Beazer Homes USA, Inc. (NYSE:BZH) Q4 2022 Earnings Conference Call November 10, 2022 5:00 PM ET
Company Participants
David Goldberg – Senior Vice President & Chief Financial Officer
Allan Merrill – Chairman & Chief Executive Officer
Conference Call Participants
Alan Ratner – Zelman & Associates
Alex Rygiel – B. Riley
Alex Barron – Housing Research Center
Operator
Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the Quarter and Fiscal Year Ended September 30, 2022. Today’s call is being recorded, and a replay will be available on the company’s website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company’s website at www.beazer.com.
At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer.
David Goldberg
Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the fourth quarter and full year of fiscal 2022. Before we begin, you should be aware that during this call we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date the statement is made. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time-to-time and it is simply not possible to predict all such factors.
Joining me is Allan Merrill, our Chairman and Chief Executive Officer. On our call today, Allan will discuss highlights of our fiscal 2022 performance, our thoughts on the current macroeconomic environment, fiscal 2023 operational initiatives and our competitive strategy. I’ll then provide details on our full year results, our expectations for the first quarter and some additional operating priorities for the year. We will conclude with a wrap-up by Allan. After our prepared remarks, we will take questions in the time remaining.
I will now turn the call over to Allan.
Allan Merrill
Thank you, Dave, and thank you for joining us on our call this afternoon. We finished fiscal 2022 with strong financial results, even as the environment for new home sales was under extraordinary pressure.
During the course of the year, our team successfully navigated complex challenges with both customers and trade partners, which allowed us to generate historically strong financial results and exceed the strategic objectives we established at the beginning of the year.
We grew EBITDA by nearly 41%, leading to more than $7 in earnings per share. We generated an average return on equity of 26.5% or 34%, excluding our deferred tax assets. We reached our long-standing leverage goal by reducing debt below $1 billion, and we increased our active lot position by almost 14%, primarily by securing option lots.
Despite a fundamental shift in the environment for new home sales during the year, we did what we said we were going to do and then some. While it is clear to all of us that the magnitude of our financial results in fiscal 2022 were greatly aided by the enthusiasm for housing that developed during the COVID crisis, it is also clear that our results were directionally consistent with our performance over the past decade.
As you can see on this slide, our long-standing balanced growth strategy has allowed us to dramatically improve profitability without growing our assets and at the same time, reduced leverage and enhance the efficiency of our balance sheet.
Balanced growth has also created tremendous value for our shareholders. We’ve been able to improve both the quantity and composition of our book value, which positions us to be more resilient and opportunistic in the face of significant challenges.
Over the past few years, we’ve consistently identified declining affordability as the greatest risk to our industry. In recent quarters, we’ve shown the graphic on this slide to illustrate the concern. As the COVID pandemic played out, rising demand for new homes and a constrained supply chain led to rapidly increasing home prices and rents. At the same time, inflation in other parts of the economy proved to be persistent, which, as we all know, has led to much higher interest rates.
With 30-year mortgages now about 7%, affordability isn’t a risk. It is the explanation for one of the sharpest drops in demand we’ve ever experienced. This has already pushed down both new and used home prices, and we anticipate continued weakness in both demand and pricing in the quarters ahead.
As tough as this environment is right now, a positive longer-term thesis for housing and home ownership remains firmly in place. We’ve under-built the country’s demographic growth for a decade, resulting in a multimillion home deficit. Employment conditions remain strong with work from home entrenched in many of the fastest-growing industries. And unlike the last serious housing downturn, the credit quality of the existing mortgage book is unlikely to contribute a wave of short sales or foreclosures to the housing supply. That’s why we’re confident that affordability will recover over time as prices, wages and interest rates find a new equilibrium.
Entering fiscal 2023, we’re not waiting on a recovery. We’re proactively addressing the weak demand environment. Like other builders, we’re adjusting prices, incentives and specification levels to enhance buyer affordability. Additionally, we’re working on two other initiatives that should offset some of the pricing pressure we’re facing.
