Forestar Group Inc. (NYSE:FOR) Q3 2022 Earnings Convention Name July 19, 2022 5:00 PM ET
Firm Members
Katie Smith – Director, Finance and Investor Relations
Dan Bartok – Chief Government Officer
Jim Allen – Chief Monetary Officer
Convention Name Members
Deepa Raghavan – Wells Fargo
Truman Patterson – Wolfe Analysis
Max Downey – BTIG
Asher Sohnen – Citigroup
Mike Rehaut – JPMorgan
Operator
Good afternoon. And welcome to Forestar’s Third Quarter 2022 Earnings Convention Name. Right now, all individuals have been positioned on a listen-only mode and the ground can be open to your question-and-comments after the presentation. [Operator Instructions]
I’ll now flip the decision over to Katie Smith, Director of Finance and Investor Relations for Forestar.
Katie Smith
Thanks, John. Good afternoon, everybody. And welcome to the decision to debate Forestar’s third quarter outcomes. Thanks for becoming a member of us.
Earlier than we get began right this moment’s name consists of forward-looking statements as outlined by the Personal Securities Litigation Reform Act of 1995. Though Forestar believes any such statements are primarily based on cheap assumptions, there isn’t any assurance that precise outcomes is not going to be materially completely different.
All forward-looking statements are primarily based upon info obtainable to Forestar on the date of this convention name and we don’t undertake any obligation to replace or revise any forward-looking statements publicly.
Extra details about points that would result in materials modifications and efficiency is contained in Forestar’s annual report on Type 10-Ok and its most up-to-date quarterly report on Type 10-Q, each of that are filed with the Securities and Change Fee.
This afternoon’s earnings launch is on our web site at investor.forestar.com and we plan to file the 10-Q later this week. After this name, we are going to put up an up to date investor presentation to our Investor Relations web site below Occasions & Shows to your reference.
Now I’ll flip the decision over to Dan Bartok, our CEO.
Dan Bartok
Thanks, Katie, and good afternoon, everybody. Along with Katie, I’m happy to be joined on the decision right this moment by Jim Allen, our Chief Monetary Officer. The Forestar group delivered a robust third quarter highlighted by web earnings rising 151% from the prior yr to $39.7 million or $0.80 per diluted share. Pretax earnings elevated 150% to $52.7 million and our pretax revenue margin expanded by over 1000 foundation factors year-over-year to 17.1%. Revenues decreased 1% to $308.5 million, whereas lot deliveries decreased by 10% to three,473.
Our lot deliveries for the quarter fell under our expectations, as a result of elevated headwinds within the growth course of. This was primarily associated to municipality delays, and to a lesser extent, shortages of sure supplies. Nevertheless, demand for completed tons remained robust in the course of the quarter, supported by our seventh consecutive quarter of completed tons available accounting for lower than 10% the Forestar’s personal portfolio. Clients proceed to buy tons quickly after completion.
Forestar tons had been offered to D.R. Horton proceed to develop as a share of D.R. Horton’s closings year-over-year. Moreover, our lot offered to clients aside from D.R. Horton elevated 213% in comparison with the prior yr quarter. Because of continued demand and our focus groups, we obtain important enchancment in our pretax revenue margin each year-over-year and sequentially.
Our rising profitability and concentrate on capital effectivity is translating into increased returns for our shareholders. Forestar achieved a 16.2% return on fairness for the trailing 12 months ended June 30, 2022. This was a 620-basis-point enchancment from the identical interval a yr in the past and our ninth consecutive quarter of ROE enchancment.
Rates of interest rose in a short time in June and the housing market is adjusting accordingly. Though, we didn’t see demand deteriorate for completed tons in the course of the third quarter, we anticipate new dwelling begins will proceed to reasonable.
We’ll now focus on our third quarter ends in extra element and I’ll finish the decision with closing remarks and up to date steerage. Jim?
Jim Allen
Thanks, Dan. Within the third quarter, Forestar’s web earnings elevated 151% to $39.7 million or $0.80 per diluted share, in comparison with $15.8 million or $0.32 per diluted share within the prior yr quarter. Consolidated third quarter revenues decreased 1% to $308.5 million.
