Smith Douglas Homes Corp

Previous wording

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. You should read this analysis in conjunction with our unaudited financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, this discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance, based upon our current plans, expectations and beliefs involving risks and uncertainties. These statements are only predictions, and actual events or results may differ materially. In evaluating such statements, you should carefully consider the various factors identified in the Annual Report, as updated by this Quarterly Report on Form 10-Q, which could cause actual results to differ materially from those expressed in, or implied by, any forward-looking statements, including those set forth in Part I, Item 1A. Risk Factorsof our Annual Report.

Current wording

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. You should read this analysis in conjunction with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, this discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance, based upon our current plans, expectations and beliefs involving risks and uncertainties. These statements are only predictions, and actual events or results may differ materially. In evaluating such statements, you should carefully consider the various factors identified in the Annual Report, as updated by this Quarterly Report on Form 10-Q, which could cause actual results to differ materially from those expressed in, or implied by, any forward-looking statements, including those set forth in Part I, Item 1A. Risk Factorsof our Annual Report.

Previous wording

During the three months ended March 31, 2024, we were encouraged by the demand for new homes even as mortgage rates continued to fluctuate throughout the period. We believe demand for new homes is being primarily driven by the continued low levels of housing inventory and homebuyers adjusting to a more normalized higher interest rate environment. As a result, our net new orders increased by 15% in the three months ended March 31, 2024 compared to the three months ended March 31, 2023. We expect the housing undersupply in the resale market and favorable demographic trends to provide a strong, long-term runway for future new home buying demand. We believe our dedication to entry-level and empty-nest homebuyers with a focus on price points that fall below FHA guidelines, our efficient construction process, and our affordable luxury sales experience caters to the desires of today’s aspiring homeowners and is resilient across economic cycles. We believe our focus on affordable luxury will continue to serve us well as we remain optimistic about long-term demand due to favorable homebuyer demographics. Additionally, we construct most of our homes on a pre-sold basis, where our homebuyers choose their homes based on a select number of value-engineered floor plans and are offered flexibility on the selection of home options. Our SMART Builder enterprise resource planning system and efficient construction process, which we call Rteam, allows this optionality for homebuyers based on just-in-time modifications. As a result of our differentiated value proposition and efficient construction cycle times, we believe we typically achieve a high level of homebuyer satisfaction and experience low cancellation rates, which were 11% and 9% for the three months ended March 31, 2024 and 2023, respectively.

Current wording

In the first half of 2024, we continued to experience strong demand for new homes despite fluctuating interest rates. Our net new home orders increased by 17% in the three months ended June 30, 2024 compared to the three months ended June 30, 2023 and 16% in the six months ended June 30, 2024 compared to the six months ended June 30, 2023. We expect the housing undersupply in the resale market and favorable demographic trends to provide a strong, long-term runway for future new home buying demand. We believe our dedication to entry-level and empty-nest homebuyers with a focus on price points that fall below FHA guidelines, our efficient construction process, and our affordable luxury sales experience caters to the desires of today’s aspiring homeowners and is resilient across economic cycles. Additionally, we construct most of our homes on a pre-sold basis, where our homebuyers choose their homes based on a select number of value-engineered floor plans and are offered flexibility on the selection of home options. Our SMART Builder enterprise resource planning system and efficient construction process, which we call Rteam, allows us to provide this optionality for homebuyers based on just-in-time modifications. As a result of our differentiated value proposition and efficient construction cycle times, we believe we typically achieve a high level of homebuyer satisfaction and experience low cancellation rates, which were 12% and 9% for the three months ended June 30, 2024 and 2023, respectively.

Previous wording

At the core of our land-light operating strategy lies the principle and discipline of primarily acquiring finished lots from a diverse pool of third-party land developers or land bankers through the effective utilization of lot-option contracts. Our lot acquisition strategy reduces our upfront capital requirements and generally provides for “just-in-time” lot delivery, better aligning our pace of home orders and home starts. While using land bankers and third-party developers comes at an additional cost, we believe our lot acquisition strategy reduces our operating and financial risk relative to other homebuilders that own a higher percentage of their land supply. As of March 31, 2024, we had 693 owned unstarted lots in real estate inventory on our balance sheet which represented only 4.9% of our total controlled lot supply.

