Q3 2023 LGI Homes Inc Earnings Call

October 31, 2023

[music].

Welcome to the L. G I homes third quarter 2023 conference call today's call is being recorded and a replay will be available on the company's website at www Dot L. G I homes dotcom.

After management's prepared comments, there will be an opportunity to ask questions.

At this time I'll turn the call over to Joshua Fatter, Vice President of Investor Relations and capital markets.

Thanks, and good afternoon.

I'll remind listeners that this call contains forward looking statements, including managements views on the company's business strategy outlook plans objectives and guidance for future periods.

Such statements reflect management's current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause those expectations to prove to be incorrect.

You should review our filings with the SEC for.

For a discussion of the risks uncertainties and other factors that could cause actual results to differ from those presented today.

All forward looking statements must be considered in light of those related risks and you should not place undue reliance on such statements, which reflect management's current viewpoints and are not guarantees of future performance on this call. We will discuss non-GAAP financial measures that are not intended to be considered in isolation or a substitute for financial information presented.

In accordance with GAAP.

Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the press release, we issued this morning and in our quarterly report on Form 10-Q for the quarter ended September 32023, and we expect to file with the SEC later today.

This filing will be accessible on the Sec's website and ended the Investor Relations section of our website.

I'm joined today by Eric Lieber, LCI, Homes', Chief Executive Officer, and Chairman of the Board and Charles <unk>, Chief Financial Officer and Treasurer.

I'll now turn the call over to Eric.

Thanks, Josh Good afternoon, and welcome to our quarterly earnings call.

I am pleased to share our exceptional performance during the third quarter of 2023, our strong results built upon the momentum generated in the first half of the year and the positive impact of decisions, we made to align our business with unique challenges of today's affordability constrained market.

Demand remains healthy supported by positive longer term fundamentals, including strong demographic trends and a low supply of affordable homes.

We believe that once the first targets are met and we have a clear view of the economic landscape interest rate volatility will subside and the market will likely exhibit more stability similar to what we experienced in the years prior to the pandemic.

However, there is no consensus on whether that takes a couple of quarters or a couple of years.

Therefore, we are laser focused on ensuring that any near term decisions around pricing incentives investments and community openings are weighed not only in the context of their impact to our company's near term success, but also 510 and 20 years down the road.

A great example of that is the <unk> hundred 50, <unk> homes, we closed in the third quarter.

This was a 13, 2% increase over the same period last year and represented a strong pace of five six closings per community per month.

It is possible that if we'd offer significantly more than our typical two to three points of rate buy down assistance, we may have pushed closings higher.

But beating the closing guidance wasn't the goal hitting the guide while also protecting and expanding margins was our focus.

And that's exactly what we did delivering adjusted gross margins of 27, 2%, representing a sequential improvement of 340 basis points and back within the pre pandemic range, we've been working towards.

Additionally, our pre tax profit margin of 14, 5% was also up 340 basis points and was the highest third quarter result in our history outside of the pandemic.

During the third quarter, our top market on a closings per community basis was Dallas Fort worth with 10, one closings per month.

Next with Charlotte with nine five closings, followed by northern California with $8 nine.

Rounding out the top five or Fort Pierce with eight five in Houston was seven nine.

Congratulations to the teams in these markets for their strong performance last quarter.

To reiterate every decision currently being made is being considered within the context of our system space philosophy and represents a careful assessment of its potential to create sustainable long term value for our shareholders.

Along with margin expansion, our continued community count growth is another highlight.

Operator: Welcome to LGI Homes 3rd Quarter 2023 Conference Call. Today's call is being recorded and a replay will be available on the company's website at www.lgihomes.com. After management's prepared root comments, there will be an opportunity to ask questions.

At the end of the quarter, we reported 106 active communities, a 14% increase from a year ago, and a 4% increase from the prior quarter.

Growing our community count remains a key focus and we still expect to be active in 115 to 125 communities by the end of 2023.

Joshua Fattor: At this time, I'll turn the call over to Joshua Fattor, Vice President of Investor Relations and Capital Markets. Thanks and good afternoon. I'll remind listeners that this call contains forward-looking statements, including management's views on the company's business strategy, outlook, plans, objectives, and guidance for future periods. Such statements reflect management's current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause those expectations to prove to the incorrect.

Finally, I'll share my thoughts on additional highlights from the quarter the land market.

Early in 2020 deal for finished lots began to diminish by.

By the end of 2020, there were virtually nonexistent.

However, we have started to see that shift during the third quarter. We approved a total of 23 new projects.

Joshua Fattor: You are filings with the SEC for discussion of the risks, uncertainties, and other factors that could cause actual results to differ from those presented today. All forward-looking statements must be considered in light of those related risks, and you should not place undue reliance on such statements, which reflect management's current viewpoints and are not guaranteed future performance. On this call, we'll discuss non-gap financial measures that are not intended to be considered in isolation or as substitutes for financial information presented in accordance with GAP.

Nine of which were composed entirely of finished lots.

Many of which will contribute to closings and community count in the back half of 2024.

They will still in the early innings, we're encouraged by this recent trend and its potential to impact future returns.

Along with attractive land opportunities. We've also seen a meaningful increase in M&A opportunities. The majority of these are small private builders looking to leverage longer dated land pipelines to free up capital to continue to grow their operations.

During the quarter, we closed the deal to acquire substantially all of the land assets of Glenwood homes in North Carolina.

The transaction enabled us to acquire over 1100 lots and one of our best performing regions.

On the opposite side of the deal the seller retained their high margin backlog and received an inflow of capital that has the potential to insulate them from turbulent credit markets and support their continued success as a homebuilder and developer.

Joshua Fattor: Reconciliation of non-gap financial measures to the most comparable measures prepared in accordance with GAP can be found in the press release we issued this morning, and in our quarterly report on form 10Q for the quarter ended September 30, 2023, and we expect to file with the SEC later today.

The win win nature of this deal illustrates a positive upside of today's uncertainty Chan.

Joshua Fattor: This filing will be accessible on the SEC's website and end of the Investor Relations section of our website.

Challenging times can create great opportunities that are structured thoughtfully real value for both parties.

Eric Lipar: I'm joined today by Eric Leeper, LGI Holmes, Chief Executive Officer, and Chairman of the Board, and Charles Meridian, Chief Financial Officer, and Treasurer. I'll now turn the call over to Eric. Thanks, Josh. Good afternoon, and welcome to our quarterly earnings call. I'm pleased to share our exceptional performance during the third quarter of 2023. Our strong results built upon momentum generate in the first half of the year and the positive impact of decisions we made to align our business with unique challenges of today's affordability constraint market.

We expect similar opportunities to materialize in the future and plan to pursue those that work within our profitability focused long term growth strategy.

I'll now turn the call over to Charles for more details on our financial results.

Thanks, Eric.

Revenue in the third quarter was $617 $5 million based on 751 homes closed.

Revenue was up 12, 9% and closings were up 13, 2% over the same period last year as we benefited from continued demand and the momentum built during the first half of the year.

Eric Lipar: The man remains healthy, supported by positive, longer-term fundamentals, including strong demographic trends, and a low supply of affordable homes. We believe that once the Fed's targets are met and we have a clear review of the economic landscape, interest rate volatility will subside, and the market will likely exhibit more stability similar to what we experienced in the years prior to the pandemic. However, there's no consensus on whether that takes a couple of quarters or a couple of years.

Of our total closings 139 were through our wholesale channel representing seven 9% of total closings in line with the second quarter. This year.

Our average selling price of $352678 was slightly lower year over year, but up one 3% sequentially.

Our third quarter gross margin was 25, 7% and adjusted gross margin was 27, 2%.

Eric Lipar: Therefore, we are laser focused on ensuring that any near-term decisions around pricing, incentives, investments, and community openings are weighed not only in the context of their impacts to our company's near-term success, but also 5, 10, and 20 years down the road.

As Erik highlighted adjusted gross margins improved 340 basis points sequentially compared to the 150 basis point improvement, we guided to on our last call.

Eric Lipar: A great example of this is the 1,751 homes we closed in the third quarter. This was a 13.2% increase over the same period last year and represented a strong pace of 5.6 closings per community per month. It is possible that if we'd offered significantly more than our typical two to three points of rate-by-down assistance, we may have pushed closings higher, but beating the closing guidance wasn't the goal. Hitting the guide while also protecting and expanding margins was our focus.

The outperformance was driven by our success in maintaining and where possible raising prices in many communities as well as lower input costs, and new and replacement community openings at normalized margin profiles.

Adjusted gross margin excluded $8 6 million of capitalized interest charged to cost of sales and $767000 related to purchase accounting together, representing a 150 basis points.

Combined selling general and administrative expenses for the third quarter were $76 5 million or 12, 4% of revenue.

Eric Lipar: And that's exactly what we did, delivering adjusted gross margins of 27.2% representing a sequential improvement of 340 basis points and back within the pre-pandemic range we've been working towards. Additionally, our pre-tax profit margin of 14.5% was also up 340 basis points and was the highest third quarter result in our history outside of the pandemic. During the third quarter, our top market on a closings per community basis was Dallas Fort Worth with 10.1 closings per month.

Selling expenses were $49 8 million or eight 1% of revenue compared to seven 6% in the second quarter of this year.

The 50 basis point sequential increase was primarily due to spending on advertising to drive leads and support new community openings.

General and administrative expenses totaled $26 $7 million.

Or four 3% of revenue a level that was in line with the second quarter of this year.

We expect advertising and G&A dollars will remain consistent in the fourth quarter, resulting in full year SG&A as a percentage of revenue of around 13%.

Eric Lipar: Next was Charlotte with 9.5 closings followed by Northern California with 8.9. Ronning out to top five were Fort Pierce with 8.5 and Houston with 7.9. Congratulations to the teams in these markets for their strong performance last quarter. To reiterate, every decision currently being made is being considered within the context of our system-based philosophy and represents a careful assessment of its potential to create sustainable long-term value for our shareholders. Along with margin expansion, our continued community count grow is another highlight.

Pre tax net income for the quarter was $89 4 million or 14, 5% of revenue a 340 basis point improvement over the prior quarter.

Our effective tax rate was 25, 1% compared to 16, 8% in the same quarter last year. The increase in the rate was primarily due to fewer federal energy efficient home tax credits.

Recognize this quarter compared to the same period last year.

We expect the rate in the fourth quarter to be similar to the third resulting in a full year effective tax rate of approximately 24%.

Eric Lipar: At the end of the quarter, we reported 106 active communities, a 14% increase from a year ago, and a 4% increase from the prior quarter. Growing our community count remains a key focus and we still expect to be active in 115 to 125 communities by the end of 2023.

Third quarter reported net income was $67 million or $2 85 per basic share and $2 84 per diluted share.

Third quarter gross orders were 2068 up 6% over the same period last year net orders were $1490, a slight decrease compared to the third quarter of last year.

Eric Lipar: Finally, I'll share my thoughts on additional highlights in the quarter, the land market. Early in 2020, deal for finished loss began to diminish. By the end of 2020, there were virtually nonexistent. However, we've started to see that shift. During the third quarter, we approved a total of 23 new projects, 9 of which were composed entirely of finished loss, many of which will contribute to closings and community count in the back half of 2024.

Our cancellation rate during the quarter was 27, 9% compared to 21, 3% in the same period last year.

At September 30, our backlog consisted of 1377 homes valued at $510 million.

Of those homes 273, or 19, 8% of our total backlog were related to wholesale contracts with single family rental partners.

Eric Lipar: They'll still in the early innings were encouraged by this recent trend and its potential to impact future returns. Along with attractive land opportunities, we've also seen a meaningful increase in M&A opportunities. The majority of these are small private builders looking to leverage longer-dated land pipelines to free up capital to continue to grow their operations.

Turning to our land position.

At September 30, our portfolio consisted of 72109 owned and controlled lots a decrease of five 7% year over year, but an increase of four 2% sequentially driven by an increase in the availability of fairly valued land deals during the quarter.

