Q3 2023 MDC Holdings Inc Earnings Call
[music].
Hello and welcome.
Please hold for Mr. Derek Kimberly.
VP and Chief Accounting Officer.
Please go ahead.
Thank you.
Ladies and gentlemen, and welcome to M. D. C Holdings 2023 third quarter earnings Conference call.
On the call with me today I have Larry Mizel, our executive Chairman, David <unk>, Chief Executive Officer, and Bob Martin Chief Financial Officer.
At this time all participants are in a listen only mode. After finishing our prepared remarks, we will conduct a question and answer session at which time, we request that participants limit themselves to one question and one follow up question. Please.
Please note that this conference is being recorded and will be available for replay for information on how to access. The replay. Please visit our website at MDC holdings Dot com.
Before turning the call over to Larry and David It should be noted that certain statements made during this conference call, including those related to Mdc's business.
Condition.
Lots of operation cash flows strategies and prospects and responses to questions may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
These statements involve known and unknown risks uncertainties and other factors that may cause the company's actual results performance or achievements to be materially different from the results performance or achievements expressed or implied by the forward looking statements.
These and other factors that could impact the company's actual performance are set forth in the company's third quarter 2023 Form 10-Q, which is expected to be filed with the SEC today.
It should also be noted that SEC regulation G requires that certain information accompany the use of non-GAAP financial measures any information required by regulation G is posted on our website with our webcast slides.
And now I will turn the call over to Mr. Michael for his opening remarks.
Thank you for joining us today as we go over our results for the third quarter of 2023 and provide an update on our company's outlook.
M D C generated strong profitability in the third quarter.
Boasting net income about $107 million or a dollar and 40 cents per diluted share.
We COVID-19 168 homes at an average sales price of 552000, resulting in our home sales revenues.
1.1 billion.
We expanded our gross margin from home sales.
280 basis points on a sequential basis to 19.2%.
We also ended the quarter with 1.8 billion in cash and marketable securities, which gives us financial strength.
Mike.
Significant investments in our business and pay our industry, leading dividend of $2.20 per share on an annualized basis.
We continue to experience solid demand trends in the third quarter. Despite the rise in mortgage rates as we generated a net absorption pace of 2.4 homes per community per month.
The lack of existing home supply coupled with our ability to offer financial incentives. That's attracted more buyers to the new home market and has resulted in market share gains for the.
Publicly traded homebuilders.
We believe this dynamic will remain in place for the foreseeable future and have a number of sales tools at our disposal to drive traffic to our communities and the address affordability concerns.
From a macro perspective.
We continue to see positive data points that bode well for our industry.
GDP continues to grow at a healthy rate design.
Expectations of an economic slowdown there.
The latest nonfarm payroll report showed that U S. Employers added 336000 jobs in September well above the economic expectations.
And home prices remain resilient nationally. According to the case Shiller index, which was up 1% year over year and its most recent reading and up 6%.
They're low in January.
Well these positive economic trends may compel the federal reserve to keep rates higher for longer they provide a solid foundation for our industry and gives consumers the ability and confidence to boot.
Forward with their home purchases.
In light of this positive economic background M. D. C has been focused on investing in our homebuilding operations in an effort to grow our local market presence.
Land acquisition activity was up sharply in the third quarter and we expect to continue this trend in the fourth quarter.
Our focus continues to be on the more affordable segment of the market, which is where we expect to see the strongest demand in the foreseeable future.
Our balance sheet remains in great shape with a quarter in debt to capital ratio of 31, 2%.
And more cash and marketable securities than or senior notes outstanding.
We also have a favorable debt profile with no senior notes due until 'twenty 30, and our weighted average cost of the debt on those senior notes of four 3%.
Thanks to an easing of supply chain constraints and they shifted more spec home production, our inventory turns have improved and our cash balance has grown.
Maintaining a strong balance sheet has always been a core principle of our company and this remains true today.
With a favorable industry outlook.
And the attractive product portfolio and a strong balance sheet M. D. C is well positioned to finish 2023 on a strong note and carry this momentum into the new year.
We had over 2700 homes in backlog at the end of the third quarter and another 20 681 homes completed or under construction.
Puts us in a great position.
Our delivery goals for the fourth quarter.
Our homebuilding operations are located in some of the fastest growing markets in the country and we plan to grow our presence in these markets through our ongoing land acquisition efforts.
We are excited about the new community openings, we have plans for the coming quarters.
And look forward to them as we draw closer to next year's spring selling season.
We made progress on a number of fronts in the third quarter and I am proud of how our team has executed through the first nine months of this year.
With that I'd like to turn the call over to David who will provide more detail on our operations this quarter.
Thanks, Larry order trends were consistent across our homebuilding platform during the third quarter.
As the absorption pace in the West Mountain and East regions. All came in at 2.4 net net.
Net sales per community per month.
The gross order trends followed a typical season pattern with July come in that is our best months, followed by a slowdown in August and a rebound in September.
We continue to favor any more spec driven operating model. During these times as it allows us to better utilize financing incentives.
Lower some probability of cancellations and caters to the needs of the first time homebuyer.
During the third quarter, nearly 80% of our gross sales were for spec homes.
We plan on maintaining a healthy level of spectrum of production through the end of the year to ensure we have a.
Fishing inventory for the spring selling season.
Our gross margins from home sales, excluding impairments was $19 seven for the third quarter.
Demonstrating our ability to generate healthy margins and a rising mortgage rate environment.
As of the end of the third quarter. The average gross margin on homes and backlog were similar to the homes that we closed in the third quarter.
So we expect the homes sold and closed in the fourth quarter will likely carry higher incentives.
Financing incentives continue to be the most effective tool in a dressing buyers affordability concerns and serve as a very competitive advantage over the existing home market.
We continue to see healthy traffic in our communities and in our website.
A sign of buyers remain motivated to own a home provided they can find something that fits their budget.
Drove rate buy downs and closing cost assistance, we can lower the monthly payment and upfront costs for our home buyers.
Overall, I am pleased with our company's performance this quarter and our outlook as we head into the end of the year.
New home demand has proven to be resilient in the face of rising interest rates. Thanks to the adjustments we've made to our sales process and our business model.
The time to build and deliver a home is down considerably from the beginning of the year.
Allowing us to turn our inventory faster and more efficiently.
We also believe the inherent competitive advantage, we and other public homebuilders have over smaller builders.
Strong due to the high cost of capital.
As a result, we are very optimistic about the near and long term outlook for the company.
With that I'd like to turn it over to Bob who will provide more detail our financial results this quarter.
Thanks, David and good morning, everyone.
During the third quarter, we generated net income of $173 million or $1.40 per diluted share representing a 26% decrease from the third quarter of 2022.
Pretax income from our homebuilding operations for the quarter was $127 4 million, which represented a 24% decrease from the third quarter of 2022.
This decrease was primarily due to a decline in home sale revenues as a result of lower closing volume as well as the 350 basis point decrease in gross margin from home sales year over year.
Despite the decline in home sale revenues, we did benefit from a 70 basis point improvement year over year, and our total SG&A expense as a percentage of home sale revenues.
Our financial services pre tax income for the quarter was $12 4 million, which represented a 29% decrease from the prior year quarter.
The decrease was primarily due to lower closing volume within our homebuilding operations as well as the impact of the special financing programs offered during the quarter.
Both our homebuilding and financial services pretax income benefited from increased interest income during the quarter.
On a consolidated basis, we recognized $22 9 million of interest income during the third quarter compared with only $2 $9 million in the third quarter of 2022.