Current wording

At the core of our land-light operating strategy lies the principle and discipline of primarily acquiring finished lots from a diverse pool of third-party land developers or land bankers through the effective utilization of lot-option contracts. Our lot acquisition strategy reduces our upfront capital requirements and generally provides for “just-in-time” lot delivery, better aligning our pace of home orders and home starts. While using land bankers and third-party developers comes at an additional cost, we believe our lot acquisition strategy reduces our operating and financial risk relative to other homebuilders that own a higher percentage of their land supply. As of June 30, 2024, we had 587 owned unstarted lots in real estate inventory on our balance sheet which represented only 3.7% of our total controlled lot supply.

Previous wording

We believe the geographic markets in which we operate demonstrate strong population and employment growth trends, favorable migration patterns, and desirable lifestyle and weather conditions. Our operations are currently organized into six geographical segments; our reportable segments include Atlanta (which includes certain Atlanta suburbs like Dalton, GA), Raleigh, Charlotte, Nashville, Alabama (which consists of both Birmingham and Huntsville), and Houston. Each of our markets is experiencing strong momentum in housing demand drivers relative to historic averages, and we believe there is significant opportunity to expand our presence in each of our respective markets.

Current wording

We believe the geographic markets in which we operate demonstrate strong population and employment growth trends, favorable migration patterns, and desirable lifestyle and weather conditions. Our operations are currently organized into six geographical segments; our reportable segments include Alabama (which consists of both Birmingham and Huntsville), Atlanta (which includes certain Atlanta suburbs like Dalton, GA), Charlotte, Houston, Nashville, and Raleigh. Each of our markets is experiencing strong momentum in housing demand drivers relative to historic averages, and we believe there is significant opportunity to expand our presence in each of our respective markets.

Previous wording

Our operations are currently organized into six geographical segments. Our reportable segments include Atlanta (which includes certain Atlanta suburbs like Dalton, GA), Raleigh, Charlotte, Nashville, Alabama (which consists of both Birmingham and Huntsville), and Houston.

Current wording

Our operations are currently organized into six geographical segments. Our reportable segments include Alabama (which consists of both Birmingham and Huntsville), Atlanta (which includes certain Atlanta suburbs like Dalton, GA), Charlotte, Houston, Nashville, and Raleigh.

Previous wording

The results of operations data in the following tables for the periods presented have been derived from the unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Current wording

The results of operations data in the following tables for the periods presented have been derived from the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Previous wording

Comparison of three months ended March 31, 2024 and 2023

Current wording

Comparison of three and six months ended June 30, 2024 and 2023

Previous wording

The following table sets forth our statements of income and other operating data for the three months ended March 31, 2024 and 2023, along with the period over period change in dollars and other amounts and percent (amounts in thousands):

Current wording

The following table sets forth our statements of income and other operating data for the periods presented (amounts in thousands):

Previous wording

Home closing revenue for the three months ended March 31, 2024, was $189.2 million, an increase of $21.1 million, or 12.5%, from $168.1 million for the three months ended March 31, 2023. The increase in revenue was primarily attributable to a 13.2% increase in home closings due to our Devon Street Homes acquisition, partially offset by a 0.6% decrease in ASP of homes closed.

Current wording

The increase in revenue was primarily attributable to increases of 17% and 15% in the number homes closed for the three and six months ended June 30, 2024, respectively, which are largely driven by our Devon Street Homes acquisition. The increase in revenue was also attributable to an increase in the ASP of homes closed of 4% and 2% for the three and six months ended June 30, 2024, respectively.

Previous wording

The following table sets forth our home closing revenue, number of home closings, and ASP of homes closed for the three months ended March 31, 2024 and 2023, in each of our reportable segments (dollar amounts in thousands):

Current wording

The following table sets forth our home closing revenue, number of home closings, and ASP of homes closed for the periods presented, in each of our reportable segments (dollar amounts in thousands):

Previous wording

Home closing gross profit for the three months ended March 31, 2024 was $49.4 million, an increase of $0.9 million, or 1.9%, from $48.5 million for the three months ended March 31, 2023. Home closing gross margin, expressed as a percentage and calculated as home closing gross profit divided by home closing revenue, was 26.1% in the three months ended March 31, 2024 compared to 28.9% in the same period in 2023. The decrease in home closing gross margin was primarily driven by a 3% increase in the average cost of home closings and 0.6% decrease in the ASP of homes closed.