Eric Lipar: During the quarter, we closed a deal to acquire substantially all of the land assets of Glenwood Homes in North Carolina. The transaction enabled us to acquire over 1100 lots in one of our best performing reaches, on the opposite side of the deal, the seller retained their high margin backlog and received an inflow of capital that has the potential to insulate them from turbulent credit markets and support their continued success as a home builder and developer.

Of those lots 56301.

Or 78, 1% were owned a decrease of seven 1% year over year and less than 1% sequentially.

Of our owned lots 42000, and 618 were raw land or land under development.

Of the remaining 13683 owned lots 1471 were completed homes, including our information centers and 3009, where homes in progress and 9203 were finished vacant lots.

Eric Lipar: The win-win nature of this deal illustrates a positive upside of today's uncertainty. Challenging times can create great opportunities that if structured thoughtfully hold real value for both parties. We expect similar opportunities to materialize in the future and plan to pursue those that work within our profitability focused long-term growth strategy.

We controlled 15808 lots of quarter, and essentially flat year over year, but an increase of 26, 8% sequentially.

With that I'll turn the call over to Josh for a discussion of our capital position.

Charles Merdian: I'll now turn the call over to Charles for more details on our financial results. Thanks, Eric. Revenue in the third quarter was $617.5 million based on 1,751 homes close. Revenue was up 12.9% and closings were up 13.2% over the same period last year as we benefited from continued demand and the momentum built during the first half of the year. Of our total closings, 139 were through our wholesale channel, representing 7.9% of total closings in line with the second quarter this year.

Thanks Charles.

As of September 30, we had just under $1 2 billion of notes payable outstanding including $904 $2 million drawn on our credit facility.

Our debt to capital ratio was 39, 8% and our net debt to capital ratio was 38, 8%.

Total liquidity at the end of the quarter was $243 $2 million, including $47 million of cash on hand, and $196 2 million of available capacity under our credit facility.

At September 30, our stockholders' equity was over $1 $8 billion.

And our book value per share was <unk> $76 50.

Charles Merdian: Our average selling price of $352,678 was slightly lower year over year but up 1.3% sequentially. Our third quarter gross margin was 25.7% and adjusted gross margin was 27.2%. As Eric highlighted, adjusted gross margins improved 340 basis points sequentially compared to the 150 basis point improvement we guided to on our last call. The outperformance was driven by our success in maintaining and where possible raising prices in many communities as well as lower input costs and new and replacement community openings at normalized margin profiles.

An increase of 10, 9% over the same time last year.

At this point I'll turn the call back over to Eric.

Thanks, Josh on Friday, we expect to report October closings of 567 homes up 5% compared to last October and 108 active communities.

Based on those deliveries and our sales pace in October that was consistent with this time last year, we expect to achieve an increase in closings year over year in the fourth quarter.

Based on this we are tightening the range of our expected closings for the year. We now expect to close between 60 707000 homes at an average selling price between 350 and $355000 for the full year.

Charles Merdian: Adjusted gross margin excluded $8.6 million of capitalized interest charged to cost of sales and $767,000 related to purchase accounting together representing 150 basis points. Combined selling general administrative expenses for the third quarter were $76.5 million or 12.4% of revenue. Selling expenses were $49.8 million or 8.1% of revenue compared to 7.6% in the second quarter of this year. The 50 basis point sequential increase was primarily due to spending on advertising to drive leads and support new community openings.

Margins in the fourth quarter are expected to be similar to slightly lower than what we've delivered in the third quarter, depending on several factors, including geographic product and retail versus wholesale mix as well as incentive levels offered in the fourth quarter related to our make your move national sales event.

Based on those variables and our performance in the third quarter, we are raising the low end of our margin guidance by 150 basis points, while holding the top end study.

We now expect full year gross margins between 23, and 23, 5% and adjusted gross margins between 24, five and 25%.

Charles Merdian: General and administrative expenses totaled $26.7 million or 4.3% of revenue a level that was in line with the second quarter of this year. We expect advertising and GNA dollars will remain consistent in the fourth quarter resulting in full year SGNA as a percentage of revenue of around 13%. Pre-tax net income for the quarter was $89.4 million or 14.5% of revenue a 340 basis point improvement over the prior quarter. Our effective tax rate was 25.1% compared to 16.8% in the same quarter last year.

Community Count is building as I mentioned earlier, we continue to expect 115 to 125 active communities at year end.

As a closing thought I'll add that based on our existing land pipeline and views on development timing. We now expect to end 2024 with over 150 communities and to be operating in over 180 communities by the end of 2025.

I'll conclude by saying again, how proud I am of our strong third quarter results and our success are returning profitability metrics back to pre pandemic levels. Our continued success is a result of outstanding execution by our teams around the country.

Charles Merdian: The increase in the rate was primarily due to fewer federal energy, efficient home tax credits, recognize this quarter compared to the same period last year. We expect a rate in the fourth quarter to be similar to the third, resulting in a full year effective tax rate of approximately 24%. Third quarter reported net income was $67 million or $2.85 per basic share and $2.84 per diluted share. Third quarter growth orders were 2068, up 6% over the same period last year.

Despite volatile rate movements market uncertainty and the occasional need to move between projects due to the timing of new openings. Our dedicated employees continue to construct sell and close homes, while delivering the best service in the industry.

Thank you for continued commitment to our company and to our customers. We'll now open the call for questions.

Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

Charles Merdian: Net orders were 1,490, a slight decrease compared to the third quarter of last year. Our cancellation rate during the quarter was 27.9% compared to 21.3% in the same period last year. At September 30, our backlog consisted of 1,377 homes valued at $510 million. Of those homes, 273 or 19.8% of our total backlog were related to wholesale contracts with single-family rental partners.

And one moment for your first question.

And our first question will come from Michael Rehaut of Jpmorgan. Your line is open Michael.

Hi, guys. This is Andrew <unk> on for Mike Congrats on an impressive quarter.

I just wanted to ask if maybe you can bucket out.

And then maybe quantify more specifically what drove the gross margin.

And maybe.

If there was a lean in one direction or the other.

Charles Merdian: Turning to our land position. At September 30, our portfolio consisted of 72,109 owned and controlled lots. A decrease of 5.7% year over year, but an increase of 4.2% sequentially driven by an increase in the availability of fairly valued land deals during the quarter. Of those lots, 56,301 or 78.1% were owned, a decrease of 7.1% year over year and less than 1% sequentially. Of our own lots, 42,618 were robbed land or land under development. Of the information centers, in 2009 were homes in progress, in 9,203 were finished vacant lots. We controlled 15,808 lots of quarter-end, essentially flat year over year, but an increase of 26.8% sequentially.

Yes, I think Andrew this is Eric I can start and Charles can add if you'd like the gross margin beat comes from a couple of different factors. One is we held pricing strong results still in a very strong demand environment low supply of inventory out there.

And able to hold pricing and raise prices in a substantial number of communities. They are thing that happened during the quarter is when we guided to $25 three and beat that as we didn't have a lot of wholesale closings or gave gave room for more wholesale closings to come through in the quarter.

Which didn't happen I'd point to those two as the two primary reasons.

That's really good color and then.

Maybe just one more.

How maybe widespread.

Price increases that you guys are sold.

Yes.

Yes, I would say in October we did our Q4 pricing, we would probably raise prices in a quarter to a third of our communities.

Okay.

Joshua Fattor: With that, I'll turn the call over to Josh for discussion of our capital position. Thanks, Charles. As of September 30, we had just under $1.2 billion of notes payable outstanding, including $904.2 million drawn on our credit facility. Our debt to capital ratio was 39.8%, and our net debt to capital ratio was 38.8%. Total liquidity at the end of the quarter was $243.2 million, including $47 million of cash on hand, and $196.2 million of available capacity under our credit facility. At September 30, our stockholders equity was over $1.8 billion.

And maybe if you could quantify the magnitude.

Yes, they're very slight just just to quantify the strong demand for <unk> and also we did have some some house cost increases, which we need to raise prices to maintain margins as well.

Thanks, so much for Blackstone.

Welcome.

And one moment for our next question.

Our next question will be coming from Truman Patterson.

Of Wolfe Your line is open Sherman.

Hey, good afternoon, everyone and thanks for taking my questions.

First Erik I'm, hoping to understand how your balance.

Eric Lipar: Our book value for share was $76.50, an increase of 10.9% over the same time last year, at this point, I'll turn the call back over to Eric. Thanks, Josh. On Friday, we expect to report October closings of 567 homes of 5% compared to last October in a 108 active means. Based on those deliveries and a sales face in October that was consistent with this time last year, we expect to achieve an increase in closings year over year in the fourth quarter.

Balancing.

Youre historically elevated gross margin, which you all were able to rebuild kind of back to normalized levels this quarter, but balancing that with the recent spike in rates and the affordability constraints or are you all going to continue to favor price a bit more.

Ed.

At the sake of absorption pace given just all of this community growth that you all have in the pipeline.

Yes, it's a great question chairman and good afternoon, starting again with very strong demand, but certainly.

Eric Lipar: Based on this, we are tightening the range of our expected closings for the year. We now expect to close between 6,700 and 7,000 homes at an average selling price between 350 and $355,000 for the full year. Marges in the fourth quarter are expected to be similar to slightly lower than what we've delivered in the third quarter depending on several factors, including geographic, product, and retail versus wholesale mix, as well as incentive levels offered in the fourth quarter related to our Make Your Move National Sales event.

<unk> abilities getting constrained whether its raising prices to offset additional costs, which I should also mention the development costs are generally increasing as well or the increasing in rates.

And were cautious about.

Throwing too many incentive dollars, where the customers because the incentives are really short term and there is no question in our mind, if we put a lot more dollars into large forward commitments are buying down rates.

That would improve sales temporarily but we want to make sure we're making good strategic long term decisions more protective of that gross margin because the financials. As we just showed this quarter of $5 six absorption pace, creating a 14, 5% pre tax the financials can handle a slower absorption pace.

Eric Lipar: Based on those variables, and our performance in the third quarter, we are raising the low end of our margin guidance by 150 basis points while holding the top end study. We now expect full-year gross margins between 23 and 23 and a half percent and adjusted gross margins between 24 and a half and 25 percent.

But when you start discounting your houses tremendously and start there aren't a lot of incentives into a short term bucket.

Eric Lipar: Community count is building. As I mentioned earlier, we continue to expect 115 to 125 active communities at year end. As the closing thought, I'll add that, based on our existing land pipeline and views on development timing, we now expect to end 2024 with over 150 communities and to be operating in over 180 communities by the end of 2025.

To drive that absorption pace that may or may not be the right long term decision for the company and that's what we're really focused on.

Okay perfect.

Perfect and then.

I believe you mentioned that you all were maintaining I think two to three points of financial incentives could you.

Help us understand what portion of your buyers.

Or getting a mortgage REIT.

Eric Lipar: I'll conclude by saying again how proud I am of our strong third quarter results and our success at returning profitability metrics back to pre-pandemic levels. Our continued success is the result of outstanding execution by our teams around the country. Despite moving between projects due to the timing of new openings, our dedicated employees continue to construct, sell, and close homes while delivering the best service in the industry. Thank you for continued commitment to our company and to our customers.

Buy down.

Are you all doing any sort of forward commitments at all or is this just kind of.

A case by case basis with incentives that the consumer can use based on their specific needs.

Yes, another great question Jerome and there is a lot of talk about rate buy downs and incentives.

For clarification, what we've been really focused on is getting the consumer the lowest fixed rate possible every week and what does that involve.

Over the last couple of quarters is really paying two or three discount points. If you will to get the lowest rate possible on a week to week basis.

Operator: We'll now open the call for questions. Certainly, as a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compiled the Q&A roster. And one moment for our first question.

That has been over 7% here recently, even paying a couple of points.

We have not purchased any big forward commitments, which is set up costs a two to three points may cost 600, 901000 basis points. So we get a rate materially lower from that and that is that is very expensive to do but we're continuing to analyze that we're continually to annualized sales week to week and what.

Michael Rehaut: And our first question will come from Michael Rahot of J.P. Morgan.

