Q3 2024 Smith Douglas Homes Corp Earnings Call
Thank you for standing by my name is Rebecca and I will be your conference operator today at this time I would like to welcome everyone to the Smith Douglas homes third quarter 'twenty 'twenty four earnings call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again.
Speaker Change: I would now like to turn the call over to Joe Thomas Senior Vice President of accounting and Finance. Please go ahead.
Joe Thomas: Good morning, and welcome to the earnings Conference call for Smiths Douglas homes, We issued a press release. This morning outlining our results for the third quarter of 2024, which we'll discuss on today's call and which can be found on our website at investors Dot Smith Douglas dot com or by selecting the Investor Relations link at the bottom of our homepage.
Joe Thomas: Please note this call will be simultaneously webcast on the Investor Relations section of our website.
Speaker Change: Before the call begins I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating goals and performance are forward looking statements actual results could differ materially from such statements due to known and unknown risks uncertainties and other important factors as detailed in the Companys.
Speaker Change: <unk> SEC filings, except as required by law. The company undertakes no duty to update these forward looking statements.
Speaker Change: Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be found in our press release located on our website and our SEC filings.
Speaker Change: Hosting the call. This morning are Greg Bennett, the company's CEO, and Vice Chairman and Russ Devendorf, our executive Vice President and CFO I would now like to turn the call over to Greg.
Greg Bennett: Thanks, Joe and good morning to everyone. Mrs. Douglas turned in another quarter of solid profitability in the third quarter of 2024 generating pre tax income of $39 6 million or 58 cents per diluted share.
The primary driver of these results was contained and to deliver on our growth plan with new home deliveries of 812.
Greg Bennett: A record quarter.
Greg Bennett: Our company.
Greg Bennett: These closings led to home closing revenue.
Greg Bennett: And 41% year over year to 277 8 million.
Greg Bennett: We also performed well on the margin front in the quarter.
Greg Bennett: With home sales gross margin coming in at the high end of our guidance range of 26, 5%.
Greg Bennett: Despite the impact of the continued high interest rates we.
Greg Bennett: We have been able to strategically take price where possible while remaining focused on reducing their sticks and bricks cost of homes. So we're also able to gain operating leverage on our selling general and administrative cost with our SG&A expenses fall into 12, 43% of revenue for.
Greg Bennett: Quarter.
Greg Bennett: Order activity during the quarter, followed normal seasonal patterns with some variation calls about movements in rates we.
Greg Bennett: We continue to see healthy demand trends in there Mark is driven by a lack of existing home inventory from local economies as daily growth.
Greg Bennett: Formation.
Greg Bennett: We did experience some hesitancy on behalf of buyers beginning in September and into October.
Greg Bennett: As many people in the market expected rates to come down further.
Greg Bennett: Concerns about the outcome of the election.
Greg Bennett: We believe these issues will prove to be temporary headwinds our sales efforts and optimistic that much of the macro uncertainty will be cleared up in time.
Greg Bennett: For the spring selling season next year during the quarter, we made progress solidified our presence in our more established markets, while also getting a better foothold in our newer markets.
Greg Bennett: Two biggest markets Atlanta, Alabama continued to perform well for us.
Greg Bennett: From a unit delivery perspective, but we do continue to face some issues of affordability in Alabama.
Greg Bennett: The Carolinas held steady during the quarter, while demand in Houston was a little softer.
Greg Bennett: We'll make further headway right.
Greg Bennett: Anthony up our operations in Central Georgia in Chattanooga.
Greg Bennett: With additional hires and contract nuclear laws.
Greg Bennett: Additionally, we're happy to announce that our Greenville, South Carolina market, where we have recently hired a new division president.
Greg Bennett: I had.
Greg Bennett: Land deals under contract.
Greg Bennett: Greg lot deliveries in early 2026.
We have been very deliberate and thoughtful in our expansion efforts targeting markets with great long term growth prospects that fit our company's operational strategy.
Greg Bennett: We believe our existing geographic presence will serve as an excellent platform to grow and increase the company size and scale driving this growth will be the same operational philosophies.
Greg Bennett: That has proven successful since our inception.
Greg Bennett: Todd land via option agreements.
Greg Bennett: Land banking arrangements.
Greg Bennett: All for quality new homes at affordable prices.
Speaker Change: Oh, Wow, our customers the ability to personalize their homes.