Current wording

Home closing gross profit for the three months ended June 30, 2024 was $59.1 million, an increase of $6.4 million, or 12%, from $52.7 million for the three months ended June 30, 2023. Home closing gross margin, expressed as a percentage and calculated as home closing gross profit divided by home closing revenue, was 26.7% in the three months ended June 30, 2024 compared to 29.0% in the same period in 2023. Home closing gross profit for the six months ended June 30, 2024 was $108.5 million, an increase of $7.3 million, or 7%, from $101.2 million for the six months ended June 30, 2023. Home closing gross margin, expressed as a percentage and calculated as home closing gross profit divided by home closing revenue, was 26.5% in the six months ended June 30, 2024 compared to 29.0% in the same period in 2023.

Previous wording

Selling, general, and administrative costs for the three months ended March 31, 2024 were $27.5 million, an increase of $7.7 million, or 39.1%, from $19.8 million for the three months ended March 31, 2023. The increase was primarily due to an increase in sales commissions and advertising costs associated with our increase in homes closed and related home closing revenue, increased payroll and performance-based bonus compensation expenses on higher employee headcount, stock compensation expense and additional overhead related to our Devon Street Homes acquisition.

Current wording

The increase for the three and six months ended June 30, 2024 compared to the same periods of the prior year was primarily due to an increase in sales commissions and advertising costs associated with our increase in homes closed and related home closing revenue, increased payroll and performance-based bonus compensation expenses on higher employee headcount, stock compensation expense and additional overhead related to our Devon Street Homes Acquisition.

Previous wording

Equity in income from unconsolidated entities consists of our portion of income from our interest in our title company in which we hold a 49% interest and which operates in certain of our markets to provide title insurance to our homebuyers. For the three months ended March 31, 2024, equity in income from unconsolidated entities decreased slightly from the three months ended March 31, 2023, due to slightly lower title insurance revenue generated by the joint venture.

Current wording

Equity in income from unconsolidated entities consists of our portion of income from our interest in the title company in which we hold a 49% interest and which operates in certain of our markets to provide title insurance to our homebuyers. For the three and six months ended June 30, 2024, equity in income from unconsolidated entities decreased slightly from the three and six months ended June 30, 2023, due to slightly lower title insurance revenue generated by the joint venture.

Previous wording

Interest expense is comprised of interest incurred, but not capitalized on our Prior Credit Facility, Amended Credit Facility, other borrowings, and amortization of debt issuance costs. Our interest expense increased $0.5 million to $0.7 million for the three months ended March 31, 2024 from $0.2 million for the three months ended March 31, 2023, which was primarily driven by an increase in unused fees incurred on our Prior Credit Facility and Amended Credit Facility, and interest on the note payable related to the Devon Street Homes Acquisition.

Current wording

The increase in interest expense for the three and six months ended June 30, 2024 was primarily driven by an increase in unused fees incurred on our Prior Credit Facility and Amended Credit Facility, amortization of deferred financing costs on our Amended Credit Facility, and interest on the note payable related to the Devon Street Homes Acquisition.

Previous wording

Other income, net primarily consists of interest income, credit card rebates, insurance settlements, and other miscellaneous income and expenses. For the three months ended March 31, 2024, other income decreased by $0.1 million from the three months ended March 31, 2023, which was primarily driven by the accretion of interest on the contingent consideration liability related to the Devon Street Homes Acquisition during the three months ended March 31, 2024.

Current wording

Other expense (income), net primarily consists of interest income, credit card rebates, insurance settlements, changes in fair value of contingent consideration related to the Devon Street Homes Acquisition, and other miscellaneous income and expenses. For the three and six months ended June 30, 2024, other expense, net increased by $1.1 million and $1.2 million, respectively, from other income, net of $46,000 and $0.2 million for the three and six months ended June 30, 2023, respectively, which was primarily driven by the change in fair value of the contingent consideration liability related to the Devon Street Homes Acquisition during the three and six months ended June 30, 2024.

Previous wording

The following table sets forth net income by reportable segment for the three months ended March 31, 2024 and 2023 (in thousands):

Current wording

The following table sets forth net income by reportable segment for the periods presented (in thousands):

Previous wording

Net income for the three months ended March 31, 2024 decreased by $8.3 million, or 28.9%. The decrease was primarily due to a $7.7 million increase in selling, general and administrative costs due to higher commissions and advertising costs and $0.9 million of income tax expense incurred for the three months ended March 31, 2024 after our IPO and Reorganization Transactions.