First, we expect to reduce our construction costs. Comparing our most recent quarter to fiscal 2019, our average sales price increased by more than $130,000, allowing gross profit to increase by nearly $60,000. That means our costs went up $70,000, the vast majority of which is related to vertical construction. We are intensely focused on recapturing those dollars.
With lumber prices back to pre-COVID levels, we’re already seeing reductions in the cost of our framing packages. We’re now realizing about $15,000 in lumber savings on new starts, which will benefit future closings.
Beyond lumber, we’re targeting significant savings across our other direct cost categories. Second, we expect to reduce our construction cycle time. Prior to COVID, we were generally able to start homes as late as April and still close them before fiscal year-end. Over the last two years, construction cycle times have extended by about 120 days, meaning that last year, our construction cutoff dates were generally in January.
Dramatic reductions in housing starts are beginning to release some of the pressure on the supply chain. That’s why we’re targeting at least an additional month of sales and closings in our current fiscal year. While affordability and availability are crucial elements in selling new homes in a challenging environment, they’re not the only things that matter, the experience we provide and the home we build also matter. That’s why we’re vigorously emphasizing 2 strategies that differentiate us from our competitors.
First, Mortgage Choice is an exceptional competitive advantage. Mortgage Choice is designed to ensure that a carefully selected group of lenders competes for our buyers business. This means, our customers have access to an array of loan programs, rate locks, buy-downs that a typical in-house lender simply can’t match.
Second, our homes surprising performance and the monthly savings it creates resonates with buyers. Our homes are built to energy efficiency standards that exceed current energy codes for new construction and are light years ahead of used homes. That means our homes cost less to operate and are more likely to retain value against the energy-efficient homes that will inevitably be built in the future.
With monthly cost of ownership and resale value at the center of most buyer conversations, our commitment to energy efficiency is a big advantage. We know that fiscal ’23 is going to be intensely challenging. But we also know that we’re positioned to emerge from this environment in strong shape. It’s not just that our corporate and operating management teams are battle tested from the last downturn. We’re a fundamentally different company. We’ve got a sizable and efficiently controlled land position. We’ve massively reduced debt and interest expense. And perhaps most importantly, we’ve developed durable competitive strategies to compete for buyers.
With that, I’ll turn the call over to Dave.
David Goldberg
Thanks, Alan. For the full fiscal year, adjusted EBITDA was $370 million, up nearly 41% versus the prior year. Net income was $221 million or $7.17 of earnings per share, inclusive of $12 million of energy efficiency tax credits. Our average community sales pace was 2.8 per month with a cancellation rate of 18%. Homebuilding revenue was $2.3 billion, up about 8% as the benefit from higher ASPs offset a modest decline in closings.
Gross margin, excluding amortized interest, impairments and abandonments, was up 330 basis points to 26.3%. SG&A as a percentage of total revenue was down 50 basis points to 10.9% as we benefited from improved leverage from higher ASP. Interest amortized as a percentage of homebuilding revenue was 3.1%, down 100 basis points as we benefited from lower interest incurred and our GAAP tax expense was about $53 million for an effective tax rate of 19.4%. As a reminder, broadly speaking, we don’t pay cash taxes as we continue to utilize our deferred tax assets.
As it relates to our balance sheet, our liquidity at the end of the year stood at more than $450 million comprised of unrestricted cash and an undrawn revolver. As Allan mentioned in his opening comments, we achieved our goal of bringing debt below $1 billion. We ended the fourth quarter at about $980 million of debt, and we now have no maturities due until March 2025. Our net debt to cap was 45%, and our net debt-to-EBITDA was 2.1 times, in line with our expectations.
