United Homes Group, Inc. 10-K Analysis & Summary – 3/14/2025

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United Homes Group, Inc

10-K

Annual report

Filing date:

03/14/2025

TLDR:

ELI5:

United Homes Group, a homebuilder, made more money this year, but it also cost them more to do so, and they have some financial risks. There are also some questions about how they handle money with related companies, so it’s best to wait and see how they improve before investing.

Accession #:

0001830188-25-000012

Published on

March 16, 2025

Analyst Summary

Revenue increased by 10% due to higher home closings and average sales prices, indicating positive market demand.
Gross profit margin declined by 1.7%, suggesting increased costs or pricing pressures.
EBITDA and Adjusted EBITDA margins experienced significant decreases, reflecting lower profitability.
Net new orders increased by 7.9%, suggesting continued demand for UHG’s homes.
Cancellation rate decreased from 13.6% to 11.4%, indicating improved buyer confidence or effectiveness of incentives.
Cash and cash equivalents decreased significantly, potentially indicating increased cash usage for operations or investments.
Inventories decreased, possibly reflecting increased sales or write-downs.
Lot deposits increased, suggesting continued investment in land acquisition.
Homebuilding debt decreased, but a new Term Loan was added, significantly increasing overall debt.
Cash flow from operating activities decreased, indicating potential challenges in generating cash from core operations.
Net income significantly decreased by 62.5%, primarily due to a substantial loss on the extinguishment of convertible notes and changes in the fair value of derivative liabilities.
The company’s net profit margin is above the industry average, while the operating profit margin is significantly lower, indicating challenges in managing operating expenses.
The company’s ROA and ROE are above the industry average.
The company’s current, quick, and cash ratios are below the industry average.
The company’s debt-to-equity and debt-to-assets ratios are above the industry average.
The company’s interest coverage ratio is below the industry average.
The company’s inventory turnover is within the average range, while DSO and DPO are below average.
The company’s asset turnover is above average.
The company’s P/E, P/B, P/S, and EV/EBITDA ratios are below average.

Opportunities and Risks

Risk: The homebuilding industry is highly cyclical and sensitive to economic conditions.
Risk: UHG’s concentration in the Southeastern United States exposes it to regional economic downturns.
Risk: Higher mortgage rates can negatively impact housing affordability and demand.
Risk: Identified material weaknesses in internal controls could affect the reliability of financial reporting.
Risk: High debt levels and restrictive covenants could limit financial flexibility.
Risk: Potential conflicts of interest in transactions with related party land developers.
Risk: Concentrated voting power with the Executive Chairman may limit shareholder influence.
Opportunity: Land-Light Operating Model reduces risk and capital requirements compared to traditional homebuilders.
Opportunity: Strong population and employment growth in the Southeastern United States.
Opportunity: Operational improvements and expansion into new markets.
Opportunity: Growing demand from institutional investors for newly constructed rental homes.

Potential Implications

Company Performance

Declining margins could continue to pressure profitability if cost reduction initiatives are not effective.
High debt levels could limit the company’s ability to invest in growth opportunities or weather economic downturns.
Material weaknesses in internal controls could lead to financial restatements or regulatory scrutiny.
Successful execution of strategic initiatives and leveraging growth in core markets could drive future revenue and earnings growth.

Stock Price

Concerns about declining margins, high debt, and internal control weaknesses could negatively impact the stock price.
Positive developments in improving profitability, strengthening internal controls, and managing debt could boost investor confidence and the stock price.
Related party transactions and the dual class stock structure could create uncertainty and limit investor appeal.

Executive Summary

This report analyzes United Homes Group, Inc.’s (UHG) 10-K filing for the fiscal year ended December 31, 2024. UHG operates in the cyclical homebuilding industry, primarily in the Southeastern United States. The analysis focuses on UHG’s financial performance, key risk factors, and strategic initiatives.

Overall Assessment: While UHG demonstrates growth in revenue and net new orders, concerns exist regarding declining gross profit margins, significant debt, and identified material weaknesses in internal controls. The dual class stock structure and related party transactions also present potential conflicts of interest. Given these factors, a HOLD rating is recommended.

Key Recommendations:

Improve Gross Margins: Focus on cost reduction initiatives and product improvements to enhance profitability.
Strengthen Internal Controls: Continue remediation efforts to address material weaknesses and ensure accurate financial reporting.
Manage Debt Levels: Monitor debt covenants closely and explore strategies to reduce leverage.
Address Related Party Transactions: Ensure transparency and fairness in all related party transactions through robust oversight and independent review.

Company Overview

United Homes Group, Inc. (UHG) is a homebuilder focused on high-growth markets in South Carolina, North Carolina, and Georgia. The company employs a land-light operating strategy, primarily building entry-level and move-up single-family homes. UHG operates through three segments: GSH South Carolina, Rosewood, and Other (including Raleigh, NC operations and mortgage operations).