Tons offered decreased 10% year-over-year to three,473 tons, with a mean gross sales worth of $86,500. Our common gross sales worth this quarter was increased than the second quarter because of the geographic and lot dimension mixture of lot deliveries. We anticipate our common gross sales worth will proceed to fluctuate quarter-to-quarter as a result of these elements.
We’re happy that we proceed to make progress delivering extra tons from initiatives supply by Forestar, 43% of tons offered within the quarter had been Forestar sourced, in comparison with 16% within the third quarter of 2021.
Moreover, that is the primary quarter since D.R. Horton acquired their controlling curiosity that 100% of lot offered in the course of the quarter had been from growth initiatives. 13% of Forestar’s third quarter lot deliveries had been offered to clients aside from D.R. Horton, up from 4% within the third quarter of fiscal 2021. We offered 435 tons to 12 clients aside from D.R. Horton, which was a 213% improve in tons offered to different clients in comparison with the prior yr quarter.
We’re excited in regards to the important progress now we have achieved in increasing our buyer base and proceed to focus on promoting roughly 30% of our tons to different clients over the intermediate time period. Dan?
Dan Bartok
Our pretax earnings for the third quarter elevated 150% to $52.7 million with a pretax revenue margin of 17.1%. As I mentioned in my opening remarks, this was an enchancment of over 1,000 foundation factors in comparison with the prior yr quarter. The prior yr quarter included an $18.1 million pretax loss on extinguishment of debt associated to the redemption of the corporate’s 8% senior notes. Excluding that $18.1 million cost, our pretax earnings for third quarter elevated 34% and our pretax revenue margin improved 460 foundation factors.
Our gross revenue margin expanded 620 foundation factors this quarter to 24%, in comparison with 17.8% a yr in the past. The development was primarily as a result of elevated margins on lot gross sales from growth initiatives sourced by Forestar.
SG&A expense as a share of revenues within the third quarter was 7.8%, in comparison with 5.4% within the prior yr quarter. Whereas this was increased than anticipated as a result of fewer lot deliveries this quarter, we consider we are going to proceed to handle our enterprise at a mid single-digit SG&A share for the complete fiscal yr. We stay centered on effectively managing our SG&Some time investing in our groups. Katie?
Katie Smith
Forestar’s underwriting standards for brand new growth initiatives features a minimal 15% annual pretax return on stock and the return of the preliminary money funding inside 36 months. In the course of the third quarter investments in land and land growth totaled $368 million, of which $79 million was for land and $289 million was for land growth. Fiscal year-to-date, our investments in land and land growth totaled roughly $1.1 billion.
We proceed to be very selective when investing in new initiatives and stay centered on growing initiatives inside our owned land portfolio at a self-discipline tempo. We now plan to take a position roughly $1.425 billion in land and land growth throughout fiscal 2022 topic to market situations and we’re persevering with to focus on a three-year to four-year owned stock of land and plenty.
Forestar’s lot place at June thirtieth was 97,000 tons, of which 65,300 tons had been owned and 31,700 tons had been managed by way of buy contracts. The vast majority of our owned tons had been put below contract previous to 2021.
At quarter finish, we had 5,300 completed tons available. Completed tons have accounted for lower than 10% of Forestar’s owned portfolio for seven consecutive quarters. We’re intensely centered on managing our growth in phases to make sure we’re delivering completed tons at a tempo that matches market demand according to our concentrate on capital effectivity and returns.
At June thirtieth, 53% of our owned tons had been sourced by Forestar, up from 51% a yr in the past. As Jim mentioned, 43% of tons offered within the quarter had been from initiatives sourced by Forestar, up from 16% a yr in the past. That share will proceed to pattern increased as extra Forestar’s sourced initiatives begin to ship tons.
We even have good visibility into future revenues. Of our 65,300 owned tons, 30% are below contract to promote to D.R. Horton, representing roughly $1.5 billion of future income. Moreover, 29% of our owned tons are topic to a proper of first supply to D.R. Horton primarily based on executed Buy and Sale agreements. Jim?
Jim Allen
Forestar stays centered on sustaining a robust stability sheet with ample liquidity and modest leverage. At quarter finish, we had roughly $500 million of liquidity, together with $150 million of unrestricted money and $350 million of obtainable capability on our revolving credit score facility. Complete debt at June thirtieth was $706 million with no senior observe maturities till 2026 and our web debt-to-capital ratio at quarter finish was 32.8%.
