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spk09: Good afternoon and welcome to the Beezer Homes earnings conference call for the quarter ended June 30th, 2022. Today's call is being recorded and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the investor relations section of the company's website at www.beezer.com. At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.
spk07: David Goldberg Thank you. Good afternoon and welcome to the Beezer Homes conference call discussing our results for the third quarter of fiscal 22. Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date the statement is made. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. New factors emerge from time to time, and it is simply not possible to predict all such factors. Joining me today is Alan Merrill, our Chairman and Chief Executive Officer. On our call today, Alan will discuss highlights from the third quarter, insight into the conditions in the housing market, and how we are positioned for this environment. I'll then provide details on our quarterly results, financial and operational expectations for the remainder of the year, and our approach to capital allocation. We will conclude with a wrap-up by Alan. After our prepared remarks, we will take questions in the time remaining. I will now turn the call over to Alan.
spk06: Thank you, Dave, and thank you for joining us on our call this afternoon. We generated excellent financial results in the third quarter. The strength of our backlog combined with disciplined execution in the field and careful management of overheads produced significant year-over-year growth and profitability. Adjusted gross margin was above 28%, up 390 basis points. Adjusted EBITDA was $88 million, up almost 12%. and earnings per share were $1.76, up nearly 45%. With a backlog of 3,000 homes valued at more than $1.5 billion, we have good visibility into the remainder of the fiscal year, allowing us to raise full-year earnings expectations again. While we were able to exceed our third quarter profitability expectations, as we anticipated, the sales environment has become significantly more challenging. We've highlighted affordability risks in prior quarters, driven by higher home prices and higher mortgage rates. Those forces, together with the highest inflation reading since 1981, finally reached a tipping point with consumers during the quarter, resulting in lower traffic and sales and an uptick in cancellation rates. This weakness represents an abrupt change from the past two years, and it reflects both economic and perceptual concerns. Many consumers are having to confront the limits to their purchasing power while others are reassessing their confidence in a home purchase decision even though they can manage the payments arising from higher rates. While we can't know the duration or severity of this more difficult sales environment, we believe our consumer positioning, operational processes, and capital allocation approach will allow us to navigate the environment that lies ahead. Our consumer positioning is both desirable and durable. For many years, we have been refining our ability to deliver extraordinary value at an affordable price, specifically through our three pillars. Our Mortgage Choice Program is designed to ensure that a carefully selected group of lenders competes for our buyer's business. This means our customers have access to an array of loan programs, extended rate locks, and buy-downs that a single in-house lender simply can't match. Beezer's surprising performance ensures our buyers have among the lowest utility bills of any new home buyers. With monthly payments at the center of most conversations with customers, the value of low utility bills has never been more apparent. Finally, our choice plans allow buyers to modify the floor plan of their homes to match their needs at no additional cost. Instead of having to buy a bigger home, to get the types of space that they need, our buyers can select pre-engineered plan options to maximize the value they get from every square foot of the home. These three pillars deliver durable value to buyers, allowing us to have a consistent strategy even in challenging markets. One of our most important operational processes is a weekly CMA review of every community. This involves deep analysis of competitive market data, including availability, pricing, features, and incentives. With this information, we can quickly refine our offering to best position our community. As an example, we may decide it makes no sense for us to match the dollar value of a competitor's closing cost incentive available on a completed spec home if we're selling to-be-built homes that we'll deliver next spring. Instead, we may offer a combination of credit to be spent in a design center and a contribution toward an extended rate log. Sometimes, however, the market shifts more significantly. In June, our analysis led us to selectively increase the dollar value of incentives in many of our communities and reduce base prices in others. To date, these adjustments have been modest for three reasons. First, even if sales have weakened, the structural imbalance between the supply and demand for homes remains in place, and there's simply no way this gap can close in the near term. Second, the labor market remains very strong, with low unemployment and rising incomes in virtually every industry. A period of stable home prices will improve affordability. And finally, locking in housing costs remains compelling in an environment of rising rental rates for apartments and single-family homes. To be clear, as market conditions evolve, we will adjust our approach in each community in ways that we feel best represent long-term shareholder interest. For the past decade, our approach to capital allocation has been driven by our balanced growth strategy. This has allowed us to deliver improved profitability and returns from a less leveraged and more efficient balance sheet. Several years ago, after improving operating margins and substantially reducing debt, we began allocating more capital to the growth of our lot position. These efforts have been successful, even as we have continued deleveraging the balance sheet. We now have over 24,000 lots controlled, more than half of which are under option. We remain active in the land market, because we remain confident in the multiyear supply shortage impacting housing. But in the near term, we expect to be highly disciplined in the deployment of land acquisition dollars. As Dave will discuss in more detail, both debt and equity repurchases are likely to also play a role as we attempt to maximize risk-adjusted returns. In summary, we believe we have the right consumer positioning, the necessary operational processes, and the correct approach to capital allocation for this environment. With that, I'll turn the call over to Dave.
