Welcome to LGI Homes Third Quarter 2022 Conference Call. Today’s call is being recorded and a replay will be available on the company’s website later today at www.lgihomes.com. We have allocated an hour for prepared remarks and Q&A. I will turn the call over to Josh Fattor, Vice President, Investor Relations at LGI Homes.

Thank you and good afternoon. I will remind listeners that this call will contain forward-looking statements including management’s views on LGI Homes’ business strategy, outlook, plans, objectives and guidance for 2022. Such statements reflect management’s current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause management’s expectations to prove to be incorrect. You should review our filings with the SEC including the Risk Factors and cautionary statements about forward-looking statements sections for a discussion of the risks, uncertainties and other factors that could cause actual results to differ from those presented today. All forward-looking statements must be considered in light of those related risks and you should not place undue reliance on such statements, which reflect management’s viewpoints as of the date of this conference call and are not guarantees of future performance. Additionally, on today’s call, we will discuss non-GAAP financial measures that are not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the press release we issued this morning and in our quarterly report on Form 10-Q for the quarter ended September 30, 2022 that we expect to file with the SEC later today. This filing will be accessible on the SEC’s website and in the Investor Relations section of our website. Our hosts today are Eric Lipar, LGI Homes’ Chief Executive Officer and Chairman of the Board and Charles Merdian, Chief Financial Officer and Treasurer. I will now turn the call over to Eric.

Thanks, Josh. Good afternoon, everyone and welcome to our earnings call. I will open by congratulating the LGI team on our accomplishments in the third quarter. In prior calls, we have said we were preparing for the housing market to normalize. Now, it’s clear the pendulum has swung past normal and indeed challenging. With mortgage rates doubling and expectations that could move higher, demand has cooled considerably. Finding buyers who are both motivated and qualified is the new game in town. And we are pivoting in line with our core competencies to meet this challenge. I am pleased to report our teams across the country are charging forward with enthusiasm and confidence. As we said on the last call, we have ramped up our marketing efforts to find qualified buyers. This continued in the third quarter and we saw positive results with over 74,000 leads, an increase of 72% over our prior quarter. I want to commend our marketing team for their ability to quickly pivot and for their success connecting with families interested in homeownership. In our information centers, we are not just focused on treasury yields, equity markets or global instability. Instead, we are focused on the needs of the customers who call us looking to discover if homeownership is possible for them. To understand and meet our customers’ needs, we are focused on training. The selling skills that differentiate our model and built our company are currently being refreshed, rehearsed, drilled and successfully executed every day in every information center across the nation. I want to thank our salespeople for their commitment, focus and positivity they demonstrate each day. We have seen considerable success driving demand to our information centers. However, the main headwind is buyer qualification. Higher selling prices, combined with higher rates has further stretched affordability and pushed ownership beyond the reach of many renters. To address this, we have implemented a number of incentives designed to make monthly payments more affordable. Additionally, in high margin communities where existing backlog isn’t at risk as well as in communities where input costs are normalizing, we have rolled out selective price reductions, while maintaining gross margins in our historical ranges. These efforts are ongoing, but results to-date have been positive with third quarter net orders at a pace of 5.5 homes per month per community, matching our third quarter closing pace of 5.5 homes per community. As noted on previous calls, our wholesale channel selling homes to the single-family rental space is a powerful lever to drive volume and this quarter was no exception. During the quarter, we delivered 443 homes into this channel and added an additional 591 wholesale contracts and our backlog at quarter end. Our wholesale business has now generated cumulative revenue of over $1 billion since beginning operations in 2016. Congratulations to the LGI Living team on this impressive milestone and on their accomplishments during the quarter. With that, I’ll turn the call over to Charles to discuss our financial results.