And work with our partners to streamline the construction process and deliver homes in a timely manner.
Speaker Change: We remain focused on adhering to this operational model and believe it is the key to our long term success in this industry.
Speaker Change: As we head into the end of 'twenty 'twenty four we believe we're in a great position to achieve our delivery goals for the year and carry that momentum into 2025.
Speaker Change: Cycle times are back to their pre COVID-19 levels in most markets and in some instances even better.
Speaker Change: We had several new communities scheduled to open ahead of spring selling season that we believe will help us drive sales.
We also have the advantage offering some of the most affordable priced homes of any of the publicly traded homebuilders.
Speaker Change: Balance sheet remains in great shape.
Speaker Change: And we have a real opportunity to gain market share.
Speaker Change: These pauses I remain very optimistic about the future of the industry and our company with that I'd like to turn the call over to Russ.
Russ Devendorf: More detail on our performance this quarter and give an update on the outlook for the year.
Russ Devendorf: Thanks, Greg I'm going to highlight some of our results for the second quarter and conclude my remarks, with our expectations and outlook for the fourth quarter and full year for 2024 and touch on some high level thoughts for 2025.
Russ Devendorf: As Greg mentioned, we finished the third quarter with $278 million of revenue of greater than 40% increase from the year ago period on 812 closings for an average sales price on closed homes of 342000.
Russ Devendorf: Our gross margin was 26, 5% and SG&A expense was 12, 3% of revenue all.
Russ Devendorf: All these results were at the high end or better of our previous guidance for the quarter.
Russ Devendorf: Pretax income was $39 6 million with net income of $37 8 million for the quarter.
Russ Devendorf: Given the nature of our up C. Organizational structure. Our reported net income reflects an effective tax rate of four 4% on the face of our income statement.
Russ Devendorf: This income tax expense is primarily attributable to the income related to the 17, 3% economic ownership of our public shareholders that is held by Smith Douglas homes Corp, and Smith Douglas Holdings LLC.
Russ Devendorf: Our adjusted net income, which is a non-GAAP measure that we believe is useful given our organizational structure is $29 9 million for the quarter and assumes at 24, 5% blended federal and state effective tax rate as if we had 100% public ownership operating as a sub chapter C Corporation.
Russ Devendorf: We believe adjusted net income is a useful metric because it allows management and investors to evaluate our operating performance and comparability more effectively to industry peers that may have a more traditional structure from an organizational and tax standpoint.
Russ Devendorf: You can find more information about our structure and income taxes in the footnotes of our financial statements.
Russ Devendorf: We finished the third quarter with just under 18000 total controlled lots an increase of 54% over the third quarter of 2023, and 13% higher than second quarter of this year.
Russ Devendorf: As we enter and expand into new markets as Greg previously highlighted we would expect our year supply of option lots under contract to be elevated from the typical run rate of three five to five and a half years of lots controlled based on forward closings.
Russ Devendorf: We finished the third quarter with 961 homes in backlog with an average selling price of 346000 and an expected gross margin on those homes of approximately 25, 5% at.
Russ Devendorf: At the end of the quarter, we were operating out of 74 active selling communities versus 62 at the end of the third quarter last year.
Russ Devendorf: Looking at our balance sheet, we ended the quarter with approximately $24 million of cash and no borrowings under our $250 million revolving credit facility and $372 million of stockholders' equity.
Russ Devendorf: Our debt to book capitalization was <unk>, 9% and our net debt to net book capitalization was negative five 8%.
Russ Devendorf: We had approximately $229 million available on our unsecured credit facility and are well positioned to execute on our growth strategy as Greg previously mentioned.
Speaker Change: Now I'd like to summarize our outlook for the fourth quarter and full year for 2024.
Speaker Change: We anticipate our fourth quarter home closings to finish between 750 and 800 homes at an average sales price between 340000 and 345000 with gross margin in the range of 25, 2% and 25, 7%.
Speaker Change: Based on the aforementioned fourth quarter guidance, we are now projecting total home closings for the full year 2024 to come in between $27 80 in 2830 homes, an increase of 80 closings are approximately 3% higher than the midpoint of our prior guidance we expect.
Speaker Change: Our average selling price to range between 339000 to 341000, and our home closings gross margin to finish between 26% and 26, 5%, which is a slight decrease to the higher end of our prior guidance primarily due to the additional closings. We are now forecasting at a lower margin.