And finally, after the end of the quarter, we replaced our secured revolver with a larger unsecured facility, which completely eliminates secured debt from our capital structure. As it relates to land spend, we’re taking a more cautious approach until we see conditions stabilize. We continue to re-underwrite all of our land deals, and in many cases, we negotiate both the cost and structure of the deal. These efforts will likely continue to yield modest abandonment charges as we walk away from deals that don’t meet our underwriting criteria in a higher rate and lower price environment.
Even with our more cautious approach to new investments, we have a robust land pipeline in place with more than 24,000 active lots, a majority of which are controlled through options. Although conditions are likely to remain challenging in the near term, our land position enables modest community count growth in fiscal ’23, accelerating in fiscal ’24, allowing us to be very disciplined in the current environment.
Moving back to the near term, we’re providing the following expectations for the first quarter of this fiscal year. We expect average monthly sales pace to be less than two per community, reflecting both normal seasonal trends as well as the weakness we’re experiencing in the current rate environment. Cancellation rates are unlikely to improve, contributing to the expectation for lower net sales. We anticipate backlog conversion to be up 400 basis points to 450 basis points versus the same period last year as cycle times continue to normalize from all-time highs.
ASP should be about $535,000. We expect gross margin to be down 150 basis points to 200 basis points versus the same period last year. SG&A on an absolute dollar basis should be up approximately $4 million, most of which is related to employee cost of living increases from the past year. This should lead to EBITDA between $45 million and $50 million for the quarter. Interest amortized as a percentage of homebuilding revenue should be in the mid-3s and our tax rate to be approximately 17%.
In addition to the cost reduction and cycle time initiatives that Allan discussed earlier, there are several other operational disciplines we are following as we continue to execute our balanced growth strategy. First, we will keep our production aligned with sales, maintaining a healthy balance of spec and to be built production as individual market conditions dictate.
Second, we will keep our organizational structure aligned with the volume of our business, while allowing for future growth when demand returns.
And third, we will remain cautious with our capital allocation, balancing opportunities for growth with expanding liquidity. As we enter fiscal 2023, our posture is cautious. We will respond as the market develops and won’t sacrifice the progress we’ve made with our balanced growth strategy.
With that, I’ll turn the call back over to Allan.
Allan Merrill
Thanks again, Dave. Our fiscal 2022 was very successful, but also very unusual. After beginning the year with demand for new homes at feverish levels, which we couldn’t fully accommodate due to supply chain challenges, we ended the year in a decidedly weak sales environment brought about by an unprecedented increase in rates. Despite this shift, we were able to generate excellent financial results and improve our balance sheet in fiscal 2022.
Taking a step back, our team has done an outstanding job executing our balanced growth strategy over many years. They’ve allowed us to improve both the operations and the financial position of the company, which should help us to withstand what we know will be a challenging environment in fiscal 2023. The long-term fundamentals for housing remain intact and robust. And our team is why I remain confident that we have the people, the strategy and the resources to create durable value over the coming years.
With that, I’ll turn the call over to the operator to take us into Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Alan Ratner. You may go ahead.
Alan Ratner
Hey guys, good afternoon. Thanks for taking the question and nice performance in a tough environment here. I’d love to Allan just dig in a little bit in terms of your pricing strategy. It’s a little bit tricky to figure out what’s going on here, just looking at the guidance and the results. Because on one hand, your 1Q margin guide is about 600 basis points lower than the near-term peak two quarters ago, which is generally consistent, I think, with what most of your peers are seeing, but it looks like your price expectation, at least for next quarter is up pretty significantly quarter-over-quarter, and it hasn’t peaked yet.
So I’m guessing that’s a function of just, kind of, homes that were sold maybe before the more recent slowdown. But what exactly is kind of the net price reduction that you guys are seeing right now? And how is that filtering through to your numbers here? Is it more on the incentive side with rate buydowns and things like that, or is it mix impact? Anything — any color you can give there would be helpful.
