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spk01: Good afternoon and welcome to GreenBrick Partners earnings call for the third quarter ended September 30th, 2022. Following today's remarks, we will hold a Q&A session. As a reminder, this call is being recorded and will be available for playback. In addition, a presentation will accompany today's webcast and is also available on the company's website at investors.greenbrickpartners.com. Joining us on the call today is Jim Brickman, co-founder and chief executive officer, Rick Costello, chief financial officer, and Jed Dolson, Chief Operating Officer. Some of the information discussed on this call is forward-looking, including the company's financial and operational expectations for 2022 and beyond. In yesterday's press release and SEC filings, the company detailed material risks that may cause its future results to differ from its expectations. The company's statements are as of today, November 3, 2022, and the company has no obligation to update any forward-looking statement it may make. The comments also include non-GAAP financial metrics. The reconciliation of these metrics and the other information required by Regulation G can be found in the earnings release that the company issued yesterday and in the presentation available on the company's website.
spk07: With that, I'll turn the call over to Jim Brickman. Thank you. During our call today, we are going to discuss the current housing landscape
spk10: GreenBrick's overall business strategy, and our land and lot position in much more detail than in past calls. Rick will discuss Q3 2022 financial results in depth, and then Jed will discuss the market dynamics, capital allocation strategy, and our supply chain. We are pleased to report another strong quarter despite multiple challenges the home building industry is facing. Residential revenue for the third quarter of 2022 increased 17.1% year over year to $397 million, based on an increase in our average sales price of 33%. This contributed to a record high home building gross margin of 32.4%. As a result, the company generated $74 million in net income, or $1.57 per diluted share, representing a year-over-year increase of 65%. Year-to-date annualized return on equity was 34.9%, about 1,100 basis points higher than last year. We believe this demonstrates our ability to consistently deliver superior returns to our shareholders. Looking ahead, the U.S. housing market has taken a dramatic shift as mortgage rates have more than doubled from a year ago and hit a 20-year high in October. Consistent inflationary pressure and high mortgage rates have been keeping potential homebuyers on the sidelines. Despite a strong labor market, consumer confidence has been negatively impacted by geopolitical risks, political uncertainty surrounding the upcoming elections, supply chain disruptions, and particularly how aggressively the Fed is hitting the economic brakes to contain inflation. Until the dust settles, we expect the housing inventory and housing market to remain very choppy. While it is difficult to actively predict what will happen in the short term, our long-term view on the immense imbalance of housing supply and demand remains adept. A decade-long underproduction of housing has resulted in a gap of approximately 4 million housing units that will take many years to adjust, if not another decade. Recent and expected future reductions in housing starts are likely to exaggerate the housing shortage. Our markets have one of the best demographics and immigration trends. Many builders have already reported the results. As you have heard on these calls, Dallas and Atlanta, which produce over 90% of our revenues, have fared much better than markets such as California, Denver, Phoenix, and Las Vegas. For example, the DFW Metroplex, our largest market at 70% of our year-to-date revenues, has attracted over 140 companies for office relocations and or expansions in 2021 and 2022. The resulting in-migration means more people and more housing. We believe that job growth, economic diversity, a younger population, climate, tax rates, and relative affordability in our core markets vis-à-vis the rest of the nation will result in our core markets continuing to outperform the nation. Let's take a quick look at slide four of our presentation. Despite the slowdown in sales, on a national scale as shown here, inventory of both existing and new single family homes remains near historic lows. We take a closer look at Dallas on slide five. In DFW, existing home listings represent a 2.2 month supply on the left graph, and finished new home inventory represents a 1.3-month supply on the right graph. Both measures are below pre-pandemic levels. We expect existing inventory to increase in Q4 and into 2023, but also see that builders are quickly responding to decreased demand by lowering starts. The byproduct of lower starts is that we believe construction costs have peaked. Furthermore, as the third largest builder in DFW, We believe that our scale and this slowdown will provide us leverage to produce our construction spend. We believe that existing home inventory growth will continue to be limited due to homeowners leasing rather than selling their homes based on the slowing market. Inventory will be further limited due to homeowners who have purchased or refinanced over the past 10 years and particularly during the last three years because they have very low mortgage rates. which disincentivizes selling their residences. We believe that long-term home demand will continue as millennials now need their first home and are financially ready. And we continue to see a record level of rents rising in our primary markets. We highlight the growth of millennial cohort on page six of our presentation. Please turn to slide seven where we focus on GreenBrick's strategic advantages. First, we have been disciplined and deliberate on maintaining a strong balance sheet. Despite purchasing almost 10% of our stock year to date, our debt-to-total capital ratio fell to 28%, and our net debt-to-total capital was 25.5% at the end of the quarter. About 89% of our outstanding debt is long-term fixed rate with an annual cost of about 3.5%. We issued 50 million of perpetual preferred stock in late 2021 at a 5.75% coupon that would be prohibitively expensive to issue today. Our goal is to always have a superior balance sheet and ample dry powder. Second, as Jed will discuss in more detail later, we have been consistently disciplined with our land investment underwriting, which leads to a superior land pipeline to support our business. Unlike many of our peers who operate under a land life playbook, we do not use land banking to secure lots. We believe this puts us in a strong position relative to these