Speaker Change: For SG&A expenses, we now expect our ratio to be in the range of 13, 5% and 14% for the full year and approximately 25 basis point improvement from previous guidance.
Speaker Change: While we are still wrapping up our 2025 budget process with Division management, which we will review with our board in December I would be remiss, if I did not provide some color on our expectations for next year given that we won't hold our next earnings call until March.
Speaker Change: Before getting to our numbers I first must caveat that there are many factors beyond our control that can and will impact our forecast but.
Speaker Change: But we remain committed to providing the analysts and investor community as much transparency into our business as reasonably possible, which we committed to during our IPO process earlier this year.
Speaker Change: As Greg previously touched on we remain long term optimistic about new home demand given the current and projected lack of housing supply in our markets.
Speaker Change: Housing affordability continues to remain the biggest challenge across the country sitting.
Speaker Change: Sitting here today, it is too difficult and too early to gauge the pace and direction at which mortgage rates will move over the next six months to 12 months.
Speaker Change: Additionally, while the election is behind US. It is also too early to determine what impact. This administration's policies, specifically on immigration and tariffs will have on our industry and the potential impact on cost and production.
Speaker Change: With that said our preliminary expectations are for 2025 closings to be in the range of 3000 to 3250 homes, assuming we finished 2024 near the midpoint of our guidance.
Speaker Change: As we have previously guided gross margin will continue to compress due to higher land cost and we would now expect the gross margin target of 25% with a 25 basis point margin of error to either site. Lastly, we would anticipate our ASP on homes closed to remain relatively flat from 2024 and be within a range of 300.
Speaker Change: 35000 to 345000 for 2025.
Speaker Change: We believe the primary risks to all of our projections are around our ability to maintain sales pace and bring our new communities and lots of online as I have mentioned on every call. We continue to see some delays with municipalities on permitting in platts macro economic factors, primarily around jobs inflation and interest rates could also have unforeseen impacts to our numbers.
Speaker Change: With that I'd like to turn the call over to the operator for instructions on Q&A.
Speaker Change: At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Hum.
Speaker Change: Your first question comes from the line of Mike Dahl with RBC capital markets.
Speaker Change: Morning, Thanks, Greg <unk> for all the comments on the opening remarks and thoughts on 'twenty five.
Speaker Change: Russ I wanted to pick up on.
Speaker Change: That and understanding it's very early lots of moving pieces. When you. When you think about those numbers that you just threw out given the moving pieces, how should we interpret that as that kind of assuming a.
Russ Devendorf: Market status quo from where we sit today. These are the numbers you deliver or is that still embedding some year.
Russ Devendorf: On some potential improvement in market conditions as kind of a spring kicks off.
Speaker Change: Yeah, that's that's thanks, Mike and good morning, but it's pretty consistent with what we're seeing.
Speaker Change: Today, just from a market perspective, we're not assuming any.
Speaker Change: You know a major shift in and what.
Speaker Change: You know what may or may not happen.
Speaker Change: Just on now the fact that we're past elections interest rates.
Speaker Change: This is what I would tell you we've been going through a budget process with the divisions for the last you know.
Speaker Change: 45 days 60 days.
Speaker Change: Kind of what we're seeing from the roll up right now and it's and look it's difficult to projecting again, because we've had such a great year I think.
Speaker Change: It's been a little bit choppy towards towards the last couple of months.
But yes, that's our best guess sitting here today, but certainly.
Speaker Change: If things if rates come down and things improve.
Speaker Change: Probably some I'd look more to the higher end of the range, but.
Speaker Change: If we see a little bit more of a shake up.
Speaker Change: With jobs there.
Speaker Change: Certainly kind of towards the lower end so.
Speaker Change: Nick again, just kind of best guess a status quo.
Speaker Change: Okay got it.
Speaker Change: Appreciate the balance there.
Speaker Change: And then.
Speaker Change: With similar topics.
Speaker Change: When you're thinking about that.
Speaker Change: Delivery Guy.
Speaker Change: Your community count kind of stagnated, a little bit obviously, there is a lot of what you've put under control a lot of plans for community openings broker existing and new markets. So help us understand.
Speaker Change: Kind of the ramp as you envision it into and through.
Speaker Change: 25, and then if I could sneak it in.
