Eric Lipar: You’re welcome.
Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Carl Reichardt with BTIG. Your line is open.
Carl Reichardt: Thanks. Good morning, everyone, or afternoon. Eric, of the 120 communities at the year-end target, the midpoint of the range you gave, what is your net openings, net closings for the year of communities in your plan?
Eric Lipar: We may have to get back to you on that, Carl. But just a €“ looking at the board in my office, which you’re familiar with.
Carl Reichardt: Yes, I am.
Eric Lipar: You know. You know, net-wise, we’re opening 20, but we’re probably closing out, you know, 40 to 50. You know, closing out €“ opening 40 to 50 and closing out 20 or 30 is probably a pretty accurate statement.
Carl Reichardt: Okay. Super. Thank you. And then the €“ you talked about raising prices, as you said, and you thought you’d found the price floor in some of your market. Do you have a sense, Eric, as to, you know, roughly all in, including incentives and base price cuts, or however you look at it, what do you think the peak-to-trough decline in asking price was for LGI?
Eric Lipar: That is a great question because there’s a mix component there, Carl, so may actually get back to you on that. But we are seeing customers select smaller plans, you know, for the same monthly payments. Instead of selecting the house, we’re seeing a lot of 1,300- square-foot or 1,400-square-foot houses selected or purchased. We’re also working on new floor plans that has smaller square footages. That’s not a trigger we can pull in a lot of communities, but some communities are rolling out smaller square footage plans to help with affordability. So, it’s really community by community. As far as that absolute trough, we don’t have a lot of similar communities with similar floor plans, but we could probably get back with you on that.
Carl Reichardt: Okay. And then
Eric Lipar: I would say 10% to 15% would probably be a really good estimate.
Carl Reichardt: 10 to 15. Okay. Super. Thank you. And then just last real quick. Roughly what percentage do you expect Terrata to be of your closings in 2023?
Eric Lipar: Approximately 5%.
Carl Reichardt: 5%. Great. Thanks so much. Appreciate it.
Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Jay McCanless with Wedbush. Your line is open.
Jay McCanless: Hey, good afternoon, everyone. Thanks for taking my questions. So, just want to check some math here. If net orders are running 7.2 for the first eight weeks, and it looks like net closings or closing absorption is running around four if you blend January and February, is that about the right fall-out rate that you’re taking that many orders, but you’re still seeing a pretty high cancellation rate on them?
Eric Lipar: No. No, the 7.2 is already having the cancellation there. That’s the net orders number. The four-ish closings you’re talking about, that’s because sales were slower in Q4.
Jay McCanless: Okay. So, we should see €“ I mean, there is €“ assuming you hit the 450 for February, that’s an acceleration of almost one turn. So, I guess that makes sense.
Eric Lipar: Yeah. Yeah.
Jay McCanless: Thank you for clarifying that.
Eric Lipar: We €“ you know, now that we’re in the business of getting monthly guidance, but we should see March closings about six to seven per community per month.
Jay McCanless: Okay. Great. Thank you. And then I guess my next question, if you’re looking at those net orders, what percentage of those net orders are new leads as of 2023 versus people who may have had to cancel when rates spiked back in November and now you’re getting them back into a home?
Eric Lipar: Yeah, a very, very large percentage. I’d be very comfortable saying 90% are leads that have come in very recently, and we sell them within 30 days.
Jay McCanless: That’s great. And then I guess the other question I had, I think you said that you guys bought three finished lot deals during 4Q. I guess, number one, what, if anything, is going to be the gross margin impact of that? I mean, it’s only three communities, but €“ and is there more opportunities now to buy some finished lot deals to make up for, you know, slower conditions in terms of getting your owned land developed?
Eric Lipar: Yeah. Well, the gross margin will be a factor, and that’s part of our guidance on gross margin based on historical. We do plan on having more finished lot opportunities, which we forecast a lower gross margin than if we’re developing in the land and believe we should make the developer profit as well. Terrata is going to be a bigger percentage of our business, maybe have more opportunities at Terrata. We forecast a lower gross margin on our Terrata business. And it really is a question, Jay, of what’s going to happen in the market. You know, interest rates spiked last week. We’ll see what happens throughout the year. We’ll see how challenging the market is. I believe, based on what we’re seeing, a lot of builders, particularly on the private side, are struggling right now.
They are committed to takedown schedules they probably don’t like. They’re renegotiating with developers. Their section sizes are probably too large. So, that’s why we really want to focus on clearing some of our inventory, creating some dry powder. We think there can be tremendous opportunities. And then we’re also thinking about the business long-term. The more challenging the market gets in 2023, the more opportunity that’s going to create for LGI over the long-term to buy more deals. If rates go back down, the market gets better, not as many opportunities, but obviously, that’s better in the short-term.
Jay McCanless: Right. And then just one other. Sorry. I just want to sneak this one in. You know, could you talk again about gross margins and what the factors are for them to be lower than the historical averages this year? I know part of it is just resetting the base pricing, but maybe the top three things that are pushing the gross margins below the historical norms for 2023.
Eric Lipar: Yeah. I think the biggest thing is affordability, Jay, and seeing the price floor. We also have to deal with appraisals and what other builders are doing. I know I necessarily don’t really have the flow through everybody’s gross margin yet, though we believe most builders are pricing through normalized gross margins or below to clear some inventory. Our costs are still very much elevated. They came down from the peak. But if you compare our costs to build a house, compared to where it was pre-pandemic, it is very much elevated, 30% higher approximately from pre-pandemic. So, that’s more €“ a lot more than just standard inflation that we should see.
Jay McCanless: Got you. Okay, great. Thanks for taking my questions.
Eric Lipar: Thank you.
Operator: Thank you. Please standby for our next question. Our next question comes from the line of Alex Barron with Housing Research Center. Your line is open.
Alex Barron: Yes. Excuse me. Thank you very much. Yeah, I wanted to ask about the interest incurred versus expense. It is basically, right now, you know, the idea that the amount of interest that’s going through the cost of goods sold will remain similar to what it’s been or is there a chance that some of the extra interest could come through the expense line below?
Charles Merdian: Yeah. Great question, Alex. This is Charles. So, we averaged about 110 basis points for the fourth quarter. So, our interest costs incurred just with interest rates going up have elevated. However, having said that, you know, they’re getting capitalized against a number of communities under development. So, I think, over time, that will tick-up slightly, but it’s going to take, you know, a couple of years as those projects are developed and brought online to work their way through the income statement. So, I think we’ll see it. The guidance implies that it’ll be slightly up from where we’re at today, but it will come in over a long period of time as those lots come through the income statement.