peers for multiple reasons. First, cost of financing. The land bankers who provide financing for land life builders typically charge a high cost of capital. The recent rise in interest rates had made previously expensive land bank capital much more expensive. As noted in peers' earning calls, because these increase costs and slowing demand, some builders are walking away from lot option contracts or land bank deals. These are typically in C locations. We expect land banking capital will contract and become more expensive in the future, and third-party lot development will be more challenging. Second, take down costs. Builders must buy lots from lot developers or land bankers at retail prices instead of wholesale prices. Ringbrick, on the other hand, is the developer, a co-developer on over 90% of our lots owned and controlled, giving us a wholesale pricing advantage on the majority of our lots. Third, price escalation. Many lot contracts, and most on A location neighborhoods, have a 6% price escalator, which means that builders must pay 6% more to purchase a lot the following year. even if the housing market slows further. While there is a lot of renegotiating taking place on option lots, very few renegotiations are taking place on lots in prime A locations. High quality lots in prime A locations are not easily replaceable, and those neighborhoods are performing better than lots in C locations. Lastly, penalty, most high quality option lots demand 15% or more of retail lot price as a first loss earnest money deposit, making it a very expensive proposition for builders to walk away from their lots. At the end of the corner, we own and control approximately 26,000 lots. We have no need to buy land to grow our business and don't plan to buy much or any land in Q4 2022 or well into 2023. Our third strategic advantage is location, location, and location. Not only do you operate in some of the best markets in the country, but you also primarily build in infill submarkets. Over 80% of our year-to-date revenues were generated from those infill markets where supply is constrained, accompanying significant demographic tailwinds. We believe our markets will outperform the rest of the country. Jed will expand this discussion on our land and lot position as well as our preferred locations later on. Fourth, operational efficiency. We have invested significant capital and resources to improve our technology and processes across Greenbrick's brands. These investments have provided us more transparency into our workflow and cost structure. As a result, as the market slows, We believe that we will have the ability to react quickly to improve overhead efficiency and negotiate what we think will be better pricing with vendors and subcontractors. Finally, and most significantly, as shown on slide eight, our industry-leading gross margins at 32.4% gives us a tremendous amount of cushion to manage pace versus price. With that, I'll now turn it over to Rick. Rick? Thank you, Jim.
spk03: Please turn to slide nine of the presentation. Our total revenues in Q3 2022 increased 19% year over year to $408 million, primarily driven by a 33% increase in ASPs of closed homes to $607,000. This was partially offset by 12% decline in the number of closings to 650 homes. The decline in the number of closings was due to a lower start pace in prior quarters and a smaller backlog entering the quarter because of weakened demand. Higher residential units revenues led to a 550 basis point year-over-year improvement in home building gross margin, so 32.4% in Q3 of 2022, breaking the previous record of 32.3% set in Q2 of 2022. Although we are not likely to maintain this level of margin in this housing market, our ability to outperform our peers has been consistently demonstrated quarter over quarter, and we believe we will continue to generate superior margins in a more trying time. SG&A leverage ratio increased slightly year over year to 10.9% during the third quarter of 2022. As a result of higher revenues and gross margins, net income attributable to Green Break grew 52% year-over-year for the quarter. Additionally, our reduced tax rate resulting from energy tax credits further improved diluted EPS for Q3 2022 to $1.57 for the quarter, a year-over-year growth of 65%. As mortgage rates rose to their highest level in 20 years, housing demand cooled quickly. Net new home orders during the third quarter of 2022 decreased 41% year-over-year to 404, while our quarterly absorption rate for average active selling communities decreased to 5.3 homes. Despite the lower sales pace, our decline in new order revenues during the third quarter was just 34%, smaller than the decline in order count, as our average sales price in new orders rose by 12.5%. from 553,000 to 622,000. Our cancellation rate increased to 17.6 for the third quarter of 2022, compared to 6.9% for the same period last year, and was up from 11.4% last quarter. As you would expect, our cancellation rate is the highest with Trophies entry-level buyer. We do not see this improving soon. Jed will provide more commentary on sales and market dynamics. On slide 10, we highlight our year-to-date results. Our total revenues were up 40% year-over-year on an ASP increase of 31%. Our year-to-date gross margin was up 460 basis points to 31.1%, and our SG&A leverage improved 150 basis points to 9.4%. Our net income attributable to Green Break was up 86%, with our diluted EPS up 94% year over year. Our annualized year-to-date return on equity was up 1,090 basis points to 34.9%, the highest among our peer group. Backlog at the end of the third quarter of 2022 declined 45% year over year to $564 million. This was due to a 54% drop in backlog units, partially offset by a 20% increase in the average sales price of backlog units. The drop in backlog units is a function of the lower levels of new home orders and the higher cancellation rate described above. As a result of fewer sales, increase of units closed, and decrease in backlog units, Spec units under construction as a percentage of total units under construction rose to 65% at the end of September 2022 from 31% a year ago. We are assessing our inventory level on a daily basis to make sure we are aligning our sales space starts in construction. Consequently, we expect to start fewer homes in Q4, and this trend will likely continue into the first part of 2023. As Jim mentioned earlier, we continue to deleverage our balance sheet with strong operating cash flow and one of the lowest debt-to-total capital ratios of 28%. As of September 30, 2022, our weighted average cost of debt was 3.5%, and 89% of the outstanding debt was fixed. Maintaining the strength of our balance sheet will remain as a top priority. I will now turn it over to Jed for market commentary.