Our income tax expense of $32 $5 million for the third quarter represented an effective tax rate of approximately 23% a slight increase from 22, 3% in the prior year quarter. We continue to expect our effective tax rate for the full year to be roughly 23%.
<unk> does not include any discrete items or any potential changes in tax rates or policies.
We delivered 1968 homes during the quarter, which was in line with our previously estimated range for the quarter of $18 50 to 2000 closings.
Homes closed during the quarter at a construction build time of approximately 200 days, which was a significant improvement on both a year over year and sequential basis.
We expect build times to continue to trend that down based on the projected build times of our homes under construction.
As a result of the cycle time improvements.
We converted 41% of our homes in beginning inventory, excluding model homes and home closings in the third quarter.
In addition, with our increased focus on spec production, 26% of our closings were both sold and closed within the quarter.
We currently anticipate deliveries for 2023 fourth quarter of between 20 to 100, 2400 homes, which at the midpoint would bring our full year closings to over 8100 homes.
The average selling price of homes delivered during the quarter decreased 6% year over year to $552000. The decrease was driven by increased incentives.
Changes in base pricing and a shift in the mix of closings from Colorado to Arizona.
We expect the average selling price of homes delivered in the 2023 fourth quarter to be between.
$545000 and $555000.
Gross margin from home sales for the quarter was 19, 2% compared to 22, 7% in the third quarter of 2012 to.
Excluding inventory impairments gross margin from home sales for the quarter was 19, 7% compared to 24, 7% in the prior year quarter.
This decrease was largely driven by an increase in incentives year over year changes in base pricing and to a lesser extent higher construction costs year over year.
On a sequential basis gross margin from home sales for the quarter improved by 280 basis points.
The inventory impairment gross margin from home sales improved 210 basis points from the second quarter of 2023. This improvement was the result of lower construction costs, along with lower incentive levels.
David mentioned, we do expect incentive levels to increase our homes sold and closed in the fourth quarter due to the most recent moved higher and mortgage interest rates.
Operator: Hello and welcome.
Operator: Please hold for Mr. Derek Kimmerle, VP and Chief Accounting Officer. Please, go ahead. Thank you.
As a result, we're currently expecting gross margin from home sales for the 2023 fourth quarter of between 18% and 19, 5%, assuming no impairments or warranty adjustments.
Our total dollar SG&A expense for the 2023 third quarter was 101 $3 million, which represented a decrease of $40 $1 million from the prior year quarter.
Derek Kimmerle: Good morning, ladies and gentlemen, and welcome to MDC Holdings 2023-3rd quarter earnings conference call.
Derek Kimmerle: On the call with me today, I have Larry Mizel, our executive chairman, David Mandarich, Chief Executive Officer and Bob Martin, Chief Financial Officer. At this time, all participants are in a listen-only mode. After finishing our prepared remarks, we will conduct a question and answer session at which time we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at MDC Holdings.com.
This decrease was primarily driven by our general and administrative expenses due to a decrease in stock based compensation expense and to a lesser extent decreased salary and bonus expenses.
In the prior year quarter, we recognized $50 million Epic's best related to equity awards granted during the quarter.
A few words granted during the current year quarter were performance base and assets no expense will be recognized in the performance metrics are probable achievement.
The decreases in commissions and selling and marketing expenses were the result of a decrease in home closings year over year.
Derek Kimmerle: Before turning the call over to Larry and David, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operation, cash flows, strategies and prospects, and responses to questions may contain forward-looking states. These statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance, or achievements to be materially different from the results, performance, or achievements expressed or implied by the forward-looking statements.
We currently estimate that our general and administrative expenses for the fourth quarter of 2023 will be between 50 and $55 million.
The dollar value of our net orders increased 532% year over year to $965 million driven by an increase in gross orders and cancellation activity that has returned to more normal levels.
Gross orders for the third quarter of 2023.
Our 2000, and 227, which is up 42% increase from the prior year quarter.
Our cancellation rate for the third quarter of 2023 was 24% of gross orders. This compares to a more elevated levels during the prior year quarter as we worked through our backlog a built to order homes.
Derek Kimmerle: These and other factors that could impact the company's actual performance are set forth in the company's third quarter, 2023, Form 10Q, which is expected to be filed with the SEC today. It should also be noted that SEC Regulation G requires that certain information, accompany the use of non-gap financial measures. Any information required by Regulation G is posted on our website with our webcast slides.
The average sales price of our net orders for the third quarter of 2023 was $570000 on a sequential basis. This represented a 2% increase from the second quarter of 2023.
This increase was the result of base price increases taken during both the second and third quarters of this year and the majority of our communities.
Larry Mizel: And now I will turn the call over to Mr. Meisel for his opening remarks. Thank you for joining us today as we go over our results for the third quarter of 2023 and provide an update on our company's outlook. MDC generated strong profitability in the third quarter, posting that income of $107 million or $1.40 cents per diluted share. We closed 1968 homes at an average sales price of $552,000 resulting in home sales revenues of $1.1 billion.
Our active subdivision count was at 235 in the quarter up 7% from 220 a year ago.
Looking at the graph on the right. The number of soon to be active communities continues to exceed the number of soon to be inactive communities at September 32023.
During the third quarter, we acquired 1190 loss, resulting in total net acquisition spend of $159 million and incurred.
$3 million of land development costs. This represented a significant increase in land acquisition from the first half of this year.
Larry Mizel: We expanded our gross margin from home sales by 280 basis points on a sequential basis to 19.2%. We also ended the quarter with $1.8 billion in cash and marketable securities which gives us financial strength to make significant investments in our business and pay our industry leading dividend of $2.20 per share on an annualized basis. We continued to experience solid demand trends in the third quarter despite the rise in mortgage rates as we generated a net absorption pace of 2.4 homes per community per month.
As already mentioned, we expect this trend to continue in the fourth quarter as indicated by our Atlanta approval activity during the quarter.
During the third quarter, we approved 2347 lots for acquisition, which was our highest level since the first quarter of 2022 more.
More importantly exceeded the number of homes closed during the quarter, which allowed us to increase our controlled lot supply and sequential basis.
We ended the quarter with 22000 and 353 lots control. Additionally, we had 6448 loss in various stages of due diligence that still require approval by our asset management committee prior to being reflected within our control blackout.
We ended the quarter with nearly $1 billion of cash and short term investments total liquidity of over $2 $9 billion and noticed senior note maturities until January 2030.
Larry Mizel: The lack of existing home supply coupled with our ability to offer financial incentives have attracted more buyers to the new home market and has resulted in market share gains for the publicly traded home builders. We believe this dynamic will remain in place for the foreseeable future and have a number of sales tools at our disposal to drive traffic through our communities and address affordability concerns. From a macro perspective, we continue to see positive data points that bowed well for our industry.
Our debt to capital ratio at the end of the quarter was 31, 2% and our cash and short term investments continue to exceed our homebuilding debt.
At quarter end.
We started 2000 and 383 homes during the third quarter of 2023, representing a 162% increase over the prior year quarter.
As a result, excluding model homes, we ended the quarter with 5266 homes in inventory. This included 2681 spec homes, 89% of which had been curated by our home galleries Nonprofessionals. In addition, our inventories completed spec homes remains low representing less than 5% of our homes in inventory.
At the end of the third quarter.
With our pivot to building more spec homes, along with the overall improvement in supply chain conditions, we have seen a meaningful improvement in our ability to turn our inventory on a trailing 12 months basis, our working process inventory turnover improved 13% year over year to two one times our cost of sales.
