continued variability in demand conditions, we are not providing full year guidance at this time. We believe the primary risk to our outlook remain tied to macroeconomic conditions, including mortgage rates, consumer confidence and employment trends. That said, we believe our affordable product offering, land-light strategy and disciplined 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.

Operator: [Operator Instructions] Your first question comes from the line of Michael Rehaut with JPMorgan.

Nisarg Kalra: It's Nick Kalra on for Michael. I wanted to start by asking on the gross margin piece, you called out some moving pieces, but would really appreciate any extra color that you have either on the incentive environment and pricing considering like ASPs for the first quarter toward the lower end of your guide as well as on the cost side would be really helpful. Any color you can provide on construction costs, labor, et cetera.

Russ Devendorf: Guidance on a GAAP basis -- came in at the high end of guidance on a GAAP basis and we had 170 basis points, as I mentioned, that -- and it's 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 3 to 6 months may come in from a cost perspective. We had closed out some communities in the fourth quarter towards the end of last year. And so those accruals 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% was -- which I think still was right in line with guidance or in 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, impairment -- not impairments, excuse me, 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 cost of goods.

So that was up sequentially, as I mentioned, and up year-over-year. And then just from a cost perspective, 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 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 the higher basis for land deals that we entered into in the last couple of years.

Nisarg Kalra: Got it. Helpful. And then on anything you could provide? I think you mentioned in your prepared remarks that demand is still looking a little choppy week-to-week. Any color you can provide on that, either on a sequential basis, just a couple of weeks in, but relative to March? Or anything you could provide on April to date, that would be helpful from a demand perspective.

Greg Bennett: Yes. Thanks for the question. We're seeing seasonal traffic. We had good strong traffic through March. April has been a slight decline, but still seasonally good as we've gone through all the spring break and all the disruptions there, it's held pretty steady, maybe down of 6% to 8% over what we were seeing earlier.

Operator: Your next question comes from the line of Mike Dahl with RBC Capital.

Stephen Mea: You've actually got Stephen Mea on for Mike Dahl today. I was hoping we could talk a little bit on the SG&A side of things. I totally understand you all are in a kind of growth phase and there's life cycle charges in there as 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 -- are in those life cycles? Is that good to keep ramping? Or is that something that might start to moderate a little bit in the coming quarters, just kind of a qualitative overview there.

Russ Devendorf: Sure. Yes, 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 $2 million, $3 million in that range. So it's more a reflection of our ASP is coming down. And again, part of that is increased incentives, like I mentioned, forwards and price discounts are pushing that ASP down, and so it's pushing that top line revenue. So some of that percentage increase is because of the top line revenue.

But it is -- the gross dollars, the increase is actually not that bad in my -- from our perspective because we did open, as you recall, so Dallas was a new division last year. We divisionalized 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 new fresh G&A that's hitting the books without any volume. And so that, again, just reflects our continued growth and scale. And so when you start to see some of that revenue come through, I think it will moderate, right?

And again, even if you go back a couple of years, Greenville is a fairly new division. We centralized -- we divisionalized Central Georgia. And so we have expanded the footprint, again, in the drive for additional scale. So it's just -- it's kind of a timing thing.

Stephen Mea: No, totally makes sense. I appreciate the response. And secondly, understanding that you're not providing full year guidance, but if there's anything you all could share with us on areas where you may have a little more visibility like your thoughts on your perhaps pace or cadence of community counts and how you're looking at kind of hopping on the previous question, incentives kind of within the guide and just kind of more broadly going forward would be helpful.

Russ Devendorf: Sure. Yes, we don't like to give full year now. I mean maybe as we wrap up the second quarter and we're kind of halfway through the year, we will give some more clarity in this. Not like we don't have our internal targets. It's just given the environment, we just don't think it's prudent to provide any full year guidance. I mean, again, especially when it comes to margin or income, I mean, that's -- it's such a wildcard. We're going to continue to push pace. We feel pretty good, especially coming off of March and the quarter. I mean we had a really good beat, exceeded our internal expectations on sales.

That's a reflection of us doing some additional price discovery in our communities, really driving our sales folks, credit to them in the field for really pushing on pace. And so it turned out to be a good quarter in sales, which obviously, the increase in backlog, it's going to set us up for -- hopefully, it starts to set us up for a good back half of the year in terms of closings. I think I mentioned on the last call, we were expecting anywhere from 10% to 20% in community count growth for the year.

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

Operator: Your next question comes from the line of Trevor Allinson with Wolfe Research.

Trevor Allinson: First one is on your expectation for vertical costs going forward. Obviously, oil prices up, quite a bit of fuel prices up, some building products materials have seen price increase announcements. So what are you expecting for vertical costs going forward? And then in terms of some of these price increase announcements from the manufacturers, are you currently taking on any of those price increases? Or have you been able to successfully push back against those?

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

Trevor Allinson: Okay. Makes sense. I appreciate that color. And then on your lot portfolio, I mean, clearly, the majority of your lots are held off balance sheet. Can you talk about what portion of those lots are held by land banks and then shed any light on the structure of your land bank agreements perhaps in terms of deposit rates, option maintenance fees as well as your ability to potentially walk away from deals that no longer pencil?