spk11: Jed?
spk09: Thank you, Rick. Please turn to slide 11. The impact of rising interest rates was felt in our markets. As Rick mentioned earlier, our net sales orders during the quarter were down 41% year over year, with revenues on sales orders down 34% because of our continued increase in average sales price. And as seen on this slide, even though our cancellation rate has continued to go up since May of this year, It is still outperforming most of our peers. Cancellations were heavily weighted to buyers who signed contracts when interest rates were lower. We also experienced higher cancellations among products with lower price points and lower deposits compared with the rest of our portfolio. People are still buying houses as there is still unmet demand. We have non-discretionary buyers who need to move out of rentals due to milestone changes in life, such as marriage, new child, or new job. During this price discovery phase, we continue to be laser focused on several key priorities that were laid out last quarter, which are, one, preserving backlog and acting quickly to restore sales momentum.
spk00: Two,
spk09: being stringent and nimble with capital allocation. And lastly, managing bottlenecks in the supply chain to bring down production costs and cycle times. We are carefully managing our sales pace and starts on a community-by-community basis. The market as a whole experienced an abrupt slowdown in June. Since then, we have adopted more aggressive incentives in underperforming communities. Sales activity picked up in the second half of July while mortgage rates temporarily dropped before rising again the second half of August. With an increased level of incentives, we were able to entice a reticent market and maintain a constant sales pace from June through September. Overall, discounts and incentives for new orders were up from 2% the previous quarter to 4.2% in Q3 2022. During October, traffic and sales pace have been slower, with monthly sales down approximately 19% versus the prior four-month average, and incentives increasing from 4.2% to 6.3%. Discounts and incentives include base price reductions, rate buy-downs, and other closing credits. We expect elevated incentives, higher cancellations, and lower sales volume to remain the biggest headwinds to our margin performance in the near term. We will continue to monitor the market carefully to adjust our pricing and to balance starts and inventory with sales. As Jim noted, our industry-leading gross margins allow us to be very aggressive pricing our homes. Next, we continue to focus on managing capital allocation prudently. Considering current market developments, we have significantly slowed down our land acquisitions and expect the trend to continue until the land markets adjust. Additionally, we conducted a thorough review of our lots owned and controlled. As a reminder, a vast majority of our lots were purchased before the upsurge of land prices on top of conservative underwriting. Therefore, our underwriting for these lots still generates adequate returns in today's environment, and we do not see immediate impairment risk and have no communities on a watch list. Given recent volatility in the market and slower sales, we are planning to postpone land development in certain communities that are entering the next phases of land development. As shown on slide 12 and 13, communities that have been delayed in the DFW area are more periphery locations, while the majority of our land book in DFW and in Atlanta are in infill locations. We project that our land and lot development spending will decline approximately 45% next year from full year 2022. We are surveilling the market conditions as to determine the best cadence and timing for the resumption of these development projects. Please turn to slide 14. The self-developing nature of our land business gives us tremendous flexibility to control delivery schedule and cost, and an upper hand on achieving higher margins. Despite slowdown in development, we expect to complete almost 8,800 finished lots between 2022 and 2023 in 73 communities. As shown on slides 15 and 16, our 2023 deliveries in DFW and Atlanta will be concentrated in infill and adjacent desirable areas. Depending on market conditions, as many peers pull back, we expect to have the opportunity to increase our count on ending active selling communities by 20 to 30 percent from the end of September over the next four to five quarters. We believe these new communities with a favorable land and lot basis provide the optionality of aggressively pricing without the overhang of protecting backlog. We also believe this will generate favorable sales per community at more traditional gross margins. We expect this capability will be an opportunity to build market share and effectively manage price-first-pace decisions. In addition to the flexibility regarding timing of community openings, our self-development of lots is expected to generate higher margins and therefore more pricing flexibility compared to builders who have accumulated higher price lots from third-party developers. This also provides us with the capability to start more homes under construction without an outlay of cash to purchase these finished