Smith Douglas Homes Q3 2026 Earnings Call Transcript

Smith Douglas Homes (NYSE:SDHC) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Smith Douglas Homes reported a 5% increase in home closings and a 13% rise in net new orders compared to last year, with a backlog increase of 25%. Despite these gains, profitability remains under pressure due to financing incentives needed to counter higher mortgage rates.

The company is focusing on maintaining a land-light operating model, controlling lots through option agreements, and is optimistic about long-term growth prospects in newer markets like Dallas and Chattanooga.

For the fourth quarter, Smith Douglas Homes expects 800 to 875 closings, with average sales prices between $310,000 and $320,000, and gross margins between 15.5% and 16.5%, while not providing 2027 guidance due to economic uncertainties.

Full Transcript

OPERATOR (Moderator)

After today’s prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Joe Thomas, Senior Vice President, Accounting and Finance. Joe, please go ahead.

Joe Thomas (Senior Vice President, Accounting and Finance)

Good morning and welcome to the earnings conference call for Smith Douglas Homes. We issued a press release this morning outlining our results for the third quarter of 2026, which we will discuss on today’s call and which can be found on our website at investors.smithdouglas.com or by selecting the Investor Relations link at the bottom of our homepage. Please note this call will be simultaneously webcast on the Investor Relations section of our website.

Before the call begins, I would like to remind everyone that certain statements made on this call which are not historical facts, including statements concerning future financial and operating goals and performance, are forward-looking statements. Actual results could differ materially from such statements due to known and unknown risks, uncertainties and other important factors as detailed in the Company’s SEC filings. Except as required by law, the Company undertakes no duty to update these forward-looking statements.

Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be found in our press release located on our website and our SEC filings. Hosting the call this morning are Greg Bennett, the company’s CEO and Vice Chairman, and Russ Devendorf, our Executive Vice President and CFO. I’d now like to turn the call over to Greg.

Greg Bennett (President and CEO)

Good morning everyone and thank you for joining us for review of our third quarter results and an update on our company’s operations. Smith Douglas Homes continued to make progress in a difficult housing market during the third quarter. We grew closings, orders and backlog compared to last year while expanding our active community count and staying focused on our operating practices that have served us well over the years. We closed 831 homes during the quarter, representing an increase of 5% over last year, and generated 777 net new orders, up 13%.

We also ended September with 947 homes in backlog, an increase of 25% from a year ago. Our active community count increased 15% to 113 communities, which contributed to our order growth and expanded our reach across our markets. At the same time, our profitability continued to be under pressure, largely due to the financing incentives needed to help customers manage higher mortgage rates. Our home closing gross margin was 16.3% for the quarter, pre-tax income was 3.3 million and earnings per share totaled $0.07. As we moved through the third quarter, demand became more difficult. We saw a reasonable level of activity in July and August, followed by a slowdown in September as mortgage rates moved higher.

That slowdown has continued to make the near term outlook less predictable and we’re adjusting our business accordingly. One encouraging sign from the quarter was that our cancellation rate remained at approximately 11%, essentially unchanged from last year. That tells us that customers who make the decision to buy a Smith Douglas home are generally following through. Our job is to offer the right home at the right price with financing options that work for our customers, and that’s where I believe Smith Douglas has an advantage. We’ve built this company around providing affordable, quality homes while giving customers more choice than they typically find at our price points. As demonstrated by our backlog growth, we remain focused on shifting more of our business toward build-to-order homes over time. This allows customers to choose the home and features they want while creating opportunities for us to earn better margins through options and upgrades.

Another important area of focus is keeping our construction cycle time as low as possible. It’s something our team works hard at every day. For the third quarter, our average cycle time was just 59 days. We’re also staying focused on our land-light operating model, which allows us to control lots through option agreements and land banking arrangements while maintaining financial flexibility. We’ve had some success working with land sellers and developers to renegotiate certain deals and adjust takedown schedules to better match current demand.

We’ll continue to look at each opportunity carefully and make decisions based on what makes sense for the business over the long term. Our newer markets are also making progress with Dallas, Chattanooga, Central Georgia and Greenville all recording home closings this year. We’re pleased with the progress in those markets and expect to continue expanding our presence over time. Despite the challenging backdrop, we continue to see opportunities to build Smith Douglas into a large scale home builder across the Southeast and Southern United States.