First one just back on the lot cost comment can you help us kind of quantify what specifically I know we've talked about this in the past, but give us an update on what youre looking at cost per next year versus 'twenty for sure.
Speaker Change: Think it'd be fair to expect 15% increase in community count.
Speaker Change: Next year and again, we've got.
Speaker Change: A lot of communities I think coming online when we look at our lot.
Speaker Change: Our community schedules it looks like you know there is.
Speaker Change: Theres more communities coming online in the back half of the year and some of this is if you think about how.
Speaker Change: Let's go on public putting more lots and we've had a significant ramp up in putting lots under control. It's now getting some of those lots and communities coming online because it takes us once we contract for a deal.
Speaker Change: And.
Speaker Change: They get LDP, it's yes, it's like 14 to 18 months to get a community online so.
I would say that thats part of that growth you might not even though we might end with 15% by the end of the year keep in mind, it's not that those are going to be all coming online and delivering a full a full year.
Speaker Change: Absorption.
Speaker Change: So that's kind of the ramp.
Speaker Change: And then yeah go ahead with your question on on lot costs.
Speaker Change: Just remind us or refresh us on.
Speaker Change: On kind of a.
Speaker Change: Don't apply what the.
Speaker Change: As you look at it today, what your average lot cost youre going to look like in 'twenty, five and how that compares to 24.
Speaker Change: Yeah, So I'll start by telling you our lot cost in the quarter.
Speaker Change: It was about $85000 and that's about a 24, 8% of our revenue.
Speaker Change: And it compares last year, we were right at around $73000 in lot costs, which was 21, 5% of revenue.
Speaker Change: And then I would say that there is.
Speaker Change: 300 basis points and like we talked about that that's the big.
Speaker Change: Driver of the compression that we've seen in margin and we will continue to be the big driver.
Speaker Change: Because when you look at our sticks and bricks, it's been relatively flat.
Speaker Change: Really for the last.
Speaker Change: Two three years sticks and bricks have been relatively flat and we were just looking at this the.
Speaker Change: The other day and our square footage of homes is also flat so we've really been able to <unk>.
Speaker Change: Control, our vertical costs, which is great and the subcontractor costs.
Speaker Change: It's really all a lot costs and so as we look towards next year.
Speaker Change: We think that the.
Speaker Change: Cost is going to go up another 10 12000.
Per lot, so somewhere mid mid nineties.
Speaker Change: And Thats again, assuming that we have.
Speaker Change: A flattish ASP.
Speaker Change: There's going to be your erosion.
Speaker Change: And margin and again, assuming that we can keep those those are <unk>.
Speaker Change: Vertical costs pretty pretty flat.
Speaker Change: Okay. Thank you very much for sure.
Speaker Change: Your next question comes from the line of Michael Rehaut with JP Morgan.
Speaker Change: Hi, everyone. Thank you all for Mike I appreciate you taking my questions Congrats on the quarter. Thanks, Andrew.
Speaker Change: Yes.
Speaker Change: Thanks for those thoughts on next year I'd love to get I don't I'm not sure. If you kind of alluded to your assumptions on the potential incentive load going forward.
Speaker Change: I would love to hear your thoughts on that I know, it's relatively small for us.
Speaker Change: Yeah. So so incentives and this is between price adjustments and closing costs incentives, we're running just over 3% for us.
Speaker Change: Price adjustments are about you know.
Speaker Change: Little less than half of that in the closing costs are a little bit more of that to just over 3%. It's actually when we were looking at looking at that year over year, it's actually slightly down year over year like about 30 basis points, mostly on the price adjustment side.
Speaker Change: Which is kind of the discounting we gave on on <unk>.
Speaker Change: On the sticker price, it's really closing costs, where we've seen those incentives creep.
Speaker Change: We're kind of assuming.
Speaker Change: Our budget for next year flat flattish in incentives and again.
Speaker Change: <unk>.
Speaker Change: Interest rates are going to be the big wildcard, obviously, the fed continues to lower rates, but I think a lot of that's been baked into.
Mortgages already for some time.
Speaker Change: So it's really difficult like I said in the prepared remarks, you know who knows the next six months to 12 months, it's real difficult to figure out.
Speaker Change: The direction of where those rates are going and then clearly.
Speaker Change: We feel like with.
Speaker Change: With the change in administration.
Speaker Change: Some of the policies hopefully, it's more net positive but.
Speaker Change: Certainly remains to be seen wait way too early to tell.