Andrew Alfie: Your line is open, Michael. Hi guys, this is Andrew. I'll be on for my contract on the project quarter.

Incentives are going to be best for our customers.

Okay Perfect and then just one final one for me just in your fourth quarter gross margin guide.

Eric Lipar: I just want to ask if maybe you can buck it out to maybe quantify more, to think we what drove the gross margin beat and maybe if there was a lead in one direction or the other. Got it, Andrew. This is Eric. I get started in Charleston ad if you'd like. I think the gross margin beat comes from a couple of different factors. One is we held pricing strong. We're still in a very strong demand environment, low supply inventory out there, and able to hold pricing and raise prices in a substantial number of communities.

Any discussion around there does that contemplate any buyers.

Or incremental.

Rate buy downs incentives needed for any buyers that might get kicked out due to affordability or any way you can help us kind of think about the sensitivity of buyers that might not be able to qualify without a buy down today.

Yes, I think it does contemplate that through them and I think we're all it's an unknown when rates got the six five to seven we didn't necessarily expect them to go to seven five or eight and I think from this point for where do they go from here.

Eric Lipar: The other thing that happened during the quarter is when we guided to 253 and then beat that, is we didn't have a lot of wholesale closings or gave room for more wholesale closings to come through in the quarter, which didn't happen. I'd point to those two, it's the two primary reasons.

So we're giving our gross margin guide.

We said similar to slightly down so I think we got a 100 to 200 basis points of room, either for mortgage incentives, we'll see where the costs.

Costs come in see what percentage of our business comes from the wholesale investors on geographic mix also plays a role on that.

Eric Lipar: That's a really good color and then maybe just one more in terms of how maybe widespread were these prices increases that you guys are seeing. Yeah, I would say in October we did our Q4 pricing, we probably raised prices in a quarter to a third of our communities. Okay, and maybe if you can quantify the magnitude or? Yeah, they're very slight, just to quantify the strong demand communities and also we did have some house costs increases, which we need to raise prices to maintain margins as well. Thanks so much. I'll pass it on. You're welcome. In one moment for our next question.

Alright, Thank you all.

Thank you.

One moment for our next question.

Okay.

And our next question will come from Ken Zenner of Seaport Research. Your line is open Ken.

Afternoon, everybody.

Good afternoon.

So a couple of different angles here.

I believe you said you bought fitness slot that you saw in the market and with the 23 communities is that what you actually said.

23 overall nine of which were finished lots again, so what was that.

And how does that.

Way into.

When you find that attractive given your.

Truman Patterson: Our next question will be coming from Truman Patterson of Wolf, Yelena's Open Truman. Hey, good afternoon everyone and thanks for taking my questions. First, Eric, I'm hoping to understand how you're balancing your historically elevated gross margin, which you all were able to rebuild kind of back to normalize levels this quarter, by balancing that with the recent spike in rates and affordability constraints, are you all going to continue to favor price a bit more at the sake of absorption pace given just all this community growth that you all have in the pipeline?

Health development bias.

To buy raw land and keep that.

300 basis points spread development too.

Buy it from somebody what makes you go ahead and do that is that because youre trying to get.

Having just literally opportunistically came up and how do you think about that relative to that the margin bias you happier existing land development business for process, it's really opportunistic cannon.

That's the positive about being in a more challenging market a more challenging affordability market, where we're seeing lower absorptions than historical past, but we're seeing tremendous opportunities to grow our community count 90, that's one of the most exciting things that we shared on the call is the ability to buy these new communities.

Truman Patterson: Yeah, it's a great question, Truman, and good afternoon, starting again with a very strong demand, but certainly affordability is getting constrained, whether it's raising prices to offset additional costs, which I should also mention the development costs are generally increasing as well, or the increasing in rates, and we're cautious about throwing too many incentive dollars with the customers, because incentives are a really short term, and there's no question in our mind if we put a lot more dollars into large forward commitments or buying down rates. That would improve sales temporarily, but we want to make sure we're making good strategic long-term decisions, we're protective of that gross margin because the financials as we just showed with this quarter of 5.6 absorption pace, creating a 14.5% free tax, the financials can handle a slower absorption pace, but when you start discounting your houses tremendously and start throwing a lot of incentives into a short-term bucket to drive that absorption pace, that may or may not be the right long-term decision for the company, and that's what we're really focused on.

<unk> buying bigger land positions, which are which take a lot more capital. There is more timing on development and Thats what were seeing in the market. Today on these 23 communities. These are smaller smaller deals most of it coming from private builders are private developers probably average lot size around 100 lots instead of a few hundred lots less capital intensive.

<unk> risk stress test it and stress testing these deals to meet our margin requirements.

The works at half the absorption pace as a larger community. So really accretive to earnings we can get in there and create closings quicker and that led to us being confident that's where we are on track for our community count growth. This year, we're confident that we're going to add 150 communities by the end of 2024, which is substantial growth in 180 community.

By the end of 2025 all of those developments are already in play it's just a matter of timing of getting them open.

Right. So absorptions their community size risks, which is duration, but how do you think broadly about like the margin differential.

When you introduce the pace.

Shortly you kind of talk about a 300 basis point spread I believe.

Truman Patterson: Okay, perfect, and then I believe you mentioned that you all were maintaining, I think, two to three points of financial incentives, could you help us understand what portion of your buyers are getting a mortgage rate by-down, and are you all doing any sort of forward commitments at all, or is this just kind of a case-by-case basis within incentives of and a consumer can use based on their specific needs? Yeah, it's another great question, Truman.

<unk> developed and the reason I'm asking is if you could just kind of reaffirm that range.

How it plays out with finished lots.

If you can buy finished lots.

Structurally I wonder if theres something that.

You might be more open to depending on how the environment is.

Given your high land positions today.

Yes, no we're more out but so first of all Youre correct that I think the big.

And we've used 300 basis points in our history as a guide I think that's still a reasonable guide I think the biggest objective that we're always cognizant about as when youre doing developments and putting lots on the ground for the purchases of homebuilding you need to make sure you're capturing the development profit as well as the homebuilding profit for taking on that risk.

Truman Patterson: And there's a lot of talk about rate that by the end of the incentives. For clarification, what we've been really focused on is getting the consumer the lowest fixed rate possible every week. And what is that involved over the last couple of quarters is really paying two or three discount points, if you will, to get the lowest rate possible on a week to week basis. And that has been over seven percent here recently, even paying a couple points.

And spending the upfront capital.

While we're talking about on this call the ability to buy finished lots is just a market component for the last 20 years. If we could go out by all finished lots we'd be open minded to that there just wasn't a lot available most of the developers can sell finished lots of smaller private builders at higher margins for the developers so it's really competitive.

Truman Patterson: We have not purchased any big forward commitments, which instead of costing two to three points, may cost 600, 900, 1000 basis points to get a rate materially lower from that. And that is that is very expensive to do. But we're continually to analyze, we're continually to analyze sales week to week. And what incentives are really best for our customers? Okay, perfect.

And we have the balance sheet and we're comfortable developing so we thought that's where the opportunity was for us. That's just the dynamic that's happening in the market as we're seeing more finished lot opportunities that we can buy get into closings quicker.

And the prices for those finished lots and.

Truman Patterson: And then just one final one for me, just in your fourth quarter gross margin guide. Any discussion around there? Does that, you know, contemplate any buyers or incremental rate buy downs incentives needed for any buyers that might get kicked out due to affordability? Or any way you can help us kind of think about, you know, the sensitivity of buyers that might not be able to qualify without a buy down today? Yeah, I think it does contemplate that, Truman.

Let's say they are distressed pricing at or coming down, but there are prices that are very realistic at todays pricing. We can make a good margin on them and we think we should buy them in and get in there and start selling and closing houses.

Alright, I appreciate that I think the fascinating part of the industry.

Last question here.

Could you give a confidence I mean, obviously you've recovered your margins gross.

Gross margins around 'twenty, one 'twenty, one 'twenty two and then they popped up which is great. There's some vacillation here in the quarter wholesale.

Truman Patterson: You know, I think we're all, it's an unknown when rates got to six and a half to seven. We didn't necessarily expect them to go to seven half a rate. And I think from this point forward, you know, where do they go from here? So when we're giving our gross margin guide, you know, we said similar to slightly down. So we think we got 100 to 200 basis points of room, either for mortgage incentives. You know, we'll see where the costs come in. See what percentage of our business comes from the wholesale investors and geographic mix also plays a role in that.

Obviously rates, but could you give us maybe some clarity about obviously input costs have gone down but was this really a function I E price stability.

Obviously your incentives.

It sounds like Youre talking about because I'm, just trying to get a sense of.

This level right.

<unk> gigawatt, what keeps us from going backwards again.

You've talked about the pace, but it's just I'm just trying to get a sense of clarity.

Truman Patterson: All right. Thank you all. Thank you.

Operator: One moment for our next question.

From pricing is what it sounds right to you.

That could go away if that were the case. Thank you.

Ken Zener: And our next question will come from Ken's inner of seaport research. Your line is open, Ken. Afternoon everybody. Good afternoon. So a couple of different angles here. I believe you said you bought finished lots that you saw in the market and was in 23 communities. Is that what you actually said? 23 overall nine of which were finished lots again. So what we said. And how does that play into, and you know, when you find that attractive given your self development bias, to buy raw land and keep that, you know, 300 basis points spread development to, you know, buy it from somebody.

Yes.

You mentioned on the call, but I can tell you.

Can take the input costs can really is that I think are.

Our philosophy Hasnt changed in terms of how we think of the input costs and I think our lot costs as a percentage of our average sales price has been pretty consistent so can run in that 18% to 20% range from a from a lot cost basis. So.

Development costs.

Overall, we've done a great job of budgeting.

Through either contingency or through our estimates to make sure that we're getting the most appropriate standard lot costs thats going to flow through the financials. So I think on the land side.

We feel like we have a pretty good visibility to where we're going to sit there the house costs.

Can fluctuate and certainly Thats, a timing piece as well. So are you starts from the second quarter and into the third or what's going to come through in the fourth quarter and even into the first quarter.

Ken Zener: What makes you go ahead and do this? Is it because you're trying to get something just literally opportunistically came up? And how do you think about that relative to the margin bias you have for your existing land development business for process? Yes. It's really opportunistic. And, you know, that's the positive about being in a more challenging market, you know, more challenging affordability market where, you know, we're seeing lower absorptions than historical past.

And we've seen nominal movement between.

House costs really slightly up to slightly down in most of our markets. So I think the input costs.

There have been about as stable as we've seen we're starting to see lumber come down at least under the last couple of months.

Ken Zener: But we're seeing tremendous opportunities to grow our community count. That's one of the most exciting things that we shared on the call is the ability to buy these new communities instead of buying bigger land positions, which are, which take a lot more capital. There's more timing on development risk. What we're seeing in the market today on these 23 communities, these are smaller, smaller deals, most are coming from private builders or private developers, probably average lot size around 100 lots instead of a few hundred lots.

Ken Zener: Less capital intensive, less risk, stress testing, these deals to meet our larger requirements. Probably works at half the absorption pace is a larger community. So really a creative earnings, we can get in there and create closing quicker. And that led to us being confident that we're on track for our community count growth this year. We're confident that we're going to have 150 communities by the end of 2024, which is substantial growth in 180 communities by the end of 2025.

Which is going to impact closings going into the first quarter. So I think it is more so about evaluating every community.

Looking at it on a community by community basis from a pricing and expected margin. We are doing a fantastic job of our estimating our purchasing team is doing a great job across the country are really working hard on making sure we're getting.

Fair bids multiple bidders on our projects and I think that is paying off for us and we have a very high confidence level on what it's going to cost to build our houses going into the future. So I think that.

Has helped us.

Navigates, making sure that we can maintain margins in.

Our historical range.

Thank you.

Youre welcome.

And one moment for our next question.