Forestar’s capital construction is one in all our key aggressive benefits. Most conventional land builders are encumbered by challenge degree financing, which makes it tougher to react to altering market situations, whereas including complexity and administrative prices.
Our robust liquidity and company degree financing allow us to successfully function by way of altering financial situations and positions us to be opportunistic when engaging alternatives current themselves. At quarter finish, stockholders fairness was $1.15 billion and our e-book worth per share elevated to $23.05, up 18% from a yr in the past. Dan?
Dan Bartok
We anticipate the setting will stay difficult as a result of rising rates of interest, persistent inflation, continued municipality delays and shortages of sure supplies. Nevertheless, our groups are relentless drawback solvers and so they proceed to navigate this setting exceptionally properly. We’ll proceed to be proactive within the areas we are able to management. As I mentioned in my opening remarks, we anticipate new dwelling begins will proceed to reasonable. We additionally anticipate to expertise a short interval of lowered lot deliveries.
As outlined in our press launch, we’re updating our steerage for fiscal 2022. We now anticipate our pretax revenue margin to be roughly 14.25% for the yr, according to the midpoint of our prior vary of 14% to 14.5%.
We anticipate to ship roughly 17,000 tons this yr, producing roughly $1.425 billion of income, in comparison with our prior steerage of between 19,500 to twenty,000 lot deliveries, producing $1.7 billion of income.
Lastly, we nonetheless anticipate our efficient tax charge in fiscal 2020 to be roughly 24.5%.
Though, the uncertainty of this market transition could persist for a while, we stay constructive on the long-term demand outlook for completed tons and our capability to achieve market share within the fragmented lot growth business. We consider that homebuilders will proceed to shift their focus in the direction of shopping for completed a lot of third-party builders as an alternative of self growing, with our nationwide footprint, robust stability sheet and seasoned administration group that has skilled in navigating to market cycles. Forestar is extraordinarily well-positioned to ship additional worth to our shareholders.
John, right now, we are going to now open the road for questions.
Query-and-Reply Session
Operator
Thanks. [Operator Instructions] And the primary query is coming from Deepa Raghavan with Wells Fargo. Your line is dwell.
Deepa Raghavan
Hello. Good night, everybody. Thanks for taking my query. Dan, would you be capable to speak about among the markets the place you anticipate to see housing slowdown impression probably the most? Additionally, are you trying to change your future land combine, as you recognize, fall off, maybe, can result in a few of these modifications?
Dan Bartok
Effectively, I believe, at this level, I don’t know that we’ve actually seen the autumn off in demand, a lot of it’s considerably anticipated. Clearly from the discharge this morning on housing begins, housing begins are paying the single-family permits or begins are down about 16% year-over-year. And — so at this level, I can’t choose — pinpoint anybody market. We’re simply being cautious and trying to adapt as market situations proceed to alter.
So far as our land technique, I — there’s nothing at this level that’s altering our technique, about — nearly two-thirds of the tons that we personal right this moment had been put below contract earlier than 2021. So we really feel excellent in regards to the foundation in our land and our positions. And I believe that we’re diversified appropriately and because it pertains to present permits market-by-markets. I truly really feel actually good about our present land and lot place.
Deepa Raghavan
Okay. You introduced up the housing begins, simply curious, would you could have a forecast for housing begins subsequent yr. I do admire you didn’t have the chance to take share down cycle, however at a excessive degree, what degree of housing begins would you be planning your online business for in [inaudible]?
Dan Bartok
Effectively, truly, I used to be trying on the Wells Fargo report earlier right this moment. So I believe I received — we received a few of our info out of your group. However proper now, I believe, at the very least out of your information, your estimate for subsequent yr is down about 2.5% to three% in single-family’s begins. However once more, that — I don’t understand how previous that report was and I believe the market is altering fairly quickly. Simply over the past a number of weeks we’ve seen builders begin to reasonable begins sort of throughout the Board.
Deepa Raghavan
All proper. That’s honest. My final query, if I can squeeze one in. Anyway to suppose, your launched and in addition your ready commentary talked about, moderating housing demand, you’ve additionally talked about municipal delays. Simply curious out of that, near 2K pull again in quantity clever, how a lot would you attribute to municipal delays and the way a lot would you attribute to tug again within the housing market and that’s the final query? Thanks.