Finally, I want to say a word about our longer term outlook. There’s no question that the housing market is going through a difficult period. Affordability remains stretched, consumer confidence is weak and mortgage rates continue to create uncertainty. We can’t control those things, but we can control how we run our business. Despite these headwinds, I believe the underlying demand for affordable housing is still there. Many families want to buy a home, but they’re waiting for a monthly payment they can manage and greater confidence in the economy.

When conditions improve, we want Smith Douglas to be able to take advantage of that demand and I believe there will be opportunities for well-capitalized, disciplined builders to grow coming out of the slowdown. We’ve built Smith Douglas with a long term view in mind. Before I finish, I want to thank our team members and our trade partners for their hard work. This isn’t an easy environment to operate in, but our teams continue to show up every day, take care of our customers and find ways to improve how we operate. With that, I’ll turn the call over to Russ for a closer look at the quarter’s financial results.

Russell Devendorf (Chief Financial Officer & Executive Vice President)

Thanks, Greg, and good morning. I’ll highlight our results for the third quarter and then conclude my remarks with an update on our balance sheet, capital allocation. priorities and outlook. We finished the third quarter with 262.5 million in home closing revenue on 831 closings, with closings up 5% from the year-ago period. Our average sales price was 316,000 compared with 333,000 a year ago. Our home closing gross margin was 16.3% on a GAAP basis and adjusted home closing gross margin was 16.9%, compared with 21% and 21.3%, respectively, in the same period last year. Adjusted home closing gross margin excludes capitalized interest charged to cost of home closings, purchase accounting adjustments and real estate inventory impairments.

Our margins continue to reflect the use of financing incentives to help customers manage higher mortgage rates and support demand. During the quarter, closing costs, price discounts and the cost of forward commitments totaled 740 basis points compared with 610 basis points in the year-ago period and 780 basis points in the second quarter. Selling, general and administrative expenses for the quarter were 40.4 million, or 15.4% of revenue, an increase of 4.3 million from the same period last year.

The increase primarily reflected higher sales commissions, advertising costs and division overhead associated with higher closings, including the cost of our newer divisions, as well as increased compensation expense on additional headcount to support community count growth. Pre-tax income for the quarter was 3.3 million compared with 17.2 million in the year-ago period. Adjusted EBITDA, which we believe provides a useful view of operating performance and excludes share-based payment expense, purchase accounting adjustments, real estate inventory impairments and lot option contract abandonment charges, among other items, was 8.6 million, or 3.3% of revenue, compared with 22.2 million, or 8.5% of revenue last year. For the first nine months of the year, adjusted EBITDA was 30.5 million compared with 64.6 million in the prior-year period.

Given the nature of our Up-C organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas Homes Corp. and the noncontrolling interest of Smith Douglas Holdings LLC. Because a significant portion of our earnings is attributable to LLC members and not taxed at the corporate level, the income tax impact reflected in our financial statements can differ from more traditional C corporations. For that reason, we also present adjusted net income, which assumes a blended federal and state effective tax rate of 27.2% as if we operated as a fully public C corporation, which we believe provides a more meaningful comparison to peers. For the quarter, adjusted net income was 2.4 million compared to 13 million in the same period last year.

Turning to orders, we generated 777 net new home orders during the quarter, an increase of 13% versus the year-ago period. Year to date we have generated 2,728 net new home orders, up 24%. We ended the quarter with 947 homes in backlog, up 25% from a year ago, with a contract value of 305.3 million and an average sales price of 322,000. Q3 demand did not keep pace with our production, leaving work-in-process inventory slightly elevated and increasing our spec count.

We plan to minimize new starts in the fourth quarter as we focus on converting existing inventory into closings and generating cash through year end. Turning to the balance sheet, we remain focused on preserving financial flexibility while continuing to invest in our growth. We ended the quarter with 5.9 million of cash and 101.4 million of notes payable, resulting in net debt of 95.5 million. Our 325 million revolving credit facility had 99 million of outstanding borrowings and 0.8 million of letters of credit at the quarter end, with 204.1 million of borrowing base availability. Net debt to net book capitalization was 17.9% compared with 6.6% at year end 2025.