Current wording

Net income for the three and six months ended June 30, 2024 decreased by $6.0 million, or 20%, and $14.3 million, or 24%, respectively. The decrease was primarily due to increases of $9.9 million and $17.7 million, respectively, in selling, general and administrative costs due to higher commissions and advertising costs and $1.1 million and $2.0 million of income tax expense incurred for the three and six months ended June 30, 2024, respectively, after our IPO and Reorganization Transactions, partially offset by increases in home closing gross profit of $6.4 million and $7.3 million, respectively.

Previous wording

Alabama: The $2.4 million increase in net income compared to the same period in the prior year was primarily due to an increase in home closing revenue and gross profit due to a 63% increase in homes closed and 1% increase in ASP of homes closed, offset by an increase in selling, general, and administrative costs.

Current wording

Alabama: The $4.1 million and $6.5 million increases in net income for the three and six months ended June 30, 2024 compared to the same periods in the prior year were primarily due to an increase in home closing revenue and gross profit due to increases in homes closed of 120% and 88%, respectively, and increases in ASP of homes closed of 6% and 3%, respectively, partially offset by increases in selling, general, and administrative costs.

Previous wording

Atlanta: The $5.0 million decrease in net income compared to the same period in the prior year was primarily due to a 22% decrease in home closings largely due to the timing of communities coming online, partially offset by a 6% increase in ASP of homes closed.

Current wording

Atlanta: The $5.4 million and $10.3 million decreases in net income for the three and six months ended June 30, 2024 compared to the same periods in the prior year were primarily due to decreases in home closings of 24% and 23%, respectively, largely due to the timing of communities coming online, partially offset by increases in ASP of homes closed of 11% and 9%, respectively.

Previous wording

Houston: Net income of $3.4 million represents the results of operations due to the Devon Street Homes Acquisition.

Current wording

Houston: Net income of $3.4 million and $6.8 million for the three and six months ended June 30, 2024, respectively, represents the results of operations due to the Devon Street Homes Acquisition.

Previous wording

Nashville: The $0.9 million decrease in net income compared to the same period in the prior year was primarily due to a decrease in home closing gross profit driven by higher average lot costs on the mix of homes closed.

Current wording

Nashville: The $1.7 million and $2.6 million decreases in net income for the three and six months ended June 30, 2024 compared to the same periods in the prior year were primarily due to decreases in home closing gross profit of 23% and 24%, respectively, driven by higher average lot costs on the mix of homes closed.

Previous wording

The following table sets forth our backlog homes and contract value and ASP of backlog homes by reportable segment as of March 31, 2024 and 2023, along with their period-to-period change in percent (dollar amounts in thousands):

Current wording

The following table sets forth our backlog homes and contract value and ASP of backlog homes by reportable segment for the periods presented, along with their period-to-period change (dollar amounts in thousands):

Previous wording

In addition to our results determined in accordance with GAAP, we have provided information in this Quarterly Report on Form 10-Q relating to “adjusted home closing gross profit,” “adjusted home closing gross margin,” “adjusted net income,” “EBITDA”, “EBITDA margin”, and “net-debt-to-net book capitalization.” We believe these non-GAAP financial measures are useful in evaluating our operating performance.

Current wording

In addition to our results determined in accordance with GAAP, we have provided information in this Quarterly Report on Form 10-Q relating to “adjusted home closing gross profit,” “adjusted home closing gross margin,” “adjusted net income,” “EBITDA”, “EBITDA margin”, “adjusted EBITDA”, “adjusted EBITDA margin”, and “net-debt-to-net book capitalization.” We believe these non-GAAP financial measures are useful in evaluating our operating performance.

Previous wording

The following table presents a reconciliation of adjusted home closing gross profit and adjusted home closing gross margin to the GAAP financial measure of home closing gross profit and home closing gross margin for each of the periods indicated:

Current wording

The following table presents a reconciliation of adjusted home closing gross profit and adjusted home closing gross margin to the GAAP financial measure of home closing gross profit and home closing gross margin for each of the periods indicated (amounts in thousands):

Previous wording

Our adjusted home closing gross profit increased slightly while adjusted home closing gross margin decreased from the three months ended March 31, 2023 to the same period in 2024 primarily as a result of a 13.2% increase in home closings offset by a 3% increase in the average cost of home closings and 0.6% decrease in the ASP of homes closed.