Larry Mizel: GDP continues to grow to a healthy rate, defining expectations of an economic slowdown. The latest non-farm payroll report showed that U.S, employers added 336,000 jobs in September, well above economic expectations. And home prices remain resilient nationally according to the case Schiller index, which was up 1% year over year in its most recent reading and up 6% since their low in January. While these positive economic trends may compel the Federal Reserve to keep rates higher for longer, they provide a solid foundation for our industry and give consumers the ability and confidence to move forward with their home purchases.
We expect to drive further improvements in this metric in the near term as we continue to leverage our curated spec production model.
In summary, our current backlog and inventory of curated spec homes puts us in position for a strong end to 2023 and provides us the opportunity for year over year increases in home sale revenues and pre tax income to start 2024.
While the most recent increases in mortgage interest rates will likely remain a headwind in the near term our ability to buy down our homebuyers mortgage interest rate and offer closing cost assistance remained very effective incentives to address affordability concerns.
In terms of capital allocation, we remain committed to our industry, leading dividend and reinvesting in and growing our homebuilding operations.
While we make significant progress with our land acquisition and approval activity during the third quarter growing our land pipeline remains a top priority to position us for growth in future periods.
Larry Mizel: In light of this positive economic background, MDC has been focused on investing in our home building operations in an effort to grow our local market presence. Land acquisition activity was up sharply in the third quarter and we expect to continue this trend in the fourth quarter. Our focus continues to be on the more affordable segments of the market, which is where we expect to see the strongest demand in the foreseeable future.
That concludes our prepared remarks, I will now turn the call back over to the operator to start our Q&A session.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then one on your Touchstone.
If you are using a speakerphone please pick up your handset before pressing the keys to.
Larry Mizel: Our balance sheet remains in great shape with a quarter in debt to capital ratio of 31.2% and more cash and marketable securities than our senior notes outstanding. We also have a favorable debt profile with no senior notes due until 2030 and awaited average cost of the debt on those senior notes of 4.3%. Thanks to an easing of supply chain constraints and a shift to more spectrum production, our inventory turns have improved and our cash balance has grown, maintaining a strong balance sheet has always been a core principle of our company and this remains true today with a favorable industry outlook and the attractive product portfolio and a strong balance sheet.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
And our first question comes from Stephen Kim from Evercore.
Stephen Please go ahead.
Yeah. Thanks, very much guys I appreciate all the color I just wanted to get just as a housekeeping item Bob can you.
Reiterate what you said for the number of specs you had at the end of the quarter and how many of those were finished.
I believe the number was about a 2681.
For total specs and the number that was finished I think was right around $2 50 as at the end of the quarter.
Okay, Gotcha, all right and if.
If we have that okay. So youre still youre running at about 11 little over 11 specs per community.
Larry Mizel: MDC is well positioned to finish 2023 on a strong note and carries this momentum into the new year. We had over 2700 homes in backlog at the end of the third quarter and another 2600 and 81 homes completed or under construction which puts us in a great position to hit our delivery goals for the fourth quarter. Our home building operations are located in some of the fastest growing markets in the country and we plan to grow our presence in these markets through our ongoing land acquisition efforts.
But you know not much more than one finished spec per community. So that's.
Is this a level that you're you know do you feel like you've sort of arrived at kind of an optimal level of up specs or do you actually want to take that higher as you get into the spring selling season.
Yeah, I think your math is right it's about 11.
Our per active community. Once you include those communities that are just starting up and not yet active it's probably closer to call. It 95.
All that said I do think it could rise a little bit more between at the end of the third quarter and it started the year as we prepare for the spring selling season, and we're also working on making sure that we have a good sufficient inventory that is within call. It 60 to 90 days of close for the spring selling season as well.
Larry Mizel: We are excited about the new community openings we have planned for the coming quarters and look forward to them as we draw closer to next year's spring selling season. We made progress on a number of fronts in the third quarter and I am proud of how our team have executed through the first nine months of this year.
That is ongoing.
Yeah, that's that's great remind us where do you stand now in terms of the gross margins on your specs versus build to order.
I think overall for the specs are.
Built to order is about 200 basis points higher that said.
David Mandarich: With that, I'd like to turn the call over to David who will provide more detail on our operations this quarter. Thanks Larry. Order trends were consistent across our home building platform during the third quarter. As the absorption pace in the west mountain and east regions all came in at 2.4 net sales per community per month. The gross order trends followed a typical season pattern with July coming in as our best month followed by slowdown in August and a rebound in September.
Be curated specs are actually closer to dirt margins to the build to order margins, what's influencing it in the quarter are right. Now is that we still had a quite a few unintentional specs suspects that resulted from cancellations still going through the numbers.
Gotcha and I think you said your curated spec percentage has gone up to be quite a high like 89% or something.
Correct.
That 2000, and 681 total 89% are generated.
Okay and those those margins are closer to build to order that's encouraging.
Lastly, just a you know incentives you'd touched on incentives as you you know as you talked about three Q, but as we look into what's happening sort of at the end of the quarter and into October was curious as to if you could give us a sense for what you're seeing either in terms of a change in your posture towards incentives or the cause.
David Mandarich: We continue to favor a more spec driven operating model during these times as it allows us to better utilize financing incentives. Lower is the probability of cancellations and caders to the needs of the first time home buyer. During the third quarter nearly 80% of our gross sales were for spec homes. We plan on maintaining a healthy level of spec home production through the end of the year to ensure we have a sufficient inventory for the spring selling season.
Customers.
Interest in finance incentives, particularly by downs relative to what you maybe saw for the three three Q as a whole.
I think it definitely increased a bit the overall cost of offering.
David Mandarich: Our gross margins from home sales excluding impairments was 19.7 for the third quarter. Demonstrating our ability to generate healthy margins in a rising mortgage rate environment, as of the end of the third quarter, the average gross margin on homes and backlog were similar to the homes that we closed in the third quarter, though we expect that homes sold and closed in the fourth quarter will likely carry higher incentives. We continue to see healthy traffic in our communities and in our website.
Special financing incentives those buy downs towards the end of Q3, given that we've seen some movement in rates.
The the rates seem to settle down a little bit during Q2 only to come up again, so anytime we see that I think it's it's normal to see an increase in the incentives offered especially in this case for the special financing incentives. So as David mentioned, we do.
Expect a higher level of incentives to come through in Q4 because of that many of the units that are getting that special financing.
We will close in the fourth quarter.
Okay. That's helpful and then right because they're basically standing and I took a quick move ins great well I appreciate it. Thanks.
Thanks, very much guys.
Okay. Thank you.
Yeah.
David Mandarich: A sign that buyers remain motivated to own a home provided they can find something that fits their budget. Through great buy downs and closing cost assistance, we can lower the monthly payment and upfront costs for our home buyers.
And our next question comes from Michael Rehaut from JP Morgan Michael You May proceed.
Hi, This is Andrew I'll be on for Mike Congrats on the quarter Scott on the quarter guys.
Thank you.
I just wanted to ask maybe if you can break out the components that drove the gross margin be and maybe what was the biggest driver and the respective impact.
David Mandarich: Overall, I am pleased with our company's performance this quarter and our outlook as we head into the end of the year. New home demand is proven to be resilient in the face of rising interest rates thanks to the adjustments we've made to our sales process and our business model. The time to build and deliver a home is down considerably from the beginning of the year, allowing us to turn our inventory faster and more efficiently.