Our land-light strategy remains a core component of our operating model and financial flexibility. At quarter end we controlled 24,724 lots, including 1,514 homes under construction, 517 owned lots and 22,693 option lots. The 517 owned unstarted lots represented only 2.1% of our total controlled lot supply. By relying primarily on third-party developers and option agreements, we can better align lot inventory with demand and deploy capital efficiently.

Our capital allocation priorities remain focused on investing in our land pipeline and community count growth while maintaining a conservative balance sheet, and we will remain opportunistic with share repurchases. During the third quarter, we repurchased 28,370 shares of Class A common stock for 0.3 million, including repurchases earlier in the year; we had repurchased 10.4 million through September 30th, with 39.7 million remaining under the authorization.

We believe these repurchases represent a disciplined use of capital while preserving financial flexibility to support our long-term growth strategy. Looking ahead near term, demand remains sensitive to mortgage rates, affordability and consumer confidence. Our focus remains on matching lot takedowns with demand, managing costs, preserving liquidity and investing with discipline. For the fourth quarter, we currently expect closings between 800 and 875 homes, average sales price between 310 and 320,000, and gross margins between 15.5% and 16.5%. Given the continued variability in demand conditions, we are not providing 2027 guidance at this time.

While the primary risks to our outlook remain tied to macroeconomic conditions, including mortgage rates, consumer confidence, employment trends and the potential need for continued pricing incentives, we believe our affordable product offering, land-light strategy, disciplined operating model and growing community base position us well to continue gaining market share over time. With that, I’ll turn the call over to the operator for instructions on Q&A.

OPERATOR (Moderator)

We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press Star one to raise your hand. To withdraw your question, press Star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Natalie Kaliskeri with Zelman.

Natalie, your line is open. Please go ahead.

Natalie Kaliskeri (Analyst at Zelman & Associates)

Hey, good morning. Thanks for taking my question. Could you walk us through how incentives progressed through the quarter on new orders? I know you made good progress in lowering incentives even in the second quarter. I’m guessing this continued through maybe the first half of the third quarter. But were you still able to not increase incentives even when rates started moving higher in September?

Greg Bennett (President and CEO)

No, no, it was. We actually tried to pull back in July from the forward commitments, and we’re trying to pull down on incentives, but as the quarter progressed it was clear that there was just more of a lack of demand. So, you know, we turned back up the use of forward commitments through the quarter and obviously even into the first, you know, through fourth quarter today.

Natalie Kaliskeri (Analyst at Zelman & Associates)

Okay. And I guess your cancellations also being at normal levels is pretty impressive. So on top of the usual incentives you gave your buyers, did you also have to incentivize your buyers in backlog to prevent cancellation?

Greg Bennett (President and CEO)

No, we’ve maintained a pretty good backlog and I can’t speak in total, but, you know, there might have been a situation or two. But no, for the most part, we’ve been able to maintain backlog and yeah, our cancellation rate has been pretty good. Pretty consistent with historical norms.

Natalie Kaliskeri (Analyst at Zelman & Associates)

All right, thank you.

OPERATOR (Moderator)

Your next question comes from the line of Ryan Gilbert with BTIG. Ryan, your line is open. Please go ahead.

Ryan Gilbert (Analyst at BTIG)

Hey, thanks. Good morning, guys. First question is on just any color or comments you can provide on how demand trended in October. It doesn’t sound like there was too much of a change from September, but I know mortgage rates are a little lower, so I’m wondering if that had any impact on buyers.

Greg Bennett (President and CEO)

Demand was pretty consistent. September was okay, wasn’t great, but it continued to stay pretty consistent through October and even into December. We continue to use incentives to help drive demand. But yeah, we’re not seeing, as we sit here today, we haven’t seen any significant change. It’s been… And we were looking at, you know, as a matter of fact, we were looking at absorptions year over year. Absorption pace. When you look at third quarter of last year, our absorption pace is actually pretty consistent.

I think for the quarter we were about 2.3 sales per community this quarter. Last quarter of last year it was 2.4. So it was, you know, consistent where we were last year. But sequentially, obviously demand has started to, you know, feel a little bit of pressure this year.