Ken Zener: All those developments are already in play, it's just a matter of timing of getting them all. Right, so absorption, there's community size risk, which is duration, but how do you think broadly about like the margin differential, you know, when you when you introduce the pace, you know, historically, you kind of talk about a 300 basis point spread, I believe, for more than you want to develop. And the reason I'm asking is if you could just kind of reaffirm that range and, you know, how it plays out with finished lots, because if you can buy finished lots.

And our next question will be coming from Carl Reichardt of BT AIG Carr. Your line is open thanks.

Hey, Bobby.

Eric I wanted to talk a little bit about sales.

Your team you got a unique operating model when it comes to selling houses and I am curious how you manage the toggle between volume since I assume they're paid on that commission wise versus holding margin and maybe an individual salesperson sells one less house a month.

How do you balance that in terms of motivating and rewarding those folks when you toggle between margin and volume and look more in the direction of margin.

Ken Zener: Yes, structurally, I wonder if there's something that you might be more open to, depending on how the environment is given your high land positions today. Yeah, no, we're more open to it. First of all, you're correct. I think the big thing and we've used 300 basis points in our history as a guide. I guess still a reasonable guide. I think the biggest objective that we're always cognizant about is when you're doing development and putting lots on the ground for the purpose of the home building, you need to make sure you're capturing the development profit as well as the home building profit for taking on that risk and spending the upfront capital.

Yes, Great question, Carl I think the first thing and we talked about earlier on the call is really focus on focusing on the long term.

Even when we hire salespeople and you're paid on commission and we all want to close as many houses as possible every single month, but.

But sometimes getting that additional holding is not worth it because we need to think longer term for example, reducing prices in the communities is something that we want to avoid as much as we can.

Ken Zener: What we're talking about on this call, the ability to buy finished lots is just a market component, you know, for the last 20 years, if we could go out by all finished lots. We'd be open minded to that. There just wasn't a lot available. Most of the developers can sell finished lots to smaller private builders at higher margins for the developers. So it's really competitive and we had the balance sheet and were comfortable developing.

Because when you start reducing prices in the communities. It's just not really good for any anyone that customers are ourselves. They are employees. So thats one thing that we balance because we believe the interest rate volatility is going to settle in some point, it's not there yet and when interest rates are likely to come down what the.

Ken Zener: So we thought that's where the opportunity was for us. That's just a dynamic that's happening in the market as we're seeing more finished lot opportunities that we can buy. I get into closing quicker and the prices, you know, for those finished lots. I want to say they're distressed pricing or coming down, but they're prices that are very realistic at today's pricing. We can make a good margin on them. And we think we should buy them and get in there and start selling and closing houses.

Experts are saying the 30 year mortgage.

We're going to be in really good position in our sales teams across the United States are doing a really good job of working with the customers. Its more challenging now from an affordability standpoint, we're seeing more co signers the ability for a customer they may have to go pay more pay some debt down in order to qualify the customer may have to save up money for.

Downpayment they may have to look at a smaller square footage house and the team of salespeople about 400 of them that nationwide. They all have a pool of customers that they're working with to create those closings in the future. Even if it's more of a headwind on a very short term basis.

Ken Zener: Good. I appreciate that. I think it's a fascinating part of the industry. The last question here. So could you give us confidence? I mean, I obviously recovered your margins, you know, they ran gross margins ran, you know, 21, 21, 22, and then they popped up, which is great. There's some vacillation here in the quarter wholesale. Obviously, right. But could you give us maybe, you know, some clarity about, you know, obviously input costs have gone down, but was this really a function, i.e, your price stability as opposed to your incentives is what it sounds like you're talking about because I'm just trying to get a sense of.

I appreciate that Eric Thanks, and then can we talk about vertical construction times, we've heard sort of mixed commentary from from some of your peers about a return to normalcy can you talk about how long. It's taking you from from from start to CFO right now or are you back to pre pandemic norms.

And if you're not sort of how far away are you.

Yes, Carlos as Charles.

Ken Zener: This level breaks you go up what keeps us from going backwards again, you know, um, you've talked about the pace, but it's just I mean, I'm just trying to get a sense of the clarity if it's just market firm pricing is what it sounds like to you, but that go away if that were the case. Thank you. Yeah, I mean, I think I can take the input costs can really is that, you know, I think our.

We haven't really seen much movement in our build times I would describe them as generally the same I mean, we're constantly working with our trades looking for opportunities to buy.

<unk> spots and schedule, but from a.

But from a construction time standpoint, I mean, we're still.

Running that 80 to 120 days.

Timeframe, depending on the market. So we've seen it very consistent similar to pre pandemic levels. Okay, great. If I could sneak one more do you know offhand what percentage of the orders you took this quarter we're on.

Ken Zener: Our philosophy hasn't changed in terms of how we think of the input costs. I think our lot costs as a percentage of our average sales price has been pretty consistent. So we're going to run in that 18 to 20% range from a lot cost basis. So. Development Costs. Overall, we've done a great job of budgeting through either contingency or through our estimates to make sure that we're getting the most appropriate standard lot cost that's going to flow through the financials.

On homes that were in process already vertically.

Well I think the vast majority other more up world.

Almost all of them had been under construction at some point.

Operator.

Alright, Thanks, a lot I appreciate it.

Thanks Carl.

One moment for our next question.

Ken Zener: So I think on the land side, we feel like we have a pretty good visibility to where we're going to sit there. The house costs can fluctuate, and certainly that's a timing piece as well. So are you starts from the second quarter and into the third or what's going to come through in the fourth quarter and even into the first quarter. And we've seen nominal movement between house costs really slightly up to slightly down in most of our markets.

And our next question will come from Jay Mccanless of Wedbush. Your line is open.

Hey, good afternoon everybody.

My first question.

<unk>.

What do you think kind of I don't want to.

Call it a hiccup, but a little bit slower sales pace in September and now you've seen the rebound in October.

Was that a larger competitor trying to make the year or were there. Some other things going on there that we need to know about.

Ken Zener: So I think the input costs have been about as stable as we've seen. We're starting to see lumber come down at least under the last couple months, which is going to impact closings going into the first quarter. So I think it is more so about evaluating every community, looking at it on a community-by-community basis from a pricing and expected margin. We're doing a fantastic job of our estimating or purchasing teams, doing a great job across the country, really working hard on making sure we're getting fair bids, multiple bidders on our projects.

No I think Jay this is Eric I mean October sales are similar to September end as the low slower than July and August and I don't want to say, it's all about rates, but certainly rates are higher in September and October than they were in July and August were seeing those seven 7% plus rate, which the rate really doesn't matter as we talked about is real.

More about affordability and really what are.

Our success is not really determined on what our competitors are doing we are seeing more builders doing price discount certainly a lot of them are doing mortgage commitments and everybody's got their own view on incentives and we're continuously watching the cost of rent versus the cost of our own based on where rates and pricing is today that that's.

Ken Zener: I think that is paying off for us, and we have a very high confidence level on what it's going to cost to build our houses going into the future. So I think that has helped us navigate making sure that we can maintain margins in our historical range. Thank you. You're welcome.

The difference between those two is probably as high as it's ever been but our team is also our teams across the country are also focused on the reason to buy and it's not a mathematical equation of status Bradshaw equation, all the reasons that that customers buy homes for their lifestyle decisions.

Ken Zener: In one moment for our next question. And our next question will be coming from Carl Reikert of BTIG. Carl, your line is open. Thanks, everybody. Eric, I wanted to talk a little bit about sales. Your team, you've got a unique operating model when it comes to selling houses. And I'm curious how you manage the toggle between volumes since I assume they're paid on that, commission-wise, versus holding margin and maybe an individual salesperson sells one less house a month. How do you balance that in terms of motivating and rewarding those folks when you toggle between margin and volume and look more in the direction of margin? Yeah, great question, Carl.

Those are all still there and that's what we're focused on.

And then.

Asked asking the sales pace question a different way.

Is the goal maybe for the next call. It 12 to 24 months to sell at something at the lower end of normal five to $5 five per month to get you to get the company to 140 communities by year end, rather than trying to brute force open a bunch or buy a bunch of small builders.

Yes, I think I think the focus is on maintaining our historical margins at the highest absorption rate possible I think that would be a way to describe it.

We're.

We're pretty excited about putting up a $5 six absorption pace and create a 14 have pre tax is the absolute dollars with the way our average sales price has increased over the last few years.

Eric Lipar: I think the first thing, and we talked about earlier on the call, is really focusing on the long term. Even when we hire salespeople and you're paid on commission, and we all want to close as many houses as possible every single month, but sometimes getting that additional closing is not worth it because we need to think longer term. For example, reducing prices in the communities is something that we want to avoid as much as we can.

The absolute dollars coming through the income statements very positive for us so the sales pace, whether it's for a month or five a month or six or eight months. During the pandemic is one item that we closed supposedly look at it we all want more sales and closings, but we also will be have to be protective of the margins and make good long term decisions for the company.

Eric Lipar: Because when you start reducing price in the communities, it's just not really good for anyone. The customers are ourselves, our employees. So that's one thing that we balance because we believe the interest rate volatility is going to settle in some point. It's not there yet. And when the interest rates are likely to come down with the experts are saying the 30-year mortgage, we're going to be in really good position. You know, our sales teams across the United States are doing a really good job of working with the customers.

So you are right we are.

We're really excited about our community count growth and we are going to be increasing.

Revenue in closings for the company overall because of all that community count growth irregardless of how many closings per community that a great deal.

Okay got it.

And then the other question I had just are you seeing enough savings on lumber yet to maybe contribute a little bit more.

To doing mortgage rate buy downs or is that kind of flow through like first half of 'twenty four.

Eric Lipar: It's more challenging now from the affordability standpoint. We're seeing more close The ability for a customer, they may have to go pay more, pay some debt down in order to qualify. The customer may have to save up money for a down payment. They may have to look at a smaller square footed house and the team of salespeople, about 400 of them, that nationwide, they all have a pool of customers that they're working with to create those closings in the future, even if it's more of a headwind on a very short-term basis. I appreciate that, Eric. Thanks.

Yes, Jay it's.

I would describe it as relatively nominal at this point I mean, it is a couple of thousand Bucks a month over month, but.

Certainly something that gives us a little bit more flexibility.

We've seen it more in the last two months, which is really looking more into the first quarter of 'twenty four really when by the time those houses get completed and are available to close.

Okay, Great. That's all I had thanks guys.

Charles Merdian: And then can we talk about vertical construction times? We've heard of sort of a mixed commentary from some of your peers about a return to normalcy. Can you talk about how long it's taken you from start to CFO right now, or are you back to pre-pandemic norms? And if you're not sort of how far away are you? Thanks. Yeah, Carl's is Charles. I mean, we haven't really seen much movement in our build times.

Okay.

I would now like to turn the conference back over to Eric for closing remarks.

Yes, thanks, everyone for participating on today's call and for your continued interest in <unk> homes have a great afternoon.

Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

Charles Merdian: I would describe them as generally the same. I mean, we're constantly working with our trades, looking for opportunities to find spots and schedule, but from a construction time standpoint. I mean, we're still running that 80 to 120 days time frame, depending on the market. So we've seen it very consistent. Yeah, similar to pre-pandemic levels. Okay, great.

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Carl Reichardt: If I could think one more. Do you know what percentage of the orders you took this quarter were on homes that were in process already vertically? Well, I think the vast majority of the more I mean, I'm almost all of what went under construction at some point being a spectacular figure. All right. Thanks a lot. Yeah, thanks, Carl.

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Operator: And one moment for our next question.

Yes.

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Jay Mccanless: And our next question will come from Jay McCannis of Wedbush. Your line is open. Hey, good afternoon, everybody. To my first question. What do you think kind of, I don't want to call it a hiccup, but a little bit slower sales pace. And September and now you've seen the rebound in October. Was that a larger competitor trying to make their year or were there some other things going on there that we need to know about?

Okay.

Jay Mccanless: Yeah, I think Jay, this is Eric. I mean, October sales are similar to September and it's a little slower than July and August. And I don't, I don't want to say it's all about rates, but certainly rates are higher in September and October than they were in July and August. We're seeing those seven, seven percent plus rates, which the rate really doesn't matter. As we talked about, it's really more about affordability and really what are, you know, our success is not really determined on what our competitors are doing.

