Executive Summary / Key Takeaways

• United Homes Group operates with a capital-efficient, land-light strategy in high-growth Southeastern markets, focusing on entry-level to move-up homes, positioning it distinctly against larger, more asset-heavy national builders.
• Recent performance in Q1 2025 saw a decrease in closings and orders year-over-year, impacted by market affordability challenges and weather, but April orders showed a positive trend (+6%).
• Strategic initiatives, including a product refresh and direct cost reduction program, are underway and showing early promise with newly designed homes achieving higher margins (~24%) and over $3.5 million in cost savings identified for 2025.
• A shift towards a more balanced approach emphasizing presold homes is expected to improve future margins by reducing discounting on spec inventory and capitalizing on higher-margin options.
• Planned community openings (10 in Q2 2025, 18 in Q3 2025) are anticipated to boost sales efforts and drive future growth, leveraging the company's pipeline of ~7,500 controlled lots.
• The company maintains adequate liquidity and is in compliance with debt covenants following a December 2024 debt refinancing that reduced leverage and cash interest expense.

Building the Foundation: Strategy and Market Position

United Homes Group, Inc. ($UHG) is carving out its niche in the dynamic Southeastern U.S. housing market, primarily focusing on South Carolina, North Carolina, and Georgia. The company's core business revolves around the construction and sale of single-family residential homes, catering to a spectrum of buyers from entry-level to third move-up. UHG's journey to becoming a publicly traded homebuilder began as a blank check company, DiamondHead Holdings Corp., culminating in a business combination with Great Southern Homes, Inc. in March 2023. This transaction laid the groundwork for UHG's current operational footprint and strategic direction.

Central to UHG's strategy is its "land-light" operating model. Unlike many traditional homebuilders who tie up significant capital in land ownership and development, UHG primarily utilizes lot option contracts with land developers and land bank option contracts. This approach grants the company the right, but not the obligation, to purchase lots at predetermined prices and times. This strategy is designed to be capital-efficient and risk-averse, allowing UHG to defer acquiring land until closer to the construction phase. As of March 31, 2025, UHG had lot deposits of $46.9 million related to option contracts with an aggregate remaining purchase price of $336.8 million, illustrating the scale of future land access with limited upfront capital exposure. This model reduces the financial risks associated with long-term land holdings and is intended to enhance returns on invested capital, a key focus for the company.

Within the competitive landscape, UHG operates alongside national giants like Lennar (LEN), D.R. Horton (DHI), and PulteGroup (PHM), as well as regional players and specialized builders like Clayton Homes (BRK.B) in the prefabricated segment. While larger competitors benefit from immense scale and broader geographic diversification, UHG's strength lies in its focused regional expertise and the capital efficiency derived from its land-light model. This allows UHG to potentially achieve lower operating costs per unit due to reduced land inventory risks, although it may not fully match the cost advantages gained by national builders through sheer volume and supply chain leverage. UHG's target market segments, particularly entry-level and move-up buyers in high-growth Southeastern areas, align with robust demographic trends, including significant in-migration and employment growth, providing a consistent demand pipeline. The company's acquisitions of Rosewood Communities (focusing on second and third move-up homes) and Creekside Custom Homes have expanded its product offerings and geographic reach within this attractive region, complementing the core GSH South Carolina operations and establishing a foothold in markets like Raleigh, NC.

UHG's approach to innovation, while not centered on a single, disruptive building technology like prefabricated construction or 3D printing, focuses on operational efficiency and product relevance. Recognizing that its existing product designs had become less competitive and direct construction costs were relatively high, the company initiated a product refresh program in late 2024. This involves updating floor plans and home designs to better meet current buyer preferences. Early results from these newly designed homes have been positive, demonstrating improved sales traction and achieving significantly higher gross margins, with 23 such homes closed in Q1 2025 at an average gross margin of approximately 24%. Complementing this is a direct cost reduction initiative, strategically rebidding agreements with subcontractors and material suppliers. This effort has already identified over $3.5 million in direct construction cost savings for homes expected to close in 2025, leveraging the company's increasing scale to secure better pricing. These initiatives are critical for UHG to enhance its competitive positioning, improve profitability margins which have lagged some larger peers, and drive operational efficiency in a competitive market where others are also offering significant incentives.