spk07: Thanks, Alan. Looking at some of the key metrics from our third quarter compared to the prior year, our sales pace was 2.5 sales per community per month. During the quarter, we saw an uptick in our cancellation rate to 17%, although this remained well within our historical average. Our gross margin, excluding amortized interest, impairments, and abandonments, was 28.1%, up 390 basis points. Our quarterly tax expense was about $13 million, with an effective tax rate of 19.5%, reflecting the benefit of energy efficiency tax credits. As a reminder, on a cash basis, our deferred tax assets offset substantially all of our tax expenses, This led to approximately $54 million of net income from continuing operations, yielding $1.76 per share in earnings, up nearly 45%. While our backlog gives us good visibility in the fourth quarter financial results, estimating sales is very difficult. Over the past decade, we've generated fourth quarter sales paces ranging from 2.4 to 4.4, with an average just below 3. Based on what we've seen over the past 60 days, sluggish gross sales and higher cancellations, our best estimate is we'll be below our historical range, close to two sales per community per month on a community count of about 120. In terms of our financial results for the fourth quarter, closings should be in the 1400 to 1600 range, reflecting a backlog conversion around 50% up from 45% last year. This would represent the first time since the fourth quarter of fiscal 19 that we experienced improvement in our conversion ratio. While we continue to experience labor and material availability challenges, conditions have stabilized somewhat, giving us confidence in this slight year-over-year pickup. Average sales price should be around $515,000, up over 20%. Gross margin should be up around 200 basis points versus the same period last year. SG&A as a percentage of total revenue should be approximately 10%. And interest amortized as a percentage of home building revenue should be in the low threes. And our tax rate should be approximately 20% reflecting expected tax credits. Our expectations for fiscal 22 reflect the continued successful execution of our balanced growth strategy as we're going to grow profitability at a faster rate than revenue, reduce leverage, and drive better returns. Inclusive of previously disclosed energy efficiency tax credits of approximately $0.40 per share, we now expect earnings per share to be approximately $6.50, up more than 60%. This will drive improvements in both returns and leverage, with return on equity above 22%, net debt to EBITDA in the low 2s, and net debt to net capitalization in the 40s. Given our efforts over the last decade, we now have a liquidity, maturity schedule, and land position to enable significant flexibility as we consider our capital allocation priorities. Specifically, we have three primary objectives when we think about our future spend. First, we want to allocate capital to land spend to enable future growth. Second, we want to drive a higher book value per share. And finally, we want to continue to reduce our net debt to net capitalization. I'd like to elaborate on each of these priorities in relation to how we're thinking about the coming year. As with most home builders, the primary focus of our capital allocation is land to sustain and grow the business. By driving a higher option percentage over the past two years, we've been able to rapidly grow our total lot position without increasing our own lots. As we encounter a more challenging sales environment, we expect both land prices and deal structures to become more favorable in the quarters ahead. In fact, as rates began rising this spring, we took the opportunity to re-underwrite all pending land transactions. While these efforts are still at an early stage, we have already successfully reduced purchase prices, restructured takedowns, or walked away from a number of deals. It's worth noting that over time, we have not only dramatically grown our book value per share, but we've also dramatically improved the quality of the book value. Based on our third quarter results, our book value per share has grown at a compounded annual growth rate of more than 15% over the last seven years. In the past, our book value was primarily comprised of non-earning assets, specifically land held for future development and our deferred tax asset. Today, these items represent a small fraction of our net worth. As we look to drive further book value per share growth, one option we will consider is re-purchasing our stock at a healthy discount to book. As a reminder, we currently have $48 million of capacity under our previously approved share buyback. Of course, any buyback will also consider our final capital allocation priority, namely continuing to reduce our leverage. Over the last seven years, we have retired nearly $500 million of debt and reduce our net debt to net cap by almost 30 points. At the same time, we have termed out our debt complex, eliminated near-term note maturities, and significantly reduced our cash interest expense. After we get total debt below $1 billion at the end of this year, we expect further reductions to our net debt to net capitalization over time, primarily through retained earnings and matching the dollar value of any share buybacks with additional debt repurchases. With that, I'll now turn the call over to Alan for his conclusion. Thanks again, Dave.