Yeah.
Well I think overall just the closings.
That were running through there at a lesser level of incentives in part that's to be due to interest rates being a bit more stable towards the middle part of the year, So a lesser costs from our financing incentives.
Although that that turned a little bit.
Steve Kim and I were just discussing or.
David Mandarich: We also believe the inherent competitive advantage we and other public home builders have over smaller builders is strong due to the high cost of capital. As a result, we are very optimistic about the near and long-term outlook for the company.
Towards the end of the quarter.
So that's one thing I think we also had some pickups with relation to things like for example, lumber due to our built to order strategy that we're executing on for much of the prior years, we still have some of the older.
Lumber costs going through our numbers and that really started to come down in a more meaningful way during.
Bob Martin: With that, I'd like to turn over to Bob who will provide more detail on our financial results this quarter.
Q3.
Got it that's helpful. Thank you and then in terms of <unk>.
Bob Martin: Thanks, David, and good morning, everyone. During the third quarter, we generated net income of $107.3 million or $1.40 per alluded share, representing a 26% decrease from the third quarter of 2022. Free tax income from our home building operations for the quarter was $127.4 million, which represented a 24% decrease from the third quarter of 2022. This decrease was primarily due to a decline in home sale revenues as a result of lower closing volume as well as a 350 basis point decrease in gross margin from home sales year over year.
<unk> gross margin guidance, what kind of gets you to the bottom and top of the range that you guys provided.
Well you know I think it will depend on what we see in market conditions. During Q4 that relates not only to the overall psyche of the consumer the health of the consumer but also what interest rates do during the fourth quarter I imagine if for whatever reason you saw a continued increase.
<unk> in mortgage interest rates that.
That would result in more incentives in order to.
To get that rate down to a level of affordability for the consumer.
Bob Martin: Despite the decline in home sale revenues, we did benefit from a 70 basis point improvement year over year in our total SG&A expense as a percentage of home sale revenues. Our financial services pre-tax income for the quarter was $12.4 million, which represented a 29% decrease from the prior year quarter. The decrease was primarily due to lower closing volume within our home building operations as well as the impact of special financing programs offered during the quarter.
If you saw stability or even a move down maybe there is an opportunity to be towards the higher end of the range.
Thanks, a lot for that I appreciate it that's all I have.
No problem.
And our next question comes from Alan Ratner from Zelman and associates.
Alan Please go ahead.
Hey, guys. Good afternoon, thanks for taking my questions.
Bob Martin: Both our home building and financial services pre-tax income benefited from increased interest income during the quarter. On our consolidated basis, we recognized $22.9 million of interest income during the third quarter compared with only $2.9 million in the third quarter of 2022. Part income tax expense of $32.5 million for the third quarter represented an effective tax rate of approximately 23%. A slight increase from 22.3% in the prior year quarter. We continue to expect our effective tax rate for the full year to be roughly 23%.
If I look back to a year ago year, and a half ago. When rates initially began to rise you guys were.
One of the more aggressive builders and kind of slowing the pace of land buying down you took actions to to obviously make sure that you are you wouldn't kind of get stuck with land being purchased at the peak prices and whatnot and.
You know, while I hear a little bit of near term cautiousness in your your guidance at least as far as margin is concerned and the potential need for higher incentives given this more recent move in rates.
It seems like you're taking the opposite course in terms of actually accelerating land activity in keeping the start pace of specs quite high. So I was just wondering if you could talk through a little bit why you feel more confident in the market's ability to kind of withstand the headwinds now that seem to be unfolding, whereas some other builders.
Bob Martin: This estimate does not include any discrete items or any potential changes in tax rates or policies. We delivered 1,968 homes during the quarter, which was in line with our previously estimated range for the quarter of 1850 to 2000 closings. The homes closed during the quarter had a construction build time of approximately 200 days, which was a significant improvement on both a year-to-year and sequential basis. We expect build times to continue to trend it down based on the projected build times of our homes under construction.
Might be taking a bit more of a cautious tone compared to a year and a half ago. When you were seemingly very conservative invasive initially rising rates.
Yeah.
So it's a great question and as we were.
We're operating a year ago naturally it was it was very daunting, we had a cancellation rate I believe close to 80%.
Bob Martin: As a result of the cycle time improvements, we converted 41% of our homes in beginning inventory, excluding model homes into home closings in the third quarter. In addition, with our increased focus on spec production, 26% of our closings were built sold and closed within the quarter. We currently anticipate deliveries for the 2023 fourth quarter of between 2,200 and 2,400 homes, which at the midpoint would bring our full-year closings to over 8,100 homes.
And that was the result of a very sharp increase in interest rates.
So 300 basis points over the course of six months, whereas this year, even though rates continued to increase its a more modest increase a 100 150 basis points during the course of the year. So.
Think that the consumer is not being shocked as much this year, which is encouraging and we continue to see good activity.
Bob Martin: The average selling price of homes delivered during the quarter decreased 6% year-to-year to $552,000. The decrease was driven by increased incentives, changes in base pricing, and a shift in the mix of closings from Colorado to Arizona. We expect the average selling price of homes delivered in the 2023 fourth quarter to be between $545,000 and $555,000. Gross margin from home sales for the quarter was 19.2%, compared to 22.7% in the third quarter of 2022.
Each month, which is helpful. We see good traffic good conversion traffic is a quality traffic.
And we really still across all of our markets don't see a ton of supply out there in terms of inventory that is available for consumers to buy so we think that all adds up to a pretty healthy.
<unk> selling season, if we have about another healthy spring selling season, and then of course, we'll need to replace that land. So even though the level of land activity has moved up quite a bit from Q1 or Q2.
Q1, and Q2 were really not.
Really significant periods of land acquisition acquisition activity at all so we're almost getting back to more of a in Q3, just a normal run rate for land acquisition, and then future periods related acquisition will really be based upon the continued.
Bob Martin: Excluding inventory impairments, gross margin from home sales for the quarter was 19.7%, compared to 24.7% in the prior year quarter. This decrease was largely driven by an increase in incentives year-to-year, changes in base pricing, and to a lesser extent higher construction costs year-to-year. On a sequential basis, gross margin from home sales for the quarter improved by 280 basis points, excluding inventory impairments, gross margin from home sales improved 210 basis points from the second quarter of 2023.
Good solid activity that we see in the market.
Great I appreciate the thoughts there Bob.
Second question, just thinking through you know the sensitivity I guess you guys have on a price versus volume side.
You mentioned, an expectation for a pickup in incentives in the fourth quarter I think a lot of your peers are saying the same thing the big difference between you guys, though and damage your margins are a bit thinner so presumably a little bit less cushion to absorb them and you know a more meaningful increase in incentives here with margins kind of in the <unk>.
Bob Martin: This improvement with the result of lower construction costs along with lower incentive levels. As David mentioned, we do expect incentive levels to increase our homes sold and close in the fourth quarter due to the most recent move higher in mortgage interest rates. As a result, we are currently expecting gross margin from home sales for the 2023 fourth quarter of between 18% and 19.5%, assuming no impairments or warranty adjustments. Our total dollar SGNA expense for the 2023 third quarter was $101.3 million, which represented a decrease of $40.1 million from the prior year quarter.
It <unk>. So how do you think about that trade off at what point different either from an absorption standpoint, or a sales standpoint.
Would you get much more aggressive on on incentives and.
At what point would you go back and say you know what we're not going to discount anymore. Because our margins are are at a point, where we don't want to go below that.
