Smith Douglas Homes (SDHC) 2026年第三季法說會：利潤率收窄之際訂單成長

重點摘要

• Smith Douglas Homes 於 2026 年第 3 季完成 831 戶交屋，年增 5%，創造 2.625 億美元的交屋營收。平均售價自 333,000 美元降至 316,000 美元。
• 淨新增訂單成長 13% 至 777 戶，待交屋訂單增加 25% 至 947 戶，合約價值達 3.053 億美元。活躍建案社區增加 15% 至 113 個。
• GAAP 交屋毛利率自 21.0% 下滑至 16.3%。交屋費用、價格折扣與遠期承諾成本合計達 740 個基點，前一年同期則為 610 個基點。
• 稅前盈餘自 1,720 萬美元降至 330 萬美元。調整後 EBITDA 自 2,220 萬美元（佔營收 8.5%）降至 860 萬美元（佔營收 3.3%）。
• 管理階層預期 2026 年第 4 季交屋量為 800 至 875 戶，平均售價為 310,000 至 320,000 美元，毛利率為 15.5% 至 16.5%。
• 該公司計劃減少動工量，並透過額外的促銷優惠將偏高的先建後售庫存轉化為實際交屋，以便在年底前創造現金流。

關鍵財務數據

業務與營運表現

活躍建案社區增加 15% 至 113 個，支撐了訂單成長。年初至今淨新增訂單達 2,728 筆，年增 24%。訂單取消率維持在 11% 左右，與前一年大致持平。

7 月與 8 月市場需求尚可，隨後因房貸利率上升而在 9 月走弱。管理階層表示，需求隨後大致保持穩定，近期僅隨著利率回落而略有回升。第 3 季平均去化速度約為每個社區銷售 2.3 戶，前一年同期則為 2.4 戶。

為支持買方負擔能力而採取的融資促銷優惠，使獲利能力持續承壓。隨著季度推進，管理階層擴大了遠期承諾的使用。約有 25% 至 30% 的銷售採用了遠期承諾。

平均施工週期為 59 天。然而，第 3 季施工進度超越市場需求，導致在建工程與先建後售庫存增加。該公司打算在第 4 季限制新動工量，並以庫存轉化交屋為優先要務。

Smith Douglas 持續推進有機擴張。達拉斯、查塔努加、喬治亞州中部及格林維爾今年均有交屋紀錄。管理階層表示，亞特蘭大市場表現相對穩健，阿拉巴馬州維持相對穩定的毛利率，而休士頓則略顯疲弱。

輕資產購地模式仍是資本管理的核心。截至季末，Smith Douglas 掌控 24,724 個地塊，包括 22,693 個選擇權地塊、517 個自有地塊以及 1,514 戶在建住宅。自有未動工地塊佔總掌控土地供應量的 2.1%。

管理階層財測

管理階層表示，待交屋訂單約可支撐交屋預測區間的中低段。若要達到高標，主要取決於能否銷售並完成更多先建後售房屋的交屋，這可能需要透過提供更多促銷優惠來達成。

目前待交屋訂單的利潤率據稱接近第 4 季毛利率預估區間的中位數，或略高於該水準。隨著該公司致力於降低現成庫存，管理階層預期第 4 季的促銷優惠將高於第 3 季水準。

Smith Douglas 未提供正式的 2027 年財測。在問答環節中，財務長 Russ Devendorf 表示，明年社區數量可能成長 15% 至 20%，並有望支撐相仿的交屋量增幅，但他強調，毛利率與所需的促銷優惠仍是主要的不確定因素。

風險與關注焦點

• 房貸利率、負擔能力以及疲弱的消費者信心，持續限制市場需求的能見度。
• 管理階層形容市場相對缺乏彈性，提供更多促銷優惠所帶來的額外需求相當有限。
• 額外的利率補貼、遠期承諾與價格折扣，可能對毛利率造成進一步壓力。
• 偏高的先建後售庫存可能需要更積極的促銷優惠，才能在年底前轉化為實際交屋。
• 淨負債佔淨帳面資本比率從 2025 年底的 6.6% 升至 17.9%。
• 與移民相關議題引發的勞動力短缺已導致部分地區工資上漲，不過整體營建成本與前一年同期相比大致持平。