Thanks, Eric. During the quarter, we closed 1,547 homes, a decline of 38.1% primarily related to lower community count and absorptions compared to last year’s record comp. As Eric noted, 443 of our closings were sold through our wholesale business, representing 28.6% of our total closings compared to 433 homes or 17.3% of our total closings in the same quarter last year. Revenue in the third quarter was $547 million, a decline of 27.2% from last year, primarily driven by fewer home closings and partially offset by a 17.6% increase in our average selling prices to $353,635. Selling prices increased in all of our reportable segments primarily due to the quality of and our success maintaining our backlog as well as our ability to pass through higher input costs in supply constrained markets. Gross margin this quarter was 28.5%, a 160 basis point improvement over the same period last year and a new third quarter record. The increase resulted from prices and excessive costs in our backlog, lower capitalized interest expense and lower lot cost as a percentage of average sales price. Adjusted gross margin this quarter was 29.5%, a 130 basis point improvement over the same period last year and also a new third quarter record. Adjusted gross margin excludes $4.6 million of capitalized interest charged cost of sales during the quarter and approximately $1.2 million related to purchase accounting, representing 100 basis points. Combined, selling, general and administrative expenses for the third quarter were 11.2% of revenue compared to 8.6% during the same period last year. Selling expenses for the quarter were $33.9 million or 6.2% of revenue compared to 5.3% for the third quarter of 2021. The increase was primarily related to higher advertising spend and other selling related expenses as a percentage of revenues and was partially offset by lower outside commissions. General and administrative expenses totaled $27.3 million or 5% of revenue compared to $24.5 million last year. The increase was primarily driven by increased overhead expenses and terminated deal costs. We expect quarterly SG&A to vary based on revenue and initiatives undertaken to navigate the current market uncertainty. Based on our results to-date, we now expect our full year SG&A expenses as a percentage of revenue to be in a range between 11% and 12%. EBITDA for the quarter was $113.7 million or 20.8% of revenue, representing a 270 basis point improvement over the same period last year and a new third quarter record. Adjusted EBITDA was $100.8 million or 18.4% of revenue, a 130 basis point decrease year-over-year. Adjusted EBITDA excludes $14.1 million of other income and $1.2 million related to purchase accounting, representing approximately 240 basis points. The decrease in adjusted EBITDA as a percentage of revenue was attributable to an $11.8 million year-over-year increase in other income, reflecting a one-time gain on the sale of an interest rate cap prior to its expiration. Income associated with our investment in unconsolidated entities and an increase in the number of acreage home sites sold in a North Carolina community, not associated with our core homebuilding operations. Pre-tax net income was $108.7 million or 19.9% of revenue, a 300 basis point improvement over the same period last year and a new third quarter record. Our effective tax rate in the third quarter was 16.8% compared to 20.8% last year. The decrease was driven by the reinstatement of federal energy-efficient tax credits on qualified homes, including the retroactive impact of credits related to closings in the first half of 2022. We plan to receive additional tax credits during the fourth quarter and now estimate our full-year effective tax rate will be in the range between 21% and 22%. Our third quarter reported net income was $90.4 million or 16.5% of revenue. Earnings per share in the third quarter were $3.88 per basic share and $3.85 per diluted share. Gross orders in the third quarter were 1,951. Net orders were 1,536, an increase of 94.4% year-over-year, primarily due to our decision to limit sales in the third quarter of last year, resulting in a modest comp. Net orders were up 77.8% sequentially, illustrating our success driving more leads through increased advertising spend as well as our ability to implement the right combinations of incentives needed to qualify more customers. Excluding wholesale contracts written during the quarter, retail net orders were up 30% year-over-year and 20.8% sequentially. Our cancellation rate for the third quarter was 21.3% compared to 43.1% last year and 30.5% last quarter. Our backlog at the end of the third quarter consisted of 1,255 homes, valued at $428.3 million. Turning to our land position, as of September 30, our portfolio consisted of 76,453 owned and controlled lots, a decrease of 12.6% year-over-year and 15% sequentially. We ended the quarter with 60,627 owned lots, an increase of 37.2% year-over-year and a decrease of 2% sequentially. Of our owned lots, 48,516 were either raw land or land under development and approximately one-third of those lots were actively under development. Of the remaining 12,111 of our owned lots, 8,001 were finished vacant lots. We slowed our pace of starts during the quarter to align our vertical inventory with current demand. During the quarter, we started approximately 840 homes compared to over 2,300 starts this time last year and a similar amount last quarter. At September 30, we had 4,110 completed homes, information centers or homes in process. Excluding information centers and homes in process, we had 1,420 completed homes. Finally, at quarter end, we controlled 15,826 lots, a decrease of 63.5% year-over-year and 43.7% sequentially. The decrease in controlled lots primarily resulted from an ongoing assessment of our pipeline and the decision to walk from deals that no longer met our criteria or where we believe we could acquire the same or similar piece of land at more opportunistic prices in the future. During the quarter, these terminations resulted in approximately $3.1 million of costs. Turning to the balance sheet, we ended the quarter with $52.7 million in cash, nearly $2.9 billion in real estate inventory and total assets of over $3.1 billion. Total debt at quarter end was $1.2 billion, resulting in a debt to capitalization ratio of 43.4% and a net debt to capitalization ratio of 42.3%. As of September 30, we had total liquidity of $180 million consisting of the $52.7 million of cash on hand and $127.3 million available to borrow under our credit facility. We will continue to adjust inventory in line with the pace of demand in each community. And as our vertical inventory rebalances, we expect to generate positive cash flow that will further enhance our balance sheet and create additional liquidity by the end of the year. Given current market conditions, we chose not to repurchase stock during the third quarter, focusing instead on developing the land that will drive our community count growth in 2023 and 2024. At this point, I will turn the call back over to Eric.