Detailed Analysis

Management’s Discussion and Analysis (MD&A)

Management highlights a significant housing shortage and favorable fundamentals in their markets. They emphasize UHG’s land-light operating model as a key competitive advantage, reducing risk and driving superior returns. Growth strategies include leveraging macro housing trends, capitalizing on core market growth, accretive M&A, and build-to-rent relationships. Operational improvement initiatives are underway, focusing on product improvement, lowering construction costs, and comprehensive land underwriting.

Financial Statement Analysis

Key Financial Ratios and Trends:

Metric	2024	2023	Change
Revenue	$463.7M	$421.5M	+10.0%
Gross Profit Margin	17.2%	18.9%	-1.7%
Adjusted Gross Profit Margin	19.9%	21.4%	-1.5%
EBITDA Margin	13.0%	34.4%	-21.3%
Adjusted EBITDA Margin	6.8%	9.6%	-2.8%
Net New Orders	1,399	1,296	+7.9%
Cancellation Rate	11.4%	13.6%	-2.2%

Key Observations:

Revenue increased by 10%, driven by higher home closings and average sales prices.
Gross profit margin declined by 1.7%, indicating increased costs or pricing pressures.
EBITDA and Adjusted EBITDA margins experienced significant decreases, reflecting lower profitability.
Net new orders increased, suggesting continued demand for UHG’s homes.
Cancellation rate decreased, indicating improved buyer confidence or effectiveness of incentives.

Balance Sheet Insights:

Asset/Liability	December 31, 2024	December 31, 2023	Change
Cash and Cash Equivalents	$22.6M	$56.7M	-$34.1M
Inventories	$139.3M	$182.8M	-$43.5M
Lot Deposits	$48.2M	$33.0M	+$15.2M
Homebuilding Debt	$50.2M	$80.5M	-$30.3M
Term Loan, net	$67.2M	$0M	+$67.2M
Derivative Liabilities	$39.2M	$127.6M	-$88.4M

Key Observations:

Cash and cash equivalents decreased significantly, potentially indicating increased cash usage for operations or investments.
Inventories decreased, possibly reflecting increased sales or write-downs.
Lot deposits increased, suggesting continued investment in land acquisition.
Homebuilding debt decreased, but a new Term Loan was added, significantly increasing overall debt.
Derivative liabilities decreased, primarily due to changes in the company’s stock price.

Cash Flow Analysis:

Cash Flow Activity	2024	2023	Change
Operating Activities	$15.4M	$28.2M	-$12.8M
Investing Activities	-$12.6M	-$24.3M	+$11.7M
Financing Activities	-$34.0M	$40.5M	-$74.5M

Key Observations:

Cash flow from operating activities decreased, indicating potential challenges in generating cash from core operations.
Cash used in investing activities decreased, primarily due to lower acquisition spending.
Financing activities shifted from positive to negative, reflecting debt repayments and the redemption of Convertible Notes.

Risk and Opportunity Assessment

Key Risks:

Cyclical Industry: The homebuilding industry is highly cyclical and sensitive to economic conditions.
Geographic Concentration: UHG’s concentration in the Southeastern United States exposes it to regional economic downturns.
Rising Interest Rates: Higher mortgage rates can negatively impact housing affordability and demand.
Material Weaknesses in Internal Controls: Identified material weaknesses could affect the reliability of financial reporting.
Significant Debt: High debt levels and restrictive covenants could limit financial flexibility.
Related Party Transactions: Potential conflicts of interest in transactions with related party land developers.
Dual Class Stock Structure: Concentrated voting power with the Executive Chairman may limit shareholder influence.

Key Opportunities:

Land-Light Operating Model: Reduces risk and capital requirements compared to traditional homebuilders.
Growth in Core Markets: Strong population and employment growth in the Southeastern United States.
Strategic Initiatives: Operational improvements and expansion into new markets.
Build-to-Rent Relationships: Growing demand from institutional investors for newly constructed rental homes.

Red Flags and Uncommon Metrics

Declining Margins: The decrease in gross profit and EBITDA margins raises concerns about profitability.
Significant Debt: The high level of debt, including the new Term Loan, increases financial risk.
Material Weaknesses: The identified material weaknesses in internal controls highlight potential issues with financial reporting accuracy.
Related Party Transactions: The reliance on related party land developers and the Executive Chairman’s ownership interests present potential conflicts of interest.

Conclusion and Actionable Insights

UHG demonstrates growth potential in attractive markets, supported by its land-light operating model and strategic initiatives. However, declining margins, significant debt, and internal control weaknesses warrant caution. The dual class stock structure and related party transactions also present potential governance concerns.

Recommendation: A HOLD rating is recommended. Investors should monitor UHG’s progress in improving profitability, strengthening internal controls, and managing debt levels. Further analysis of related party transactions and their impact on financial performance is also warranted.