Russ Devendorf: 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 control it with varying deposits. And usually, those are pretty small. But just 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 the land bankers.

And then there's typically like a walkaway fee that if you bust out of the option, then you pay another 10% walkaway fee, and that -- we disclosed that in our financials. But 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 stick some lots when we have some bulky takedowns on active communities that we will put into a finished lot bank, and we may, within a division, cross-collateralize. But honestly, it's -- that's -- we don't view that as any real issue. So it's pretty simple the way we think about it.

Operator: Your next question comes from the line of Ryan Gilbert with BTIG.

Ryan Gilbert: On the 2Q '26 margin guidance, can you talk about how much of the step down is from higher incentives in the quarter versus higher lot costs or if there's anything else that we should call out?

Russ Devendorf: It's -- we're assuming the incentives are probably about flat sequentially, maybe up or down 10, 20 basis points. 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 probably pretty consistent. But then it's really -- I think there's a little step down in ASP. That again is probably coming from the forwards. But it's lot costs. Again, I think lot costs, you're going to continue to see that trend year-over-year where that's about 300 basis points up. So it's -- lot cost is driving it.

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

Ryan Gilbert: Okay. Got it. And can you update us on what you're seeing in terms of, I guess, spot land prices for the deals that you're signing up today? And then if you're getting any relief on pricing, how long that would take to flow through into your income statement?

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

So we don't expect the increase in lot cost to moderate for at least a couple of years, right, at any material level. And we -- when we went public, we knew we were guiding everybody. I mean, lot 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 really important for us to continue to move inventory through the pipeline so that we don't get gummed up with these lots.

We can continue to move it through the pipeline so we can start taking advantage of a reset in land basis, land prices. And so that's kind of how we're thinking about it.

Ryan Gilbert: Got it. Makes sense. Just one more...

Russ Devendorf: One last thing there, and Joe just pointed it out, and he's right, like this is part of the reason why we think it's a reasonable opportunity to enter some of these new markets. Because we're able to start fresh and take advantage of some of these reset bases. So...

Ryan Gilbert: Got it. Yes, that makes sense. Yes, just one more for me. It seems like you and the other publics and I guess the industry overall based on the starts number earlier this morning, it seems like there's a reacceleration in starts. I'm just wondering how inventory looks in your markets and if you're seeing any impact from, I guess, the recent increase in starts volume?

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

Operator: Your next question comes from the line of Natalie Kulasekere from Zelman & Associate.

Natalie Kulasekere: So could you talk a little bit about how your incentives trended as the quarter progressed? I know you said it was 730 basis points for the whole quarter on average, but I'm just wondering if March was higher than January and February and if you had to kind of push incentives to achieve that pace of for sales per community?

Russ Devendorf: Yes. And I don't have the exact numbers in front of me. And keep in mind, the 730 basis points, that's incentives and discounts that would have mostly come through in Q3, Q4 of last year that are hitting the books. And then from incentives on sales through the quarter, yes, I would just generally say that as we ramped up our pace and pushed for a little bit more price discovery, 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 a huge hit. But it does show that there is some price elasticity.

It does -- you can see it ties into increase in volume. So...

Natalie Kulasekere: All right. And what share of your closings this quarter were driven by spec sales? And where are you in terms of getting to a more presale heavy business?

Russ Devendorf: Yes. I mean that -- presales is a huge driver or a huge focus of ours because traditionally, you're going to make more money on presales. And because of our business model, we really focus on personalization and choice for our buyer, and we have a quick turn from a cycle time perspective. So really for us, we're trying to drive that message to the divisions -- 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 than when you go to some other entry-level builders that are more, "hey, you get a vanilla, chocolate, strawberry" type of choice.

But we've been averaging -- it's probably still 40, 60 presale versus spec every week. But more importantly, we're getting the contract. We saw an uptick in getting a sale 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 we're still using forward commitments, incentives. And 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 some of these buyers in figuring out payment.

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

Operator: Your next question comes from the line of Rafe Jadrosich from Bank of America.

Rafe Jadrosich: Just can you -- I know you walked through it a little bit, just the gross margin, it's good to see the backlog sort of stabilize and step up here. The gross margin sequentially flat quarter-over-quarter in 1Q, like just can you help me just understand the accrual call out that you had there and bridge like maybe on a like-for-like basis, 1Q to 2Q?

Russ Devendorf: Yes. So if you -- so we had 170 basis points roughly of a benefit because we reversed some land development accruals on closeout communities. So these were several communities that closed out in kind of Q3, Q4. And so our internal policy is we keep -- we start to ratchet down accruals over 3 to 6 months just in case there's any stragglers or any costs out there once we close a community. And so that was 170 basis points to margin. So basically, if you just look operationally, take our margin for the quarter, back out 170 basis points, and that's kind of where you would start with your gross margin, to take out the noise.

We had a little bit of impairment in there. So strip that out. I think that was 30 -- I don't know how many basis points that accounted for...

Joe Thomas: 70.