Thanks, Charles. While rates may keep climbing and the market will remain uncertain for a while, there is no question in our mind about the parts of our business that we control and how we will manage our business in this environment. Pending verifications of fundings we expect to report we closed approximately 530 homes in October. Based on our closings today, we now expect to close between 6,700 and 7,100 homes at an average selling price between $340,000 and $350,000 for the full year. Supply shortages continue to extend development timelines and we now expect to end the year with 95 to 100 active communities. We are tightening the range of our gross margin guidance to a range between 27.7% and 28.7% and adjusted gross margin between 29% and 30%. Finally, we now expect wholesale closings to be approximately 20% of our full year closings. I will conclude by talking briefly about our people and LGI Homes’ longer-term outlook for the business. When times get tough, the people in an organization can start to feel uncertain about the future. What they need is reliable, honest communication about the business, and more importantly, how the organization plans to manage the situation. To that end, we are regularly updating our employees on our business and the exact steps management is taking to confront the headwinds through all employee calls, our weekly national sales calls, quarterly updates at corporate and in our local markets, and a number of other roles, specific calls, meetings and retreats. Additionally, we look forward to hosting our senior leadership teams here in Houston next week for additional updates, training and development that they will take back to their local markets around the country. We remain positive about the long-term outlook for the housing market and continue to manage our business with a focus on growth and profitability not just in the coming quarters, but for many years in the future. We are actively investing in development to grow our community count 20% to 30% in 2023 and another 20% to 30% in 2024. To do this, we need to retain our loyal employees and hire additional people to support our plan. We thank our employees for their commitment and enthusiasm during this uncertain time. Your determined efforts on behalf of our customers, combined with our systems culture and 100% spec-focused model, delivered positive results last quarter and will continue to drive our success in the future. We will now open the call for questions.

Thank you. Our first question comes from Michael Rehaut from JPMorgan. Please go ahead.

Hi, everyone. Thanks for taking my question. This is Andrew on for Mike. Congrats on the quarter. I wanted to ask it’s great to see that you guys haven’t lowered your gross margin guidance despite being a spec builder and pricing the market. How should we be thinking about the next two to three quarters as you are adjusting prices for new communities ahead of their opening?

Yes, great question, Andrew. Yes, I think we are now getting into guidance for next year’s gross margin. But I think our guidance for this year is assuming margins are normalizing. We are really – margins are a byproduct of pricing and really looking at pricing on a community by community level and we are lowering prices, last quarter's highest gross margin history in Q2, solid gross margins in Q3 and then we are adjusting to the current market. Most of our peer group is lowering prices around us get into appraisal challenges. So we are pricing to market and that’s part of our incentive program. But yes, we are pleased with our gross margin guidance and that will be a great gross margin to end the year with.

That’s helpful. And then speaking about pricing, looking at the pricing that’s kind of implied next quarter, can you speak to whether that’s more so due to new communities coming online or if it’s just adjustments at existing communities and if you can kind of provide a percentage gap that would be great between the pricing?