Financial Analysis of United Homes Group, Inc. (UHG)

1. Commentary

United Homes Group’s (UHG) financial performance in 2024 presents a mixed picture. Revenue increased by 10%, driven by higher average sales prices and net new orders, indicating positive market demand. However, net income significantly decreased by 62.5%, primarily due to a substantial loss on the extinguishment of convertible notes and changes in the fair value of derivative liabilities. The company also experienced a decline in EBITDA and adjusted EBITDA margins, reflecting increased costs and expenses. While revenue growth is a positive sign, the decline in profitability raises concerns about UHG’s operational efficiency and financial stability.

2. Financial Ratio and Metric Analysis

Profitability

Ratio/Metric	2024	2023	Change (%)	Industry Comparison
Gross Profit Margin	17.2%	18.9%	-9.0%	Industry average for homebuilders is typically between 20-25%. UHG’s margin is below average.
Operating Profit Margin	1.1%	3.5%	-68.6%	Industry average is around 8-12%. UHG’s operating margin is significantly lower, indicating challenges in managing operating expenses.
Net Profit Margin	10.1%	29.7%	-66.0%	The industry average is around 6-10%. UHG’s net profit margin is above average.
Return on Assets (ROA)	17.7%	41.9%	-57.8%	The industry average is around 5-8%. UHG’s ROA is above average.
Return on Equity (ROE)	70.2%	-401.0%	NM	The industry average is around 15-20%. UHG’s ROE is above average.
EPS (Basic)	$0.96	$2.74	-65.0%	Comparable to peers like LGI Homes (LGIH) and Century Communities (CCS) but depends on specific company strategies and market conditions.
EPS (Diluted)	$0.90	$2.35	-61.7%	Comparable to peers like LGI Homes (LGIH) and Century Communities (CCS) but depends on specific company strategies and market conditions.

Liquidity

Ratio/Metric	2024	2023	Change (%)	Industry Comparison
Current Ratio	1.31	0.87	50.6%	The industry average is around 2. UHG’s current ratio is below average.
Quick Ratio	0.61	0.31	96.8%	The industry average is around 1. UHG’s quick ratio is below average.
Cash Ratio	0.13	0.17	-23.5%	The industry average is around 0.2. UHG’s cash ratio is below average.

Solvency/Leverage

Ratio/Metric	2024	2023	Change (%)	Industry Comparison
Debt-to-Equity Ratio	2.97	-10.58	NM	The industry average is around 1-2. UHG’s debt-to-equity ratio is above average.
Debt-to-Assets Ratio	0.75	1.10	-31.8%	The industry average is around 0.4-0.6. UHG’s debt-to-assets ratio is above average.
Interest Coverage Ratio	2.23	8.24	-72.9%	The industry average is around 3-5. UHG’s interest coverage ratio is below average.

Activity/Efficiency

Ratio/Metric	2024	2023	Change (%)	Industry Comparison
Inventory Turnover	2.76	1.87	47.6%	The industry average is around 2-4. UHG’s inventory turnover is within the average range.
Days Sales Outstanding (DSO)	3.2	1.4	128.6%	The industry average is around 20-40 days. UHG’s DSO is below average.
Days Payable Outstanding (DPO)	16.9	39.9	-57.6%	The industry average is around 30-60 days. UHG’s DPO is below average.
Asset Turnover	1.75	1.41	24.1%	The industry average is around 0.8-1.2. UHG’s asset turnover is above average.

Valuation

Ratio/Metric	2024	Industry Comparison
Price-to-Earnings Ratio (P/E)	3.5	The industry average is around 10-15. UHG’s P/E ratio is below average.
Price-to-Book Ratio (P/B)	0.5	The industry average is around 1-2. UHG’s P/B ratio is below average.
Price-to-Sales Ratio (P/S)	0.07	The industry average is around 0.5-1. UHG’s P/S ratio is below average.
Enterprise Value to EBITDA (EV/EBITDA)	-19.1	The industry average is around 8-12. UHG’s EV/EBITDA is below average.

Growth Rates

Ratio/Metric	2024	2023	Change (%)
Revenue Growth	$463,714,017	$421,474,101	10.0%
Net Income Growth	$46,905,740	$125,060,284	-62.5%
EPS Growth	$0.96	$2.74	-65.0%

Other Relevant Metrics

Adjusted Gross Profit and Adjusted EBITDA: The company presents adjusted gross profit and adjusted EBITDA as non-GAAP measures. These metrics exclude certain items such as interest expense in cost of sales, amortization in homebuilding cost of sales, severance expense, abandoned project costs, and non-recurring remediation costs. These adjustments generally aim to provide a clearer picture of the company’s core operational performance. However, it’s important to critically assess whether these adjustments are reasonable and consistently applied. The significant difference between EBITDA and Adjusted EBITDA suggests that these excluded items have a material impact on the company’s profitability.
Net New Orders and Cancellation Rate: Net new orders increased by 7.9%, indicating healthy demand. The cancellation rate decreased from 13.6% to 11.4%, which is a positive sign, suggesting improved customer confidence and sales execution.
Backlog: The backlog decreased by 16.9%, which could indicate a slowdown in future revenue recognition.