Bob Martin: This decrease was primarily driven by our general administrative expenses due to a decrease in stock based compensation expense, and to a lesser extent decrease salary and bonus expenses. In the prior year of quarter, we recognized $15 million of expense related to equity awards granted during the quarter. Every awards granted during the current year of quarter were performance-based and as such no expense will be recognized until the performance metrics are probable achievement.
Well I think in Q4, you have the impact of seasonality. So we have to take that into account. There's only so many buyers out there buying as we approach the holiday season, but we want to be competitive. So we are looking at our competition, how many there are selling and what price it.
Makes to sell there.
As a another entity the equation certainly the margin is one thing, but the the velocity with the inventory turns certainly is important as well. So we want to strike a balance we don't want to go down to next to nothing kind of of sales because we know that is something that is at the moralising to our teams.
Bob Martin: The decreases in commissions and selling the marketing expenses were the results of the decrease in home closings year over year. We currently estimate that our general administrative expenses for the fourth quarter of 2023 will be between $50 and $55 million. The dollar value of our net orders increased to 532% year over year to $965 million, driven by an increase in gross orders and cancellation activity that has returned to more normal levels.
To our sales teams certainly so that wouldn't be appropriate as well. So if we see that we're keeping up with really a good seasonal pace I think that's a good guide for us although there's no absolutes, we got to look at it subdivision by subdivision and making sure.
Bob Martin: Gross orders for the third quarter of 2023 were $2,227, which is a 42% increase from the prior year quarter. Our cancellation rate for the third quarter of 2023 was 24% of gross orders. This compares to more elevated levels during the prior year quarter as we work through our backlog of built-in-order homes. The average sales price of our net orders for the third quarter of 2023 was $570,000. On a sequential basis, this represented a 2% increase from the second quarter of 2023.
We're remaining competitive.
I would also add just given our land supply being amongst the lowest in the industry, that's really something that Insulates us.
As well not having so much pressure on us to monetize.
Land at any given point in time.
Got it I appreciate the thoughts thanks a lot.
Okay.
And I just would like to remind you if you would like to enter the question queue Press Star one.
Bob Martin: This increase was the result of base price increases taken during both the second and third quarters of this year in the majority of our communities. Our active subdivision count was at 235th and the quarter, up 7% from 220 a year ago. Looking at the graph on the right, the number of soon-to-be active communities continue to exceed the number of soon-to-be inactive communities at September 30, 2023. During the third quarter, we required 1,190 lots, resulting in total land acquisition spend of $159 million and incurred $83 million of land development costs.
Our next question comes from.
Truman Patterson from Wolfe research.
Please go ahead.
Hey, good afternoon, everyone. Thanks for taking my questions first one I just wanted to understand what you're seeing on the wind front you know specifically given some of the tightening in lending to the private builders and developers are are you all are actually finding it.
He finished swaps come to market.
You know just a general update on kind of land pricing and I'm really trying to understand when you're underwriting a deal today what level are you able to underwrite to a from a gross margin perspective should we be thinking something in kind of the high teens.
Bob Martin: This represented a significant increase in land acquisition from the first half of this year. As Larry mentioned, we expect this trend to continue in the fourth quarter as indicated by our land approval activity during the quarter. During the third quarter, we approved 2,347 lots for acquisition, which was our highest level since the first quarter of 2022. More importantly, it exceeded the number of homes closed during the quarter, which allowed us to increase our controlled lots of land sequential basis.
Yeah, I guess I'll start off by saying we were fortunate that the majority of what we bought and what we approved our finished lot deals during the quarter in fact, I think it was.
Close to 80%.
So we have seen some finished lot deals it is competitive out there for us.
Bob Martin: We ended the quarter with 22,353 lots controlled. Additionally, we had 6448 lots in various stages of due diligence that still require approval by our asset management committee prior to being reflected within our control block count. We ended the quarter with nearly $120 billion of cash and short-term investments, total liquidity of over $2.9 billion and no senior note maturities until January 2030. Our death capital ratio at the end of the quarter was 31.2% and our cash and short-term investments continue to exceed our humbling debt as a quarter end.
Generally speaking so I'm I imagine.
There won't be nearly as many in the future.
From an underwriting standpoint, the 2020 rule still applies in terms of margin and IRR, Although I would say for something that truly is finish where you're taking all of that development risk off the table.
Can actually start building houses immediately.
Would go into the high teens for that kind of deal potentially so it all depends on the deal but right now most of the deals that we've done during the quarter are ones that can add closings and sales relatively quickly.
Bob Martin: We started at 2,383 homes during the third quarter of 2023, representing a 162 percent increase over the prior quarter. As a result, excluding model homes, we ended the quarter with 5,266 homes in inventory. This included 2,681 spec homes, 89 percent of which have been curated by our home gallery design professionals. In addition, our inventory of completed spec homes remains low, representing less than 5 percent of our homes in inventory at the end of the third quarter.
Gotcha Gotcha understood and thanks for that.
You know this is a little bit near term focus, but could you give an update on kind of October demand trends and then maybe perhaps go across some of your your metros or regions. Just you know given the recent rate move.
Which areas have been relatively outperforming or underperforming would be helpful.
Yeah. So for October I think October has been healthy.
Bob Martin: With our pivot to building more spec homes, along with the overall improvement in supply chain conditions, we have seen a meaningful improvement in our ability to turn our inventory. On a fairly 12 month basis, our work and process inventory turnover improved 13 percent year-to-year to 2.1 times our home cost of sales. We expect to drive further improvements in this metric in the near term as we continue to leverage our curated spec production model.
Considering seasonality.
Seasonality, it's really in line with normal seasonal patterns.
And we think it's moving along very well so.
That's October.
In terms of a regional focus.
It's interesting to see a 2.4 absorption rate for every one of our regions.
Bob Martin: In summary, our current backlog in inventory of curated spec homes puts us in position for a strong end to 2023 and provides us the opportunity for year-to-year increases in home-fail revenues and pre-tax income to start 2024. While the most recent increases in mortgage interest rates will likely remain a headwind in the near term, our ability to buy down a home buyer's mortgage interest rate and offer closing cost assistance remain very effective incentives to address affordability concerns.
For the third quarter and I think it speaks to the resilience of of all the markets. There are markets out there, where we know the consumer base maybe.
Is a bit more.
More credit challenge.
You see some of that in Phoenix, you see some of that in Orlando.
For example, our Las Vegas.
So those are areas that typically have a sensitivity to affordability.
Bob Martin: In terms of capital allocation, we remain committed to our industry-leading dividend and reinvesting in and growing our home building operations. While we make significant progress with our land acquisition and approval activity during the third quarter, growing our land pipeline remains a top priority to position us for growth in future periods.
I think we've been able to manage through it with our special financing programs.
And offering closing costs and those kind of programs. So I don't know if there's any any one location that strikes me as a particularly.
Particularly impacted were disproportionately impacted.
Bob Martin: That concludes our prepared remarks.
Okay, great. Thank you all and good luck in the coming quarter.
Operator: I will now turn the call back over to the operator to start our Q&A session. Thank you, and we will now begin the Q&A session. To ask a question, you may press star than one on your touchstone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.
Thank you much.
And we'll proceed with our question from Ken Zenner from Seaport.
Please go ahead.
Hello, everybody.
Okay.
So you guys like in the interest income I take it the $20 million. This quarter is that a fair rate just to think about going forward all else being equal.
Operator: At the time we will pause momentarily to assemble a roster.