Yes. Our backlog is at 341,000. I think though there are a couple of things that impact our ASPs going forward. One is the normalizing margins and lowering the price point communities and also the newer communities coming online would be priced with normal margins, which is going to lead to our lower ASP. Also, our wholesale mix has increased. We sell houses in bulk to the single-family rental industry. They are getting a discount off of the retail price. So that’s a headwind to ASP and gross margin, but is very accretive to the bottom line of LGI. And then also what we are seeing and not surprising in this higher rate environment, where payments were important, is our customers are choosing smaller floor plans. And that has an impact on ASP. So for example, if the customer chooses and qualifies for and we close on a 1,400 square foot house, instead of a 1,700 square foot house in the same community, there is probably a delta of $20,000 to $30,000 in ASP, because they chose the smaller floor plan and we are also introducing smaller floor plans in a select number of communities as well.

Okay, that’s really helpful. Congrats on the quarter and good luck in the coming quarters.

Thank you. Appreciate it.

Thanks.

Thank you. Our next question comes from Truman Patterson with Wolfe Research. Please go ahead.

Hey, good afternoon, everyone. Thanks for taking my questions. First, bit of a housekeeping question, but I am hoping you can help us understand the delta between your reported gross margin and adjusted gross margin. I think it implies that the fourth quarter amortized interest is going to triple maybe quadruple from here in the fourth quarter versus the third quarter? And I believe you mentioned something about selling an interest rate cap in your prepared remarks, so hoping to get a little clarity there?

Yes. Sure, Truman. This is Charles speaking. So we are expecting the delta between adjusted gross margin and gross margins to stay relatively similar. I think we gave 130 basis points spread. The third quarter came in at about 100 basis points. So, similar to what we have said in the past that we tightened that up a little bit from 150 to 130 based on what we have seen so far year-to-date. So the spread should be consistent with what we have said on previous calls. And then the interest rate cap sale is coming in through other income as a $7.1 million impact to other income. This was an interest rate cap that we purchased back in November of 2020 and sold in the third quarter as we felt like it had good value and the term was expiring in early 2023. So we felt like it was the right time to monetize that interest cap for us during the quarter.

Okay, okay. Thanks for that. And then in your orders, I am hoping to understand the incentive level, including kind of base pricing adjustments and we will call it September compared to earlier in the year. And then could you also discuss the incentive levels needed to move product for the core homebuyer compared to your wholesale channel?

Yes, sure. I mean, this is Eric. I put incentives in a few different buckets. One is on the mortgage side, obviously rates are higher. We are in the business of offering an affordable alternative to rent. So, monthly payment is important and mostly impacted by rates. We have not gone down the road of spending a lot of dollars on big forward commitments through the mortgage partner or going that route. We are doing 1 to 2 discount points every week as an incentive to get that fixed rate as low as possible going into every weekend. So, that’s the incentive part on the mortgage side. And then how much we are normalizing pricing in the community is really community by community nationwide. It depends on what the backlog is, how many houses are left in that community, what the gross margins are at to start off and then new communities are in our 25% to 28% adjusted gross margin rolling out business as usual. And then the wholesale mix is also a way not necessarily to reduce the prices through the retail channel. But as a way to move some excess inventory that’s been a big part of our business and very important part of our business. And the single-family rental industry is still buying houses from us and their appetite is still strong. It’s just working on the price that works for both parties.

Okay, okay. Thanks for that. And if I could sneak one more in, your cancellation rate dropped almost 10 points, I think quarter-over-quarter. I think you are the first builder to report that. Can you just help us think through what drove that result as you will scrubbing buyers more aggressively rate locks buy-downs or did you all adjust pricing in your backlog as well?

Yes, no, I can – this is Eric, I can handle that one. We did not adjust pricing in our backlog at all. I would describe our cancellation rate as back to normal. And I think the difference between us and the other builders says we are 100% spec builder. The backlog is all new. We don’t have backlog from sales from quarters ago flowing through anymore. So, our sales going forward and our closings are really going to be what we sell over the next 30 to 60 days still are going to impact Q4 closing. So, cancellations rates back to normal, I think our team is doing a great job of managing the pipeline. But I would expect normal cancellation rate in that range for next year as well.