Dan Bartok
Okay. For this prior quarter, mainly our — as we had been ending tons, they had been nonetheless being bought, we didn’t actually see the impression of what will be the future goes to herald demand for these tons. In order we completed tons, they had been nonetheless offered our completed lot on our stock actually didn’t change a lot quarter-over-quarter or year-over-year, we’re staying fairly regular at that quantity.
It’s humorous and all of the prior calls, final a number of calls and discussions I’ve had, a number of the opposite builders have been speaking about municipality delays. And we actually had not skilled it till this previous quarter. So it was — got here as considerably of a shock to us. However simply actually the delays in getting the paperwork completed, plats recorded, getting these remaining certifications from the municipalities, the tons run the bottom that we simply didn’t have that the correct capability to transact and promote that platted lot.
Deepa Raghavan
Okay. Thanks very a lot. Good luck.
Dan Bartok
Yeah. Thanks.
Operator
Okay. The subsequent query is coming from Truman Patterson with Wolfe Analysis. Your line is dwell.
Truman Patterson
Hey. Good afternoon, everybody. Thanks for taking my questions and I do apologize, I used to be having a tough time listening to Deepa. So if I double up on questions, I apologize. However — so it appears such as you all pulled again a bit on land exercise in the course of the quarter primarily based in your lot rely, I’m simply hoping you can provide us sort of the lay of the land from a contest standpoint, whether or not builders have typically pause bidding on sure parcels out there. Are you listening to many are trying to renegotiate sort of choice land phrases and whether or not there are any metros, you’re truly beginning to see land costs soften a bit sequentially.
Dan Bartok
Okay. First, truly, in the event you actually look again at our lot stock over the previous yr, we actually sort of began slowing our land acquisition a few yr in the past and we stayed fairly regular year-over-year in our owned and managed tons.
So far as markets and what different builders doing, we’re clearly listening to about builders dropping contracts. We’re seeing that firsthand in some cases the place the land that was tied up by builders, they’re simply — they’re letting these contracts go and are coming again into the market.
I don’t know that that has translated into lowered land costs but. I believe it’ll in all probability take somewhat longer for the landowners to understand that possibly the worth they encountered observe to that earlier than is — was overstated.
Though, we do anticipate seeing that someday later this yr that we anticipate landowners to possibly get somewhat extra sensible about among the pricing and the phrases, I imply, among the — a few of it wasn’t costs as a lot because it was phrases that basically tightened up and so far as quick by way of diligence intervals in closing on entitled land was sort of turned the norm there for some time for different land patrons. So I anticipate that that may soften, however once more, I don’t know that now we have seen that within the market but.
Truman Patterson
Okay. Okay. Thanks for that. After which, with charges shifting increased and homebuyer demand has clearly cooled a bit right here. You all who talked about the monetary — refinancing aggressive benefit over your friends, however I’m simply making an attempt to know what the technique is over the approaching, we’ll name it, 12 months, I believe, you had been speaking about single-family begins being down somewhat bit earlier. However do you benefit from the slowdown actually exit and seize incremental market share, maybe, even develop the land financial institution or do you shore up a bit of money, and possibly even simply develop and liquidate a portion of your present owned land financial institution?
Dan Bartok
Effectively, we’re going to be consistently on the lookout for these alternatives. If we see engaging alternatives to purchase land in good places, at good costs, that’s one of many causes we need to hold a robust stability sheet with a number of liquidity is to have the ability to benefit from these alternatives.
However we don’t really feel the identical want that possibly we did a few years in the past to exit and construct up our land portfolio. Once more, I — we anticipate that pricing will develop into extra cheap when it comes to come extra cheap because the yr progresses.
So, however from a day-to-day, we’re begins within the every of the subdivisions that now we have, we’re trying on the underlying gross sales, and making an attempt to ensure we’re monitoring and adjusting our lot deliveries as finest as we are able to.
Possibly probably staging tons in {a partially} accomplished trend in order that we are able to rapidly react when demand modifications and turns round, I believe everyone’s on the market experimenting somewhat bit with some lowered begins, it’s not essentially each subdivision, however in lots of locations the place possibly spec stock had grown or the builders loaded up on some completed tons, we anticipate some moderation for time being. However once more, it’s actually simply sort of watching as carefully as we are able to and adapting as rapidly as we are able to.