Well you know for for now.
Certainly as it ties to where interest rates move more broadly speaking and of course, we're hoping to invest some of our capital into.
Stephen Kim: And our first question comes from Steven Kim from Evercore. Steven, please go ahead. Yeah, thanks very much, guys. Appreciate all the color. I just wanted to get just as a housekeeping item, Bob. Can you reiterate what you said for the number of specs you had at the end of the quarter and how many of those were finished? I believe the number was about 2681 for total specs, and the number that was finished, I think, was right around 250 as of the end of the quarter. Okay, gotcha. All right, and if we have that, okay, so you're running at about a little over 11 specs per community, but not much more than one finished spec per community.
Additional.
Homebuilding assets to bring those cash balances down maybe just a smidge. So those are the two factors are but right now it seems like we're going to continue to earn a healthy rate.
Yeah, a good rate yeah finally.
So you have a more spec bias things are more seasonal or is what you're seeing.
Yet your starts exceeded.
Your orders in.
Three Q.
Could you talk about that.
Decision.
As it relates to.
You know.
The fourth quarter or and then perhaps more broadly you're thinking about that.
<unk>.
Yes. The the starts during Q3 were just shy of 2400.
Bob Martin: Do you feel like you've sort of arrived at kind of an optimal level of specs, or do you actually want to take that higher as you get into the spring selling seats? You know, I think your math is right. It's about 11 per active community. Once you include those communities that are just starting up and not get active, it's probably closer to all at night and a half. All that said, I do think it could rise a little bit more between the end of the third quarter and the start of the year as we prepare for the spring-selling season. We're also working on making sure that we have good sufficient inventory. That is within, call it, 60s and 90s of close for the spring-selling season as well. So, that is ongoing. Yeah, that's, that's great.
So that did easily exceed our net orders and I think we're thinking about.
Spring selling season, and making sure that we have the right amount of inventory for spring selling season, I know with rates being where they are still at recent highs.
Hi.
At this point, we know it's still going to be a pretty important for our consumers to be able to know.
What their interest rate is at that time, they buy their houses at least for the majority of consumers and I think that means specs. So we want to have that inventory in place too.
To.
And the year. So that's why you see the the differential.
Bob Martin: Remind us, where do you stand now in terms of the gross margins on your specs versus build to order? I think overall for this specs, build to order is about 200 basis points higher. That said, the curated specs are actually closer to dirt margins to the build to order margins. What's influencing it in the quarter right now is that we still had quite a few unintentional specs, so specs that resulted from cancellations still going through the numbers.
Do you and I have.
I have a couple of follow up questions here because that does makes sense do you think.
And others can chime in given that perspective about the interest rate your shift to back which.
Makes sense, but is that something that was experienced let's say in the late seventies, David and.
Yeah. That's that's my first question I have a couple here for you so I apologize.
Yeah.
Well actually you know.
If you got to the Jimmy Carter years.
Bob Martin: Yeah, Chen, I think you said your curated spec percentage has gone up to be quite a high, like, 89% or something? Correct. Of the, that, 2681 total, 89% are curated. Okay, and those margins are closer to build to order. That's encouraging.
Larry and I experienced mortgage rates there were 17 to 18 in the you know at that time, we did forward commitments.
<unk> 13, and a half so you know so this is a this seems like a pretty good market compared to when the [laughter].
Stephen Kim: Okay, lastly, just, you know, incentives, you touched on incentives as you, you know, as you talked about 3Q, but as we look into what's happening sort of at the end of the quarter and into October, what's curious is to, if you could give us a sense for, you know, what you're seeing either in terms of a change in your posture towards incentives or the customers' interest in finance incentives, particularly buy-downs relative to what you maybe saw for the 3Q as a whole. I think it definitely increased a bit the overall cost of offering those special financing incentives, those buy-downs towards the end of Q3.
And our Carter's president.
Well related to that one of the things you know the dollar bottomed and I believe October 78, but you know home prices were exceeding.
Inflation then.
Obviously, a variety of housing price metrics out there.
If you consider them in the low single digits. You know one of the differences now is that prices are I appreciate you're on a real basis do you have any.
Context for how that influenced.
<unk> says buyers because I know it was one of the big carriers in the past to explain sure you had to pay a lot of mortgage but prices were appreciating faster than that so it was kind of a.
Stephen Kim: Given that we've seen some movement in rates, the rate seemed to settle down a little bit during Q2 only to come up again. So, anytime we see that, I think it's normal to see an increase in the incentives offers, especially in this case for the special financing incentives. So, as David mentioned, we do expect a higher level of incentives to come through in Q4 because of that, many of the units that are getting that special financing will close in the fourth quarter. Okay, that's helpful. It's in right because they're basically standing, you know, it's okay, quick move-ins. Great. Well, I appreciate it. Thanks very much, guys. Perfect. Thank you.
Moot point I in my opinion.
Yes. It is.
What happened in the late seventies has a lot of like Whatsapp.
What's happening today, there was actually a shortage of houses.
And.
So.
On the news side, it's tied to capital are under onsite out her opinion on the news.
The new site and you know what what are the different times of day, because if you think about you know we're competing we're competing for.
For home sales with other builders, but what's interesting is you have so many people that are on the sidelines because they have a mortgage rate under four.
And so you've got a lot of people have existing houses are living at home. So yeah.
And as you well know the new homebuilders are now picking up a bigger percentage of home sales, but that was kind of feel better resales.
Michael Rehart: And our next question comes from Michael Rehart from JP Morgan. Michael, you may proceed.
Yeah.
Andrew Ozzy: Hi, this is Andrew Ozzy on for Mike. Congratulations on the Q4 guys. Thank you. I just wanted to ask maybe if you can break out the components that drove the gross margin B and maybe what was the biggest driver in the respective impact. Well, I think overall, just the closings that were running through the adolescent level of incentive in part that's due to interest rates being a bit more stable towards the middle part of the year.
It's I think there's a lot of parallel some of them are good and unfortunately some of them are are are bad.
I'm going to circle back now to start question. This will be my last one.
Because.
Even if you're holding.
Well your inventory units.
Let me get this right, we're down 15% year over year. So about 5300, if you back out bottles and such.
And if you start.
What you.
How have orders for them.
Andrew Ozzy: So a lesser cost from financing incentives, although that turned a little bit as Steve Kim and I were just discussing towards the end of the quarter. So that's one thing. I think we also had some pickups with relation to things like, for example, lumber due to our built order strategy that we were executing on for much of the prior years. We still had some of the older lumber costs going through our numbers and that really started to come down in a more meaningful way during Q3.
I do think your orders are going to be up sequentially that would be very odd I guess.
But given.
Yeah. So anyway, you're your inventory units are poised to be up nicely year over year call. It 4500.
Maybe even 5000 units.
And if inventory using your 'twenty 10, 10 example.
You know if you close out at about 5000 units based upon your start decision that would imply.
To 10000 units next year could you talk to.
Why that logic.
Andrew Ozzy: Got it. That's helpful. Thank you. And then in terms of four cues, gross margin guidance, what kind of gets you to be bottom and top of the range that you guys provided? Well, you know, I think it'll depend on what we see in market conditions during Q4. That relates not only to the overall psyche of the consumer, the health of the consumer, but also what interest rates do during the fourth quarter.
But he 10, 10 would not be appropriate or or or what would be wrong with that simplistic approach too.
Your inventory as a forward indicator next year.
Thank you.
Yeah.