spk06: The third quarter of fiscal 22 was very successful for Beazer, and we're poised to deliver exceptional full-year results. Just as importantly, our efforts over the past decade have positioned us to weather what is undoubtedly a more challenging operating environment. Specifically, execution of our balanced growth strategy and adoption of our three pillars have allowed us to structurally improve profitability, greatly reduce debt, while efficiently expanding our lot position to fuel future growth. None of this would have been possible without our team, and I want to thank them for their ongoing efforts. I remain confident that we have the people, the strategy, and the resources to create growing and durable value over the coming years. With that, I'll ask the operator to take us into Q&A.
spk09: Thank you. We will now begin the Q&A session. To ask a question, please press star followed by one. Please ensure your phone is unmuted and record your name clearly when prompted. To withdraw your request, press star two. Again, to ask a question, that is star followed by one. One moment please while we wait for questions to come in. Our first question is from Alex Barron with Housing Research Center. You may go ahead.
spk03: Yeah, thanks. I wanted to see if you could elaborate on the share buybacks and maybe debt buybacks and your thoughts around, you know, is the idea to basically not grow the company but to emphasize those capital allocations going forward? Well, it's Dave.
spk07: I think we tried to make it pretty clear it's really about balancing the capital allocation priorities, and that's setting the business up for growth in the future from a land perspective, growing book value per share, and continuing to de-lever the business from a net debt to net cap perspective. So I think if you look at the land position that we currently have in place, especially what we've done from an option perspective, we're actually set up pretty well to grow the business, but what we've also done is create a lot of flexibility in our capital structure that if it makes sense from a risk-adjusted return perspective to go out and buy back some debt, or go out and buy back some shares, a company with debt repurchases, we have the flexibility to do that and still grow the business.
spk03: Okay. Well, that sounds interesting. I think I also heard you say that you guys have implemented among your incentives lowering base prices. Can you comment on to what extent you've done that and some idea of how much? you've reduced either how many percentage of communities or how much the price reductions have been?
spk06: So, Alex, it's Alan. I would say across our portfolio, we have either increased incentives or reduced base prices on the majority of our communities. Of that, a larger share has been increased incentive. A smaller share has been reduced base prices. I'm familiar with base price reductions that have been $5,000, $10,000, so relatively small percentages of previous base prices. And the thing that comes into play is each market, and my peers in the industry, I think, would acknowledge this. Every city kind of has a different competitive dynamic. So in some cities, you'll see what I call mark-up-to-mark-downs. where you tend to see increasing dollar value of incentives. There are some other cities where the denominator in the competition is more around base price. More of the places we do business really emphasize the dollar value of incentives. A handful of the markets really are more about base pricing, and those are typically the places that we have made adjustments to base price. But I was careful to point out that to this point, The adjustments that we've made to base price have been pretty modest, single-digit percentage of ASP, low single-digit. Part of it is because I don't think in this psychological environment right now, chasing with price is terribly effective. I think we're in a transition period, and we need to deal with that adjustment, and I don't think that price by itself is going to fix that psychology piece. We may find, you know, in future periods that we need to be more aggressive. We may not. But at this point, it's been pretty modest.
spk03: Okay, that's helpful. And if I could ask one more. Some builders, you know, seem to be sticking with build to order. Other guys are saying, you know, that there's demand for quick move-in specs. Which way are you guys leaning here, you know, in terms of strategy? How are you guys looking at that?
spk07: Yeah, Alex, so if you look, we've historically run at about 60-40 to be built to specs. I would tell you in the last couple of years, we've leaned a little bit more towards to be built. And I would tell you that in this environment, I think we'll kind of get back towards that 60-40 historical split to be built to specs. It certainly is important in this environment that if you have a buyer who can qualify at current mortgage rates, you get them in and you have some standing inventory. So I would tell you kind of closer to that 60-40 level that we've seen historically.
spk03: Okay, thanks. I'll get back in the queue. Thank you.
spk09: Thank you. The next question is from Julio Romero with Sidoti Company. You may go ahead.