lots when demand returns. Next, I would also like to provide some update on our expansion into Austin. In August, we fulfilled several key roles, including our new division president, Ryan Durkee, to operate the Trophy brand in Austin. Ryan brings tremendous experience and knowledge in home building, and we are excited to have him join the team. Austin is a tough market today, but we think we will be able to deliver homes from $275,000 where there's a pent-up demand. We will keep everyone posted when we break ground on homes in early 2023. The last focal point for us is to value engineer to bring down cycle times and costs. Our cycle time for homes closed during Q3 of 2022 varies significantly by brand and price point, but in aggregate churned modestly by 21 days sequentially. Although we are not back to pre-COVID levels, we are pleased to see improvements in the supply chain across multiple categories, especially with front-end construction. The falloff in starts across the industry gives us more leverage and negotiations on new communities as we become more selective with vendors in regards to both pricing and quality. To be clear, we're still experiencing struggles in certain aspects of the supply chain, but we will continue to work with our trade partners to resolve bottlenecks in the supply chain and unlock additional savings. With that, I'll turn it over to Jim for closing remarks. Jim?
spk10: Thank you, Jed. I would like to thank our entire Green Brick team for their continued hard work in this more challenging environment. We believe that Green Brick is entering this cycle in a strong position. We have. a significant footprint in some of the best markets in the country, a broad spectrum of product types and customer bases, a strong balance sheet and ample dry powder to deploy, a disciplined land pipeline to support growth, and most importantly, an experienced team in place to navigate our business in this environment and achieve our long-term goals. As far as stock buybacks and capital allocation are concerned, For the first time in many years, we think unique investment opportunities may arise in 2023. Consequently, we expect to evaluate buying back stock versus these direct investment opportunities as the opportunities arise. This concludes our prepared remarks. We will now open the line for questions.
spk01: Thank you. If you would like to ask a question on the phone lines today, please press star 1 on your telephone keypad. To remove yourself from the queue, you can press star 1 again. Please limit yourself to one question and one follow-up, and if you have additional questions, please feel free to re-enter the queue. Once again, everyone, that is star 1 to ask a question. We'll take our first question from Carl Reichardt with BTIG.
spk05: Thanks. Morning, guys, or afternoon. I'm not sure what time it is, actually.
spk00: Rick.
spk05: I wanted to ask about the SG&A, which was ahead of what we were expecting, and there was some negative leverage despite the relatively good-sized increase in revenue. I know there was some unabsorbed overhead, I think you said, in the queue. Can you just expand on why that number increased year over year on a percentage basis? And then what kind of run rate should we be thinking for core G&A on a go-forward basis?
spk03: Those are great questions, Carl. This is Rick. You know, first, you know, particularly if you look queue to queue, we went from $512 million of home building revenues in Q2 down to $397 million in Q3. So most of SG&A, well, I shouldn't say that, commissions generally are going to be your most significant singular variable cost. In the short run, a lot of your overhead are going to be fixed costs. In the long run, everything is variable, right? So about 60% of the quarter-to-quarter increase from 8.2% to 10.9% was that function of math, just having a bigger denominator versus your costs, because costs excluding commissions were in about the same. Other than the other 40%, about a 1% delta, related to a cumulative year-to-date incentive comp adjustment, an increase for the kind of year that we're having. But if you normalize that, that would have only been 0.3% instead of 1% in the quarter. So, you know, it would have been about 10.2%. It's a lot more interesting to talk about the long-term run rate because we're going to be cutting costs, you know, just in this in this view of having fewer starts until demand comes back more robustly, we're going to be looking to chop that number down. So lower is the answer. But that will lag. It will lag. It will always lag. We still have a bunch of homes to complete at this point.
spk05: Okay. All right. I think I've got that. And then... Jim, I have a question here and you got to it at the very end of your remarks, which is obviously Greenbrick was started at effectively the bottom of an awful housing market. We're looking at at least some struggles in the near to intermediate term. So when you're thinking about opportunities, are those opportunities that you think you'd see in your existing markets? So any opportunity to grow your share? Or is this the opportunity for GreenBrick now to begin to spread its wings into new markets? I'd just like your perspective on that. Thanks.