Recent Performance and Operational Dynamics

The first quarter of 2025 presented a challenging operating environment for UHG, reflecting broader industry headwinds. Revenue for the three months ended March 31, 2025, totaled $87.0 million, a decrease of 13.7% from $100.8 million in the prior-year period. This decline was primarily driven by a 19.0% decrease in home closings, totaling 252 units compared to 311 in Q1 2024. The average sales price (ASP) of production-built homes increased by 2.9% to approximately $345,000, partially offsetting the impact of lower volume. Notably, Q1 2024 closings included 24 build-to-rent units with lower ASPs, which contributed to a higher overall ASP increase (6.5%) when comparing total closings year-over-year.

Gross profit for Q1 2025 was $14.1 million, down 12.4% from $16.1 million in Q1 2024. However, the gross profit margin saw a slight improvement, increasing by 20 basis points to 16.2%. Adjusted gross profit margin, which excludes certain non-recurring items and capitalized interest expensed in cost of sales, was 18.8%, down from 20.4% in Q1 2024. Margins remained under pressure due to elevated sales incentives and price discounting, particularly on aged finished inventory, a strategic decision to accelerate sales in a competitive market. Management highlighted that lower interest expense in cost of sales as a percentage of revenue partially offset these pressures.

Selling, general, and administrative (SG&A) expenses decreased by 5.3% to $16.2 million in Q1 2025, primarily due to lower commissions expense and transaction costs, partially offset by increases in salaries, stock compensation, and ERP implementation costs.

Net income for the quarter was $18.2 million, significantly influenced by a non-cash gain of $21.2 million from the change in fair value of derivative liabilities. This gain primarily relates to the accounting for potential earnout shares tied to the company's stock price, which fluctuates quarterly and does not represent a cash expense. Excluding this non-cash item, the operating results reflect the challenging sales environment.

Operational metrics also showed the impact of market conditions. Net new orders decreased by 22.9% to 296 units in Q1 2025 from 384 units in Q1 2024. The cancellation rate increased to 12.7% from 9.6%. Backlog at the end of the quarter stood at 201 units with a value of approximately $75.3 million, down 23.3% in units year-over-year. Management attributed the slow start to the year to persistently elevated mortgage rates, housing affordability concerns, and unusually bad weather in South Carolina in January. However, they noted an improvement in sales pace in the latter half of February and March, with April orders showing a positive 6% increase year-over-year, indicating some momentum exiting the quarter.

Segment performance mirrored these trends. The GSH South Carolina segment saw a significant decrease in income before taxes, primarily driven by lower closings and higher average costs. The Rosewood segment also experienced a decrease in income before taxes, largely due to changes in the fair value of contingent consideration related to its acquisition. In contrast, the Other segment, which includes the Raleigh operations, saw a substantial increase in revenue and a shift from a loss to income before taxes, driven by a significant increase in closings (from 4 to 15 homes), although ASP decreased due to the community mix. The mortgage joint venture contributed $0.2 million in equity in net earnings.

Operationally, the company reported improvements in construction cycle times, reducing the average by 16 days compared to the prior year, benefiting from better labor and material availability.

Strategic Execution and Forward Outlook

UHG's strategic response to the current market environment and its focus on long-term growth are centered on the initiatives highlighted earlier. The product refresh is gaining traction, with newly designed homes not only selling well but also achieving higher margins, particularly when sold as presales. This aligns with the company's strategic shift towards a more balanced approach, emphasizing presold homes over a high-spec strategy, especially in move-up product lines. This pivot is expected to improve future margins by reducing the need for discounting completed inventory and allowing buyers to select higher-margin options and upgrades. It also provides better visibility into future delivery outlooks and reduces capital tied up in standing inventory.

The direct cost reduction initiative is expected to yield tangible benefits, with identified savings set to ramp up through the second half of 2025. These cost efficiencies, combined with the improved margins from new product designs and presales, are anticipated to drive overall margin improvement throughout the year, helping to offset the ongoing impact of sales incentives necessitated by affordability challenges and competitive pricing.

Growth in sales volume is expected to be significantly boosted by planned community openings. Management anticipates opening 10 new communities in the second quarter of 2025 and a further 18 in the third quarter. Most of these new communities will feature the newly refreshed product designs, leveraging their positive market reception. The company's pipeline of approximately 7,500 controlled lots, primarily through option agreements and land banking, provides the necessary inventory depth to support this planned community growth and future expansion.

Management remains optimistic about the long-term prospects for its markets, citing favorable housing fundamentals driven by continued in-migration, job growth, and relative affordability compared to other regions. The mortgage joint venture is viewed as a valuable business vertical that can enhance buyer traffic conversion and reduce cancellation rates, contributing to future revenue and EBITDA growth.