Speaker Change: Got it thanks for that Ross.
Speaker Change: And then maybe turning to the M&A environment, and maybe a less stress.
Speaker Change: Strict regulation environment.
Speaker Change: Can you talk about what Youre seeing there and has anything changed with how the pipeline is looking like.
Speaker Change: Sure Luke.
Certainly less regulation is.
Speaker Change: It's definitely a positive that will come out of this whether it's M&A and and hopefully just in us.
Speaker Change: Dealing with the municipalities and the federal agencies that we typically have to go through as we can.
Speaker Change: As we go through the process of getting zoning and all that stuff. So that should be that should be helpful. And then just specifically on the M&A front.
Speaker Change: Yeah.
Speaker Change: I think thats going to really go the way of the general market.
Speaker Change: How the economy fares going forward, we're still seeing a pretty healthy pipeline. There is definitely deals out there we've seen packages come across our desk.
Speaker Change: From our standpoint.
Speaker Change: Might be a little too rich right now.
Speaker Change: But we're always looking how we're going to be opportunistic as we've said previously.
Speaker Change: We did we did enter as Greg mentioned Greenville, South Carolina, we're doing that through a greenfield startup.
Speaker Change: We're seeing plenty of opportunity as we look at some new markets not just on the M&A front, but for us in our business model.
Speaker Change: And up until we did the Houston deal last year everything we've done is through a greenfield startups. So we're very confident in getting ramped up and in markets. It takes a little bit longer clearly, but.
Speaker Change: That's probably the strategy that we will.
Speaker Change: Proceed with is more looking at Greenfield, but.
Speaker Change: Yes, we're seeing we're seeing some deals we'll keep our eyes open but.
Speaker Change: Yes.
Speaker Change: Thank you Ross I'll pass along.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Again, if you would like to ask a question press star one on your telephone keypad.
Your next question comes from the line of Sam Red with Wells Fargo.
Speaker Change: Thanks, So much guys for taking my question wanted to touch on the order cadence on the prepared remarks, it sounds like it was a bit more seasonal.
But wanted to put a finer point on that especially September into October.
Speaker Change: Where it sounds like buyers might have pulled back a bit ahead of the election, and then I know, it's still early but we are let's call. It a week off the election here any early thoughts on buyer traffic and conversion Denver coming off the election, we should be mindful of as we're modeling orders in Q4.
Yes, Sam Thanks.
Speaker Change: Thanks for the question.
Speaker Change: We did see softer traffic September and October.
Speaker Change: Uh huh.
Speaker Change: Traffic, probably followed more of like seasonality is the conversions were slower.
Speaker Change: Buyer's remorse.
Speaker Change: To make decisions.
Speaker Change: I can only assume that a lot of that's tied to the election and thoughts around will there be.
Speaker Change: Insane as an opportunity should we wait.
Speaker Change: Kind of thoughts with buyers.
Speaker Change: And assumption that maybe that was the mentality.
Speaker Change: We have.
Speaker Change: You know as you said, it's been early but.
Speaker Change: But we had good traffic last week, maybe slightly better than seasonal traffic.
Speaker Change: Okay.
Speaker Change: What's encouraging our appointments were up.
Speaker Change: So to me, that's an indicator maybe future.
Speaker Change: We're going to see.
Speaker Change: Some of the reluctance to come back.
Speaker Change: We're still getting conversions there Justin.
Speaker Change: The typical buyers taken much longer to.
Speaker Change: To get converted.
Speaker Change: The.
Speaker Change: Yes.
Speaker Change: It's too early for us to say theres going to be any meaningful uptick, but we're optimistic.
Speaker Change: No that helps thanks, Greg and then wanted to talk through your recently announced mortgage JV I believe that's been a long time coming it's going to probably streamline the mortgage process for your buyers, but maybe also can you give us any color on how you might be able to better target your financing.
Speaker Change: Perhaps with a more formal mortgage JV program in place.
Speaker Change: Yeah.
Speaker Change: For us.
Speaker Change: The biggest thing will be consistency across our our platform. We've had I think it's roughly 18 preferred lenders across the footprint and we're real thankful for those preferred lenders it's actually.
Speaker Change: My 25 years in the business.
Speaker Change: Preferred lenders and the kind of capture that we've been getting has been really good.
Speaker Change: They were good partners, but but there are look it's much more difficult to manage.
