Smith Douglas Homes (NYSE:SDHC) increased home closings and orders in the third quarter of 2026, but its profitability fell as financing incentives and lower selling prices weighed on margins.
The homebuilder closed 831 homes, up 5% from a year earlier, and generated 777 net new orders, an increase of 13%. Its active community count grew 15% to 113, while homes in backlog rose 25% to 947.
CEO and Vice Chairman Gregory Bennett said demand slowed in September after reasonable activity in July and August, as mortgage rates moved higher. The company is responding by reducing planned home starts and working to sell its existing inventory.
“Affordability remains stretched, consumer confidence is weak, and mortgage rates continue to create uncertainty,” Bennett said. He added that he believes underlying demand for affordable housing remains, with many prospective buyers waiting for a manageable monthly payment and greater confidence in the economy.
Margins and earnings decline
Third-quarter home closing revenue was $262.5 million, with an average sales price of $316,000, down from $333,000 a year earlier. GAAP home closing gross margin fell to 16.3% from 21%, while adjusted gross margin declined to 16.9% from 21.3%.
Chief Financial Officer Russell Devendorf said margins continued to reflect financing incentives used to support demand. Closing costs, price discounts and the cost of forward commitments totaled 740 basis points, compared with 610 basis points a year earlier and 780 basis points in the second quarter.
Pre-tax income dropped to $3.3 million from $17.2 million a year earlier. Adjusted net income was $2.4 million, down from $13 million, while adjusted EBITDA fell to $8.6 million from $22.2 million. Earnings per share were $0.07.
Selling, general and administrative expenses rose $4.3 million to $40.4 million, or 15.4% of revenue. Devendorf attributed the increase primarily to higher commissions, advertising, division overhead and compensation associated with additional staff and community growth.
Incentives and inventory in focus
Devendorf said Smith Douglas tried to reduce incentives and the use of forward commitments in July, but increased their use as demand weakened during the quarter. He expects incentives to be somewhat higher in the fourth quarter as the company seeks to sell speculative homes and reduce standing inventory.
The company plans to minimize new starts in the fourth quarter after demand failed to keep pace with production, leaving work-in-process inventory slightly elevated and increasing its speculative home count. Devendorf said the number of speculative homes sold and closed by year-end will be a key factor in both closings and margins.
Smith Douglas expects fourth-quarter closings of 800 to 875 homes, an average sales price of $310,000 to $320,000 and gross margin of 15.5% to 16.5%. Devendorf said backlog margin was near the middle of that range or slightly higher, but additional incentives to move inventory could put pressure on results.
The company’s cancellation rate was approximately 11% in the third quarter, essentially unchanged from a year earlier. Devendorf said the company generally had not needed to provide additional incentives to buyers already in backlog to prevent cancellations.
On mortgage financing, Devendorf said the company has shifted toward offering a 4.99% 5/1 adjustable-rate mortgage as the cost of buying down a 30-year fixed-rate mortgage increased. He said about 25% to 30% of sales involve a forward commitment, and the company expects to continue using incentives to support demand.
Land negotiations and growth outlook
Smith Douglas ended the quarter with $5.9 million in cash and $101.4 million in notes payable, for net debt of $95.5 million. Net debt to net book capitalization was 17.9%, up from 6.6% at the end of 2025. The company reported $204.1 million of borrowing base availability under its revolving credit facility.
The builder controlled 24,724 lots at quarter-end, including 22,693 option lots and 517 owned, unstarted lots. Bennett said the company has had some success renegotiating land deals and adjusting lot takedown schedules to better match demand.
Devendorf said discussions with land developers and land-bank partners can include lot prices, takedown schedules and other terms. Bennett said some land development costs were softening, although the company was seeing little relief in the cost of land itself. Overall construction costs were roughly flat year over year, he said, with localized labor shortages contributing to some wage increases.
The company did not provide formal 2027 guidance, citing variable demand. During the question-and-answer session, however, Devendorf said he could see community count and volume each growing 15% to 20% next year as newer divisions expand. He identified margins and the incentives needed to generate those sales as key uncertainties.
About Smith Douglas Homes (NYSE:SDHC)
Smith Douglas Homes, Inc is a residential homebuilder that designs, constructs and sells primarily single-family homes. The company serves a range of buyers, including first-time purchasers, move-up buyers and others seeking newly built homes in planned communities.
Its business activities include acquiring and developing residential land, planning communities, building homes and providing customers with selections of floor plans, finishes and other design options. Smith Douglas Homes generally offers homes at accessible price points across a variety of suburban and exurban settings.
Founded in 2008, the company operates in markets across the southeastern United States, including communities in Georgia, Alabama, Tennessee, North Carolina and Kentucky.
