Hello, everyone. Thank you for joining us, and welcome to the Smith Douglas Homes Third Quarter 2026 Earnings Conference Call. 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.
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.
Good morning, everyone, and thank you for joining us for a 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 to 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.
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 non-controlling 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 $310,000 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.
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 Kulasekere with Zelman. Natalie, your line is open. Please go ahead.
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 am 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?
No. We actually tried to pull back in July from the forward commitments, and we are 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 we turned back up the use of forward commitments through the quarter, and obviously even into the first through fourth quarter today.
Okay. I guess your cancellations also being at normal levels is pretty impressive. On top of the usual incentives you gave your buyers, did you also have to incentivize your buyers in backlog to prevent cancellations?
No. We've maintained a pretty good backlog. I can't speak in total, but there might have been a situation or two. No, for the most part, we've been able to maintain backlog, and our cancellation rate has been pretty good, pretty consistent with historical norms.
All right. Thank you.
Thanks.
Your next question comes from the line of Ryan Gilbert with BTIG. Ryan, your line is open. Please go ahead.
Hey. Thanks. Good morning, guys. First question's 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.
Demand was pretty consistent. September was okay. It 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. As we sit here today, we haven't seen any significant change. We were looking at, as a matter of fact, we were looking at absorptions year-over-year.
Our absorption pace, when you look at third quarter of last year, 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. It was consistent where we were last year, but sequentially, obviously, demand has started to feel a little bit of pressure this year.
Okay. Got it. On the fourth quarter gross margin guide, I think the range is a little wider than what you've provided the last couple quarters. 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.
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. We're really trying to get our spec levels back to what we like. Historically, as you know, we're a to be built, builder. 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 incentives to get the demand going with our start space, because we are a very production-oriented, kind of cycle time-focused builder.
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. Clearly in Q3, we were not able to keep that pace.
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. That's the big difference.
Okay, got it. I think just reading between the lines on where backlog sits currently and the 4Q 2026 delivery guide, I think the implication is that the number of homes started, sold, and closed in fourth quarter should be down pretty significantly. Is that correct?
Started, yes. We will bring down starts. Our backlog is already puts us kind of in the mid to low end of the range. Our expectation, as long as backlog holds, which again, we have had some pretty good cancel rates, as I mentioned just before. Really, to the extent that we can continue to move some specs, we should drive the closings higher or closer to the high end of the range.
That is the big wild card. Again, it is what we are able to do with specs. But yes, we would expect our starts to come down. You know, Q3 is traditionally your highest level of inventory, as you are really building to a bigger Q4 closing number. Clearly, the demand this year has been off heading into year-end, but we fully expect to generate cash flow and bring inventory levels down by the end of Q4. Hopefully, that answers your question.
It does. Thanks, guys. Appreciate it.
Okay. Yep. Thanks.
Your next question comes from the line of Rafe Jadrosich with Bank of America. Rafe, your line is open. Please go ahead.
Hi. You have Victoria Piskarev on for Rafe Jadrosich. Thanks for taking our question. I was wondering if we can talk more about lot. I see lot count is up 2%. Can you give any additional color what you're seeing in terms of raw land availability and how lot development costs trended through the quarter?
Yeah. Lot count, obviously, we've been continuing to take lots and trying to manage that 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 in trying to either restructure or renegotiate or push some takedowns off. That's obviously number one focus is to keep the just-in-time inventory and manage the balance sheet. We expect to continue to work through that through the quarter. Then, just as far as land development costs, I don't know, I'll let Greg speak to kind of what we're seeing on the LD side.
Yeah. Thanks for the question. We are seeing some softening in cost. We are seeing some availability of trades on the horizontal side that is providing some opportunity on pricing there. Unfortunately, the land itself, we are still struggling to see much relief out of. We continue to push, we continue to look at avenues to make those more efficient. Yeah, I think that maybe touches on the question there about the cost.
Thank you. That is helpful. Then, thinking about other costs, how did stick and brick costs trend through the quarter? Also, what are you seeing in terms of labor availability?
Yeah. Go ahead.
Yeah. Construction cost is flattish through the quarter. The one area we are seeing, it is spotted, but it is there, is some of the immigration-related issues where we are having some labor shortage. Due to those labor shortages, we are 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.
Your next question comes from the line of Jay McCanless with Citizens Bank. Jay, your line is open. Please go ahead.
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?
A lot of the growth is, has really, 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 got our 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. You're starting to see those divisions add to the growth. As a reminder, I think that's a great point. 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. 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.
Great. Thanks. 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 buydowns are costing you in 3Q, and then what have you had to give so far in 4Q?
Yeah. That's kind of the flavor of the month is ARMs. 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, was a 4.99% fixed, 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. The bigger shift was kind of to a 4.99% 5/1 ARM, which is roughly 400, 500 basis points. So 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 continue to moderate, and that should be a pickup to margin. We run, even though, and I tell you, 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 they need more, our buyers need more closing costs, so we have to move some money around, so we're not necessarily giving everything to everybody. That's why you don't see everybody take the forward.
Again, sometimes some folks can't qualify even, and it's really an FHA product. So, I'd say we run about 25%-30% of our sales have a forward commitment. So it's not every buyer, and so you really have to take that rate, 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 yeah, for the foreseeable future, we expect to continue to use those incentives to push demand.
Okay, great. 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?
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 cross our fingers that selling season into next year is going to start to look pretty positive.
Okay, great. Thank you.
Yeah. Thanks, Jay.
Your next question comes from the line of Sam Reid with Wells Fargo. Sam, your line is open. Please go ahead.
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 the similar levels Q3 or if they step up in Q4. Just curious if the gross margin and backlog is kind of above what you're guiding to, and there's some sort of flexibility if margins should compress as the quarter goes on?