分析師問答重點

促銷優惠與取消訂單：管理階層表示，促銷優惠在 7 月最初有所縮減，但隨後因需求疲弱而增加。現有待交屋訂單基本上不需要額外的讓利，且取消率維持在歷史水準附近。

第 4 季毛利率敏感度：主要變數在於年底前銷售並交屋的先建後售房屋數量。更積極的融資促銷優惠可能拉抬交屋量，但會使毛利率承壓，逼近財測區間的下限。

房貸產品：隨著補貼 30 年期固定利率房貸的成本攀升，建商已轉向 5/1 機動利率房貸（ARM）。管理階層表示，若近期的利率趨勢持續，較低的遠期承諾成本將有助於支撐毛利率。

土地談判：Smith Douglas 正與開發商及土地銀行合作夥伴協商地價、取地進度、利率與暫時性付款寬減措施。該公司會評估每個地塊與房屋是否仍能創造正向的現金利潤率。

建案社區成長：管理階層預期較新的事業處與全新開發項目（greenfield investments）將貢獻更多交屋量。預期的成長屬於有機擴張，而非由收購推動。

法說會完整逐字稿

完整財報電話會議逐字稿

管理層陳述

Operator

Hello, everyone. Thank you for joining us, and welcome to the Smith Douglas Homes Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Joe Thomas, Senior Vice President, Accounting and Finance. Joe, please go ahead.

Joe Thomas

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

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. Pretax income was $3.3 million and earnings per share totaled $0.07. As we move 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 falling 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 homebuilder 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't 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.

Russ Devendorf

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.

Pretax 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 9 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 UPC 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 30, 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 risk 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

[Operator Instructions] Your first question comes from the line of Natalie Kulasekere with Zelman.

分析師問答

Natalie Kulasekere

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

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 we turned back up the use of forward commitments through the quarter and obviously, even into the first through fourth quarter today.

Natalie Kulasekere

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 buys in backlog to prevent cancellations?

Greg Bennett

No. We've maintained a pretty good backlog. And I can't speak in total, but there might have been a situation or 2. But no, for the most part, we've been able to maintain backlog. And yes, our cancellation rate has been pretty good, pretty consistent with historical norms.

Operator

Your next question comes from the line of Ryan Gilbert with BTIG.

Ryan Gilbert

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

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. But yes, we're not seeing -- as we sit here today, we haven't seen any significant change. It's been -- and 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, 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 consistent where we were last year. But sequentially, obviously, demand has started to feel a little bit of pressure this year.

Ryan Gilbert

And then on the fourth quarter gross margin guide, I think the range is a little wider than what you provided the last couple of 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

Yes. 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. Historically, we always -- as you know, we're a to-be-built builder. We focus on presales. Our objective is always to get to 100% presale. 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. 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

And I think just reading between the lines on where backlog sits currently and the 4Q '26 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

Started, yes, we'll bring down starts. Our backlog is already -- puts us kind of in the mid- to low end of the range. So our expectation as long as backlog holds, which again, we've had some pretty good cancel rates, as I mentioned just before. So really, to the extent that we can continue to move some specs, we should drive the closings higher or closer to that -- to the high end of the range. So that's the big wildcard. Again, it's what we're able to do with specs. But yes, we would expect our starts to come down. And Q4 is traditionally -- Q3 is traditionally your highest level of inventory as you're 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.

Operator

Your next question comes from the line of Rafe Jadrosich with Bank of America.

Victoria Piskarev

You have Victoria Piskarev on for Rafe Jadrosich. I was wondering if we can talk more about lot count is up 2%. Can you give any additional color on what you're seeing in terms of raw land availability and how lot development costs trended through the quarter?

Russ Devendorf

Yes. 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 and trying to either restructure or renegotiate or push some takedowns off. So that's obviously #1 focus is to keep the just-in-time inventory and manage the balance sheet. So that will continue to -- we expect to continue to work through that through the quarter. And 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.

Greg Bennett

Yes. Thanks for the question. We -- 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. We continue to look at avenues to make those more efficient. But yes, I think that maybe touches on the question there about the cost.

Victoria Piskarev

And then thinking about other costs, how did input costs trend through the quarter? And also, what are you seeing in terms of labor availability?

Greg Bennett

Yes. Construction cost is flattish through the quarter. The one area we're seeing it's spotted, but it's there is some of the 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. But overall cost is pretty much flattish year-over-year.

Operator

Your next question comes from the line of Jay McCanlesswith Citizens Bank.

Jay McCanless

First question I had, good job on growing volumes year-on-year. But I 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 opened last year?

Russ Devendorf

A lot of the growth is -- has really -- we're starting to see the fruits of our investment over the last couple of 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 start-ups, which would include Greenville, Dallas, which Dallas has really got -- 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 is really a split out from Atlanta. So you're starting to see those divisions add to the growth.