Alright, thank you. Appreciate it.

Yes, you are welcome, Truman.

Thank you. Our next question comes from Kenneth Zener from KeyBanc. Please go ahead.

Good morning, gentlemen.

Good morning.

Hopefully I have two questions here. As you talked about starts, we are in the 800 range matching demand I don’t want to paraphrase you. But I think that’s what I heard. And can you talk to what that means about the level of activity sequentially, really driving communities out. So I don’t want to get – I am not looking for guidance, I am just trying to – it is an impressive number versus sequentially and year-over-year. So is that where demand is in terms of what you – yes, if you could answer that or give illuminate that, I would appreciate it?

Yes, I think that’s about where demand is on the resale side – retail side, excuse me, Ken, 840 and just where demand is with rates where they are right now and affordability. And the inventory we already had on the ground, we just didn’t need to start a lot of houses. So we got – I won’t say ahead of ourselves, because we are building houses according to the demand from the retail side when interest rates have went from 3.5, 4, all the way up to 7, it slowed considerably. So, that total amount of inventory that we have is just not necessary. I mean, we got its highest 4,800 houses total under construction. We got that number down to 4,100. And at the pace we are running right now probably 3,500 is where we need to be.

Good. And then I want this to be one question but they tie in together, sorry about that. You mentioned community count growth I think you said 20%, 30% and 23%, 24%, can you talk about how that impacts SG&A, because it’s varied obviously between 22% and 21%? Are you going to see leverage there up or down versus kind of your run-rate right now? And how do you think that’s going to be impacting your cash flow? That requires obviously a lot of people as well as capital. And if you might just give us some broad thoughts because I am sure you have already considered that – those elements? Thank you.

Yes, you bet, Ken. This is Charles. So starting, I think the way we think about it is breaking it down into the two components. So on the selling expense side, we have been talking about over the last several quarters just the benefits of a limited advertising spend as we went through kind of through the pandemic and post-pandemic. So, as we grow community count, we would expect selling expenses really do not see much leverage there. And actually the opposite, where you see selling expenses as a percentage of revenue, start to tick back up, that’s also implied in our guidance for full-year SG&A for this year. So, I think you will see selling as a percentage inch up rather than leverage. And then on the G&A side, that is where we do have opportunity for some leverage in the future. I think it would be muted more in the short-term. We will obviously give guidance for 2023, at a later date. But I think that on the G&A side, where it tends to be more fixed expenses, is where there is some opportunity for leverage in the future. And then the second part of the question on just how we are thinking about that in cash flow, most of the acquisitions that are resulting in the community count growth, are deals that we purchased in 2020 and ‘21, raw land deals that we have been developing over time. So most of the cost to get those lots ready have been incurred up to this point. So, we do have about a third of our lots that were under active development. So, the majority of those costs have been incurred as we are getting those communities online. So, we expect our development costs to taper as we deliver those sections, which in the short run will generate some cash flow as we mentioned, particularly as we adjust our vertical inventory as well.

Thank you.

You’re welcome.

Thank you. Our next question comes from Carl Reichardt with BTIG. Please go ahead.

Thanks to everybody. Hey, Eric, you mentioned 3,500 units being kind of the ideal vertical construction number now. And you were at, I think a little over 1,500 finished this quarter, which I think is the highest you had in a couple of years. Is the right ratio for that 3,500 to be kind of one-third finished, two-thirds under construction, or how do you sort of think about that given that you want to run your business model based off of specs? And I assume as much finished? Did you think the balance sheet can handle running that model?

Yes. Sure. Carl, this is Charles. We are really thinking about it. We are really thinking about inventory from a six months supply. So, 3,500 would make sense to us at a 7,000 a year pace. If you go back and look, pre-pandemic, we had about 1,800 completed houses at the end of 2019. But we are really thinking about inventories. About half of it should be complete, on the ground getting back to normal, where our salespeople have the ability to show the customer the house that they are going to move into, which is not what we have experienced over the last couple of years. So, about half in complete and about half under production. And then we would start what we are closing, and then get back to that rotational aspect of close six, start six, close five, start five, so get back into that inventory management type of flow.