spk02: Hey, good afternoon. Thanks very much for taking my questions. Hey, Julio. How are you? I'm good. Thanks. So you guys mentioned earlier that labor and material availability challenges have lessened somewhat in June. I was hoping you could expand on that at all.
spk06: Yeah, we're down to a handful of categories that are particularly problematic. You've probably heard the list of horribles. Certainly garage doors are challenging in most markets. HVAC equipment and appliances are selectively challenging. But it's nice to have a shorter list of challenges than we've had in some prior periods. I think the labor picture is the glimmer there is that starts are actually down. And so if you think about the bowling ball moving through a snake, of course, as soon as I say that, now I can't get the picture of why there would be a bowling ball in a snake. But anyway, the front end trades are the ones that are starting to see that reduction in starts. And that's where we're gaining a little confidence that we can move things faster. The finishing trades, those towards the back end, they're not feeling it yet. There's still an enormous backlog in the industry out there and specs to be finished that are under construction. But I think if you think about it sequentially, that reduction in starts in June, it will play through. And that's one of the things that we're looking to, particularly into Q1 and Q2, and why we think we may be at a turning point where we can regain some of our cycle time.
spk02: Got it. That's helpful. And then I guess my follow-up, I just wanted to ask about how you expect community count to trend beyond the fourth quarter. And you also talked about you expect land prices maybe to become more favorable. Does that lend itself to maybe land spend being a little bit more, I guess for lack of a better word, like larger chunks as you see some favorable opportunities ahead and like less kind of steady?
spk06: Let me talk about the land market, and Dave can talk about community count a little bit, because I've been very involved in our land market negotiations and strategies. I don't think they necessarily lead to larger chunks. I think right now discretion is definitely the better part of valor, and buying time, renegotiating pricing, resetting risk profiles, like when do we need to buy it, who's responsible for which costs, There are lots of dynamics like that that I think are available to us. And frankly, I think there will be even better opportunities in the months ahead. But I don't think that that necessarily leads to bigger chunks. If anything, one deal I was working on this morning, we've converted it to five takedowns from a bulk buy and reduced the price. So the price is lower and the rate at which it consumes capital will be lower. And I like winning on both of those fronts. So I think that's in front of us. It won't be possible in every deal for sure, but I've been pretty pleased with our ability to capture benefit from a softer land market.
spk07: Julio, I would tell you from a community count, look, we've talked about and still expect an upward trajectory next year. You're going to probably see some volatility quarter over quarter. And look, I would tell you that volatility is because it's harder to predict closeouts with more volatile sales, and then you have delays in new community openings. Now, Look, I think we're hopeful that as we move into next year, some of those delays may ease a little bit, but still probably too early to tell from that perspective. So upward trajectory, but some volatility.
spk02: Got it. No, that makes sense. Thanks very much for taking the questions.
spk07: Thank you, sir.
spk09: Thank you. The next question is from Susan McCleary with Goldman Sachs. You may go ahead.
spk08: Thank you. Good afternoon, everyone. Hey, Sue. My first question is, obviously, Alan, in the last month or so, there's been a lot of focus on the state of the consumer, their health, their willingness, their ability to buy things, including homes. As you take a step back, how are you thinking about where your buyers' mindsets are today and where the broader macro is and perhaps even going? What is giving people really pause as they think about potentially buying a home or not buying a home right now and just How some of these big factors could come together?
spk06: It's a question I wish I had an even better crystal ball for, Sue. But I think if we go back a couple of months, the rate shock was the first wave. It was kind of eye-popping, right? How does a three become a four, become a five, nearly a six? So just there was a little shock and awe just around the rate. And that's even before you do the math, obviously that has an adverse effect on payments and on affordability. But just the almost stunned response. I think you move past that and then you get into now you're doing the work, you're doing the math. What was $2,500 as a payment is now $3,200 as a payment. And how do I feel about that increase? How does that compare to rent? And that's a process. That takes a little bit of time, and I would say we are in that process. And then I think there's a third leg, and that is, well, what's going to happen to prices? And, you know, I've listened to some but maybe not all of the industry calls. I think there's been a fair bit of responsiveness on the part of builders, but with a high degree of discretion. And what I mean is I think there have been a lot of adjustments, But the fundamentals, this knowledge that we've got that there is a shortage of housing in this country, I just haven't seen, and I don't anticipate, candidly, a big reduction in prices. But I think from the psychology of the buyers, after grappling with the rate, after grappling with the payment, now you've got to ask yourself, but is there a better deal that is going to be available? And I think time will tell. But over the next couple of months, I think that's the phase that we're in. And that's why, you know, I made the comment before, I think chasing with price right now, let's see how it plays out. That's kind of what we're doing. We're wanting to be competitive, but we're not trying to go steal market share right now with price. Because I think that the psychology is still in that adjustment phase where the dollar levers aren't really going to be the thing that makes the biggest difference.