Speaker Change: That.
Speaker Change: Those kind of relationships. It takes a lot of time for the divisions to do it it's difficult for us it at corporate too to really help in.
Speaker Change: In the management and really looking at stats and trying to keep things consistent. So I think the biggest thing for US is the consistency that thats going to bring across the footprint and then certainly loan depot goes without saying, but they they they partner with some other big builders that was a big reason for us.
Speaker Change: Using <unk>.
Speaker Change: Home depot this isn't their first rodeo.
Speaker Change: They operate all across the country. So they are definitely well setup.
Speaker Change: Set up to to support us and the growing business. So we're really excited about that partnership.
Speaker Change: But yes, it's going to be a lot of a lot of consistency that we bring to the table and look first and foremost for us the preferred lender relationships and even this loan depot the joint venture.
Speaker Change: It's going to be great sure, it's going to add some dollars to the bottom line.
Speaker Change: No doubt, but it's really about controlling the process as most builders would tell you.
Speaker Change: Having that that financial partnership in getting that captures really about controlling the process and helping our buyers mostly in getting to the closing table and work through a smooth closing process. So we're pretty excited.
Speaker Change: Got it thanks, so much Greg or Ralph I'll pass it along sure. Thanks Sam.
Speaker Change: Your next question comes from the line of Jay Mccanless with Wedbush Securities.
Speaker Change: Good morning, guys. Thanks for taking my questions.
Speaker Change: So russ not to get too much into the details but.
Speaker Change: That's all I'm talking about with doing some greenfield expansions.
Speaker Change: Any thought as to what SG&A dollars or percentages look quite for 25.
Speaker Change: It sounds like between Chattanooga Greenville in the I 75 quarter Youre going to be doing a lot of greenfield buying a lot of new dirt. So any thoughts on SG&A would be helpful.
Speaker Change: Where we're going to finish I think I quoted 13, 5% to 14 and 13, 5% to 14% this year on SG&A as a percent of revenue.
Speaker Change: Yes, we're going to put some some more variable well I mean, we're going to put that put the fixed overhead and we've got division president in Greenville, We got a.
Speaker Change: We hired somebody on the land development side, we're looking at somebody on the land side as well and some folks and then obviously some office space and so yes. There is some there is definitely going to be some G&A ramp without the revenues.
Speaker Change: For sure next year, but we are growing we are hoping to grow the business at least somewhere in the 10% to 20% range.
Speaker Change: From a unit volume perspective, and if asps.
Speaker Change: Stay relatively flat, obviously, that's going to grow the revenue and I think we're pretty good right now on the support center side.
Speaker Change: I don't think Theres, a lot of head count to add on the on the corporate G&A. So I would be surprised if we didn't see.
Speaker Change: The opportunity to leverage more overhead maybe it's 50 basis points I mean, we'd love to I'd love to tell you, we're going to get down and up 100 basis points to 12, 5%, but it's it's hard to sit here and say that when we also are looking at some of these greenfield opportunities.
Speaker Change: That are going to definitely add some some G&A. So look if we can get.
Closer to 13% next year I'd say, that's probably a good target if youre, if youre going to try and milestones.
Ed: Ed one thing I'll add there.
Speaker Change: Jay is.
Speaker Change: The Chattanooga, where all we're really realizing closings, there and getting some offset.
Speaker Change: The majority of the loss pick up there in Chattanooga was finished lots so were already into production in vertical in most all those neighborhoods.
Speaker Change: Okay. That's great. Thank you Greg.
Speaker Change: I guess the second question on pricing power again, what percentage of communities, where you're able to raise base pricing and could you break out what to do.
Speaker Change: Incentives were in this quarter, maybe versus <unk> in last year.
Speaker Change: Yeah, So I'll touch on the incentives I know, we actually just did an analysis on communities, where we were.
Speaker Change: Where we've raised base prices and maybe to actually took some decreases and I can tell you and Jos Jos here. He is he's looking it up but it actually.
Speaker Change: Slowed down clearly right third quarter, we did not raise price in in communities as fast as we had in actually in some cases, we were.
Speaker Change: We were taking based prices down.
Joe Thomas: And Joe.
Speaker Change: If he is able to pull it up can give you exact but or we can get back to you after the call.
As it relates to incentives I think I've mentioned.
Speaker Change: One of the prior questions are incentives initiatives between price adjustments and closing costs incentives were just over 3%.