spk10: Okay, Carl. First of all, we quit seeing much deal flow from brokers to sell builders because they knew we wouldn't buy based on Rosie going forward assumptions. So, you know, I... I'd like to say that we see a lot of deals, but frankly, we didn't because they knew that we weren't going to be buyers. Right now, we are in a cyclical business. I think this is my fourth real estate cycle. I've never seen a real estate cycle where optimism didn't revert to realism. So that's why I think that maybe, maybe is the operative word, the opportunities in 2023, purchasing a private builder for the first time, because I think you're going to see optimism revert to realism and pricing will adjust accordingly the perfect scenario would be to find a private builder that fits our culture and more importantly fits our economic hurdle rates in a south or southeastern market great i appreciate that color thanks very much i'll get back in queue we'll take our next question from michael rio with jp morgan
spk11: Hi, everyone. It's Andrew Ozzie on for Mike. I appreciate you taking my question. Congrats on the results this quarter. I wanted to ask if you can give us some of your thoughts around directionally how gross margins might be shaping up over the next one or two quarters.
spk10: Sure. I think I'm going to start that. Jed can chime in later as he tracks this almost on a daily basis neighborhood by neighborhood. It's really interesting in the A class infill neighborhoods, we're seeing margins maintained because it's so supply constrained from a competitive lot position and a builder's competitive situation. I don't want to be overly optimistic, but we actually raised prices in a million dollar neighborhood this week and are having really good demand even though at a slower sales pace in a triple a location neighborhood the neighborhoods that are really hard to handicap right now are c location neighborhoods and jed's going to chime in how most of our neighborhoods are not c location neighborhoods but trophy does have some we think it's going to be much more challenging because there's more builders down the street housing is more commoditized and frankly what our gross margins are gonna be are gonna be dependent to a great degree on what our peers do down the street, so your guess is really as good as mine.
spk09: Yeah, I would just add that gross margin is also gonna be, our gross margin and below our gross margin will be affected by financing and increased realtor commissions that would probably
spk07: in these periphery markets all having to add to incentivize sales. Okay, great. Thank you for that color.
spk11: And then you mentioned raising prices. So in your AAA market, so how should we be thinking about closing ASPs in the next two, three quarters ahead of you opening these new communities?
spk10: Jed, why don't you take the product mix question? Because obviously we're not raising prices in many, in as many neighborhoods as either they're flat or decreasing.
spk09: Yeah, I think our ASP will continue to increase slightly because what we've seen is the periphery locations that say we're selling 10 to 12 a month, sales have really dropped to about four. So that's quite a dramatic decrease. Whereas the preponderance of our communities are in AAA locations, And we've seen a slight decrease. Maybe we're selling three a month instead of four. So the percentage drop in the A locations, which again are the preponderance of our communities, is much smaller.
spk03: And the ASP in those communities is typically very high. Andrew, I think that probably some of the best color we gave was on just the increase in October of the of the average discount going from up to 6.3%. So that's going to have an impact certainly on the ASP in part if it's a price discount or on incentives. So it becomes a little bit of a combination between gross margin hit and just right off the top for a discount.
spk07: Okay, great. Yeah, super helpful to get your thoughts on that. I'll get back in the queue. Thank you. We'll take our next question from Jay McCandless with Wedbush.
spk02: Yep. Hey, good afternoon, guys. So, Rick, I did not follow your answer to Carl on the SG&A question. Can you talk about why that was up year over year and what we should be forecasting going forward?
spk03: Well, the bottom line is it's a function of lower revenues, and our cost structure is going to have to come down. So it was probably 0.7 too high this quarter for the incentive comp adjustment, and otherwise it's going to be a function of us making adjustments to the core cost probably the beginning of 2023. Okay.
spk02: And then, Judd, in your prepared comments.
spk10: I wouldn't expect a big decrease in SG&A in 2004. We're going to start addressing the cost structure more into 2023. We don't want to have a knee-jerk reaction to that based upon three- or four-month sales, but we're watching very closely.
spk02: Okay. Thank you, Jim. And then, Judd, in your comments, I've caught about half of it. I think you said something about 20% to 25% community growth. Is that what you said for next year?
spk09: Yes.
spk02: Okay. And does that community growth include the potential purchase of a southern builder you were talking about, Jim, or is that something that you already have under contract?
spk10: We have no place card for a builder, and we have some maps in our slide deck showing new community opening locations, Rick, that I think investors really need to stay in tune with that map and your presentation. What slide is that?