Current wording

Our adjusted home closing gross profit increased slightly while adjusted home closing gross margin decreased from both the three and six months ended June 30, 2023 to the same periods in 2024. The increase in adjusted home closing gross profit primarily results from increases in home closings of 17% and 15%, respectively. The decrease in adjusted home closing gross margin is driven by increases in the average cost of home closings of 8% and 6%, respectively, partially offset by increases in the ASP of homes closed of 4% and 2%, respectively.

Previous wording

The following table presents a reconciliation of adjusted net income to the GAAP financial measure of net income for each of the periods indicated:

Current wording

The following table presents a reconciliation of adjusted net income to the GAAP financial measure of net income for each of the periods indicated (in thousands):

Previous wording

EBITDA and EBITDA margin are not measures of net income or net income margin as determined by GAAP. EBITDA is a supplemental non-GAAP financial measure used by management and external users of our consolidated financial statements, such as industry analysts, investors, lenders, and rating agencies. We define EBITDA as net income before (i) interest income, (ii) capitalized interest charged to cost of home closings, (iii) interest expense, (iv) income tax expense, and (v) depreciation. We define EBITDA margin as EBITDA as a percentage of home closing revenue.

Current wording

EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin are not measures of net income or net income margin as determined by GAAP. EBITDA and adjusted EBITDA are supplemental non-GAAP financial measures used by management and external users of our consolidated financial statements, such as industry analysts, investors, lenders, and rating agencies. We define EBITDA as net income before (i) interest income, (ii) capitalized interest charged to cost of home closings, (iii) interest expense, (iv) income tax expense, and (v) depreciation. We define EBITDA margin as EBITDA as a percentage of home closing revenue. We define adjusted EBITDA as net income before (i) interest income, (ii) capitalized interest charged to cost of home closings, (iii) interest expense, (iv) income tax expense, (v) depreciation, (vi) adjustments resulting from the application of purchase accounting included in cost of sales, and (vii) adjustments resulting from the application of purchase accounting included in other expense (income), net. We define adjusted EBITDA margin as adjusted EBITDA as a percentage of home closing revenue.

Previous wording

Management believes EBITDA and EBITDA margin are useful because they allow management to more effectively evaluate our operating performance and compare our results of operations from period to period without regard to our financing methods or capital structure, or other items that impact comparability of financial results from period to period. EBITDA and EBITDA margin should not be considered as alternatives to, or more meaningful than, net income, net income margin, or any other measure as determined in accordance with GAAP. Our computation of EBITDA and EBITDA margin may not be comparable to EBITDA and EBITDA margin of other companies. We present EBITDA and EBITDA margin because we believe they provide useful information regarding the factors and trends affecting our business.

Current wording

Management believes EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin are useful because they allow management to more effectively evaluate our operating performance and compare our results of operations from period to period without regard to our financing methods or capital structure, or other items that impact comparability of financial results from period to period. EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin should not be considered as alternatives to, or more meaningful than, net income, net income margin, or any other measure as determined in accordance with GAAP. Our computation of EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin may not be comparable to EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin of other companies. We present EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin because we believe they provide useful information regarding the factors and trends affecting our business.

Previous wording

The following table presents a reconciliation of EBITDA and EBITDA margin to the GAAP financial measure of net income and net income margin for each of the periods indicated:

Current wording

The following table presents a reconciliation of EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin to the GAAP financial measure of net income and net income margin for each of the periods indicated:

Previous wording

Our EBITDA and EBITDA margin decreased from the three months ended March 31, 2023 to the same period in 2024 primarily as a result of an $8.4 million decrease in net income, partially offset by a $0.5 million increase in interest expense and $0.9 million increase in provision for income taxes.

Current wording

Our EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin decreased from the three and six months ended June 30, 2023 to the same periods in 2024 primarily as a result of decreases in net income of 20% and 24%, respectively, partially offset by increases in interest expense of $0.3 million and $0.8 million, respectively, and increases in provision for income taxes of $1.1 million and $2.0 million, respectively.