David Goldberg
That’s a complicated question and an intelligent one, Alan, but it’s a hard one to answer, too because there are a lot of moving parts. It, sort of, pull it apart. You know, we — I’m pretty confident. I don’t know for sure, but I’m pretty confident Q1 will end up being peak ASP for us in fiscal 2023. And I think it’s for the reasons you mentioned that is backlog that we’re delivering in the December quarter that was sold up to 12 months ago, 9 months ago, 7 months ago. There’s also some mix element embedded in that.
And those homes would have had some incentives mixed in, but not a lot. As we think about going forward, we’ve really identified markets into two categories, and this is an oversimplification, but it might help explain why it’s hard to figure out exactly what’s going on in the numbers.
There are markets that had traditionally operated in what I call markup to mark down, which is to say that they really — that the markets are characterized by a fairly aggressive level of incentive dialogue, 30,000, 40,000. But you don’t really see base price moves in that environment.
Then you’ve got other markets where just traditionally, it’s kind of an everyday low price, and there’s, kind of, a cut to the chase and give me the base price. And the thing that’s tricky, honestly, is that markets don’t — they’re not permanently in one or the other category. And in fact, what ends up happening typically in the markets that have large incentives that at some point, the incentives are large enough that there is a release — pressure that is built up and the base price drops. But then the incentives dramatically reduce as well. So as I think about our pricing strategy, it’s less about, kind of, a national perspective, and it’s more about what are we doing in Dallas? What are we doing in California? What are we doing in the East Coast?
And look, the bottom-line is base prices are coming down and/or incentives are going up. But you know as well as anybody who listens to this call, what’s happening in a national context, is it that — I mean it’s meaningful, but it isn’t as meaningful as what’s happening in that neighborhood and what competitors are doing. So I think we’re going to see ASP come down over the course of 2023.
And I think we will have margin pressures through 2023. But I think there are going to be some offsets on the incentive and pricing side because I’m really confident we can go get more than just lumber savings into the direct costs. And I wish there was a simpler, fewer words, yes or no kind of answer to your question, but those are some of the components that I think may help understand what’s happening in our business.
Alan Ratner
Yes, no. That’s really helpful, Alan, and I appreciate at least kind of just talking through the progression of price in 2023. I think kind of answers at least a good chunk of that question there.
Second, I’d love to drill in a little bit on the cancellations. Obviously, it’s not unique to you guys, but cancellations are accelerating. And can you talk a little bit about the main drivers of those cancellations? What stages are those cancellations occurring? And are you losing people at the closing table because you’re not maybe as aggressive on willing to incentivize those buyers, or are these people that were only in backlog for a month? Any color you can give there to better understand what’s causing the cancellations and at what stage they’re occurring? And then I guess the final point on that is what the success rate looks like in reselling those cancellations?
Allan Merrill
Okay. So one sort of overarching comment about cancellations, and I have to make this comment, it’s a bit redundant. But our cancellation rate consistently has included lot transfers. So, somebody moving within a community to a different home. It doesn’t affect the net sales, but if they move from Lot 6 to Lot 8, that’s a new sale and a new can. And I only point that out, because I want to be careful as anyone looks at our can rate and compares it to anybody else’s can rates, I don’t know what their math is and what they include or exclude. So we tend to be very focused on the trajectory within our own business, because we know that it’s comparable calculation.
So with that out of the way, I would tell you that there really are two things that are happening in cancellations, either people chose to not lock and they find rates that either they can’t or they don’t want to afford or in a few of our cities, and it really isn’t in most of our cities, we’ve seen folks walk away from fairly significant earnest money deposits in order to buy a home that is ready right now before their home with us is ready at a giant discount. And I think that there is definitely a dynamic around fiscal year ends in the industry between September and December, where if you’re sitting on finished specs and we see it every year, maybe more so this year than many, you’re seeing giant incentives on those ready to move in homes as opposed to on to-be-built homes.