Speaker Change: A little less than half of that 3% was coming from the price adjustments and the <unk>.
Speaker Change: Greater than half of that was.
Speaker Change: On the closing cost side and Thats mortgage buy downs.
Speaker Change: This assumes some some closing credits and stuff.
Speaker Change: And then last year that compared were actually down about 30 basis points from third.
Speaker Change: Third quarter of last year.
Speaker Change: So it was actually the.
Speaker Change: The price adjustments came down a bit but it was the closing cost incentives that were that were that were up but but overall between the two we were slightly down.
Speaker Change: And then I'd have to look I don't have the second quarter in front of me, but I want to tell you I think it's probably probably about flat from where we saw second quarter.
Speaker Change: Hosing cost might have been up a little bit.
Speaker Change: So it's I mean again, we haven't we haven't seen we haven't seen it move, but I would say materially.
Speaker Change: Quarter over quarter, we definitely.
Speaker Change: Did see some base price.
Speaker Change: Decreases in certainly the speed at which we were raising prices has slowed quite a bit so we're.
Speaker Change: And we're definitely seeing the effects of a little more choppy third quarter as Greg mentioned in kind of as we get we headed towards the election unosom buyer hesitancy. So.
Speaker Change: Okay, Great and then the last question I had Greg you touched on Alabama, some affordability issues I guess what are you all doing there whether it's smaller floor plans ticket some options out how rial attacking that challenge.
Speaker Change: So.
Speaker Change: We are.
Speaker Change: Focused on.
Speaker Change: Plants.
Speaker Change: <unk>.
Speaker Change: It's more on incentives and margin from what were just given the margin to keep pace.
Speaker Change: And making the homes.
Speaker Change: To meet the buyers' qualification needs.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of rave.
Speaker Change: Chad Ross sick with Bank of America.
Speaker Change: Hi.
Speaker Change: Good morning, Thanks for taking my question.
Speaker Change: Bob.
Speaker Change: I appreciate all the comments on 2025.
Speaker Change: I just wanted to follow up on the gross margin side. Thank you said your backlog now as well.
Speaker Change: A little bit above, 25%, maybe 25 and a half if I heard it right.
Speaker Change: And you are sort of planning to stay in that range next year can you just talk about what that assumes for inflation net price into what like you have visibility on.
Speaker Change: Obviously, it sounds like you still have land inflation feels like you feel confident you can offset that.
Speaker Change: Can you help us understand the puts and takes there.
Yes, so our backlog right now is sitting at 25 and a half.
Speaker Change: There could be a little more cushion with rebates in there.
Speaker Change: And so we guided and again like I mentioned on the prepared remarks, I mean, there is a ton of caveats in there.
Speaker Change: Sure.
Speaker Change: So so early to tell what's going to happen with again rates and policy.
Speaker Change: The best we can sit here and say, it's a 25% gross margin with <unk>.
Speaker Change: Our margin of error 25 basis points on either side, so that 25 could actually come down a little bit, but what we've seen in our last.
Speaker Change: When we look at gross margin.
Speaker Change: We look at it on trailing 13 week, and where things are going and it's still.
We're still we're still selling at north of 25% as we sit here today.
Speaker Change: So we hope we'd love to say that we're going to go into the to the end of the year and a lot of this depends on how much we sell the balance of the year.
Speaker Change: And what closings come in at but we'd love, we we'd love to see you.
Speaker Change: Our backlog these close to about a third of what we're going to close in 2025, and so if we're sitting at 25, 5% and with 30% of the closings already baked then you can imagine.
Speaker Change: We are assuming that.
Speaker Change: Margins are going to continue to compress as we sell throughout the years.
Speaker Change: But thats, just kind of land costs and.
Yes.
Speaker Change: Really considering a more flat market, but again, if the market doesn't cooperate sure I mean that margin could actually.
Speaker Change: It will be a little bit lower and if you know how we operate which we've talked about before we are we are a pace over price builder right, where we make more or we lose less at full capacity and so we're really focused on keeping our.
Speaker Change: Our manufacturing our operating machine going and so we will.
Speaker Change: Margin is the is really that that's going to be what we would have to dial up or down.
Speaker Change: Two to hit our velocity, so it really just going to depend but sitting here today, we just kind of expect like I said earlier status quo.
Speaker Change: From a market perspective.
