Investors looking for more exposure to the U.S. housing industry have a new initial public offering IPO to consider.
On September 6, Smith Douglas Homes Corp. (“Smith Douglas”), filed a registration statement on Form S-1 with the Securities and Exchange Commission (SEC) for an IPO of its Class A common stock. The Georgia-based firm plans to float on the New York Stock Exchange under the ticker “SDHC.” Smith Douglas did not disclose a date for the deal but will launch as soon as practicable after its IPO registration is declared effective. It did not reveal specifics regarding total units or pricing, instead keeping a placeholder sum of $100 million.
Smith Douglas is one of America's fastest-growing private homebuilders by number of closings. It constructs single-family and multifamily residential homes across several states in the Southeastern region, namely in Texas, Alabama, Georgia, Tennessee, and North Carolina.
Lead underwriters for the deal include J.P. Morgan, BofA Securities, RBC Capital Markets, and Wells Fargo.
The builder booked $140.44 million in profits last year from $755.35 million in revenue. As of June 30 this year, Smith Douglas had $11.4 million in cash and $49.7 million in total liabilities.
Investors should note that Smith Douglas currently has no plans to pay dividends and will retain earnings for reinvesting into the growth and expansion of its business.
A light touch
Douglas Smith claims its light touch to plot procurement gives it an edge in the market.
“We employ an efficient land-light, production-focused, and conservatively leveraged business model, which we believe results in a compelling combination of strong home closing gross margins, construction cycle times, and returns,” reads its prospectus.
Part of this approach includes buying finished lots through lot-option contracts from third parties. This, Douglas Smith claims, reduces up-front capital requirements, enabling “just-in-time” lot delivery.
The firm's main competitors are other operative builders, including D.R. Horton, Lennar Corporation, PulteGroup, NVR, K.B. Home, and others.
The market opportunity for homebuilding is large and growing. Pent-up demand for housing could push the sector further still. However, economic factors such as interest rates and employment could alter the industry's trajectory.
The U.S. is in the midst of a housing affordability crisis. Owning a home is becoming increasingly out of reach for average Americans, especially since the Fed began hiking interest rates after the pandemic.
Typically, rising interest rates raise the cost of homeowning, depressing demand for property and cooling prices.
Yet the supply of new houses has failed to keep up with booming demand in recent years, and hence, house prices have hardly fallen at all despite monetary tightening.
According to real estate company Redfin, there was a statistical drop of 3.1% for the median home sales price in May this year, which ebbed slightly to $419,103. Yet this slight relapse isn't much relief to aspiring homebuyers – houses are still costly compared to pre-pandemic prices. In January 2020, by comparison, the median home price in the U.S. was just $290,499.
In weighing up this IPO, investors will want to assess the outlook for the U.S. property market, especially in the South and Southeast, as well as the company's own acumen to capitalize on the projected growth in the market.