Jay Mccanless: We are seeing more builders doing price discounts. Certainly a lot of them are doing more instrumentments and everybody's got their own view on incentives. And we're, you know, continuously watching the cost of rent versus the cost of own, you know, based on where race and pricing is today, you know, that, that difference between those two is probably as high as it's ever been. But our team is also, our teams across the country are also focused on the reason to buy and it's not a mathematical equation, it's not a spreadsheet equation, all the reasons that that customers buy homes for their lifestyle decisions. Those are all still there and that's what we're hoping.

Eric Lipar: And then, asking the sales-paced question a different way, is the goal maybe for the next call at 12 to 24 months to sell it something at the lower end of normal five to five and a half per month to get the company to 140 communities by year end, rather than trying to brute force, open a bunch or buy a bunch of small builders? Yeah, I think the focus is on maintaining our historical margins at the highest absorption rate possible.

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Eric Lipar: I think that would be a way to describe it. And we're pretty excited about putting up a 5.6 absorption pace and creating 14 half pre-tax to the absolute dollars with the way our average sales price has increased over the last few years. The absolute dollars coming through the income statements very positive for us. So the sales pace, whether it's four months or five months or six or eight months during the pandemic, is one item that we closely look at and we all want more sales and closings but we also have to be protective of the margins and make good long-term decisions for the company.

Sure.

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Eric Lipar: So you're right, we are really excited about our community count growth and we are going to be increasing revenue and closings for the company overall because of all that community count growth. You're regardless of how many closings per community that it equates to. Got it.

Okay.

Yes.

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Jay Mccanless: And then the other question I had, are you seeing enough savings on lumber yet to maybe contribute a little bit more to doing more retreat buy-downs or is that going to flow through like first half of 24? Yeah, Jay, I would describe it as relatively nominal at this point, I mean it is a couple thousand bucks month over month but certainly something that gives us a little bit more flexibility. You know, we've seen it more in the last two months which is really looking more into the first quarter of 24 really when by the time those houses get completed and are available to close. Okay, great.

Okay.

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Jay Mccanless: That's all I had. Thanks, guys. Yeah.

Sure.

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Yes.

Eric Lipar: I would now like to turn the conference back over to Eric for closing remarks. Yeah, thanks everyone for participating on today's call and for your continued interest in L.J. Holmes. Have a great afternoon.

Okay.

Yes.

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Okay.

Operator: Thank you for participating, you may now disconnect. [inaudible] Michael Rehaut, Paul Przybylski, Paul Przybylski, Paul Przybylski, Paul Przybylski[inaudible] Michael Rehaut, Paul Przybylski, Paul Przybylski, Paul Przybylski, Paul Przybylski,[inaudible] Paul Przybylski, Paul Przybylski, Paul Przybylski, Paul Przybylski,[inaudible] . .

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Please.

Welcome to <unk> homes third quarter 2023 conference call today's call is being recorded and a replay will be available on the Companys website at www Dot <unk> dot com after management's prepared comments, there will be an opportunity to ask questions.

At this time I will turn the call over to Joshua <unk>, Vice President of Investor Relations and capital markets.

Thanks, and good afternoon all.

I'll remind listeners that this call contains forward looking statements, including managements views on the company's business strategy outlook plans objectives and guidance for future periods.

You should review our filings with the SEC for.

For a discussion of the risks uncertainties and other factors that could cause actual results to differ from those presented today.

All forward looking statements must be considered in light of those related risks and you should not place undue reliance on such statements, which reflect management's current viewpoints and are not guarantees of future performance on this call. We'll discuss non-GAAP financial measures that are not intended to be considered in isolation or as substitutes for financial information presented.

In accordance with GAAP.

This filing will be accessible on the Sec's website and in the Investor Relations section of our website.

Im joined today by Eric Lieber, LCI, Homes', Chief Executive Officer, and Chairman of the Board and Charles <unk>, Chief Financial Officer and Treasurer.

I will now turn the call over to Eric.

Thanks, Josh Good afternoon, and welcome to our quarterly earnings call.

Joshua Fattor: Michael Rehaut, Paul Przybylski, Paul Przybylski, Paul Przybylski, Charles Merdian[inaudible] Paul Przybylski Paul Przybylski, Paul Przybylski, Paul Przybylski, Paul Przybylski at this time I'll turn the call over to Joshua Fattor, Vice President of Investor Relations in Capital Market. Thanks and good afternoon. I'll remind listeners that this call contains forward-looking statements, including management of use on the company's business strategy, outlook, plans, objectives, and guidance for future periods. Such statements reflect management's current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause those expectations to prove to be incorrect.

Demand remains healthy supported by positive longer term fundamentals, including strong demographic trends and a low supply of affordable homes.

We believe that once the first targets are met and we have a clearer view of the economic landscape interest rate volatility will subside and the market will likely exhibit more stability similar to what we experienced in the years prior to the pandemic.

There is no consensus on whether that takes a couple of quarters or a couple of years.

A great example of this is the <unk> hundred 50, <unk> homes, we closed in the third quarter.

This was a 13, 2% increase over the same period last year and represented a strong pace of five six closings per community per month.

It is possible that if we'd offer significantly more than our typical two to three points of rate buy down assistance, we may have pushed closings higher <unk>.

Beating the closing guidance wasn't the goal hitting the guide while also protecting and expanding margins was our focus.

Additionally, our pre tax profit margin of 14, 5% was also up 340 basis points and was the highest third quarter result in our history outside of the pandemic.

During the third quarter, our top market on a closings per community basis was Dallas Fort worth with $10, one closings per month.

Next with Charlotte with nine five closings, followed by northern California with $8 nine.

Rounding out the top five or Fort Pierce was eight 5% in Houston was seven nine.

Congratulations to the teams in these markets for their strong performance last quarter.

To reiterate every decision currently being made is being considered within the context of our systems based philosophy and represents a careful assessment of its potential to create sustainable long term value for our shareholders.

Along with margin expansion, our continued community count growth is another highlight at.

At the end of the quarter, we reported 106 active communities, a 14% increase from a year ago, and a 4% increase from the prior quarter.

Growing our community count remains a key focus and we still expect to be active in 115 to 125 communities by the end of 2023.

Finally, I'll share my thoughts on additional highlights from the quarter the land market.

Early in 2020 deal for finished lots began to diminish by.

By the end of 2020, there were virtually nonexistent.

However, we have started to see that shift during the third quarter. We approved a total of 23 new projects.

Joshua Fattor: You should review our filings with the SEC for a discussion of the risks uncertainties and other factors that could cause actual results to differ from those presented today. All forward-looking statements must be considered in light of those related risks, and you should not place undue reliance on such statements which reflect management's current viewpoints and are not guaranteed future performance. On this call, we'll discuss non-gap financial measures that are not intended to be considered in isolation, or as substitutes for financial information presented in accordance with GAP.

Nine of which were composed entirely of finished lots.

Many of which will contribute to closings and community count in the back half of 2024.

Though still in the early innings, we're encouraged by this recent trend and has potential to impact future returns.

During the quarter, we closed the deal to acquire substantially all of the land assets of Glenwood homes in North Carolina.

The transaction enabled us to acquire over 1100 lots and one of our best performing regions.

The win win nature of this deal illustrates a positive upside of today's uncertainty Chan.

Joshua Fattor: This filing will be accessible on the SEC's website and end in the investor relations section of our website.

Challenging times can create great opportunities that are structured thoughtfully real value for both parties.

Eric Lipar: I'm joined today by Eric Lieber, LGI Holmes, Chief Executive Officer, and Chairman of the Board, and Charles Meridian, Chief Financial Officer, and Treasurer. I'll now turn the call over to Eric. Thanks, Josh.

We expect similar opportunities to materialize in the future and plan to pursue those that work within our profitability focused long term growth strategy.

Eric Lipar: Good afternoon, and welcome to our quarterly earnings call. I'm pleased to share our exceptional performance during the third quarter of 2023. Our strong results built upon momentum generate in the first half of the year and the positive impact of decisions we made to align our business with unique challenges of today's affordability constrained market. The man remains healthy, supported by positive longer-term fundamentals, including strong demographic trends, and a low supply of affordable homes.

I'll now turn the call over to Charles more details on our financial results.

Eric Lipar: We believe that once the Fed's targets are met and we have a clearer view of the economic landscape, interest rate volatility will subside, and the market will likely exhibit more stability, similar to what we experienced in the years prior to the pandemic. However, there's no consensus on whether that takes a couple of quarters or a couple of years. Therefore, we are laser focused on ensuring that any new term decisions around pricing, incentives, investments, and community openings are weighed not only in the context of their impact to our company's near-term success, but also 5, 10, and 20 years down the road.

Thanks, Eric.

Revenue in the third quarter was $617 $5 million based on 751 homes closed.

Revenue was up 12, 9% and closings were up 13, 2% over the same period last year as we benefited from continued demand and the momentum built during the first half of the year.

Of our total closings 139 were through our wholesale channel representing seven 9% of total closings in line with the second quarter. This year.

Our average selling price of $352678 was slightly lower year over year, but up one 3% sequentially.

Our third quarter gross margin was 25, 7% and adjusted gross margin was 27, 2%.

As Erik highlighted adjusted gross margins improved 340 basis points sequentially compared to the 150 basis point improvement, we guided to on our last call.

Eric Lipar: A great example of this is the 1,751 homes we closed in the third quarter. This was a 13.2 percent increase over the same period last year and represented a strong pace of 5.6 closings per community per month. It is possible that if we'd offered significantly more than our typical two to three points of raised-by-down assistance, we may have pushed closings higher, but beating the closing guidance wasn't the goal. Hitting the guide while also protecting and expanding margins was our focus, and that's exactly what we did, delivering adjusted gross margins of 27.2% representing a sequential improvement of 340 basis points and back within the pre-pandemic range we've been working towards. Additionally, our pre-tax profit margin of 14.5% was also up 340 basis points and was the highest third quarter result in our history outside of the pandemic.

Adjusted gross margin excluded $8 6 million of capitalized interest charged to cost of sales and $767000 related to purchase accounting together, representing 150 basis points.

Combined selling general and administrative expenses for the third quarter were $76 5 million or 12, 4% of revenue.

Selling expenses were $49 8 million or eight 1% of revenue compared to seven 6% in the second quarter of this year.

The 50 basis point sequential increase was primarily due to spending on advertising to drive leads and support new community openings.

General and administrative expenses totaled $26 7 million or four 3% of revenue a level that was in line with the second quarter of this year.

Eric Lipar: During the third quarter, our top market on a closings per community basis was Dallas Fort Worth with 10.1 closings per month. Next was Charlotte with 9.5 closings followed by Northern California with 8.9. Rowning out to top five were four peers with 8.5 and Houston with 7.9. Congratulations to the teams in these markets for their strong performance last quarter. To reiterate, every decision currently being made is being considered within the context of our systems-based philosophy and represents a careful assessment of its potential to create sustainable, long-term value for our shareholders.

We expect advertising and G&A dollars will remain consistent in the fourth quarter, resulting in full year SG&A as a percentage of revenue of around 13%.

Pre tax net income for the quarter was $89 4 million or 14, 5% of revenue a 340 basis point improvement over the prior quarter.

Our effective tax rate was 25, 1% compared to 16, 8% in the same quarter last year.

The increase in the rate was primarily due to fewer federal energy efficient home tax credits.

Recognize this quarter compared to the same period last year.

We expect the rate in the fourth quarter to be similar to the third resulting in a full year effective tax rate of approximately 24%.

Eric Lipar: Along with margin expansion, our continued community count grow is another highlight. At the end of the quarter, we reported 106 active communities, a 14% increase from a year ago, and a 4% increase from the prior quarter. Growing our community count remains a key focus and we still expect to be active in 115 to 125 communities by the end of 2023.

Third quarter reported net income was $67 million or $2 85 per basic share and $2 84 per diluted share.