And we’ve lost some of our buyers there. But in terms of what stage we’re losing them, they are they’re spread. There isn’t a pattern where they’re all two weeks out from closing where they’re all two weeks after sale. I don’t know that I can manufacture quickly as a statistic that would answer that in a precise way. But it doesn’t feel like there is a particular emphasis at the front end or at the back end, but those are the two things. Folks that were not locked in on their rate and got to a place where they can’t afford it or just say, “gosh, 7% is a lot, and I want to wait or there’s a $50,000 offer, an $80,000 off and they’re walking away from a significant earnest money with us in order to go capture that.
Now you ended the question with whether we’re being successful or not successful, we’re open for business. And we are talking to those buyers. I think we’re as aware of the incentive structure that our peers are offering. So we tend to not be surprised when that happens. And in many instances, we’re proactive with backlog. If we’ve done something in pricing in our community where we see what’s happening around this. We’ll reach out to the backlog and talk to them about what we can do to make sure that they’re feeling great about closing.
So I don’t know with a 30-ish percent can rate in the fourth quarter. I want to say it was super successful, but that’s certainly the effort that we’ve got underway. And it’s been fairly consistent at that level, I would tell you from kind of mid-summer through present day. So I haven’t really seen it dramatically change over the last 30, 60 days. I mean it wasn’t great in July, and it hasn’t really been great since.
David Goldberg
Allan, I would tell you, it’s Dave, just to add to that, on Slide 27 in the presentation, we have spec homes and you can see the level of specs and specifically the level of finished specs still remains very, very low. So in terms of cancellations, pretty high success in being able to resell homes and not tendering a lot more specs from that perspective.
Allan Merrill
That’s good.
Alan Ratner
Great. All right guys. Well, thanks a lot. Appreciate all the time.
David Goldberg
You bet. Thanks, Allan.
Operator
Our next caller is Alex Rygiel with B. Riley. You may go ahead.
Alex Rygiel
Thank you, gentlemen, nice quarter.
David Goldberg
Thanks.
Allan Merrill
Thank you, sir.
Alex Rygiel
Drilling into the $70,000 per home cost inflation, it’s great to hear you’ve already sort of recaptured 15,000 of lumber savings. What are some of the other large buckets that you see opportunities to recapture in the near-term? And maybe if you can quantify that, that would be helpful.
David Goldberg
Yeah, I can’t, because we haven’t done it yet, in terms of the individual categories. But look, the big categories, we’re looking at all of the mechanical systems, certainly, plumbing and electrical and HVAC of our categories that we think that there are opportunities.
And our manufacturers know this, not just from us, but from our peers, windows and doors, that’s another category, bricks and other category. There isn’t a single category that is as large as lumber that we’re going after.
So it’s more — I won’t call them nickels-and-dimes, because we’re talking about thousands and tens of thousands of dollars, but it’s individual parts and pieces as opposed to big juicy categories like lumber.
Julio Romero
And then, congratulations on achieving your debt reduction target. Any chance you could point us in a direction for what a new target might look like for year-end fiscal 2023?
David Goldberg
Look, I think we’re pretty comfortable. We wanted to get the leverage down below $1 billion, and it’s — I don’t anticipate any increase in debt. But I think we’ve got a relationship between our equity and our debt now that we’re very comfortable with.
And I expect that just through the ordinary course as we continue to grow book value that that leverage ratio will come down. But I don’t think the total level of debt is going to change very much.
Julio Romero
Thank you very much.
David Goldberg
All right. Thank you.
Operator
And our next caller is Alex Barron with Housing Research Center. You may go ahead.
Alex Barron
Yes. Thanks, gentlemen. And great job this year. I wanted to focus in on SG&A. I think, this year we saw an improvement in that ratio. But obviously, as being slowed down, that also kind of goes the other way. So my question is, do you have any thoughts or initiatives to try to, I guess, not allow that ratio to go up too much this year that you can discuss?