Okay. So, this has been encouraging, and it feels like you are getting back a little more to the balance model on the sales and construction side. Are you seeing any kind of improvement in your cycle times over the last quarter or so labor availability? Obviously, we have heard the front end trades are a little more available now, or is that 1,500 also partially a function of cans?

No, I think the production flow is – we would describe its similar. And I think you are accurate and the feedback you are getting in terms of the front end seems to be a slightly better, but really nominal from that aspect in terms of improvement costs are marginally better. We would not describe them as significantly better, but hopefully headed that way.

Okay. Great. I will get back in queue. Thanks.

Thank you. The next question comes from Jay McCanless from Wedbush. Please go ahead.

Hi. Good afternoon, everyone. First question, are you guys still limiting sales and so you are within 60 days of closing or if we all had to take that off, just given what’s going on in the market?

We are limiting sales. Jay, this is Eric, good afternoon. We are limiting sales at 90-day just so we can be comfortable with the closing dates. And most of the time that house will have started construction. So, as long as we have a good – know the closing day, want to have the customer have a great experience. So, 90 days instead of 60 days in this current environment.

I guess when you made that change, is that maybe part of the reason that the cancellation rates have gone up, or are those two not related?

Yes. I don’t think they are really related and the cancellation rates really went down a lot year-over-year. So, the cancellation rate around 20% has normalized. So, now I look too much into that.

Got it. And then I guess to get to 20% to 30% community growth for I think you said ‘23 and ‘24. What needs to go right, because that seems pretty ambitious goal given that you guys and pretty much every other builder, we have talked to said that the horizontal development is still harder right now than vertical development.

Yes. It is very difficult Jay and hopefully we have enough contingency and we have got today’s current market conditions embedded in those dates. But we have been wrong so far. We thought it’s going to get better and it’s gotten worse. As you – as everybody has seen, we have adjusted our community count guidance down from where we started the year. But those communities didn’t disappear. They are still under development. They are still owned. And they are still coming. It’s just been delay. So, the community count growth in ‘23 and ‘24 should be conservative. We own all that land. All those projects are on development. We think we have the correct schedules built in based on today’s environment that has not built in any additional opportunities we see or any additional communities that we have an opportunity to buy and add to that number. We had no M&A built in. So, we think those numbers should be conservative and we are confident in that community count growth.

Okay. Great. I will jump back in the queue. Thank you.

Thank you.

Thank you. Our next question comes from Alex Barron with Housing Research Center. Please go ahead.

Yes. Thank you, gentlemen. I just wanted to make sure I heard correctly. You said the growth for the next few years is expected to be 20% to 30%? If that’s correct, how are you guys looking to fund it? Is it going to be mainly with debt? And if so, what kind of maximum leverage are you thinking you will be willing to carry?

Yes. It was community count growth of 20%, 30%. And I will let Charles handle that questions.

Sure. Yes. Alex, so our target leverage ratio, as we have previously stated, has been between 35% and 45%. So, by lowering our vertical inventory, we expect to generate some positive cash flow in the short run. And as I mentioned, most of the development costs incurred to bring on next year’s communities have already been spent. So, that is on balance sheet already. So, as we move and open into those communities, we will start generating cash flow. We feel very comfortable with the section sizes that we have coming online. So, we feel like a good portion of that investment for both 2023 and 2024 has already been made and is reflected on our balance sheet today.

Got it. And then as it pertains to margins and costs going forward, I mean it seems you guys have obviously, adjusted pricing and orders have gone up as a result. But as we look forward with rates kind of still trending up and all that stuff. Are you guys finding a way to offset the price cuts with cost cuts as well somehow, like other trades responding at this point? And if so, do you feel like margins are going to stabilize pretty soon?

Yes. I think Alex, margins are definitely normalizing. You see our margins quarter-over-quarter are trending down. Based on our guidance, we are expecting gross margins to be lower in the fourth quarter, but still in the historical range. Like we said earlier, as we roll out new communities, 25% to 28% adjusted gross margin is where we were historically. And then obviously, it’s been a very robust gross margin environment. Last couple of years from the pandemic, we expect to go back to that with the after given the more business we booked through the wholesale channel. That lowers the gross margin as well. But we don’t anticipate getting to 20% or below type of gross margin. We plan on getting back to our historical range of 25% to 28% and then factoring in the wholesale business.