spk03: There are a couple slides in there, 15 and 16, but 14 is probably really on point because it shows how we have between this year and next year, 73 total communities where we're delivering lots. So that's going to drive the opening of those communities. will be driving that growth in 2023.
spk10: And what's really interesting, we don't get this granular in our presentations, but if you take a look at the slide deck on 15, and you take a look where those communities are open, you can see that they're in the areas that Burns describes as most desirable and desirable areas. And I don't think any CEO is jumping up and down excited about what's happening in the market. But we're relatively optimistic because the communities that are opening in these new highly desirable neighborhoods, we have a very favorable lot cost. We purchased them when the land was low. Some of them have low cost mud debt on them. already have other neighborhoods not far from that and our lot cost in these new neighborhoods is very favorable compared to our older neighborhoods that are already producing very nice margins. So we feel good about that. You'll see two dots that are a few dots that are not in the highly desirable locations and as we said in the call those are in more Horton higher competitive neighborhoods where there's more competition and we're going to see margin compression in those neighborhoods and we know it. We just don't know what it's going to be because we know we can price a house more than Horton because frankly it's a pressure architecture, more windows, better indoor out living space, but we can only go so the spread over a Horton product can only be so much.
spk02: To that end, Jim, if this is a longer term downturn than shorter one, what's the future for trophy signature? Do you just put a lot of that land in mothball and wait till Jay Powell's done jacking up rates? Or what's the near to medium term outlook for trophy signature?
spk10: Well, it's obviously going to be harder to grow trophy signature unless you want to take lower margins. We're going to evaluate that. You know, we've already made the investment in land. So in terms of return on capital stuff, we think it's going to be accretive, but how accretive, we don't know. In terms of Austin, for example, Jed, why don't you tell them what we're doing in Austin? We think we can still be very successful in Austin because we can price a home under $300,000, and we think there's a huge amount of demand. And in this market, it's kind of a winner-take-all because the consumer is so smart, and if you open at $300,000 and you can make decent margins, and some other builders not far from you at 350, you don't get one incremental sale, you get 10 a month.
spk09: Yeah, I would just add that, Jay, I would just add that our lot cost basis in a lot of these periphery locations is around $50,000. We saw our vertical construction costs really kind of run out of control, not just us, but the whole industry to say, you know, where it's costing close to $200,000 a house to build. And we think we can beat those down, you know, in the 150 to 175 range and really deliver, as Jim pointed out, a much cheaper product at a very industry standard historically nice gross margin of 25, 26%.
spk02: Thank you for that, Jen. Jim, the last one I had, if infill is still selling that well and on the company average you had a 41% order decline, I guess what was the level of declines in the softer areas versus the level of declines in the better areas for the quarter?
spk09: Yeah, this is Jed. I'll take that. I don't have the exact numbers, but the cancellations in the A locations was at least half of what it was in the periphery locations.
spk10: And right now... The real problem in the periphery locations is not demand. It was the cancellation factor that was so much higher. In the A locations, we're taking $60,000, $70,000 in some of the higher-end price points and lot deposits, and obviously those people are more qualified and they're less likely to walk away from $65,000 than an entry-level buyer that puts $5,000 in a house. So what was really affecting the sales pace... The demand was there, our cancellations were too high. I think they were running 29, 30% at Trophy. And sometimes, on some week, they can even be higher than that.
spk07: And they're much lower than that for the aggregate of the rest of our builders. OK, great. Thanks for that question.
spk01: As a reminder, everyone, that is star 1 on your telephone to ask a question. We'll take our next question from Alex Regio with B-Rally Securities.
spk08: Yes, good afternoon. First, quick clarification. Did you say that incentives and cancellations increased in the month of October?
spk03: Yes. Yeah, the incentives went from 4.2% in Q3 to 6.3% in October, for instance. Helpful. And then...
spk08: How many finished spec homes did you have at the end of the quarter? And then lastly, what's your land spend likely to be for 2022?
spk10: I don't think we provide that detail. I think we were internally taking a look at land spend in 2022 and 2023, and I think it was going to be within about $140 million delta.
spk03: Yeah, we're going to be down 45% between land and development spend from 22 to 23. And the delta on that is about $150 million.
spk08: Thank you very much.
spk10: But that's somewhat fluid depending on costs and other phasing issues that we're looking at right now. Obviously, with lower demand, any time that we can reduce development spend, that's a good idea, and we're really evaluating that on a neighborhood-by-neighborhood basis. All of our builders are coming to Dallas November 8th and 9th to discuss that issue with us.
spk07: Thank you.
spk01: We'll take our next question from Alex Barron with Housing Research Center.
spk06: Thank you very much. I wanted to see if you guys could provide the number of starts this quarter and how that compared to last quarter and last year.