Third quarter gross orders were 2068 up 6% over the same period last year net orders were $1490, a slight decrease compared to the third quarter of last year.

Eric Lipar: Finally, I'll share my thoughts on additional highlights from the quarter, the land market. Early in 2020, deal for finish-lops began to diminish. By the end of 2020, there were virtually nonexistent. However, we've started to see that shift. During the third quarter, we approved a total of 23 new projects, 9 of which were composed entirely of finish-lops, many of which will contribute to closings and community count in the back half of 2024. They'll still in the early earnings were encouraged by this recent trend and its potential to impact future returns.

Our cancellation rate during the quarter was 27, 9% compared to 21, 3% in the same period last year.

At September 30, our backlog consisted of 1377 homes valued at $510 million.

Of those homes 273, or 19, 8% of our total backlog were related to wholesale contracts with single family rental partners.

Turning to our land position.

Eric Lipar: Along with attractive land opportunities, we've also seen a meaningful increase in M&A opportunities. The majority of these are small private builders looking to leverage longer-dated land pipelines to free up capital to continue to grow their operations.

Eric Lipar: During the quarter, we closed the deal to acquire substantially all of the land assets of Glenwood Homes in North Carolina. The transaction enabled us to acquire over 1100 lots in one of our best-performing regions. On the opposite side of the deal, the seller retained their high-margin backlog and received an inflow of capital that has the potential to insulate them from turbulent credit markets and support their continued success as a homebuilder and developer.

Of those lots 56 301.

Or 78, 1% were owned a decrease of seven 1% year over year and less than 1% sequentially.

Of our owned lots 42000, and 618 were raw land or land under development.

Of the remaining 13683 owned lots 1471 were completed homes, including our information centers and 3009, where homes in progress and 9203 were finished vacant lots.

Eric Lipar: The win-win nature of this deal illustrates a positive upside of today's uncertainty. Challenging times can create great opportunities that have structured thoughtfully old real value for both parties. We expect similar opportunities to materialize in the future and plan to pursue those that work within our profitability focused long-term growth strategy.

We controlled 15808 lots of quarter, and essentially flat year over year, but an increase of 26, 8% sequentially.

With that I'll turn the call over to Josh for a discussion of our capital position.

Charles Merdian: I'll turn the call over to Charles for more details than our financial results. Thanks, Eric. Revenue in the third quarter was $617.5 million based on 1,751 homes close. Revenue was up 12.9% and closings were up 13.2% over the same period last year as we benefited from continued demand and the momentum bill during the first half of the year. Of our total closings, 139 were through our wholesale channel, representing 7.9% of total closings in line with the second quarter this year.

Thanks Charles.

As of September 30, we had just under $1 2 billion of notes payable outstanding including $904 $2 million drawn on our credit facility.

Our debt to capital ratio was 39, 8% and our net debt to capital ratio was 38, 8%.

Total liquidity at the end of the quarter was $243 2 million, including $47 million of cash on hand, and $196 2 million of available capacity under our credit facility.

At September 30, our stockholders' equity was over $1 8 billion.

And our book value per share was <unk> $76 50.

An increase of 10, 9% over the same time last year.

At this point I'll turn the call back over to Eric.

Thanks, Josh on Friday, we expect to report October closings of 567 homes up 5% compared to last October and 108 active communities.

Based on those deliveries and our sales pace in October that was consistent with this time last year, we expect to achieve an increase in closings year over year in the fourth quarter.

Based on this we are tightening the range of our expected closings for the year. We now expect to close between 60 707000 homes at an average selling price between 350 and $355000 for the full year.

Charles Merdian: Adjusted gross margin excluded $8.6 million of capitalized interest charged to cost of sale and $767,000 related to purchase accounting together representing 150 basis points. Combined selling general and administrative expenses for the third quarter were $76.5 million or $12.4% of revenue. Selling expenses were $49.8 million or $8.1% of revenue compared to 7.6% in the second quarter of this year. The 50 basis points sequential increase was primarily due to spending on advertising to drive leads and support new community openings.

Margins in the fourth quarter are expected to be similar to slightly lower than what we delivered in the third quarter, depending on several factors, including geographic product and retail versus wholesale mix as well as incentive levels offered in the fourth quarter related to our make your move national sales event.

Based on those variables and our performance in the third quarter, we are raising the low end of our margin guidance by 150 basis points, while holding the top end of study.

We now expect full year gross margins between 23, and 23, 5% and adjusted gross margins between 24, five and 25%.

Charles Merdian: General and administrative expenses totaled $26.7 million or $4.3% of revenue, a level that was in line with the second quarter of this year. We expect advertising and GNA dollars will remain consistent in the fourth quarter resulting in full year SGNA at the percentage of revenue of around 13%. Pre-tax net income for the quarter was $89.4 million or $14.5% of revenue, a 340 basis point improvement over the prior quarter. Our effective tax rate was 25.1%, compared to 16.8% in the same quarter last year.

Community Count is building as I mentioned earlier, we continue to expect 115 to 125 active communities at year end.

I'll conclude by saying again, how proud I am of our strong third quarter results and our success in returning profitability metrics back to pre pandemic levels. Our continued success is the result of outstanding execution by our teams around the country.

Charles Merdian: The increase in the rate was primarily due to fewer federal energy efficient home tax credits. Recognize this quarter compared to the same period last year. We expect the rate in the fourth quarter to be similar to the third resulting in a full year effective tax rate of approximately 24%.

Charles Merdian: Third quarter reported net income was $67 million or $2.85 per basic share and $2.84 per polluted. Chair. Third quarter growth orders were 2068, up 6% over the same period last year. Net orders were 1,490, a slight decrease compared to the third quarter of last year. Our cancellation rate during the quarter was 27.9% compared to 21.3% in the same period last year. At September 30th, our backlog consisted of 1,377 homes valued at $510 million. Of those homes, 273 or 19.8% of our total backlog were related to wholesale contracts with single-family rental partners.

Thank you for continued commitment to our company and to our customers. We will now open the call for questions.

And one moment for your first question.

And our first question will come from Michael Rehaut of Jpmorgan. Your line is open Michael.

Hi, guys. This is Andrew <unk> on for Mike Congrats on an impressive quarter.

I just wanted to ask if maybe you can bucket out.

And then maybe quantify more specifically what drove the gross margin be.

And maybe.

If there was a lean in one direction or the other.

Charles Merdian: Turning to our land position. At September 30th, our portfolio consisted of 72,109 owned and controlled plots, a decrease of 5.7% year-over-year, but an increase of 4.2% sequentially driven by an increase in the availability of fairly valued land deals during the quarter. Of those plots, 56,301 or 78.1% were owned, a decrease of 7.1% year-over-year and less than 1% sequentially. Of our owned plots, 42,618 were robbed land or land under development. Of the remaining 13,683 owned plots, 1,471 were completed homes, including our information centers, and 3,09 were homes in progress, and 9,203 were finished vacant lots. We controlled 15,808 lots of quarter-end, essentially flat year-over-year, but an increase of 26.8% sequentially.

Yes, I think Andrew this is Eric I can start and Charles can add if he likes the gross margin beats comes from a couple of different factors. One is we held pricing strong results still in a very strong demand environment low supply of inventory out there.

Able to hold pricing and raise prices in a substantial number of communities. The other thing that happened during the quarter is when we guided to $25 three and beat that as we then have a lot of wholesale closings or gave gave room for more wholesale closings to come through in the quarter.

Which didn't happen I would point to those two as the two primary reasons.

Okay.

That's really good color.

Maybe just one more.

How maybe widespread.

Price increases that you guys are sold.

Yes.

Yes, I would say in October we did our Q4 pricing, we proudly raised prices in a quarter to a third of our communities.

Joshua Fattor: With that, I'll turn the call over to Josh for a discussion of our capital position. Thanks, Charles. As of September 30th, we had just under $1.2 billion of notes payable outstanding, including $904.2 million drawn on our credit facility. Our debt-to-capital ratio was 39.8%, and our net debt-to-capital ratio was 38.8%. Total liquidity at the end of the quarter was $243.2 million, including $47 million of cash on hand, and $196.2 million of available capacity under our credit facility.

Okay.

And maybe if you could quantify the magnitude or.

Yes, they're very slight just just to quantify the strong demand for <unk> and also we did have some some house cost increases, which we need to raise prices to maintain margins as well.

Thanks, so much for Blackstone.

Welcome.

And one moment for our next question.

Our next question will be coming from Truman Patterson.

Of Wolfe Your line is open.

Hey, good afternoon, everyone and thanks for taking my questions.

Joshua Fattor: At September 30th, our stockholder's equity was over 1.8 billion dollars. Our book value for share was $76.50, an increase of 10.9% over the same time last year.

First Erik I'm, hoping to understand how your balance.

Balancing.

Eric Lipar: At this point, I'll turn the call back over to Eric. Thanks, Josh. On Friday, we expect to report October closings of 567 homes, of 5% compared to last October in 108 active means. Based on those deliveries and a sales face in October that was consistent with this time last year, we expect to achieve an increase in closings year-over-year in the fourth quarter. Based on this, we are tightening the range of our expected closings for the year.

Ed.

At the sake of absorption pace given just all of this community growth that you all have in the pipeline.

Yes, it's a great question chairman and good afternoon, starting again with very strong demand, but certainly.

Eric Lipar: We now expect to close between $6,700 and $7,000 homes, at an average selling price between $350,000 and $355,000 for the full year, here. Marges in the fourth quarter are expected to be similar to slightly lower than what we delivered in the third quarter, depending on several factors, including geographic, product, and retail versus wholesale mix, as well as incentive levels offered in the fourth quarter related to our Make Your Move National Sales event.

Portability is getting constrained whether its raising prices to offset additional costs, which I should also mention the development costs are generally increasing as well or the increasing and rates.

And were cautious about.

Throwing too many incentive dollars, where the customers because of the incentives are really short term and there is no question in our mind, if we put a lot more dollars into large forward commitments are buying down rates.

That would improve sales temporarily but we want to make sure we're making good strategic long term decisions. We're protective of that gross margin because the financials as we just show, but this quarter at five six absorption pace, creating a 14, 5% pre tax the financials can handle a slower absorption pace.

Eric Lipar: Based on those variables, and our performance in the third quarter, we are raising the low end of our margin guidance by 150 basis points while holding the top end study. We now expect full-year gross margins between 23 and 23 and a half percent, and adjusted gross margins between 24 and a half and 25 percent. Community count is building. As I mentioned earlier, we continue to expect 115 to 125 active communities at your end.

But when you start discounting your houses tremendously and start there aren't a lot of incentives into a short term bucket.

Eric Lipar: As the closing thought, I'll add that, based on our existing land pipeline and views on development timing, we now expect to end 2024 with over 150 communities and to be operating in over 180 communities by the end of 2025.

To drive that absorption pace that may or may not be the right long term decision for the company and Thats what were really focused on.

Okay perfect.

Perfect and then.

I believe you mentioned that you all were maintaining I think two to three points of financial incentives could you.

Help us understand what portion of your buyers.

Eric Lipar: I'll conclude by saying again how proud I am of our strong third quarter results and our success at returning profitability metrics back to pre-pandemic levels. Our continued success is the result of outstanding execution by our teams around the country. Despite volatile rate movements, market uncertainty, and the occasional need to move between projects due to the timing of new openings, our dedicated employees continue to construct, sell, and close homes, while delivering the best service in the industry. Thank you for continued commitment to our company and to our customers.

Or getting a mortgage REIT.

Pay down.

Are you all doing any sort of forward commitments at all or is this just kind of.

A case by case basis with incentives that the consumer can use based on their specific needs.

Yes, another great question Jerome and there is a lot of talk about rate buy downs and incentives.

A clarification, what we've been really focused on is getting the consumer the lowest fixed rate possible every week and what has that evolved over the last couple of quarters is really paying two or three discount points. If you will to get the lowest rate possible on a week to week basis.

Operator: We'll now open the call for questions. Certainly, as a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And one moment for our first question.

That has been over 7% here recently, even paying a couple of points.