Okay. I guess my question was, are you guys getting some type of offset from subs at this point or not yet?

Not yet. We will start seeing the costs to come down. Obviously, it’s a community-by-community and market-by-market. So, we are starting to see some cost relief, obviously, lumber is down. And I think it’s really just, how strong or weak the market is going forward, and where the pricing is going to come out for all of us.

Got it. Okay. Thanks and best of luck.

Thank you.

Thank you.

Thank you. Our next question comes from Carl Reichardt with BTIG. Please go ahead.

Hey. Thanks for the follow-up time. Charles, you said you put $3.1 million in I think it’s option walk away and written off due diligence costs on dirt in the G&A line? Does the full year SG&A guidance include any more of those types of costs in fourth quarter and if so how much?

Yes. We should probably see some, not as much as what we saw in the third quarter as we brought down are controlled pretty significantly already. There may be some left in the queue to pull through in the fourth quarter. I think the majority of what you will see in the implied guidance is really more getting back to normal expenses, hosting meetings, some of the things that we talked about, in terms of some of the initiatives that we are doing from a training standpoint, is going to offset any reduction from Q3 to Q4.

Okay. Thank you for that. And then Eric just to clarify the last comment you made so 25% to 28%, normalized adjusted gross margin, and then factoring in what comes from the wholesale business, or is that inclusive of what to expect from wholesale?

You need to factor that separately. And I am talking generally here, that’s really what our guidance applied as well for the end of the year. And then going forward, we don’t want to get into ‘23 types of guidance. That’s just how we think about the business. And we do a lot of land development. So, we need to be capturing some of that development profit as well.

Yes. Okay. Thanks so much. Appreciate it, guys.

You’re welcome.

You’re welcome.

Thank you. Our next question comes from Kenneth Zener with KeyBanc. Please go ahead.

Hello, again. I wonder if you guys could expand on comments you made around the wholesale buyers? Can you talk to cap rates specifically like a change in cap rates or what your understanding of their appetite is based on? What cap rates are changing? Because obviously, related to interest rates as well, I am just interested to see how that part of the market is shifting from your perspective.

Yes, Ken. This is Eric. I’ll take it at a high level, but we work with a number of different investors from big, large single-family REITs to smaller private equity type of customers. And it’s been very positive for us. And there is still demand, but there is some price discovery when we will work with our wholesale investors. Interest rates have impacted them. Cap rates have changed. So they are looking to pay less for houses than they did 6 months or a year ago, but that’s also part of the normalization. So I don’t really look at that as a headwind. We both have to get back to normal margins whether we are selling the houses retail or selling it to wholesale. So, it’s a lot of negotiation and also how we look at it. Right now, we are starting to build finish inventory that we are open-minded to moving and getting close etcetera. But going forward, once we get our inventory balanced to the current retail environment, it’s going to go back to more of we are starting construction and selling them to the single-family rental industry. So it’s going to be more normalized pricing as well. I think all of us in the industry if we are going to make aggressive deals with single-family rental operators it can be unfinished inventory that we have and we are getting limited in those. We have put a big dent in our inventory. Inventory dollars are coming down in our inventory units like we talked about earlier on the call.

Thank you.

Thank you. Our next question comes from Truman Patterson with Wolfe Research. Please proceed.

Hey, thanks for taking my follow-up. Just wanted to get a little clarity, I believe that the midpoint of your fourth quarter gross margin guide implies – your reported gross margin guide implies like a 22.5% level, but it’s pretty wide anywhere from 20% to 25%. I am just hoping to understand what would get you all to the upper and lower bands of that range? And I am trying to tie it all together with the new community openings coming in at an adjusted 25% to 28% level?

Yes. I think, Truman, it’s a great question. I think the lower end of the range just assumes more higher percentage of our business coming from the wholesale channel and tougher sales environment with more incentives. And then I think the higher end of the range is exactly the opposite on gross margin.

Thank you. At this time, I am not showing any further questions.

Alright. Thank you for participating on today’s call and for your continued interest in LGI Homes. Have a great day and go Astros.

This concludes LGI Homes’ third quarter 2022 conference call. Have a great day.