spk08: Yeah, okay, that's incredibly helpful. And, you know, sort of building on that, as you think about the mortgage market, right, and the role of higher mortgage rates, I guess, number one, what are you seeing out there, especially as you think about your program that you have that's, you know, very unique to Beezer as it relates to mortgage financing, but then just longer term, any sort of newer programs or changes that could come through that perhaps help buyers as they do look to purchase homes?
spk06: Well, I'm going to try and resist the temptation to give a marketing pitch in my response, but, Sue, it is absolutely the case. With mortgage origination volumes having collapsed and the elimination for the largest part of the refi market, the competition for high-quality whole loans is very high. So having multiple lenders compete for a buyer We see that in rate, but where we really see it in is locks and buy-downs and telling lenders, that's not going to be good enough. You're going to have to sharpen your pencil and do better to win this deal. And it doesn't stop there. Because once we've got somebody under contract, pre-approved, they may be fully approved. They can keep shopping rate until roughly 30 days before the closing. So I think that dynamic that... lack of demand for mortgages right now is an extraordinary advantage because our dollar, any contribution that we are making in closing costs that is to be applied to things like buy downs and locks goes a lot further when you've got that kind of competition among very hungry lenders. So I think that's really the thing that we're saying, and I admit there's a little myopia there. I'm sort of looking at that very closely. At a broader level, I'm not saying crazy things happen from a mortgage origination risk perspective. I mean, I think we've squeezed most of that out of the system, and appropriately so. I'm not saying, you know, riskier loans, you know, dramatic changes in underwriting criteria. I'm not saying banks' portfolio, you know, subprime or anything like that. So I think that the mortgage market remains quite sound from an underwriting standpoint, and we're just trying to leverage that that competition for the benefit of our buyers.
spk08: No, that's great, Alan. Thank you for all the insights, and good luck with everything.
spk07: Thanks, Sue. Thanks, Sue.
spk09: Thank you. The next question is from Alan Brenner with Zellman. Go ahead.
spk01: Hey, guys. Good afternoon. Thanks for the time and taking the questions. Alan, I know the price adjustments and incentives, it sounds like they've been fairly modest up to this point, but I'm wondering if you could just talk a little bit about any kind of elasticity you're seeing from those adjustments when you do make them. Are you finding that it's making a notable difference either in conversions or traffic or anything like that? And just on a similar line, I noticed on your gross margin guide for 4Q, that does imply I think about 200 basis points or so of sequential pressure. I'm guessing it's too soon to really see the impact of those incentives, so I'm just curious if that's what's driving it or if it's more of a cost story. Thanks.
spk06: All right. Yeah, thank you, Alan. We'll divide and conquer here. I'm going to let Dave talk about gross margins. And by the way, your instinct is right. It's early, but Dave will talk about that. I think the elasticity is an awesome question, and I am super interested in it every week with our teams. in our weekly calls talking about sales, I would say that there is not as much elasticity as you might think. You have to be in a competitive range, and then you have to really be in a counseling and value proposition establishment mode, but it isn't the last dollar that seems to be making the biggest difference. I mean, again, I'm going to talk our book, Having people feel like they're getting absolutely the best possible mortgage execution, that's a win. Telling people you can't get a lower utility bill, that's a win. But you've got to make sure that your price and included features is in market. So if somebody's including a 42-inch cabinet and we had 36-inch cabinets, maybe that's an adjustment we need to make to be in market to make sure that we're in the right solution set. but it isn't $5,000 more than that, right? It's sort of these micro adjustments to make sure that you're in line, and then you gotta sell your value. And part of that is company specific, part of that is just establishing confidence for this buyer in this transition period. Now, before Dave talks about margin, if you wanna follow up on that, I'm happy to kinda keep working to try and answer your question.
spk01: No, I think that makes a lot of sense, Alan, and I guess I don't think anybody's asked it up to this point, so I'll just throw it out there in response to that. I mean, it sounds like kind of the July trends then based on that would have been fairly similar to kind of where you exited the quarter, like these adjustments, assuming they've continued into July, probably haven't drastically changed the direction of the market at this point.