Russ Devendorf: 70 basis points. So there was 70 basis points of impairment that was a negative impact to margin. Again, you want to strip that out. So when you see our filing, you'll be able -- and I think it's in the notes, it's in the back half of the press release. But when you look at the adjusted margins, you'll be able to see some of that stuff. So that's why 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, there was a lot there, but we can walk through any detail if it's -- once you see the numbers, it's -- you have any confusion?

Rafe Jadrosich: Okay. That actually -- that's very helpful and makes sense. And that's the sequential from 1Q to 2Q, that you still have land inflation, but incentives sort of flattish and that's getting to it.

Russ Devendorf: That's right. Yes.

Rafe Jadrosich: Okay. And then on the SG&A side, you said it was really interesting. And obviously, the dollars have stepped up here and continue to grow, but you're expanding communities. You're also moving into new markets. Of the markets that you operate in today, what would you consider to be like at scale versus what you're still trying to get the scale up and are sort of below where you'd expect it to be longer term?

Greg Bennett: Yes. Thanks, Rob. I'll take that. We're in still infancy, I would say, in Greenville. -- the same in Dallas, Fort Worth, Gulf Coast. And we're kind of over that hump in Chattanooga, made a lot of growth strides there in the last year. And then Central Georgia would be another that we're still building scale in. It's just kind of a spin-off of Atlanta, but without any real community count as we spun that off. So those are, again, not the scale would be Central Georgia, Greenville, Dallas, Fort Worth and Gulf Coast.

Russ Devendorf: Yes. And the only -- what I'd add to that as well is while we have -- we always are targeting a minimum of 2, what we call R-teams, and that's roughly 208 starts per our team. We want to have a minimum 2 R-teams in every division. And so we're not quite there in a couple of our legacy divisions like Charlotte, it's Nashville, 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 should be closer to 3 R-teams, 600 closings specifically Raleigh. I do think Charlotte can get there, 600 plus. We're not there yet.

Nashville should be 400 plus. And then obviously, Atlanta and Houston right now are too big from a permit count, right, 2 of the largest markets that we're in. Atlanta, because we peeled out Chattanooga, which was really kind of North, Georgia, pulled back a little bit. But again, Atlanta proper should be close to 1,000 units on a run rate. And then Houston for us, we entered that. We're making a lot of good strides in getting them what I would say is like Smith Douglas-ized from a turns and they've been great. But we're only doing 400 plus or minus closings there. I mean that should be double, right?

Within 5 years, we need to -- I mean, that's such a big market. We've had some headwinds, but that should be double. And then what's really shining for us is our Alabama division. They're at pretty good scale between Birmingham and Huntsville, 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, a lot of these new ones are just getting going. But that's why you see the G&A, right? When you look at the G&A relative to the community count increase, right, our community count was up 24% and our G&A was only up $2.9 million on a gross dollar basis.

So to me, that's pretty efficient.

Operator: Your next question comes from the line of Jay McCanless from Citizens Bank.

Jay McCanless: First question I had, we've seen some articles in the mainstream press about affordability being even worse than some of the larger cities now, which is forcing some migration out. So I guess my question is, are you guys seeing better demand in your smaller markets, whether it's absorption, traffic, however you want to measure it versus maybe some of the larger markets like Raleigh and Atlanta?

Russ Devendorf: Yes. Look, Alabama has done really well. And I would consider that relative, obviously, Birmingham, Huntsville relative to Houston, for instance, yes, we've seen some better demand trends. And again, Texas is its own animal. So yes, I think it's also just -- we're so used to in the Alabama markets. They didn't have the kind of spike up 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 it's just the way we operate. So yes, we saw some better demand there.

But it's -- 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 kind of in the Southeast and Central U.S., which is -- that's by design. But nothing really that I can say sticks out. I don't know, Greg, if you...

Greg Bennett: The only thing, Jay, I'll add to that is the in-migration in some of the bigger metro locations we're in is down. I mean that's been a lot. And so you feel that a little more and some of those smaller markets are not as sensitive to that.

Jay McCanless: Got it. Okay. And then the second question I had, ARMs, are you guys still trying to push on those? Is that still having good success with customers? And maybe what your ARM percentage was this quarter?

Russ Devendorf: Yes. We shifted really towards the end of the quarter and into April, we moved from a 4.99% incentive that we're kind of marketing across the footprint, a 30-year fixed. We moved to -- 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 really into April. And if you go to our website, I think that's what you'll see 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 salespeople as much flexibility, right, when -- because with a 3.99%, 5/1 ARM, the buyers can qualify off of that payment that calculates off the 3.99%. So for our buyer, that's definitely helpful. So we kind of give them some optionality there. But it's -- we're just trying -- seeing what the market is doing, trying to at least compete at that level and give buyers as much affordable options as possible.

Joe Thomas: And we're seeing more usage of the 4.99%.

Russ Devendorf: Yes. 4.99%, the 30-year fixed 4.99% is probably taken the most of the incentive.

Operator: We have reached the end of the Q&A session. I will now turn the call back to Greg Bennett for closing remarks.

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

Operator: This concludes today's call. Thank you for attending. You may now disconnect.

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