spk03: Yeah, it's actually that you can do the math pretty easily. Every quarter we tell you what the closings are, obviously, and we tell you what the ending units under construction. But in Q3, we started 490 homes.
spk07: Okay. And a year ago?
spk03: A year ago was 801.
spk10: It's very difficult. I would caution anybody to take a look at comparing COVID sales results and required starts that were resulting of that and matching that to other periods because it's going to skew your results because we just had a when we were starting, 801, that we were selling homes really in hindsight that I wish we would have delayed selling some of them because of the cycle times.
spk06: Right. My next question was, you know, with these new communities that you guys plan on opening and where you've said that you have a cost advantage, does that imply that, you know, you will open them at lower prices than you would have otherwise to gain an advantage over other builders?
spk10: Well, first of all, the market sets the price. We don't set the price. But we do know that you can hit a jet stream of buyers offering a real value when you're in a peripheral neighborhood compared to piers. So our pricing strategy really is very dependent upon neighborhood location. In terms of opening some of these new neighborhoods, One of the things we're going to be very cautious of is that we want to get sales kicked off better, and we want to be able to raise prices and not have to worry about the impact of pricing on backlog. So I think we can be more competitively priced, whereas in some existing neighborhoods that we had a large backlog, we frankly didn't want to jeopardize that backlog and get too aggressive on pricing when we only had, say, 20, home sites left in the neighborhood.
spk06: But does that imply that most of these homes are going to be specs that you sell very close to completion?
spk10: Yes, because, yeah, I think more and more specs. I think we had 65% of level specs at the end of 3Q. I think you're going to see that progress for two reasons. First of all, the buyer right now just doesn't want to take the risk on interest rates. They want to be able to, when they contract for a home, They want to be able to move in in two months because they're concerned about rising interest rates, and then they're concerned just generally about jobs, costs, and a lot of other uncertainties that we weren't dealing with a year ago.
spk06: Right. Okay, well, that makes sense. Now, if I could ask one more. Some builders have said that they plan on maintaining a certain – sales pays, let's say, three or four a month, and that they're just going to keep finding the market clearing price. I'm curious if you guys share that philosophy or if you look at the world from a different perspective.
spk10: Well, it's going to be interesting. In the A locations, we don't look at the world that way because we don't have to. On the peripheral locations, as I said, they said, what's going to happen to our gross margins? And when you say things like some peers are going to maintain sales pace, obviously, If we want to maintain sales space, we're going to be impacted by those guys because we're down the street. So we're going to have to see what they do.
spk06: Got it. Okay, well, best of luck. Thank you.
spk07: Thanks, Alex.
spk01: We'll take our next question from Carl Reichardt with BTIG.
spk05: Thanks. Actually, Alex just got to the point I was trying to get to, which is – so, Jed, so – What, what, where on average are you releasing trophy signature homes for sale in the construction process now? At slab pour. At slab pour. And so then you've got another, what, let's four or five, six months to get to finished. Yes. Is there a thing that you would, you would do it later than maybe at, you know, maybe at wrap or something like that in process?
spk10: Well, the thing, reality is that most buyers, even though we release this slab pour, they don't want to buy a slab pour. They want to buy after drywall and when the carpet's getting ready to get put in. So we're opening for sales, but we're not seeing the buyer interest at that level because they don't want to take the risk we just described.
spk05: Yeah. Okay. So, Jim, you're saying that that will transition, Trophy will transition as you move into 23 to releasing for sale deeper in the construction process, the vertical process.
spk10: Yeah, but we don't see a lot of buyer demand there. And frankly, that buyer is putting up such small amount of earnest money at Trophy compared to our other builders that, yeah, for SEC and your reporting, we count it as a sale, but we watch it very closely because they have very little skin in the game.
spk07: Okay. All right. Thanks very much. I appreciate that.
spk01: We'll take our next question from Bill Deselman with Teton Capital.
spk04: Thank you. That's Tyatin Capital. And you, I think, began to answer this question, but with input costs adjusting downwards, would you discuss the possible benefit to gross margin and maybe link that to the commentary before that if you had $200,000 of building costs, you think you can bring that down to $150,000 to $175,000? And with that magnitude, of a percentage drop in cost apply to higher-priced homes also? So I recognize there are several questions kind of embedded in that, but maybe you could talk to the whole input cost phenomenon.