Ryan Gilbert (Analyst at BTIG)

Okay, got it. And then on the fourth quarter gross margin guide, I think the range is a little wider than what you’ve provided the last couple quarters. And I’m wondering if you could talk us through what gets you to the low end of the range versus the high end of the range and where you’re seeing some of that uncertainty come from.

Greg Bennett (President and CEO)

Yeah, it’s all tied to our ability to push some of our specs through this quarter to get some sales and closings through the balance of this month and get those closed in December. So we’re really trying to get our spec levels back to where what we like. You know, historically we always, you know, as you know, we’re a to-be-built builder. You know, we focus on pre-sales. Our objective is always to get to 100% pre-sale. Clearly in this environment, you’re always kind of looking in the rearview mirror and realizing, okay, you didn’t hit the right incentive to get the demand going with our starts pace because we are a very production-oriented, kind of cycle-time-focused builder. So we continue to start homes in this environment and it’s our expectation that we’re going to set the price to meet that production. Well, clearly in Q3 we were not able to keep that pace.

So really the range is us trying to get those specs sold even if we have to offer some further incentives to what we’re currently doing to maintain that strong balance sheet and generate cash flow into year end. So that’s the big difference.

Ryan Gilbert (Analyst at BTIG)

Okay, got it. And I think just reading between the lines on where backlog sits currently and the 4Q26 delivery guide, I think the implication is that the, like the number of homes started, sold and closed in fourth quarter should be down pretty significantly. Is that correct?

Greg Bennett (President and CEO)

Started? Yes, we’ll bring down starts. Our backlog already puts us kind of in the mid to low end of the range. So, you know, our expectation, as long as backlog holds, which again we’ve had some pretty good, you know, cancel rates as I mentioned just before. So really, you know, to the extent that we can continue to move some specs, we should drive the closings higher or, you know, closer to the high end of the range. So that’s the big wild card again.

It’s what we’re able to do with specs. But yes, we would expect our starts to come down and, you know, Q4 is traditionally, you know, Q3 is traditionally your highest level of inventory as you’re really building to a bigger Q4 closing number. You know, clearly the demand this year has been off, you know, heading into year end. But, you know, we fully expect to generate cash flow and bring inventory levels down by the end of Q4. Hopefully that answers your question.

Ryan Gilbert (Analyst at BTIG)

It does. Thanks guys. Appreciate it.

Greg Bennett (President and CEO)

Yep, thanks.

OPERATOR (Moderator)

Your next question comes from the line of Rafe Jadricich with Bank of America. Rafe, your line is open. Please go ahead.

Victoria Pisker

Hi, you have Victoria Pisker on for Raf Jadrich. Thanks for our question. I was wondering if we can talk more about lots. If the lot count is up 2%, can you give any additional color on what you’re seeing in terms of raw land availability and how land development costs trended through the quarter?

Russell Devendorf (Chief Financial Officer & Executive Vice President)

Yeah, you know, lot count—obviously we’ve been continuing to take lots and trying to manage those lot takedowns with our land bank and development partners. With the slowdown in the demand environment, we’ve stacked up a little bit more lots, but we expect to get that back in line. We’ve been having conversations with all of our partners and trying to either restructure or renegotiate or push some takedowns off. So that’s obviously number one focus: to keep the just-in-time inventory and manage the balance sheet.

We expect to continue to work through that throughout the quarter. And then, just as far as land development costs, I’ll let Greg speak to what we’re seeing on the LD side.

Greg Bennett (President and CEO)

Yeah, thanks for the question. We’re seeing some softening in cost. We’re seeing some availability of trades on the horizontal side that’s providing some opportunity on pricing there. Unfortunately, the land itself we’re still struggling to see much relief out of. So we continue to push and look at avenues to make those more efficient. But yeah, I think that touches on the question about the cost.

Victoria Pisker

Thank you, that’s helpful. And then speaking about other costs, how did costs trend through the quarter and also what are you seeing in terms of labor availability? Keith?

Russell Devendorf (Chief Financial Officer & Executive Vice President)

Yeah, go ahead. Yeah.