We have not purchased at a bake forward commitments, which is set up costs a two to three points may cost 600, 901000 basis points. So we get a rate materially lower from that and that is that is very expensive to do but we're continuing to analyze our continually to annualized sales week to week and what wasn't.

Michael Rehaut: And our first question will come from Michael Rahot of J.P. Morgan. Your line is open, Michael.

Andrew Alfie: Hi guys, this is Andrew Alfie from my contract on the process quarter. I just wanted to ask you if maybe you can bucket out the maybe quantify more, to think we what drove the gross margin beat, and maybe if there was a lead in one direction or the other. I think Andrew, this is Eric. I can start in Charleston ad if you'd like. I think the gross margin beat comes from a couple of different factors.

<unk> is really best for our customers.

Okay Perfect and then just one final one for me just in your fourth quarter gross margin guide.

Any discussion around there does that contemplate any buyers.

Or incremental rate buy downs incentives needed for any buyers that might get kicked out due to affordability or any way you can help us kind of think about the sensitivity of buyers.

Might not be able to qualify without a buy down today.

Andrew Alfie: One is we held pricing strong. We're still in a very strong demand environment, low supply of inventory out there, and able to hold pricing and raise prices in a substantial number of communities. The other thing that happened during the quarter is when we guided to 25-3 and beat that, is we didn't have a lot of wholesale closings or gave room for more wholesale closings to come through in the quarter, which didn't happen.

So we're giving our gross margin guide.

We said similar to slightly down so I think we got a 100 to 200 basis points of room, either for mortgage incentives, we will see where the costs.

Costs come in see what percentage of our business comes from the wholesale investors on geographic mix also plays a role in that.

Andrew Alfie: I've pointed those two as the two primary reasons. That's a really good color, and then maybe just one more. How many widespread were these price increases that you guys are seeing? Yeah, I would say in October we did our Q4 pricing, we probably raised prices in a quarter to a third of our communities. Okay, and maybe if you can quantify the magnitude? Yeah, they're very slight, just to quantify the strong demand communities, and also we did have some house costs increases, which we need to raise prices to maintain margins as well. Thanks so much, I'll pass it on. You're welcome. In one moment for our next question.

Alright, Thank you all.

Thank you.

One moment for our next question.

Okay.

And our next question will come from Ken Zenner of Seaport Research. Your line is open Ken.

Afternoon, everybody.

Good afternoon.

<unk>.

So couple of different angles here.

I believe you said you bought finished lots that you saw in the market and with a 23 communities is that what you actually said.

23 overall nine of which were finished lots again, so what was that.

And how does that.

Play into.

When you find that attractive given your.

Truman Patterson: Our next question will be coming from Truman Patterson of Wolf, Yelena's Open Truman.

Self development bias.

Tobira lab and keep that.

Truman Patterson: Good afternoon everyone, and thanks for taking my questions. First, Eric, I'm hoping to understand how you're balancing your historically elevated gross margin, which you all were able to rebuild kind of back to normalize levels this quarter. By balancing that with the recent spike in rates and affordability constraints, are you all going to continue to favor price a bit more at the sake of absorption pace given just all this community growth that you all have in the pipeline?

300 basis points spread development too.

Buy it from somebody what makes you go ahead and do that is that because youre trying to get.

Having just literally opportunistically came up and how do you think about that relative to that the margin bias you happier existing land development business for process, yes.

It's really opportunistic and.

That's the positive about being in a more challenging market a more challenging affordability market, where we're seeing lower absorptions than historical past, but we're seeing tremendous opportunities to grow our community down 90, that's one of the most exciting things that we shared on the call is the ability to buy these new communities.

Truman Patterson: Yeah, that's a great question, Truman, and good afternoon, starting again with very strong demand, but certainly affordability is getting constrained, whether it's raising prices to offset additional costs, which I should also mention the development costs are generally increasing as well, or the increasing in rates. And we're cautious about throwing too many incentive dollars with the customers, because incentives are a really short term, and there's no question in our mind if we put a lot more dollars into large for commitments or buying down rates.

Instead of buying bigger land positions, which are which take a lot more capital. There is more timing on development risk what we're seeing in the market today on these 23 communities. These are smaller smaller deals most of it coming from private builders are private developers probably average lot size around 100 lots instead of a few hundred lots less capital intensive.

Truman Patterson: That would improve sales temporarily, but we want to make sure we're making good strategic long term decisions were protective of that gross margin because the financials as we just showed with this quarter at 5.6 absorption pace, creating a 14.5% three tax, the financials can handle a slower absorption pace. But when you start discounting your houses tremendously, and start throwing a lot of incentives into a short term bucket to drive that absorption pace, that may or may not be the right long term decision for the company, and that's what we're really focused on.

Less risk stress test it stress testing these deals to meet our margin requirements.

Probably works at half the absorption pace as a larger community. So really accretive earnings we can get in there and create closings quicker and that led to us being confident that's where we are on track for our community count growth. This year, we're confident that we're going to have a 150 communities by the end of 2024, which is substantial growth in 180 <unk>.

<unk> by the end of 2025 all of those developments are already in play it's just a matter of timing of getting them open.

Right. So absorptions their community size risks, which is duration, but how do you think broadly about like the margin differential.

We introduced the pace.

Shortly you kind of talk about a 300 basis point spread I believe.

Truman Patterson: Okay, perfect, and then I believe you mentioned that you all were maintaining, I think, two to three points of financial incentives. Could you help us understand what portion of your buyers are getting a mortgage rate by down? And are you all doing any sort of forward commitments at all, or is this just kind of a case by case basis within incentives? and a consumer can use based on their specific needs. Yeah, it's another great question, Truman.

For Mark do you want to achieve develop and the reason I'm asking is if you could just kind of reaffirm that range.

How it plays out with finished lots.

If you can buy finished lots.

Structurally I wonder if theres something that.

You might be more open to depending on how the environment is.

Given your high land positions today.

Yes, no. We're more open so first of all Youre correct that I think the big thing and we've used 300 basis points in our history as a guide I think that's still a reasonable guide.

Truman Patterson: And there's a lot of talk about rate that by the end of the incentives. For clarification, what we've been really focused on is getting the consumer the lowest fixed rate possible every week. And what is that involved over the last couple of quarters is really paying two or three discount points if you will to get the lowest rate possible on a week-to-week basis. And that has been over, you know, seven percent here recently, even paying a couple points.

Biggest objective that we're always cognizant about as when youre doing developments and putting lots on the ground for the purchase of the homebuilding you need to make sure you're capturing the development profit as well as our homebuilding profit for taking on that risk and spending the upfront capital.

We're talking about on this call the ability to buy finished lots is just a market component for the last 20 years. If we could go out by all finished lots we'd be open minded to that there just wasn't a lot available most of the developers can sell finished lots of smaller private builders at higher margins for the developers so it's really competitive in.

Truman Patterson: We have not purchased any big forward commitments, which instead of costing two to three points, may cost, you know, 600, 900, 1000 basis points to get a rate materially lower from that. And that is very expensive to do. But we're continually to analyze, we're continually to analyze sales week-to-week and what incentives are really about for our customers. Okay, perfect.

We have the balance sheet and we're comfortable developing so we thought that's where the opportunity was for us. That's just the dynamic that's happening in the market as we're seeing more finish lot of opportunities that we can buy get into closings quicker.

And the prices for those finished lots.

Truman Patterson: And then just one final one for me, just in your fourth quarter gross margin guide. Any discussion around there? Does that, you know, contemplate any buyers or incremental rate buy downs in incentives needed for any buyers that might get kicked out due to affordability or any way you can help us kind of think about, you know, the sensitivity of buyers that might not be able to qualify without a buy down today?

Let's say they are distressed pricing or coming down but their prices that are very realistic at todays pricing. We can make a good margin on them and we think we should buy them in and get in there and start selling and closing houses.

Alright, I appreciate that I think the fascinating part of the industry.

Last question here.

Chuck.

You guys have confidence I mean, obviously you've recovered your margins gross.

Gross margins ran 21 in 'twenty, one 'twenty two and then they popped up which is great. There's some vacillation here in the quarter wholesale.

Truman Patterson: Yeah, I think it does contemplate that, Truman, you know, I think we're all, it's an unknown. When rates got to six and a half to seven, we didn't necessarily expect them to go to seven to half a rate. And I think from this point forward, you know, where do they go from here? So when we're giving our girls margin guide, you know, we said similar to slightly down. So I think we got 100 to 200 basis points of room, either for mortgage incentives, you know, we'll see where the costs come in, see what percentage of our business comes from the wholesale investors and geographic mix also plays a role in that.

Obviously rates, but could you give us maybe some clarity about obviously input costs have gone down but was this really a function I E price stability.

Obviously your incentives.

It sounds like Youre talking about because I'm, just trying to get a sense of.

This level right.

<unk> gigawatt, what keeps us from going backwards again.

<unk>.

Truman Patterson: All right. Thank you all. Thank you.

You've talked about the pace, but it's just I'm just trying to get a sense of clarity.

Ken Zener: One moment for our next question. And our next question will come from Ken's[inaudible] Right, so, absorption, there's community size risk, which is duration, but how do you think broadly about like the margin differential, you know, when you, when you introduce the pace, you know, historically, you kind of talk about a 300 basis point spread, I believe, for more than you want to develop, and the reason I'm asking is if you could just kind of reaffirm that range and, you know, how it plays out with finished lots, because if you can buy finished lots, structurally, I wonder if there's something that you might be more open to, depending on how the environment is given your high land positions today. Yeah, no, we're more open to it.

From pricing is what it sounds like to you.

That could go away if that were the case. Thank you.

Yes.

<unk> mentioned on the call.

Can take the input costs can really is that I think are.

Development costs.

Overall, we've done a great job of budgeting.

Through either contingency or through our estimates to make sure that we're getting the most appropriate standard lot costs thats going to flow through the financials. So I think on the land side.

We feel like we have a pretty good visibility to where we're going to sit there at the house.

Costs.

Can fluctuate and certainly that's a timing piece as well. So are you starts from the second quarter and into the third or what's going to come through in the fourth quarter and even into the first quarter.

And we've seen nominal movement between.

The house costs really slightly up to slightly down in most of our markets. So I think the input costs.

It has been about as stable as we've seen we're starting to see lumber come down at least under the last couple of months.

Which is going to impact closings going into the first quarter. So I think it is more so about evaluating every community.

Looking at it on a community by community basis from a pricing and expected margin. We are doing a fantastic job of our estimate our purchasing team is doing a great job across the country are really working hard on making sure we're getting.

Fair bids multiple bidders on our projects and I think that is paying off for us and we have a very high confidence level on what it's going to cost to build our houses going in the future. So I think that.

Has helped us.

NAV again.

Making sure that we can maintain margins in our historical range.

Thank you.

Youre welcome.

One moment for our next question.

And our next question will be coming from Carl Reichardt of BT AIG Carr Your line is open.

Hey, Buddy.

Eric I wanted to talk a little bit about sales.

Your team you got a unique operating model when it comes to selling houses.

And I'm curious how you manage the toggle between volume since I assume they're paid on that commission wise versus holding margin and maybe an individual salesperson sells one less house a month.

Are you balanced that in terms of motivating and rewarding those folks when you toggle between margin and volume.

Look more in the direction of margin.

Yes, Great question, Carl I think the first thing and we talked about earlier on the call is really focus on focusing on the long term.

Eric Lipar: First of all, you're correct, I make the big thing, and we've used 300 basis points in our history as a guide and I guess still a reasonable guide. I think the biggest objective that we're always cognizant about is when you're doing developments and putting lots on the ground for the purpose of the home building, you need to make sure you're capturing the development profit as well as the home building profit for taking on that risk and spending the upfront capital.

Even when we hire salespeople and you're paid on commission and we all want to close as many houses as possible every single month.