Previous wording

As of March 31, 2024, we had $32.8 million of cash and cash equivalents. We believe existing cash and cash equivalents, availability under our Amended Credit Facility and positive cash flows from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. We have historically generated cash and fund our operations primarily from cash flows from operating activities as well as availability under our credit facilities and other borrowings. We exercise strict controls and have a prudent strategy for our cash management, including those related to cash outlays for lot acquisitions and deposits on lot-option contracts. We require multiple party account control and authorization for payments. We competitively bid each phase of the development and construction process and closely manage production schedules and payments. Land acquisitions are reviewed and analyzed by our senior management team and ultimately approved by our Chief Executive Officer and Chief Financial Officer. Additionally, our land-light business model reduces our upfront capital requirements and generally provides for “just-in-time” lot delivery, which better aligns our pace of home orders and home starts. Our principal uses of cash include deposits on lot-option contracts, acquisition of finished lots, home construction, operating expenses, and the payment of interest and routine liabilities.

Current wording

As of June 30, 2024, we had $17.3 million of cash and cash equivalents. We believe existing cash and cash equivalents, availability under our Amended Credit Facility and positive cash flows from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. We have historically generated cash and fund our operations primarily from cash flows from operating activities as well as availability under our credit facilities and other borrowings. We exercise strict controls and have a prudent strategy for our cash management, including those related to cash outlays for lot acquisitions and deposits on lot-option contracts. We require multiple party account control and authorization for payments. We competitively bid each phase of the development and construction process and closely manage production schedules and payments. Land acquisitions are reviewed and analyzed by our senior management team and ultimately approved by our Chief Executive Officer and Chief Financial Officer. Additionally, our land-light business model reduces our upfront capital requirements and generally provides for “just-in-time” lot delivery, which better aligns our pace of home orders and home starts. Our principal uses of cash include deposits on lot-option contracts, acquisition of finished lots, home construction, operating expenses, and the payment of interest and routine liabilities.

Previous wording

The Amended Credit Facility contains certain financial covenants, among others, including requirements to maintain (i) a minimum tangible net worth equal to the sum of (a) $130.0 million, (b) 32.5% of positive pre-tax income earned in any fiscal quarter after June 30, 2023, (c) 75% of the equity proceeds of Smith Douglas Homes Corp. and its subsidiaries from the IPO and (d) 50% of new equity proceeds of Smith Douglas Homes Corp. and its subsidiaries after the IPO, (ii) a maximum leverage ratio of 60%, (iii) a minimum ratio of EBITDA to interest incurred of 2.00 to 1.00, and (iv) a minimum liquidity requirement of $15.0 million. The Amended Credit Facility also contains various covenants that, among other restrictions, limit the ability of Smith Douglas Homes LLC and the other borrowers to incur additional debt and to make certain investments and distributions. Additionally, the Amended Credit Facility contains certain covenants that restrict certain activities of Smith Douglas Homes Corp. The Amended Credit Facility also contains customary events of default relating to, among other things, failure to make payments, breach of covenants and breach of representations. If an event of default occurs and is continuing, the borrowers may be required immediately to repay all amounts outstanding under the Amended Credit Facility.

Current wording

The Amended Credit Facility contains certain financial covenants, among others, including requirements to maintain (i) a minimum tangible net worth equal to the sum of (a) $130.0 million, (b) 32.5% of positive pre-tax income earned in any fiscal quarter after June 30, 2023, (c) 75% of the equity proceeds of Smith Douglas Homes Corp. and its subsidiaries from the IPO and (d) 50% of new equity proceeds of Smith Douglas Homes Corp. and its subsidiaries after the IPO, (ii) a maximum leverage ratio of 60%, (iii) a minimum ratio of EBITDA to interest incurred of 2.00 to 1.00, and (iv) a minimum liquidity requirement of $15.0 million. The Amended Credit Facility also contains various covenants that, among other restrictions, limit the ability of Smith Douglas Homes LLC and the other borrowers to incur additional debt and to make certain investments and distributions. Additionally, the Amended Credit Facility contains certain covenants that restrict certain activities of Smith Douglas Homes Corp. The Amended Credit Facility also contains customary events of default relating to, among other things, failure to make payments, breach of covenants and breach of representations. If an event of default occurs and is continuing, the borrowers may be required immediately to repay all amounts outstanding under the Amended Credit Facility. As of June 30, 2024, we were in compliance with all covenants related to the Amended Credit Facility.

Previous wording

The foregoing description of the Amended Credit Facility is qualified in its entirety by reference to the Amended Credit Facility, a copy of which is filed as an exhibit hereto.

Current wording

The foregoing description of the Amended Credit Facility is qualified in its entirety by reference to the Amended Credit Facility, a copy of which is filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2024.