Keith

Construction cost is flattish through the quarter. The one area we’re seeing—it’s spotted—but there are some immigration-related issues where we’re having some labor shortage, and due to those labor shortages we’re seeing some labor price increases. Those are market by market and not really widespread, but we are seeing some occurrences of that. Overall cost is pretty much flattish year over year.

OPERATOR (Moderator)

Your next question comes from the line of Jay McKenlis with Citizens Bank. Jay, your line is open. Please go ahead.

Jay McKenlis (Analyst at Citizens Bank)

Hey, good morning, everyone. First question, I had—good job on growing volumes year on year—but was just wondering how much of the growth in orders was related to new community openings versus maybe some same-store gains in the communities you had open last year.

Greg Bennett (President and CEO)

A lot of the growth. We’re starting to see the fruits of our investment over the last couple years from when we went public in putting that capital to work in not only our existing divisions and continuing to push scale on those divisions, but also we’re starting to see finally the investment of the startups, which would include Greenville, Dallas—which Dallas has really, in earnest, kicked off this year—Dallas Gulf Coast, which really hasn’t added much yet.

But then we divisionalized Chattanooga and Central Georgia and created separate divisions, which was really a split out from Atlanta. So you’re starting to see those divisions add to the growth. And as a reminder, none of our growth that we’re seeing, and growth that we would expect in the next year, is coming from acquisitions. We are certainly always looking—we’re always opportunistic; we’re looking for options in terms of growing through M&A. But for us we’ve been very successful in growing the business organically and through greenfields. And as a reminder, we don’t have to pay a big premium or any premium to do that. It’s just an investment and it takes a little bit longer.

But we’re starting to see that scale come through and we expect that to really add some more volume next year.

Jay McKenlis (Analyst at Citizens Bank)

Great, thanks. And then wanted to ask also on the mortgage side—you talked a lot about ARMs the last couple conference calls. I guess what’s working from a mortgage perspective right now and how much do you think those buy-downs are costing you in 3Q, and then what have you had to give so far in 4Q?

Russell Devendorf (Chief Financial Officer & Executive Vice President)

Yeah, that’s kind of the flavor of the month—is ARMs. And when you look across the builder landscape, a lot of builders have shifted to a 5/1 ARM, and that’s really driven by the cost. It used to be, kind of middle of the year, earlier in the year, it was a 4.99% 30-year fixed, and it’s just that the cost of that has more than doubled. We were paying at one point this year, call it 400 basis points, plus or minus, and now that had more than doubled at points in the quarter, so that’s coming down.

So then the bigger shift was kind of to a full 4.99% 5/1 ARM, which is roughly 400 or 500 basis points. And we’re starting to see, in the last 30 days or so, the 10-year has started to come down and so the cost of forwards are coming down. We’d like to see it come down more, but that certainly is going to have a positive impact, if that trend continues, on margins. We’ll continue to use the incentives in this environment to the extent needed, but hopefully the cost of those incentives continues to moderate, and that should be a pickup to margin.

I think this is for a lot of builders, at least that I speak to: not everybody takes the forward. I think we’re seeing more and more folks utilize those incentives because, again, we give that incentive. Sometimes our buyers need more closing costs, so we have to move some money around. So we’re not necessarily giving everything to everybody, and that’s why you don’t see everybody take the forward. And again, sometimes some folks can’t—they can’t qualify.

And it’s really an FHA product. I’d say we run about 25% to 30% of our sales that have a forward commitment. So it’s not every buyer, and so you really have to take that absorption rate on those forwards over the cost. So that’s why it’s not like a full load of that forward commitment—it’s because not everybody uses it. But for the foreseeable future, we expect to continue to use those incentives to push demand.

Jay McKenlis (Analyst at Citizens Bank)

And then, you kind of stole my last question, Russ, but I was going to ask if the pullback in mortgage rates from mid-October to now—if it had increased demand, traffic, clicks, however you want to look at it—have people responded to that?