spk06: No, I haven't seen that in any of And I'm not trying to be disparaging. The industry calls them wire reports, you know, as builders share sales across cities. I haven't seen any big spikes in those in the aggregate. And certainly for us, you're right, July has felt a lot like the way that June ended. And that's why we gave, you know, a guide on Q4 orders that's sort of below historical average, because I think that's the kind of environment we're in right now during this adjustment period.
spk01: Sure, makes sense. Yeah, maybe, Dave, you can add some color on the margin, and then I do have a follow-up after that if I can. Thanks.
spk07: Sure. Your intuition is exactly right, Alan. It really is not the increased incentives in Q4. It's much more price-cost, which was very favorable. You know, the higher prices that rolled through in Q3, along with what had been kind of previously kind of lower costs, especially with the prominently-to-be-built business. In Q4, again, kind of sales we made nine months ago, price cost isn't quite as favorable and you have a little bit of sequential margin degradation, although still up year over year. So it really is price cost as opposed to incentives in the guide.
spk06: I think it has a lot to do with lumber locks, is the truth. Where was lumber eight months ago versus where was it 12 months ago? And I think that's kind of one of the things that you're going to see in that Q3 to Q4 progression. By the way, lumber came down, so that's also going to help in the future. But I think we've probably got our highest-cost lumber rolling through in the fourth quarter.
spk01: Got it. Now that makes sense. And I guess, you know, second question, if I could. David, thank you for the time spent walking through the capital allocation kind of strategy there. So, you know, if I look at your balance sheet today, your cash balance, dip lower this quarter, you know, back to the lowest levels we've seen in a couple of years. And obviously, it sounds like you expect to generate a good amount of cash in the fourth quarter, which I'm sure a portion of that will be used to pay off the term loan. Just thinking ahead, you know, obviously, you have a fairly positive view on the outlook for the next few years and kind of, you know, the housing shortage thesis, etc. But let's say devil's advocate, you know, the market does continue to deteriorate into year end. And You know, you're looking at your liquidity position and your balance sheet. You know, your revolver, I believe, correct me if I'm wrong, matures in 24. And, you know, the last time we hit a kind of pocket during the early stages of the pandemic, your first instinct was to borrow against the revolver and just kind of boost the liquidity profile, which I think made sense at the time. Thankfully, you didn't need it. But, you know, kind of just let's take a worst-case scenario here. How would you react if the market, you know, falters further and maybe the debt markets dry up a little bit and you're in a position where you do want to boost up that liquidity heading into year end or into 23?
spk07: Well, you know, look, Alan, it's Dave. You know, I think, as you know, we have flexibility as we think about land spend heading into next year. And frankly, we can be pretty cash generative in the business if conditions dramatically were to kind of fall off. So You know, look, I think that's the flexibility that we're talking about in the script. We have quite a bit of land tied up under options, so, you know, looking forward. And the ability to generate a lot of liquidity on a go-forward basis if the market were to deteriorate, giving us a lot of optionality. And so, you know, that's kind of a moving target. We obviously didn't talk about 23 land spent in the call specifically, because as we kind of measure what's going to happen in the market and what we're seeing, we'll be pretty flexible the way we think about our capital allocation approach.
spk01: Got it. I appreciate that, Dave. All right, guys, thanks a lot. Thanks, Alan.
spk09: Thank you. The next question is from Alex Regal with B Reilly. You may go ahead.
spk04: Thank you. Good evening, gentlemen. A couple of quick questions here. The absorption guidance for the fiscal fourth quarter is two. So we've gone from about three and a half down to two in about six months. If we were to assume that demand stabilized at a new level. In six months or how long might it take for you to get back to your target absorption rate and what is that rate?
spk06: So it's a great question and I again as I said to an earlier question I wish our crystal ball were great but I think this is a six to nine month kind of transition period psychologically, economically. I think we get into the spring selling season next year. At this point, I would predict that we will see some improvement in absorption rates across the sector. And for us, we certainly want to be in that three range. When things are really going great, it sort of gets to four, but that creates other issues. Two isn't a level that we want to sustain for very long. But I think sometimes you have to be a little bit patient. You've got to work with buyers. You've got to establish value. and not just react, overreact, because it may not be very effective. So I would tell you, I don't know. One of the challenges, of course, will be seasonality. And our first quarter is seasonally our lowest absorption rate quarter, again, looking back 10 years. So some of the sequentials may be a little bit trickier. But when I think about kind of where do we get back to, and I think the thrust of your question is when do we get back to something that feels like more normalized absorption levels, I'm guessing it's next spring.