It's a it's a loaded question for sure with a lot of a lot of facts that I think Iot, we're going with it and that we.
Andrew Ozzy: I imagine if for whatever reason you saw continued increase in mortgage interest rates, that would result in more incentives in order to to get that right down to a level of affordability for the consumer. If you saw stability or even a move down, maybe there's an opportunity to be towards higher into the range. Thanks a lot for that. Appreciate it.
Really if you look healthy inventory.
Right, Yeah, Rudi Road builders, who are starting aggressive inventory I think we calculate overtime its been a two to one ratio closings versus that starting inventory excluding models. So if we do end up in that north of 5000.
Number to end the year and it gives us the opportunity for a a higher unit volume year.
Operator: Let's all have a problem.
Right.
Alan Ratner: And our next question comes from Alan Radner from Zellman and Associates.
24 of course that depends on making sure that the cycle times are continuing to improve they don't revert back.
Bob Martin: Alan, please go ahead. Hey guys. Good afternoon. Thanks for taking my questions. You know, if I look back two a year ago, a year and a half ago when we initially began to rise, you guys were, you know, one of the more aggressive builders and kind of slowing the pace of land buying down. You took actions to obviously make sure that you wouldn't kind of get stuck with land, the approaches at the peak prices and whatnot.
That we have all the land necessary and I think we've done a lot of good activity too.
To get there so you're your line of thinking.
It makes sense when backed up by.
Cycle times that are improving inventory that's our attorney.
Faster more generally speaking.
Yeah, I just think it's really I mean builders don't know about the back half of 'twenty three but you certainly know about I mean 24, but you certainly know the front half of 'twenty four and that inventory unit is.
Bob Martin: And you know, while I hear a little bit of near-term cautiousness in your guidance, at least as far as margin is concerned and the potential need for higher incentives given this more recent move in rates. It seems like you're taking the opposite course in terms of actually accelerating land activity and keeping the start pace of specs quite high. So I was just, you know, wondering if you could talk through a little bit, you know, why you feel more confident in the market's ability to kind of withstand the headwind now that seemed to be unfolding, whereas some other builders might be taking a bit more of a cautious tone. Compared to a year and a half ago when you were, you know, seemingly very conservative in the face of initially rising rates.
Pretty impressive what the implications are thank you.
Thank you.
[laughter].
And I will proceed with the question from Alex Barron from housing Research Center.
Alex Please go ahead.
Yes. Thank you.
Yeah I was curious if you guys happen to have the statistics for what your average.
Average buyer it looks like in terms of you know average income.
Average FICO average down payment.
Bob Martin: Well, it's a great question. As we were operating a year ago, naturally, it was very daunting. We had a cancellation rate, I believe, close to 80%, and that was the result of a very sharp increase in interest rates. I think some 300 basis points over the course of six months, whereas this year, even though rates continue to increase, it's a more modest increase, 150 basis points during the course of the year.
And what the average interest rate is either in your recent closings are in your backlog.
I think the average FICO was 744, the average down payment or I guess that backwards. The average LTV was 82%.
And the most recent interest rate so for those closings that occurred.
In Q3, we were at about 6% for our mortgage company I'm not sure if I have fee income number Andy.
Bob Martin: I think that the consumer is not being shocked as much this year, which is encouraging. We continue to see good activity each month, which is helpful. We see good traffic, good conversions. The traffic is quality traffic, and we really still, across all of our markets, don't see a ton of supply out there in terms of inventory that is available for consumers to buy. So we think that all adds up to a pretty healthy spring selling season.
Okay, maybe we can touch base offline yet because the income would be interesting to know just to see.
Relatively speaking you know because it's one thing to think the average household is buying a home.
It's another if it's the upper quintile buying a home.
These days so I'd just be curious to know what your average ink household income that's buying actually is.
Yeah and income just just for one one point of reference was about 42%. So that is in line with what it's been in prior periods.
Bob Martin: If we have another healthy spring selling season, then of course we'll need to replace that land. Even though the level of land activity has moved up quite a bit from Q1 or Q2, Q1 and Q2 will really not really significant periods of land acquisition activity at all. So we're almost getting back to more of Q3, just a normal running for land acquisition, and then future periods for land acquisition will really be based upon the continued good solid activity that we see in the market.
Got it and in terms of rate buy down or forward commitment roughly what what are you guys.
Advertising and how many of the people buying are actually.
Going for a rate buy down rather than some other type of incentives.
Right now, we're at 575% on government and $5 99%.
Unconventional and I would say the vast majority of the buyers are using right to some degree or closing costs incentives to either get there.
Bob Martin: Great. I appreciate the thoughts there, Bob.
Bob Martin: Second question, just thinking through the sensitivity, I guess you guys have on a price versus volume side. You mentioned an expectation for a pickup and incentive in the fourth quarter. I think a lot of your peers are saying the same thing. The big difference between you guys, though, and them as your margins are a bit thinner, so presumably a little bit less cushion to absorb a more meaningful increase in incentives here with margins kind of in high teens.
Payment down or to get their initial cost to close down.
But as you can tell from the 6% average in Q3, not everybody is getting all the way down to $5 75, or four or $5 99.
Right. Okay. Thanks, so much and best of luck.
Thank you.
Yeah.
Bob Martin: So how do you think about that trade off at what point, either from an absorption standpoint or sell standpoint, would you get much more aggressive on incentives? And at what point would you sit back and say, we're not going to discount anymore because our margins are at a point where we don't want to go below that? I think in Q4, you have the impact of seasonality, so we have to take that into account.
Okay.
And this concludes our question and answer session I would like to turn the conference back over to Bob Martin for any closing remarks.
Thank you to everyone for being on the call and we look forward to speaking with you again after the release of our Q4 earnings.
Bob Martin: There's only so many buyers out there buying as we approach the holiday season, but we want to be competitive. So we are looking at our competition, how many they are selling and what price it takes to sell. There is another end to the equation. Certainly the margin is one thing, but the velocity with the inventory turns certainly is important as well. So we want to strike a balance. We don't want to go down to next to nothing kind of sales because we know that is something that is demoralizing to our team.
And the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Bob Martin: Williams, to our sales teams, certainly, so that wouldn't be appropriate as well. So if we see that we're keeping up with really a good seasonal pace, I think that's a good guide for us, although there's no absolutes. We've got to look at it sub-division by sub-division and making sure we're remaining competitive. I guess I would also add, just given our land supply being amongst the lowest in the industry, that's really something that insulates us as well, not having so much pressure on us to monetize land at any given point of time.
Bob Martin: Got it. Appreciate the thought. Thanks a lot.
Operator: And I just would like to remind you, if you would like to enter the question queue, press star 1.
Truman Patterson: Our next question comes from Truman Patterson from Wolf Research. Truman, please go ahead. Good afternoon, everyone. Thanks for taking my questions. First one, I just want to understand what you're seeing on the land front specifically, given from the tightening and lending to the private builders and developers. Are you actually finding any finished locks come to market, just a general update on kind of land pricing and really trying to understand when you're underwriting a deal today, what level are you able to underwrite to from a gross margin perspective? Should we be thinking something in kind of the high teens?
Bob Martin: I guess I'll start off by saying we were fortunate at the majority of what we bought and what we approved were finished lot deals during the quarter. In fact, I think it was close to 80%. So we have seen some finished lot deals. It is competitive out there for deals, generally speaking. So I imagine there won't be nearly as many in the future for an underwriting standpoint, the 2020 rule still applies in terms of margin and IRR.