Russell Devendorf (Chief Financial Officer & Executive Vice President)

Yeah, a little bit. It’s been, I’d say, probably flat, but we’ve seen a little bit of an uptick. Last week was a little bit better than the prior week. It’s not a trend just yet, but there are people—let’s put it this way—people need homes. People want homes. There is an underlying demand. I think it’s been more of a confidence issue because we’ve been able to solve kind of the rate problem—and by that meaning, really, it’s getting people to the right payment.

So I think it’s a confidence issue. Hopefully now that midterms have officially passed, we’ll start to see some folks get off the sidelines and, you know, cross our fingers that selling season into next year is going to start to look pretty positive.

Jay McKenlis (Analyst at Citizens Bank)

Okay, great, sounds good. Thank you.

Russell Devendorf (Chief Financial Officer & Executive Vice President)

Yep, thanks, Jake.

OPERATOR (Moderator)

Your next question comes from the line of Sam Reid with Wells Fargo. Sam, your line is open. Please go ahead.

Eric (Analyst at Wells Fargo)

Hi, this is Eric on for Sam. You talked about incentives have been accelerating. Just curious within your Q4 gross margin guidance whether or not you’re assuming incentives are at similar levels to Q3, or if they step up in Q4. And just curious if the gross margin in backlog is kind of above what you’re guiding to, and if there’s some sort of flexibility if margins should compress as the quarter goes on.

Russell Devendorf (Chief Financial Officer & Executive Vice President)

Yeah, we expect the incentives to be a little bit higher into Q4. And again, to the last question on kind of the range that we gave in terms of closings, the real flex point is going to be how many specs we’re able to sell and close into year-end and move some of our standing inventory. So the expectation would be that we’re going to have some more incentives to move that inventory, and so that would obviously elevate the incentives and thereby put a little more pressure on margins.

As we sit here today from a backlog perspective, our backlog margin is kind of right in the middle of that range—maybe slightly more. So we have given ourselves, we feel like, enough cushion to hit that range. Again, it’s always our intent to provide realistic guidance, but we tend to lean to the side of being a little more conservative—under-promise and over-deliver. This was the first quarter where our closings came in—while we were within range, it was probably a little bit more on the lower side of where we guided.

And that really just speaks to the demand environment and what we saw through the quarter and the ability to move inventory. Whether we could have increased incentives a little bit faster to get some of that inventory—who knows. The demand levels did trail off through the quarter. But now we’re starting to see some stabilization. Rates are starting to come down, and so we’re kind of cautiously optimistic now, with midterms over and going into the end of the year and into 2027, that maybe we see a few more green shoots.

Eric (Analyst at Wells Fargo)

Thanks, that’s helpful. You did talk about the specs are a little bit elevated, but curious what you’re seeing from peers in terms of their spec inventory, if that’s also sort of elevated. And could that just sort of be an incremental pressure not just for you, but for specs across the industry?

Greg Bennett (President and CEO)

Yeah, I think the competitors have all been moderating specs throughout the last 12 months. I read the analyst reports, I listen to the other builder calls, talk to our friends at the other builders. I think, just like us, in Q3 the demand environment probably created a little bit more speculative inventory on the margin across our competitors. But it’s not because our competitors are not focused on leveling their spec count off. I think it was just Q3 demand maybe pushed spec levels a little bit higher than folks wanted.

But I think for the most part, all the builders are looking to minimize spec levels. That’s what we’ve been seeing; that’s the trend we’ve been seeing over the last 12 months—so not really a big issue that I see.

Eric (Analyst at Wells Fargo)

Great. Thanks a lot.

Russell Devendorf (Chief Financial Officer & Executive Vice President)

Yep, thank you.

OPERATOR (Moderator)

Your next question comes from the line of Paul Sibilski with Wolfe Research. Paul, your line is open. Please go ahead.

Paul Sibilski (Analyst at Wolfe Research)

Thanks. Good morning, Russ. I guess, it sounds to me like demand really hasn’t improved a whole lot here in the second half of October as rates have trended a bit lower. What type of elasticity then are you seeing when you do increase your incentives? Are buyers coming into the market because of that if they’re not coming in because of rate reductions?

Greg Bennett (President and CEO)

On the margin? No, I think there’s. We have been, you know, and through the quarter and into the first part of, you know, this, the fourth quarter, it’s been a very inelastic market, and that’s really kind of across the board. So it’s really, you know, it’s challenging. But like I said the last couple weeks, you’re starting to see it, you know, either level off or we’re starting to see, you know, a little bit more of a return. And I don’t know if that’s, again, because of some of the additional incentives.