spk04: That is very helpful. And then I'm trying to think about community count kind of 9, 12 months down the road into You know, I know you plan on opening 15 communities in the next six months. I guess I'm kind of struggling with the quantity of closings over the next six to nine months. Any further color you can add to that?
spk07: Well, you know, I'll tell you, Alex, a couple things. One, we have talked about the challenge that we face, frankly, in predicting closeouts. with the volatility of sales. And I think you're right, it is difficult, which is why we didn't really give community account guidance further ahead, other than talk about an upward trajectory in overall community account. I think if you look at page 27 in the deck, it can give you a sense of kind of what's happening in the next six months in terms of new community openings, what's kind of under development that's not going to open in the next six months, but we have some visibility into. And then, frankly, deals that are approved but aren't yet closed, looking past kind of that what's under development. And then, frankly, what's coming offline in the next 12 months. And so I think when you kind of think longer term, it helps you to think about trajectory, if not exact timing.
spk06: And I'd add one other way to kind of think about it. We'd have to sell at a really rapid pace to not be in a place where we're opening more communities than we're closing out. Because we can control, well control, we can't pull forward openings, right? There is a land development aspect to that, but you can accelerate the closeout. So if we're in a robust selling environment, we may struggle in certain quarters to have the growth, but given the number of communities under development and approved, I would say we'd have to sell at a much faster pace than I think is likely for us to not have community count growth.
spk04: And then real quick, some of your peers have mentioned their July trends and seeing some green shoots. Did you see any green shoots in the month of July?
spk06: We did. More in the traffic side than the sales side. I would tell you that traffic in a bunch of our markets did show nice improvement. And I think that's why I've got some confidence. I think this is an adjustment period. I think people are back out. They're looking. They're curious, they've seen stability in mortgage rates over a number of months, not the one-way upward rocket that we were on there for a few months. That didn't really translate into significant changes in the cadence of sales, which again informed how we thought about our Q4 guide on order base.
spk04: Very helpful, thank you very much. Thanks, Alex.
spk09: Thank you. The next question is from Kwaku Abroqua with Goldman Sachs. You may go ahead.
spk00: Hi, guys, and congrats on the quarter. Thanks for fitting me in. I know it's getting a little bit late, but I just wanted to revisit your comments from earlier about re-underwriting some of your land and how that sort of connects with the uptick in land spend. during the quarter. I just want a little bit of the puts and takes about what exactly the reevaluation or re-underwriting consisted of, and then we'll move forward from there.
spk06: So in any period, the land cash spend relates to things approved, developed in prior periods. So when we talk about re-underwriting, that's going to have an effect on the fourth quarter or on the first quarter. It really doesn't happen typically within the same quarter. So that's the first thing. The second thing is when we think about re-underwriting, I think about really three things. What are going to be the price of these homes? What's the pace that we're going to be able to sell these homes? And what incentives or what costs are we going to incur? And revisiting all of those assumptions, ASPs, sales paces, and incentives and costs, led us to, in a number of cases, say, you know, this market feels different than when we first either contracted or started negotiating on this. And we went back very directly to sellers and said, still doesn't work. It needs to be a different structure. It needs to be a different price. We dropped some. We renegotiated some. And we absolutely lowered the price on some. Now, the sample size is a couple of dozen deals that I am describing. But we have more underway. And I'm pretty encouraged by the success that we had in those dialogue. And I'm given 24,000 lots under control. I'm perfectly happy to walk away from a deal that doesn't work. We don't have to go chase a land deal to get to a lot position. We put ourself in a spot now where we can show a lot of discipline in making sure that the deals work in this environment, not the environment that we used to have.
spk00: Thanks for that, Collar. It really was very helpful. I think you talked about the land sellers being a little bit more willing to negotiate. Are you seeing that improve as the summer progresses, or has the realization that the market has changed not filtered into the land side yet?