Bob Martin: Although I would say for something that truly is finished where you're taking all that development risk off the table and you can actually start building houses immediately, you would go into the high teens for that kind of deal potentially. So all depends on the deal, but right now most of the deals that we've done during the quarter are ones that can add closings and sales relatively quickly. Gotcha, gotcha. I understood and thanks for that.
Bob Martin: You know, this is a little bit near-term focus, but could you give an update on kind of October demand trends and then maybe perhaps go across some of your metros or regions just, you know, given the recent rate move, which areas have been relatively outperforming or underperforming would be helpful. So for October, I think October has been healthy considering seasonality. It's really in line with normal seasonal patterns. And we think it's moving along very well.
Bob Martin: So that's October in terms of regional focus. It's interesting to see a 2.4 absorption rate for every one of our regions for the third quarter. And I think it speaks to the resilience of all the markets. Yes, there are markets out there where we know the consumer base maybe is a bit more credit challenge. I think you see some of that in Phoenix, you see some of that in Orlando, for example Las Vegas.
Bob Martin: So those are areas that typically have a sensitivity to affordability. That said, I think we've been able to manage through it with our special financing programs and offering closing costs and those kind of programs. So I don't know that there's any any one location that strikes me as particularly impacted or disproportionately impacted.
Truman Patterson: Okay, great. Thank you all and good luck in the coming quarter. Thank you much.
Ken Zener: And we'll proceed with a question from Ken Zener from seaport. Can please go ahead.
Ken Zener: Hello everybody. So you guys like in the interest income, I take it the 20 million this quarter. Is that a fair rate just to think about going forward all else being equal? Well, you know, for now, certainly it's tied to where interest rates move more broadly speaking. And of course, we're hoping to invest some of our capital into additional home building assets to bring those cash balances down maybe just a smidge.
Ken Zener: So those are the few factors that right now it seems like we're going to continue to earn a healthy rate. Yeah, a good rate. Yeah, finally. So you have a more spec bias. Things are more seasonal is what that you're seeing. And yet your starts exceeded your orders in 3Q. Could you talk about that decision as it relates to, you know, the fourth quarter or and then perhaps more broadly, you're thinking about that strategy.
Ken Zener: Yes, the starts during Q3 were just shy of 2400. So that did easily exceed our net orders. And I think we're thinking about spring selling season and making sure that we have the right amount of inventory for spring selling, season. I know with rates being where they are still at recent highs, decades highs. At this point we know it's still going to be pretty important for our consumers to be able to know what their interest rate is at the time they buy their houses at least for the majority of consumers and I think that means specs so we want to have that inventory in place to end the year.
Ken Zener: So that's why you see the differential. Do you and I can have a couple of follow-up questions here because that does make sense. Do you think and others can chime in given the perspective about the interest rate, your shift to back which makes sense, was that something that was experienced, let's say, in the late 70s, David? Yeah, that's my first question. I have a couple here for you, so I apologize. Well, actually, if you've got to the Jimmy Carter years, Larry and I experienced mortgage rates that were 17, 18, and at that time we did forward commitments that were 13 and a half.
Ken Zener: So this seems like a pretty good market compared to when the Carter was present. Well, related to that, one of the things, the dollar bottom didn't, I believe October 78, but home prices were exceeding inflation then and obviously a variety of housing price metrics out there. But if you consider them in the low single digits, you know, one of the differences now is that prices aren't appreciating on a real basis. Do you have any, you know, context for how that influence influences buyers because I know it was one of the big carries in the past to explain sure you had to pay a lot of mortgage, but prices were appreciating faster than that.
Ken Zener: So it was kind of a mute point in my opinion. And what happened in the late 70s is a lot of what's happening today. There was actually a shortage of houses. And in so not only on the news side, it's tied to capital or on the news side. News side. You know, we're in a different time today because if you think about, you know, we're competing for for home sales with other builders, but what's interesting is you have so many people that are on the sidelines because they have a mortgage rate under four.
Ken Zener: And so you got a lot of people have existing houses. They're living in home. So and as you well know, the new home builders are not picking up a bigger percentage of home sales that that was kind of filled by the resales. Yeah. I think there's a lot of parallel. Some of them are good and unfortunately some of them are bad.
Bob Martin: I'm going to circle back now to the start question. This will be my last one because, even if you're holding, well, your inventory units, let's get this right, we're down 15% year of year, so about 5300 if you back out bottles and such. And if you start what you have orders for, I do think the orders are going to be up sequentially, that would be very odd, I guess, but given, yeah, so anyways, your inventory units are going to be up nicely year over year, call it, you know, 4,500, maybe even 5,000 units.
Bob Martin: And if inventory using your 2010, 10 example, you know, if you close out at about 5,000 units based upon your start decision, that would imply 2,000, 10,000 units next year. But you talked to why that logic flying your 2010 would not be appropriate or what would be wrong with that simplistic approach to your inventory as a forward indicator next year.
Bob Martin: Thank you. It's a loaded question for sure with a lot of facts, but I think I know you're going with it and that we really, if you look at the inventory, yeah, we're going to go to our starting request inventory. I think we calculate over time, it's been a two to one ratio closings versus that starting inventory, excluding models. So if we do end up in that north of 5,000 number to end the year, then it gives us the opportunity for a higher unit volume year in 2024.
Bob Martin: Of course, that depends on making sure that the cycle times are continuing to improve. They don't revert back that we have all the land necessary. And I think we've done a lot of good activity to get there. So your line of thinking certainly makes sense when backed up by cycle times that are improving in an inventory that's turning faster more generally speaking. Yeah, I just think it's, I mean, builders don't know about the back half of 23, but you certainly know about, I'll be 24, but you certainly know the front half of 24 and that inventory unit is pretty impressive, but it's the implications are.
Bob Martin: Thank you.
Alex Barron: And I will proceed with a question from Alex Barron from Housing Research Center.
Alex Barron: Alex, please go ahead. Yes, thank you. Yeah, I was curious if you guys happen to have the statistics for what your average buyer looks like in terms of you know average income, average FICO, average down payment, and what the average interest rate is either in your recent closing during your back loss. I think the average cycle was 744, the average down payment, I guess that backwards, the average LTV was 82%, and the most recent interest rates, so for those closings that occurred in Q3, we were at about 6% for our mortgage company, I'm not sure if I have the income number handy.
Alex Barron: Okay, maybe we can touch face off on yet because the income would be interesting to know just to see relatively speaking, you know, because it's one thing to think the average household is buying a home, it's another if it's the upper quintile buying a home these days, so it's just be curious to know what your average income household income that's buying actually is.
Alex Barron: Okay. The average income just for one point of reference was about 42%, so that is in line with what it's been in prior periods.
Alex Barron: Got it. And in terms of rate by down or forward commitment, roughly what are you guys advertising and how many of the people buying are actually, you know, going for a rate by down rather than some other type of incentives? Right now we're at 5.75% on government and 5.99% on conventional, and I would say, you know, the vast majority of the buyers are using rate to some degree or closing costs in as you can tell from the 6% average in Q3. Not everybody is getting all the way down to 5.75 or 5.99. Right.
Alex Barron: Okay. Thanks so much, Mr. Luck.
Operator: Thank you.
Bob Martin: In this concludes our question and answer session, I would like to turn the conference back over to Bob Martin for any closing remarks. Thank you to everyone for being on the call. We look forward to speaking with you again after the release of our Q4 earnings.
Operator: And the conference has now concluded. Thank you for attending today's presentation.