Eric Lipar: What we're talking about on this call, the ability to buy finished lots is just a market component, you know, for the last 20 years, if we could go out by all finished lots, we'd be open-minded to that. There just wasn't a lot available. Most of the developers can sell finished lots to smaller private builders at higher margins for the developers, so it's really competitive and we had the balance sheet and were comfortable developing, so we thought that's where the opportunity was for us.

Because when you start reducing prices in the community. It's just not really good for any anyone that customers are ourselves. They are employees. So thats one thing that we balance because we believe the interest rate volatility is going to settle in some point, it's not there yet and when interest rates are likely to come down what.

Experts are saying the 30 year mortgage.

Eric Lipar: That's just the dynamic that's happening in the market is we're seeing more finished lot opportunities that we can buy, get into closing quicker and the prices, you know, for those finished lots. I want to say they're distressed pricing or coming down, but they're prices that are very realistic at today's pricing, we can make a good margin on them, and we think we should buy them and get in there and start selling and closing houses.

We're going to be in really good position in our sales teams across United States are doing a really good job of working with the customers. Its more challenging now from an affordability standpoint, we're seeing more co signers the ability for a customer they may have to go pay more pay some debt down in order to qualify the customer may have to save up money.

For a down payment they may have to look at a smaller square footage house and the team of salespeople about 400 of them that nationwide. They all have a pool of customers that they're working with to create those closings in the future. Even if it's more of a headwind on a very short term basis.

Ken Zener: Good, I appreciate that. I think it's a fascinating part of the industry.

Eric Lipar: Last question here. Could you give us confidence, I mean, I obviously recovered your margins, you know, they ran gross margins ran, you know, 21, 21, 22, and then they popped up, which is great. There's some vacillation here in the quarter wholesale, you know, obviously rates, but could you give us maybe, you know, some clarity about, you know, obviously input costs have gone down, but was this really a function, i.e, your price stability as opposed to your incentives is what it sounds like you're talking about because I'm just trying to get a sense of this level.

And if youre not sort of how far away are you.

Yes.

Yes, Carlos as Charles I mean, we haven't really seen much movement in our build times I would describe them as generally the same I mean, we're constantly working with our trades looking for opportunities to <unk>.

Eric Lipar: What keeps us from going backwards again, you know, you've talked about the pace, but it's just, I mean, I'm just trying to get a sense of clarity if it's just market firm pricing is what it sounds like to you, but that go away if that were the case, thank you. Yeah, I mean, I think I can take the input costs can really is that, you know, I think our. Our philosophy hasn't changed in terms of how we think of the input costs, I think our lot costs as a percentage of our average sales price has been pretty consistent.

Find spots and scheduled from a.

But from a construction time standpoint, I mean, we're still.

Running that 80 to 120 days.

Timeframe, depending on the market. So we've seen it very consistent yes, similar to pre pandemic levels, yes, okay, great. If I could sneak one more do you know offhand what percentage of the orders you took this quarter we're on.

Homes that were in process already vertically.

Eric Lipar: So we're going to run in that 18 to 20% range from a, from a lot cost basis. Development Costs. Overall, we've done a great job of budgeting through either contingency or through our estimates to make sure that we're getting the most appropriate standard lot cost that's going to flow through the financials. So I think on the land side, we feel like we have a pretty good visibility to where we're going to sit there.

Yeah.

Well I think the vast majority other more equal.

Almost all of what's been under construction at some point being a spec builder.

Alright, Thanks, a lot I appreciate it.

Thanks Dara.

And our next question.

And our next question will come from Jay Mccanless of Wedbush. Your line is open.

Eric Lipar: The house costs can fluctuate, and certainly that's a timing piece as well. So are you starts from the second quarter and into the third or what's going to come through in the fourth quarter and even into the first quarter. And we've seen nominal movement between house costs really slightly up to slightly down in most of our markets. So I think the input costs have been about as stable as we've seen. We're starting to see lumber come down at least under the last couple months, which is going to impact closings going into the first quarter.

Hey, good afternoon everybody.

My first question.

<unk>.

What do you think kind of.

Call it a hiccup, but little bit slower sales pace in September and now you've seen the rebound in October.

Was that a larger competitor trying to make the year or were there. Some other things going on there that we need to know about.

No I think Jay this is Eric I mean October sales are similar to September and it's a little slower than July and August and I don't want to say, it's all about rates, but certainly rates are higher in September and October than they were in July and August were seeing those seven 7% plus rate, which the rate really doesn't matter as we talked about is real.

Eric Lipar: So I think it is more so about evaluating every community, looking at it on a community-by-community basis from a pricing and expected margin. We're doing a fantastic job of our estimating or purchasing teams, doing a great job across the country, really working hard on making sure we're getting fair bids, multiple bidders on our projects. I think that is paying off for us and we have a very high confidence level on what it's going to cost to build our houses going in the future. So I think that has helped us navigate making sure that we can maintain margins in our historical range.

More about affordability and really what are.

Eric Lipar: Thank you.

Operator: You're welcome.

The difference between those two is probably as high as it's ever been but our team is also our teams across the country are also focus on the reason to buy and it's not a mathematical equation is not a spreadsheet equation all the reasons that that customers buy homes for their lifestyle decisions.

Carl Reichardt: In one moment for our next question. And our next question will be coming from Karl Reichert of BTIG. Karl, your line is open. Thanks everybody. Eric, I wanted to talk a little bit about sales. Your team, you've got a unique operating model when it comes to selling houses. And I'm curious how you manage the toggle between volume since I assume they're paid on that commission-wise versus holding margin and maybe an individual salesperson sells one less house a month. How do you balance that in terms of motivating and rewarding those folks when you toggle between margin and volume and look more in the direction of margin? Yeah, great question, Karl.

Those are all still there and that's what we're focused on.

And then.

Asked asking the sales pace question a different way.

Is the goal maybe for the next call. It 12 to 24 months to sell at something at the lower end of normal five to five five per month to get you to get the company to 140 communities by year end, rather than trying to brute force opened a bunch or buy a bunch of small builders.

Yes, I think I think the focus is on maintaining our historical margins at the highest absorption rate possible I think that would be a way to describe it.

We're.

We're pretty excited about putting up a $5 six absorption pace and create a 14 have pre tax or the absolute dollars with the way our average sales price has increased over the last few years.

Eric Lipar: I think the first thing and we talked about earlier on the call is really focusing on the long term. Even when we hire sales people and you're paid on commission and we all want to close as many houses as possible every single month. But sometimes getting that additional closing is not worth it because we need to think longer term. For example, reducing prices in the communities is something that we want to avoid as much as we can because when you start reducing price in the communities, it's just not not really good for anyone.

The absolute dollars coming through the income statements very positive for us so the sales pace, whether it's for a month or five a month or six or eight months. During the pandemic is why no. One item that we closed supposedly look at and we all want more sales and closings, but we also will be have to be protective of the margins and make good long term decisions for the company.

So you are right we are.

We're really excited about our community count growth and we are going to be increasing.

Eric Lipar: The customers are ourselves, our employees. So that's one thing that we balance because we believe the interest rate volatility is going to settle in some point. It's not there yet. And when the interest rates are likely to come down with the experts are saying the 30-year mortgage, we're going to be in really good position. Our sales teams across the United States are doing a really good job of working with the customers.

Revenue in closings for the company overall because of all of that community count growth irregardless of how many closings per community that a great deal.

Okay got it.

And then the other question I had just are you seeing enough savings on lumber yet to maybe contribute a little bit more.

To doing mortgage rate buy downs or is that kind of flow through like first half of 'twenty four.

Eric Lipar: It's more challenging now from the affordability standpoint. We're seeing more close The ability for a customer, they may have to go pay more, pay some debt down in order to qualify. The customer may have to save up money for a down payment. They may have to look at a smaller square footage house and the team of salespeople, about 400 of them, that nationwide. They all have a pool of customers that they're working with to create those closings in the future, even if it's more of a headwind on a very short-term basis. I appreciate that, Eric.

Yes, Jay it's it's.

I would describe it as relatively nominal at this point I mean, it is a couple of thousand Bucks a month over month, but <unk>.

Certainly something that gives us a little bit more flexibility.

We've seen it more in the last two months, which is really looking more into the first quarter of 'twenty four really when by the time those houses get completed and are available to close.

Okay, Great. That's all I had thanks guys.

Charles Merdian: Thanks. Can we talk about vertical construction times? We've heard of sort of a mixed commentary from some of your peers about a return to normalcy. Can you talk about how long it's taken you from start to CFO right now or you back to pre-pandemic norms, and if you're not sort of how far away are you? Thanks. Yeah, Carl's is Charles. I mean, we haven't really seen much movement in our build times.

Okay.

I would now like to turn the conference back over to Eric for closing remarks.

Yes, thanks, everyone for participating on today's call and for your continued interest in <unk> homes have a great afternoon.

Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

Charles Merdian: I would describe them as generally the same. I mean, we're constantly working with our trades, looking for opportunities to find spots and schedule from a construction time standpoint. I mean, we're still running that 80 to 120 days time frame, depending on the market. So we've seen it very consistent. Yeah, similar to pre-pandemic levels. Yeah.

Carl Reichardt: Okay. Great. If I could think one more. Do you know what percentage of the orders you took this quarter were on homes that were in process already vertically? Well, I think the vast majority of the moral world, I mean, I'm almost all of what would have been under construction at some point, being a spec builder. All right. Thanks a lot, though.

Carl Reichardt: I appreciate it. Thanks, Carl.

Jay Mccanless: And one moment for our next question. And our next question will come from Jay McCannis of Wedbush. Your line is open. Hey, good afternoon, everybody. To my first question, what do you think kind of, I don't want to call it a hiccup, but a little bit sore sales base in September. Now you've seen the rebound in October. Was that a larger competitor trying to make their year or were there some other things going on there that we need to know about?

Jay Mccanless: No, I think Jay, this is Eric. I mean, October sales are similar to September and it's a little slower than July and August. And I don't want to say it's all about rates, but certainly rates are higher in September and October than they were in July and August. We're seeing those seven, seven percent plus rates. Which the rate really doesn't matter as we talked about. It's really more about affordability and really what our, you know, our success is not really determined on what our competitors are doing.

Jay Mccanless: We are seeing more builders doing price discounts. Certainly a lot of them are doing more instrumentments and everybody's got their own view on incentives. And we're, you know, continuously watching the cost of rent versus the cost of own, you know, based on where race and pricing is today, you know, that difference between those two is probably as high as it's ever been. But our team is also, our teams across the country are also focused on the reason to buy and it's not a mathematical equation. It's not a spreadsheet equation. All the reasons that that customers buy homes for their lifestyle decisions. Those are all still there and that's what we're hoping.

Eric Lipar: And then asking the sales-paced question a different way, is the goal maybe for the next 12 to 24 months to sell it something at the lower end of normal five to five and a half per month to get the company to 140 communities by year end rather than trying to breed force, open a bunch or buy a bunch of small builders? Yeah, I think the focus is on maintaining our historical margins at the highest absorption rate possible.

Eric Lipar: I think that would be a way to describe it. And we're pretty excited about putting up a 5.6 absorption pace and creating 14 half pre-tax because the absolute dollars with the way our average sales price has increased over the last few years, the absolute dollars coming through the income statements very positive for us. So the sales pace, whether it's four months or five months or six or eight months during the pandemic, is one item that we closely look at and we all want more sales and closings, but we also have to be protective of the margins and make good long-term decisions for the company.

Eric Lipar: But you're right, we are really excited about our community cow growth and we are going to be increasing revenue and closings for the company overall because of all that community cow growth, regardless of how many closings per community that equates to. Got it.

Eric Lipar: And then the other question I had, are you seeing enough savings on lumber yet to maybe contribute a little bit more to doing more trade buy-downs or is that going to flow through like first half of 24? Yeah, Jay, I would describe it as relatively nominal at this point. I mean, it is a couple thousand bucks month over month, but certainly something that gives us a little bit more flexibility. You know, we've seen it more in the last two months, which is really looking more into the first quarter of 24, really when by the time those houses get completed and are available to close. Okay, great.

Jay Mccanless: That's all I have. Thanks, guys. Yeah.

Operator: Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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