spk06: It has certainly become more and more evident. over the last 60 days. In May, when we started having, April really, in May, started having conversations, yeah, we got a few sideways looks. By today, I don't think there's a land seller in the country that doesn't expect to have this kind of a discussion. Now, whether or not the price was struck on terms that still are justified, that may be the case. So I'm not saying every deal is going to be retraded because some of them are actually entirely appropriate in the current environment. But I definitely have seen that change. The other thing I would tell you is sophisticated land sellers, I mean the smartest land sellers that we do business with, were among the first to say, we get it, the market's different, we need to do some different things. The professional land sellers, they have been, I would say, more open. The occasional land seller or the accidental land seller or the one-off land seller, that's usually a little stickier. It usually takes a little bit more time and a little more education to get to a different deal.
spk00: Perfect. And this one's for you, David. On the debt side or capital allocation side, under what conditions would you guys consider perhaps being a little bit more aggressive in your debt repurchases, given it's traded at a discount or a deep discount for a few months now, and it presents opportunities perhaps for you guys?
spk07: Well, Kwaku, I think the answer really, and I'm not going to give you kind of the playbook specifically, but I would tell you more broadly that It's about risk-adjusted returns in the business. It's about opportunities. And it's about what we're seeing in the business overall and balancing the three priorities that we talked about, which is continuing to be leveraging, growing the book value, and setting the business up for growth. So as we look forward, we'll keep, obviously, watch very, very carefully the renegotiations that are underway that Alan was talking about, thinking about overall liquidity, watching yields, and frankly, watching the share price and finding how we can maximize our risk-adjusted returns for shareholders and for our debt holders and increase the overall value of the company. So it's a little bit of a vague answer for you, but that's how we think about capital.
spk00: Perfect. Best of luck, guys. Thank you.
spk07: Thanks, sir.
spk09: Thank you. And our last question comes from Jay McCandless with Wedbush. You may go ahead.
spk05: Hey, good afternoon. So on slide 28, your spec count moved up pretty dramatically. I can't remember what the number was in the second quarter, up nearly 100% plus year on year. I guess, is that a lot of cancellations that you booked at the end of the quarter or those age specs? Maybe if you could give us a little color on that and when you might anticipate those go into closing.
spk06: Well, Jay, it really isn't about cans. I mean, we had fewer than 200 cans total in the quarter across all of our sales. Really what that reflected was back in February, In fact, even earlier than that, our desire to have a little bit more production and frankly, a little better environment to get starts out in the field than we had a year ago. You know, we had a combination last spring of explosive sales and the supply chain, largely for COVID reasons, was just stuck. So there was no way to have specs. We were well under specced. We did not have enough in Q3 a year ago. I think this is back in the order of kind of a normal number for us. It certainly feels nice to have very few finished, and that's the thing that I spend more time focused on, and I think there continues to be a reason we've got a 60-40 mix. Some of our markets, it's terrific for us to have homes at Stage 8, Stage 10 that are relatively quick move-in for buyers. So I'd say this is a pretty healthy place for us to be.
spk05: Okay. And then what type of impact are the base price cuts having on your backlog or people trying to cancel out and get a better price or get some of the incentives that the newer buyers are getting? What type of impact is that having on your backlog currently?
spk06: Well, for most of our backlog, moving five grand down, just as an example, in a base price, there's still $95,000 in the money. Now, I'm exaggerating to make a point, but if you're 6, 9, 8, 12 months in backlog, us moving around a few dollars between incentives and base price today has really no effect on the value proposition that you've contracted for. So I don't think what we've done so far has had really any effect on the backlog.
spk05: Okay. The last question I had, and I think someone already asked it, but just based on Slide 20, I think it's 27, where the community count is, and it looks difficult to get to any type of meaningful, sustainable community growth. Was your answer, I think, that you're not going to be closing out of some of these as fast as you had been before, and that's how you're going to drive it? Or do you feel like there's some land deals you can bring on in the interim that will help pull that count higher?
spk07: I think actually if you kind of go through slide 27 and you see what's open in the next six months, what's under development, which is obviously coming not in the next six months, but we have good visibility on it, and then what's approved in the system versus what's closing in the next 12 months, there's a pretty good picture of the trajectory of upward community account growth. So happy to chat with you offline, but that's really what we talked about in the responses. You can kind of see what's coming on and what's been approved. versus, frankly, what's closing out and the kind of growth potential that's in our community count role.
spk05: Okay. All right. Thanks for taking my questions. Thanks, Jay.
spk09: And I'll turn it back to the speakers for any closing remarks.
spk07: I want to thank everybody for joining the call today, and we look forward to talking to you for our year-end call in three months. Thank you very much. This concludes today's call.
spk09: Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.
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