Yeah. We expect the incentives to be a little bit higher into Q4. 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.
The expectation would be that we're going to have some more incentives to move that inventory, and 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. 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 when you look at 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 kind of the demand environment and really 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? It just, the demand levels did kind of trail off through the quarter. But now we're starting to see some stabilization.
Rates are starting to come down. We are 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.
Thanks, that is helpful. You did talk about the specs are a little bit elevated, but curious what you are seeing from peers in terms of their spec inventory, if that is also sort of elevated, and could that just sort of be an incremental pressure, not just for you, but for specs across the industry?
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, I think Q3, just the demand environment probably created a little bit more speculative inventory on the margin across our competitors.
But it is not because our competitors are really not focused on, I think, leveling their spec count off. I think it was just Q3 demand maybe pushed spec levels a little bit higher than folks wanted. But yeah, I think for the most part, all the builders are looking to kind of minimize spec levels. I mean, that is what we have been seeing. That is the trend that we have been seeing over the last 12 months. So, not really a big issue that I see.
Great. Thanks a lot.
Yep. Thank you.
Your next question comes from the line of Paul Przybylski with Wolfe Research. Paul, your line is open. Please go ahead.
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. I guess, 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?
On the margin, no. I think we have been, and through the quarter and into the first part of the fourth quarter, it's been a very inelastic market, and that's really kind of across the board. It's challenging. But like I said, the last couple weeks, you're starting to see it either level off or starting to see a little bit more of a return.
I don't know if that's, again, because of some of the additional incentives. We clearly are laser-focused on driving leads, driving traffic. We have been transitioning our CRM and 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.
Again, looking at the absorption pace year-over-year, as we sat here in third quarter of last year and looking at 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.
Again, it's just been challenging, and again, that's in the face of much higher rates, right? 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. 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.
Again, I think the consumer confidence and getting past midterms, again, hopefully, that starts to have a bit of a positive impact on folks, and we get people off the fence, because again, we don't believe it's a lack of demand, right? There's definitely a need for housing and folks wanting to move. We just have to focus on what we can control and continue to stick to our business model.
We are focused on pre-sales, so we're just going to work to get back in alignment in terms of inventory and sales this quarter and into next year. Hopefully that helps, Paul.
Okay. All right. I guess as you do increase your spec incentives in Q4 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?
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?
Yeah. 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. The incentives, us putting more dollars towards a rate buydown or forward commitment is going to have a much more impactful. That will be much more impactful for our buyer, because buying down the rate's going to have a much bigger impact on a payment and affordability.
That is where you will probably see a little more of the overall incentive go. Then, in terms of the markets, Atlanta's been Atlanta's, it's 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's been pretty good. That is our largest market. Chattanooga's had a couple of good weeks.
Houston, Texas, maybe a little bit on the weaker side, but we are fighting and scrapping and getting our own. Alabama, pretty good, relatively speaking. I mean, they have 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 will get their volumes this year.
Again, we can go through all of them, but it's really a mixed bag week to week, and I would not tell you that there is one that is significantly better or worse. It's just kind of, I think, across the footprint, it's just generally demand is not where we would like it to be.
Yep. Yep, it's a tough market. All right, I appreciate it. Thank you.
Yeah. Yeah, thanks, Paul.
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.
Hi, guys. Thanks for taking the follow-up. I wanted to ask on your negotiations with your land developer partners. Are the negotiations primarily around, I guess, adjusting take-down 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?
Yes, yes, and yes. We are negotiating everything. Everything is on the table. Obviously, in this environment where you are getting so much price pressure, the biggest thing would be to try and get a reduction in the cost, because we look at each deal, 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, then okay, it still makes sense. If we take a lot down and we put a house on that lot and we lose more money, that is a problem.
That is when we go back to our partners, developer partners, even our land bank partners, and say, "Look, guys, it just does not make sense anymore to take it down." Again, we are looking at it from a cash perspective, so forget about the GAAP issue. It is really more about, can we continue to make positive cash margin?
If the answer is no, we have got to look at that and collectively figure out, okay, how can we work with you to make this community work? That is really the bottom line is, what is best for the community? Do we put a pause on the community and just wait it out? Or 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? 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 with our developer partners and our land bankers. At the end of the day, nobody's looking to hand the keys back to anybody, and we're always trying to come up with solutions to figure out how to work through it.
At a minimum, it sucks that we're in this business to make money, but the last thing we want is for anybody to certainly lose money. Those are the conversations we have, and I think everybody's realistic. This is a tough market. It's been going on for a couple years, and we've had some success. I think everybody's pretty realistic.
Okay. Understood. 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. I guess how you're thinking about runway for community growth.
Yeah. I think, again, looking ahead to next year, and with no expectation of an improved demand environment, we're not in the business of making predictions. We look at where today's market is and make the assumption that, okay, if nothing changes, what does the next quarter, two quarters, year look like? 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, full R team in every one of those divisions, at least one full R team. The way we look at an R team, it's a geographic pod. That's about, call it 200 sales starts and closings in a given year.
You'll start to see those newer divisions really add some velocity next year. I could see next year being up 15%-20% in community count growth, and then that should also translate into a volume growth 15%-20% next year. 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. Again, this is all in organic growth with no, we hadn't done any M&A in the last two, three years, so this is organic growth. The volume can be there. It's just a question of what's the margin and incentive going to end up being to get there.
Our expectation is that it's going to be the current environment, and if we can get some wind at our back, it could be a pretty good year.
Okay, great. Thanks again, guys.
Thanks, Ryan.
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.
Thank you to everyone for joining us as we discuss our results at Smith Douglas. Hope everyone has a great day, great holiday season coming up. Thank you.
This concludes today's call. Thank you for attending. You may now disconnect.