While specific quantitative full-year guidance figures were not provided in the Q1 2025 materials beyond the expected ramp-up of cost savings and community openings, the outlook is framed around the successful execution of these strategic initiatives. The expectation is that these efforts will lead to improved margins and sales momentum in the latter half of 2025, building on the positive trend seen in April orders.

A significant recent development, announced subsequent to the Q1 filing on May 19, 2025, is the initiation of a review of strategic alternatives by the Board of Directors, concurrent with leadership changes including the appointment of Jack Micenko as CEO. This review is aimed at exploring ways to maximize shareholder value and introduces a new layer of potential outcomes for the company's future direction.

Financial Health and Risk Profile

UHG ended Q1 2025 with approximately $25.0 million in cash and cash equivalents. The company's liquidity is further supported by availability under its Syndicated Line of Credit, which had $61.9 million in unused committed capacity as of March 31, 2025. Management believes this level of liquidity, combined with cash flows from operations and available borrowings, is sufficient to meet its short-term and long-term working capital needs, contractual obligations, and support potential future acquisitions.

The company's debt structure primarily consists of a Syndicated Line of Credit ($53.2 million outstanding as of March 31, 2025) and a subordinated Term Loan ($67.2 million outstanding). The Syndicated Line carries a weighted average interest rate of 7.60% and matures primarily in August 2027, while the Term Loan has a weighted average rate of 11.61% and matures on the earlier of December 2030 or the Syndicated Line maturity. Both facilities contain financial covenants related to tangible net worth, leverage, debt service coverage, and liquidity, with which UHG was in compliance as of March 31, 2025. A notable financial event was the December 2024 refinancing of the Convertible Notes, which reduced total debt and is expected to lower cash interest expense by approximately $4 million annually based on current rates.

The land-light strategy, while capital-efficient, means UHG's cash flows can differ significantly in timing from its reported results, as cash outlays for lot deposits and construction occur before revenue recognition upon home closing. The risk exposure from option contracts is generally limited to the non-refundable deposits and capitalized pre-acquisition costs, totaling approximately $46.9 million and $6.2 million respectively as of March 31, 2025. However, in certain development agreements with land bankers, the company may face risk of cost overruns. Other commitments include surety bonds ($8.2 million) and letters of credit ($1.3 million) related to development projects.

UHG is exposed to various risks inherent in the homebuilding industry. Market cyclicality, driven by macroeconomic conditions, interest rate fluctuations, and consumer confidence, can significantly impact demand and profitability. As a variable-rate borrower, UHG is sensitive to interest rate changes; a 100 basis point increase in overall rates would negatively affect net income by approximately $1.2 million based on current debt levels. Competition is intense, both from other new home builders who may sacrifice margin for volume and from the resale market, which can necessitate the use of sales incentives that pressure UHG's margins. Rising costs of land, materials, and labor, as well as potential disruptions from trade policies or supply chain issues, can also impact profitability. Weather events and natural disasters can delay construction and affect sales activity. The company is also subject to litigation risks, primarily construction defect claims, and is currently involved in a lawsuit related to the Rosewood acquisition, though management believes the outcome will not have a material adverse effect, aside from a reasonably possible loss in the Rosewood matter whose amount is not estimable.

Conclusion

United Homes Group is strategically positioned in attractive, high-growth markets across the Southeast, leveraging a capital-efficient, land-light operating model that differentiates it from many larger, more asset-intensive competitors. While the first quarter of 2025 reflected the impact of challenging market conditions on sales and closings, the company is actively implementing strategic initiatives designed to improve its operational efficiency and profitability trajectory.

The product refresh and direct cost reduction programs are showing early signs of success, promising higher margins on new product and significant cost savings in the coming quarters. The shift towards a greater focus on presales is a sensible move to capture higher-margin opportunities and reduce inventory risk. Coupled with a robust pipeline of controlled lots and planned community openings, UHG appears poised to drive future growth. The recent debt refinancing has strengthened the balance sheet and reduced cash interest expense, providing additional financial flexibility.

However, the company operates in a highly competitive and interest-rate-sensitive environment. The ongoing need for sales incentives and potential cost pressures from land and materials remain factors that could impact margin expansion. The successful execution of the strategic initiatives and the outcome of the recently announced review of strategic alternatives will be critical determinants of UHG's future performance and value creation for shareholders. Investors should monitor the company's progress in ramping up new community openings, the realization of cost savings, and the continued reception of its refreshed product line as key indicators of its ability to capitalize on the opportunities in its core markets.