And 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. 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 McCanless

And then I wanted to ask also on the mortgage side. You talked a lot about ARMs in the last couple of 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?

Russ Devendorf

Yes. 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 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. So then the bigger shift was kind of to a 4.9951 ARM, which is roughly 400, 500 basis points. And 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'd 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. And so that's why you don't see everybody take the forward. And again, sometimes some folks can't they can't qualify even, and it's really an FHA product.

So I'd say we run about 25% to 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 yes, we'll -- for the foreseeable future, we expect to continue to use those incentives to push demand.

Jay McCanless

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

Russ Devendorf

Yes, 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 we're -- 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.

Operator

Your next question comes from the line of Sam Reid with Wells Fargo.

Unknown Analyst

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 as 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 there's some sort of flexibility if margins do compress as the quarter goes on?

Russ Devendorf

Yes. 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 push -- 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 -- it's always our intent to provide realistic guidance, but we tend to lean to the side of being a little more conservative, underpromise and overdeliver. 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, just not -- whether we could have increased incentives a little bit faster to get some of that inventory, who knows? It's 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. And so we're kind of cautiously optimistic now with midterm is over and going into the end of the year and into 2027 that maybe we see a few more green shoots.

Unknown Analyst

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?

Russ Devendorf

Yes. I think the competitors have all been moderating specs throughout the last 12 months. And I saw -- I read the analyst reports, I look at -- 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's 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 yes, I don't -- I think for the most part, all the builders are looking to kind of minimize spec levels. I mean that's what we've been seeing. That's the trend that we've been seeing over the last 12 months. So not really a big issue that I see.

Operator

Your next question comes from the line of Paul Przybylski with Wolfe Research.

Paul Przybylski

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?

Russ Devendorf

On the margin, no. I think there's -- we have been and through the quarter and into the first part of this -- the fourth quarter, it's been a very inelastic market, and that's really kind of across the board. So it's really -- it's challenging. But like I said, the last couple of weeks, you're starting to see it either level off or we're starting to see a little bit more of a return. And 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 it 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, 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. 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 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, 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 we just have to focus on what we can control and continue to stick to our business model. We are focused on presales. So we're just going to work to get back in alignment in terms of inventory and sales this quarter and into next year. So hopefully, that helps, Paul.

Paul Przybylski

I guess as you do increase your spec incentives in 4Q to clear some of the inventory, will that be, I guess, more focused on more aggressive forward commitments? Or will it just be price discounts? And then my final question. As you look at -- 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

Yes. So 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, 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 those -- buying down the rate is going to have a much bigger impact on the payment and affordability. So that's where you'll probably see a little more of the overall incentive bill. And then in terms of the markets, Atlanta has been -- Atlanta, 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 has been pretty good. That's our largest market. Chattanooga's had a couple of good weeks.

Houston, Texas might be 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 just kind of, I think, across the footprint, it's just generally demand is not where we'd like it to be.

Operator

[Operator Instructions] Your next question comes from the line of Ryan Gilbert with BTIG.

Ryan Gilbert

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?

Russ Devendorf

Yes, yes and yes. Yes, we're negotiating everything is 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 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's a problem. So that's when we go back to our partners, 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. So forget about the GAAP issue. It's really more about can we continue to make positive cash margin. And if the answer is no, 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 what's best for the community. Do we put a pause on the community and just wait it out? Or do we -- 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 is on the table. But again, we really look at it as -- it's not in us versus them. This is truly a partnership with our developer partners and our land bankers.

And at the end of the day, we're -- nobody is 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. And at a minimum, it stocks that we're in this business to make money, but the last thing we want is for anybody to certainly lose money. So those are the conversations we have. And I think everybody is realistic. This is a tough market. It's been going on for a couple of years, and we've had some success. I think everybody is pretty realistic.

Ryan Gilbert

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 announced with the credit facility. So I guess, how you're thinking about runway for community growth?

Russ Devendorf

Yes. 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, let's -- if nothing changes, what is the next quarter, 2 quarters, 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, full -- our teams in every one of those divisions, at least one full R team.

And the way we look at in our team, it's a geographic pod. That's about, 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 that should also translate into a volume growth, 15% to 20% next year. So we're -- we've got that going for us. The big wildcard 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 -- we hadn't done any M&A in the last 2, 3 years. So this is organic growth. So 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. But 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.

Operator

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

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

Operator

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