Previous wording

Cash flows from operating, investing, and financing activities – comparison for the three months ended March 31, 2024 and 2023

Current wording

Cash flows from operating, investing, and financing activities – comparison for the six months ended June 30, 2024 and 2023

Previous wording

The following table summarizes our cash flows for the three months ended March 31, 2024 and 2023 (in thousands):

Current wording

The following table summarizes our cash flows for the six months ended June 30, 2024 and 2023 (in thousands):

Previous wording

We used approximately $9.3 million and generated approximately $26.6 million in net cash (used in) provided by operating activities for the three months ended March 31, 2024 and 2023, respectively. Operating cash flows for the three months ended March 31, 2024 benefited from cash generated by net income of $20.5 million primarily offset by a $17.8 million increase in real estate inventory, $7.7 million increase in deposits on real estate under option or contract, and $7.2 million decrease in accrued expenses and other liabilities. Operating cash flows for the three months ended March 31, 2023 benefited from cash generated by net income of $28.8 million primarily offset by a $5.2 million increase in real estate inventory.

Current wording

We used approximately $9.2 million and generated approximately $35.9 million in net cash from operating activities for the six months ended June 30, 2024 and 2023, respectively. Operating cash flows for the six months ended June 30, 2024 benefited from cash generated by net income of $45.2 million, which was more than offset by a $50.3 million increase in real estate inventory, $9.2 million increase in deposits on real estate under option or contract, and $4.6 million increase in other assets. Operating cash flows for the six months ended June 30, 2023 benefited from cash generated by net income of $59.6 million primarily offset by a $21.3 million increase in real estate inventory.

Previous wording

We used approximately $0.4 million and generated approximately $38,000 in net cash from investing activities for the three months ended March 31, 2024 and 2023, respectively. The net cash used in investing activities during the three months ended March 31, 2024 was primarily due to purchases of property and equipment. The net cash provided by investing activities during the three months ended March 31, 2023 was primarily due to purchases of property and equipment offset by distributions of capital from unconsolidated entities.

Current wording

We used approximately $3.2 million and $0.2 million in net cash in investing activities for the six months ended June 30, 2024 and 2023, respectively. The net cash used in investing activities during the six months ended June 30, 2024 was primarily due to purchases of property and equipment and investments in unconsolidated entities. The net cash used in investing activities during the six months ended June 30, 2023 was primarily due to purchases of property and equipment partially offset by distributions of capital from unconsolidated entities.

Previous wording

Net cash provided by (used in) financing activities was approximately $22.7 million and $(43.8 million) for the three months ended March 31, 2024 and 2023, respectively. The $66.5 million increase in cash provided by financing activities was primarily attributable to net proceeds from the IPO and Reorganization Transactions of $116.3 million and a $11.0 million decrease in distributions to members of Smith Douglas Holdings LLC, partially offset by a $56.4 million increase in net repayments under revolving credit facility.

Current wording

Net cash provided by (used in) financing activities was approximately $9.9 million and $(53.9 million) for the six months ended June 30, 2024 and 2023, respectively. The $63.8 million increase in cash provided by financing activities was primarily attributable to net proceeds from the IPO and Reorganization Transactions of $115.7 million and a $20.1 million decrease in distributions to members of Smith Douglas Holdings LLC, partially offset by a $66.0 million increase in net repayments under revolving credit facility.

Previous wording

While using land bankers and third-party developers as part of our land-light operating strategy comes at an additional cost, we believe our lot acquisition strategy reduces our operating and financial risk relative to other homebuilders that own and develop a higher percentage of their land supply. As of March 31, 2024, we had 693 owned unstarted lots in real estate inventory on our balance sheet which represented only 4.9% of our total controlled lot supply.

Current wording

While using land bankers and third-party developers as part of our land-light operating strategy comes at an additional cost, we believe our lot acquisition strategy reduces our operating and financial risk relative to other homebuilders that own and develop a higher percentage of their land supply. As of June 30, 2024, we had 587 owned unstarted lots in real estate inventory on our balance sheet which represented only 3.7% of our total controlled lot supply.

Previous wording

As of March 31, 2024 we had $62.0 million of non-refundable cash deposits under land and lot-option contracts pertaining to 12,528 lots with a remaining aggregate purchase price of approximately $742.6 million.

Current wording

As of June 30, 2024, we had $62.8 million of non-refundable cash deposits under land and lot-option contracts pertaining to 8,551 lots with a remaining aggregate purchase price of approximately $545.6 million.