You know, we clearly are laser focused on, you know, driving, driving leads, driving traffic. We have, you know, been transitioning our CRM and, you know, our online sales consultants and doing a lot of really good things, positive things on the marketing side. So I think you’re starting to see some of that work. But again, you’re doing it in the face of a very challenging environment. You know, again, looking at the absorption pace year over year, as we sat here in third quarter of last year and looking at, you know, what the absorptions were, I probably would have taken the over in terms of what our absorption pace would have been this year. And it was roughly flat. So again, it’s just been challenging. And again that’s in the face of much higher rates last year versus this year. The rate environment has just totally moved against us.

And the cost of forwards versus last year is double, if not more than double. And we still kept the same absorption pace year over year. So that I would tell you is a positive. It certainly has had pressure on our margins, but the fact that we were still able to maintain an absorption pace that was consistent versus last year in the face of forward commitments that have doubled in a much more difficult rate environment, I’d say if you’re looking for some positives, I’d say that’s a positive.

And so again, I think the consumer confidence and you know, getting past midterms, again, hopefully, you know, that starts to have a bit of a positive impact on folks and we get people off the fence because again, it’s not a, we don’t believe it’s a lack of demand. Right. There’s definitely a need for housing and folks wanting to move. So you know, we just have to focus on what we can control and continue to, you know, stick to our business model.

We are focused on pre sales. So we’re just going to, you know, work to get back in alignment in terms of inventory and sales this quarter and into next year. So hopefully that helps. Paul?

Paul Sibilski (Analyst at Wolfe Research)

All right. I guess as you do increase your spec incentives in 4Q to clear some of that inventory, will that be, I guess, more focused on more aggressive forward commitments or will it just be price discounts? And then final question. As you look, you obviously have a different geography than most of your peers and we hear a lot about Texas, Florida and the western markets. But Atlanta nationally is a big market and clearly a big market for you. Any color on demand trends in the Atlanta market and also Nashville?

Greg Bennett (President and CEO)

Yeah, so the first, the first part of your question, the answer is yes, in terms of incentives and discounts. I would tell you it really is, it’s all about payment. So the incentives, the, you know, us putting more dollars towards a rate buy-down or forward commitment is going to be much more impactful. That’ll be much more impactful for our buyer because those, you know, buying down the rate is going to have a much, much bigger impact on a payment and affordability.

So that’s where you’ll probably see a little more of the incentive, overall incentive go. And then, you know, in terms of the markets, you know, Atlanta’s been… Atlanta’s… It’s, you know, week to week, it’s interesting. Week to week, we kind of see some divisions better than others, and it kind of moves around. Atlanta in general has been pretty good. That’s our largest market. Chattanooga’s had a couple of good weeks. Houston, Texas, maybe a little bit on the weaker side, but we’re fighting and scrapping and getting our own. Alabama, pretty good, relatively speaking.

I mean, they’ve been able to maintain probably the least amount of margin compression year over year. So it’s been pretty consistent from that regard, and they’ll get their volumes this year. So, again, I mean, we can go through all of them, but it’s really a mixed bag week to week. And I wouldn’t tell you that there’s one that’s significantly better or worse. It’s, you know, it’s just kind of, I think, across the footprint, it’s just, you know, generally demand is not where we’d like it to be.

Paul Sibilski (Analyst at Wolfe Research)

Yep, it’s a tough market. All right. I appreciate it. Thank—

Greg Bennett (President and CEO)

Thank you. Yeah, yeah. Thanks, Paul.

OPERATOR (Moderator)

As a reminder, if you would like to ask a question, press star one to raise your hand. Your next question comes from the line of Ryan Gilbert with BTIG. Ryan, your line is open. Please go ahead.

Ryan Gilbert (Analyst at BTIG)

Hi, guys. Thanks for taking the follow-up. I wanted to ask on your negotiations with your land developer partners, and are the negotiations primarily around, I guess, adjusting takedown schedules, or are you able to get price reductions as part of the negotiations, or are there other terms that I should be thinking about that can be negotiated?