David Goldberg
Well, Alex, the answer, it’s Dave. Obviously, we’re very, very focused on it. And you’re right, look, you had a lot of leverage as ASP has gone up, and SG&A as apprentices come down.
We talked about Q1 guidance of SG&A being up about $4 million, primarily from cost-of-living increases. You haven’t really seen wage pressures ease yet. But if the environment gets weaker, we’re hopeful we’re going to see some of that.
But look, absolutely focused on SG&A, looking at overheads, looking at our volumes and what we’re driving the community — as a business, excuse me, at the community level and being very, very focused on making sure that we’re watching that carefully and manage that carefully to the size of the business.
Alex Barron
Okay. And how about in terms of being able to deleverage further? And is there a plan to slow down or stop land spend this year to raise cash and keep paying down debt?
David Goldberg
Well, look, we talked about in the script, Alex, very clearly that there’s a level of caution in our land spend this year, renegotiating existing deals, focusing on liquidity.
I wouldn’t go so far as to say there’s a specific desire, as Alan mentioned, to pay down debt, further below the $1 billion where we’ve gotten so far.
But the idea is to create liquidity in the business and gives ourselves a lot of financial flexibility as we look forward into a relatively uncertain 2023 and what we think is going to be better conditions in the future.
Allan Merrill
I’ll just add to that, Alex. I think building a little cash is a good thing to do, obviously, in an uncertain environment. And honestly, I look at our fixed income instruments and say they’re fairly attractively priced, no maintenance covenants and low coupons. So, I think we want to be a little bit careful. I don’t think we need to go pay that off as much as being cautious, having liquidity is a good thing. I don’t know that structural reductions are the best intermediate and longer term strategy.
Alex Barron
Got it. And I don’t know if it’s here in your presentation. I’m just kind scrolling through. But do you guys have a figure for what the starts were in the quarter and what your total homes under construction is, whether it’s old or not sold?
David Goldberg
Well, so I can tell you, Alex, that starts were down 50% year-over-year in Q4, and we expect a pretty meaningful decline in Q1 just given the overall environment and given the sales pace and given the focus on units under production. So, a pretty significant declination in terms of overall start spaces.
Alex Barron
Okay. And do you have the overall homes under construction you guys have at this time?
David Goldberg
We certainly. It’s in the chaos and you certainly can look at overall what’s in backlog and spec starts in the K. I don’t have it right in front of me, but the total volume is certainly in the K and disclosed in terms of specs and backlog under construction.
Alex Barron
Okay. And if I could ask one more. What’s your overall approach at this point? You guys mentioned about the anecdotal of people walking away, canceling because they can find a quick move-in somewhere else at a discounted price. I mean are you guys thinking of following that same approach of trying to have those specs or and chasing that type of buyer or not necessarily?
Allan Merrill
That’s not really us. We’ve always had a blend of to-be-built and spec homes. And in an environment where we had a hard time predicting what our build costs were going to be, it was difficult to sell to be built and then have your costs get away from you. And so we certainly moved more in the direction of specs over the last 18 months or two years.
But I think things are reverting more to norm for us right now, Alex. And I think you’ll see us back in a 60%-plus to be built context. We have individual communities, townhome communities and certain cities where specs have always been, for us, a slightly larger share, but we’re not intending to go put a bunch of inventory in the air and then try and compete on the size of discounts we can get to sell them.
Alex Barron
Got it. Okay. Gentlemen, that’s luck for the year. Thank you.
Allan Merrill
Thanks Alex.
Operator
[Operator Instructions] Our next caller is Julio Romero with Sidoti. You may go ahead.
Unidentified Analyst
All right. Good afternoon, everyone. And my name is Stefan — this is Stefan on for Julio Romero. How are you guys doing?
David Goldberg
Good. How are you?
Unidentified Analyst
Good. I’m sorry if I missed this, but how are you thinking about land spend given the uncertain environment? And sorry if I missed it.