Speaker Change: That's helpful. Thank you and then.
Speaker Change: Can you talk about what the what are you seeing in terms of the margins for Devon Street.
In Houston relative to the overall Macau about acquisitions progress on the margin side.
Speaker Change: Sure.
Speaker Change: I want to say for the year, they were probably around 24, 25% growth.
Speaker Change: And it's actually it's as good as we could have expected.
Speaker Change: Overall.
Acquisition one of the.
I think our team has done a phenomenal job, it's a huge credit to the Houston folks, we really didn't lose.
Speaker Change: Many folks in the transition and now it's been almost.
Speaker Change: It's over a year.
Speaker Change: But that team has done a phenomenal job of of <unk>.
Speaker Change: Our team is well of just trying to integrate them into the Smith Douglas system and process and we've changed we've changeover product, where we could and in neighborhoods. We've obviously re branded the entire thing and they are they are on 100% of our systems.
Speaker Change: So it's.
Speaker Change: It's actually gone real well now as Greg mentioned, Houston has been a little bit slower in the back half of the year first half of the year sales were great.
Speaker Change: I'd say, it's definitely been a bit slower.
Speaker Change: But they they will.
Speaker Change: I think as part of our projection I think we will get 375 to 400 closings out of Houston.
Speaker Change: This year, maybe closer to the high end of that range as we sit here today.
Speaker Change: So it's been a phenomenal acquisition for us.
Speaker Change: We're real happy with it.
Speaker Change: Great. Thanks, I appreciate all the color.
Speaker Change: Yes.
Speaker Change: Your next question comes from the line of Alex Barron with housing Research Center.
Speaker Change: Yes. Thank you good morning.
Speaker Change: Yes, it was just.
Speaker Change: Thinking about the rough guidance you gave us $332 50 for next year, I guess that would imply Amy 800 to 900.
Speaker Change: Orders in the quarter and given where things are at right now in the comments on hesitancy is that the only thing do you think needs to go away.
Speaker Change: Two to get those numbers back up there or is there a implied ramp up in community count there or.
Speaker Change: Whereas at your other comment about maybe dialing the margin a little lower just to increase the pace. What are you guys. How do you guys see the progression to get there.
Alex Barron: Yeah, Alex Thanks.
Speaker Change: Thanks for the question.
Speaker Change: Like I said, it's we're assuming kind of a status quo it assumes that.
Speaker Change: And even though the market doesn't really move strongly one way or another we do have the land and lots under control.
Speaker Change: Certainly to get to those numbers right. So a 100, 100% of our of our land and lots for next year under control to hit those numbers.
Speaker Change: And I would tell you it look if the market picks up and rates come down and jobs are grading and policy is great.
Speaker Change: I think we can potentially do better but.
Speaker Change: It's real difficult sitting here today, there is <unk>.
Speaker Change: Definitely.
Speaker Change: The risks to next year as I see it from a unit volume perspective, or certainly the market itself in.
Speaker Change: Whats.
Speaker Change: What's that going to be for the demand picture.
Speaker Change: And I would say specifically, it's more about jobs right. We've always we've definitely been able to solve.
The affordability issue.
Speaker Change: With rate buy downs and closing costs incentives in it that hasnt been the biggest issue, but if the demand the actual homebuyer demand slows in which I'd say the biggest thing is going to be around job growth.
Speaker Change: Unemployment in that.
Speaker Change: <unk> could be the biggest factor that would push you to a lower end of that that guidance.
Speaker Change: And then the other the second thing I'd say is really just getting some of those communities that we're forecasting mostly for the back half of the year to come online and getting those finished lots in the ground. So that we can start.
Speaker Change: Building homes and internally, we have a big focus next year on.
Speaker Change: Looking at we're maniacal about cycle times when it comes to vertical construction and so we've really taken a deep dive and a focus on that cycle time around.
Speaker Change: The lot process in getting lots on the ground.
Okay. Thank you I appreciate it and best of luck.
Alex Barron: Thanks, Alex.
Again, if you would like to ask a question press star one on your telephone keypad.
Alex Barron: I will now turn the call back over to Greg Bennett for closing remarks.
Greg Bennett: Thank you everyone for your interest today and thank you for the questions.
Sure.
Greg Bennett: I appreciate the opportunity to share with each.
Greg Bennett: On the earnings call today hope everyone has a great day.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
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