Greg Bennett (President and CEO)

Yes, yes and yes. Yeah, we’re negotiating everything. Everything’s on the table. Obviously, in this environment where you’re getting so much price pressure, the biggest thing would be to try and get a reduction in the cost because, you know, we look at each deal, you know, we do a deep dive in each deal. We do it every quarter, and we look to see, okay, can we still take lots down, put a house on that lot and make a positive cash margin? If the answer is yes, okay, if the answer is, you know that, then, then okay, it’s still, still makes sense.

If we take a lot down and we put a house on that lot and we lose more money, that’s a problem. So that’s when we go back to our developer partners, even our land bank partners and say, look, guys, it just doesn’t make sense anymore to take it down. And again, we’re looking at it from a cash perspective, you know, so forget about the GAAP issue. It’s really more about can we continue to, you know, make positive cash margin. And if the answer is no, you know, we’ve got to look at that and collectively figure out, okay, how can we work with you to make this community work. And that’s really the bottom line is, you know, what’s best for the community. Do we put a pause on the community and just, you know, wait it out or do we, you know, can they absorb a lot price reduction that makes sense for us to keep working through it?

Can we get an interest rate reduction? Can we get a free ride for a few months and maybe we wait to selling season? So everything’s on the table. But again, we really look at it as, it’s not an us versus them. This is truly a partnership, you know, with our developer partners and our land bankers. And at the end of the day, you know, we’re… Nobody’s looking to, you know, hand the keys back to anybody. And we’re always trying to come up with solutions to figure out how to work through it. And at a minimum, you know, it sucks, you know, that we’re in this business to make money. But, you know, the last thing we want is for anybody to certainly lose money.

So, you know, those are the conversations we have. And you know, I think everybody’s realistic. This is a tough market. It’s been going on for a couple years and, you know, we’ve had some success. I think everybody’s pretty realistic.

Ryan Gilbert (Analyst at BTIG)

Okay, understood. Then just quickly on, I guess, how you’re thinking about the trajectory for community count. It looks like at least some of the growth in inventory this quarter was financed with the credit facility. So I guess how you’re thinking about runway for community growth.

Greg Bennett (President and CEO)

Yeah, I think again, looking ahead to next year and, you know, with no expectation of an improved demand environment, we’re not in the business of making predictions. You know, we look at where today’s market is and, you know, make the assumption that, okay, if nothing changes, what does, you know, the next quarter, two, four, year look like. And again, we’ve been investing dollars into our existing communities. I mentioned this on an earlier question.

Our new divisions that we’ve been opening up and we’ll finally, I think across those new divisions next year with the community openings and the investments we’ve made, you’ll start to see the way we look at it, you know, full R teams in every one of those divisions, at least one full R team. And the way we look at an R team, it’s a geographic pod that’s about, you know, call it 200 sales, starts and closings in a given year. And so you’ll start to see those newer divisions really add some velocity next year.

And so I could see next year being up 15 to 20% in community count growth. And then, you know, that should also translate into a volume growth of 15 to 20% next year. So we’re, you know, we’ve got that going for us. The big wild card there is, well, what’s the margin going to be? Because I think we’ll have the community count to do the volume. And again, this is all in organic growth with no, you know, we hadn’t done any M&A in the last two to three years.

So this is organic growth. So the volume can be there. It’s just a question of, you know, what’s the margin and incentive going to end up being to get there. But, you know, our expectation is that it’s going to be, you know, the current environment and if we can get some wind at our back, it could be a pretty good year.

Ryan Gilbert (Analyst at BTIG)

Okay, great. Thanks again, guys.

Greg Bennett (President and CEO)

Thanks, Ryan.

OPERATOR (Moderator)

We have reached the end of our Q&A session. I will now turn the call back to Greg Bennett, chief executive officer and vice chairman, for closing remarks.

Greg Bennett (President and CEO)

Thank you to everyone for joining us as we discuss our results at Smith Douglas Homes. Hope everyone has a great day. Great holiday season coming up. Thank you.

OPERATOR (Moderator)

This concludes today’s call. Thank you for attending. You may now disconnect.

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