spk10: Bill, I'll try to address it. It's really an unusual situation, this cycle, compared to cycles, say, 20 years ago. We think labor costs, as starts go down significantly, we think they could. They're going to react very quickly, okay? And we think labor costs and the total cost of a home represent about 25% of the cost of a home. We think those costs are going to adjust fairly quickly. We're already seeing framers and concrete people interested in our business that really weren't a year ago. The side that's very difficult to evaluate on input costs is cement and some of the other large costs involved in our business. Unfortunately, in the last 20 years, oligopolies have been created with lumber companies, cement companies, aggregates and those things. Those guys are still very reluctant to lower prices. We think firing up a cement plant is very expensive. When they see demand, they're not lowering prices right now, but when they have less demand, we're still hopeful that we're going to see the impact of those next spring, but we haven't seen it yet.
spk09: I would add, we've already realized huge labor, or sorry, huge lumber savings. A lot of the homes that we're now closing and that we will close in Q4 and Q1 are on very expensive lumber packs that were at the, let's call it March, April of this year. And we've seen dramatic savings on those.
spk10: Bill, when he's talking dramatic, we're talking on a 2,000, 2,200 square foot house, $20,000 savings. So that creates a lot of volatility in these gross margins you're looking at too.
spk04: That's insightful. So the reference to bringing costs down $25,000 to $50,000, that was basically incorporating lumber and labor into the thought process, or were there other
spk10: That was everything, and I thought it was 175. Did you go to 150 in that conversation?
spk09: No, I said 150 to 175. Bill, we're hopeful we can get cement down. Concrete's at an all-time high. Like Jim mentioned, the concrete suppliers are not bending yet, but we're hopeful that we'll see some price decreases there. The mill lumber is way down. The specialty lumber is still high. We're hopeful we'll see some of that. The container shipping prices out of China that we're getting a lot of our flooring on, those were sky high. We're starting to see those drop. Hopefully we see the fuel charges start evaporating. So home buildings, you know, a collection of a thousand line items to build a house. And if we start whittling them down 10% to 20% per line item, we're going to see a totally different cost structure than these homes that we started back in March and April this year that are now closing over the next 30 to 120 days.
spk10: Yeah, prices go up quickly. They just go down slower.
spk04: And then one additional question tied to this, do you have an indication yet of the elasticity of demand that's in place in the market, meaning that if you were to use those lower input costs to bring prices down, even though you might be maintaining margin, does that drive additional sales, or is the buyer relatively inelastic at this point? Any insights?
spk10: We're actually discovering that. really and don't have a good answer in some areas we're seeing there's really price elasticity where if we lower price ten thousand dollars fifteen thousand dollars we get demand again in some of the perimeter neighborhoods that fifteen thousand dollars is not as important as the ability of that buyer to qualify so we're looking at rate buy downs and everything's that are not price related but i guess indirectly related to our margin at the end of the day and trying to provide more affordable mortgage options for these buyers because that's more important to many buyers than price.
spk07: Thanks for all the insight.
spk01: We'll take a follow-up question from Jay McKenless with Ledbush.
spk02: Hey, thanks for taking my follow-up. Two of them actually. The first one, if you think about the cost actions you talked about possibly starting in 2023, I guess, how are you going to be able to take those type of cost actions but then grow the community count 20 to 25 percent? Could you talk about that in terms of where the staffing levels have to be to drive that level of community growth?
spk10: Well, the community level growth is more of an indirect cost, a lot of those costs, but Rick, do you want to chime in on that?
spk03: Yeah, we've got capacity with a lot of our builders to man a couple of projects, perhaps. When you're starting a community up, you start with a fairly limited number of, you know, you're going to build the model fast, try to get it open as fast as you can. And once it's open, you're starting your production. So there's a buildup over time. So transitioning from an old community to a new community or transitioning to a you know, modify the number of superintendents that you've got because certainly the cost related to our field overhead is going to be variable over the next six to 12 months just based on what we see from a sales standpoint because we're measuring our starts based on our sales pace. You know, so a lot of that answer is yet to be discovered from, you know, what is the right answer you know, human count out in the field, but it's a matter of moving pieces around the chessboard and making sure that we keep our strongest players on the team. You know, I'm not going to quantify it for you because we're going to have to discover this as we go.
spk02: And then that 6.3% in incentives for October, And I apologize, I don't remember how you guys lined those out, but is all that going to hit the gross margin or is some of that going to show up in SG&A?
spk03: No, it's all in gross margin. It's between price drops or closing cost incentives for buy downs, et cetera. The only thing that's going to be below the line would be anything that we do with the brokerage community on promotions to them.
spk07: Great, thanks again, appreciate it. Sure.
spk01: And that concludes the question and answer session. I would like to turn the call back over to Jim Brickman for any additional or closing remarks.
spk10: No, we would just invite anybody to give us a call in person if you have any questions. The market's challenging. It's not impossible. We've been through this before, and we appreciate everybody's support.
spk01: And that concludes today's presentation. Thank you for your participation and you may now disconnect.
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