Allan Merrill
Go ahead, David.
David Goldberg
Look, we did speak to it earlier, but no worries, happy to kind of go through it again. I would tell you we’re taking a pretty cautious approach to land spend. We started to outline this as conditions slowed, but frankly, renegotiating every deal that we’re involved in and trying to find opportunities to restructure price, takedowns, whatever we can in the deal to make it more attractive.
So, I would tell you, overall, the approach, especially with the lack of visibility into the market is cautious and waiting to see more stability until we see more stability in the market.
Unidentified Analyst
Thank you so much. Can you also talk about the variability in what community count could end up — at the end of fiscal 2020, 2023?
David Goldberg
I think there are two things going on there. I mean we’ve got a great lot position today. And I think if we could all assume that absorption rates were going to be similar to or the average of what they’ve been in normal times, it would be a little easier to make a prediction. And that prediction would be our community count will be a little higher at the end of the year. I think when you overlay a very high degree of difficulty in predicting sales paces, certainly over the next three to six months.
I think it’s harder to know what the community closeouts are going to be. So, I think there’ll be modest community count increase over the basis of the year or over the balance of the year. But the weaker sales are in Q1 and Q2, the higher the community count, at least temporarily, will be toward the end of the year. So that’s kind of a two-part answer, but those are the elements that will make up the ending community count.
Unidentified Analyst
All right. Thank you. And on your debt, can you tell us how much is like fixed versus floating? And secondly, does the move-up in like rates, impact the interest expense dollars going through your cost of sales?
David Goldberg
No, it doesn’t. So, in terms of what fixed versus floating, the fixed rate debt all the senior notes are fixed. The revolver is a floating rate instrument when it’s drawn, and there’s a non-usage fee. And again, at the end of the year, we had nothing drawn on the revolver. And then obviously, the movement, as we talked about from the secured revolver to the unsecured revolver and the fully unsecured capital structure.
The second debt, the sub debt has — that’s true. That’s element. And it’s a LIBOR base and it’s really an insignificant. It really doesn’t matter what happens to rates. It’s such a small instrument, around $70 million, that it doesn’t really have any material effect on interest expense.
Allan Merrill
In terms of — I think the second part of the question was interest amortized through cost of goods sold. And frankly, it won’t really be impacted by rate increases and rate changes. It’s much more of a factor of interest incurred, which we said is predominantly from fixed rate instruments. The previously capitalized interest balance, which, of course, is in our K, you can take a look. And then inventory turnover is the big factor in that. So, it really won’t be impacted by higher rates or changes in the treasury or the Cipher rate?
Unidentified Analyst
Thank you so much. And the last one for me. With the expectation of lower volumes in fiscal 2023, how are you guys thinking about setting up fiscal 2024 and beyond upward earnings trajectory?
David Goldberg
Well, I think we’ve got the land position right now, where we expect to exit this year with a slightly larger community count, again, with the variability around closeouts. And frankly, in 2024, I think we’ll be in a position for an even larger community count. And I actually think there will be unit activity growth over the next couple of years in our company. It’s very challenging right now. We have no misunderstanding about that, but the positions that we’ve secured over the last several years, we’re pretty excited about bringing to market.
And I think there will be — as I said in the script, there will be an equilibrium between wage growth that has been accumulating, prices being flat and then down, and rates finding a more stable environment and may be at lower levels in the next year or two. Combination of those things, we’re pretty optimistic about the ability to grow both community count and home deliveries as we look out into 1024.
Unidentified Analyst
Thank you, guys, so much for taking my questions.
David Goldberg
Thank you.
Allan Merrill
You’re welcome.
Operator
And we have no additional questions at this time.
David Goldberg
Okay. I want to thank everybody for joining us on our call. We look forward to talking in the next three months. Thank you so much. And this concludes today’s call.
Operator
This concludes today’s conference. Thank you for participating. You may disconnect at this time.
Be the first to comment