Truman Patterson
Okay. After which one remaining for me, clearly a 3rd of your land financial institution is optioned or managed offers, which have a fairly engaging foundation, given the land appreciation the previous couple of years. However I’m simply hoping you possibly can assist us suppose by way of, like, what would market situations really want to appear to be earlier than you would possibly, simply step apart from a few of that optioned land?
Dan Bartok
Once more, I believe, it’s actually on a project-by-project foundation and we’ll be , one, what different land will we personal in that space? What are lot positions are? What the gross sales exercise appears like and making an attempt to guarantee that we aren’t too lengthy on land in these markets.
It’s — once more, if you consider how we’re centered on our returns, simply ensuring that the money that we’re deploying, we are able to return comparatively rapidly. So I don’t know that there’s any widespread reply to your query, nevertheless it’s — as a result of it actually goes to be executed on a deal-by-deal foundation and a submarket-by-submarket foundation.
Truman Patterson
Okay. Obtained you. So if you’re pondering by way of it, it’s a bit extra in regards to the quantity of land that you’ve out there, reasonably than any degree of worth declines or something like that within the land market.
Dan Bartok
Yeah. Once more, we hope to have the ability to benefit from alternatives as they arrive up. However proper now, it’s fairly darn granular. I imply, we actually spend a lot of our days, components of each day going by way of project-by-project and understanding the native stock and a challenge stock as we make selections on, placing tons into growth or slowing growth or — and/or future land purchases.
Truman Patterson
Okay. Excellent. Thanks for taking my questions and good luck within the upcoming quarter.
Dan Bartok
Nice. Thanks, Truman.
Operator
Okay. Up subsequent now we have Max Downey with BTIG. Max, your line is dwell.
Max Downey
Hey, guys. Thanks for taking my questions. So on the fabric facet, are there any explicit supplies which can be inflicting delays proper now?
Dan Bartok
There’s two which can be in all probability probably the most outstanding, one in all them is getting transformers from the facility corporations to get subdivisions sizzling with electrical energy. It appears to be sort of widespread. It’s not only one location versus one other. However I’d say that’s in all probability the most typical drawback we’re having is definitely, tons will be executed, however we simply can’t get electrical energy to them, ready on that utility firm.
The second is definitely bolstered concrete pipe and there’s a number of that pipe is made in places near our initiatives, it’s shipped at lengthy distance. It isn’t essentially the pipe itself, nevertheless it’s the reinforcing wire that goes in that pipe and there appears to be a scarcity of that. And once more, one of the best we are able to decide is it’s, there’s a scarcity that’s fairly nationwide and scope is, as I believe most of us made in China and ship over right here, then the pipe is made domestically. That’s in all probability the 2 largest areas that we’re experiencing materials delays.
Max Downey
Obtained it. Thanks. That’s actually useful. After which my second query is, final quarter you guys mentioned an curiosity from the build-for-rent operators for a few of your belongings. Have you ever seen a change demand or curiosity both up or down this quarter and do you could have any up to date ideas on the house usually?
Dan Bartok
At this level, we’re nonetheless seeing the demand to be robust. We anticipate possibly pricing could be — as we glance to promote extra parcels, we expect pricing could be somewhat softer, as a result of I believe, the rates of interest have gone up and at the very least the looks of cap charges has gone up somewhat bit and as they again into what they will pay for develop land.
We’re frequently trying on the house. We’ve offered some parcels to that house that was taking place. It’d be a novel transaction in the best way that it was structured, which in all probability introduced somewhat extra visibility to that specific transaction. And however, yeah, we are going to proceed to have a look at the build-for-rent market as a viable demand for tons in our subdivisions.
Max Downey
Superior. Thanks a lot, guys.
Dan Bartok
Thanks.
Operator
[Operator Instructions] Up subsequent now we have Anthony Pettinari with Citigroup. Anthony, your line is dwell.
Asher Sohnen
Hello. That is Asher Sohnen on for Anthony. Thanks for taking my questions. I simply need to know, what sort of dwelling worth or dwelling gross sales volumes, the consumer state of affairs, would you need to see materialized earlier than you might begin desirous about potential impairments to your e-book if any?
Dan Bartok
That’s all the time a tough query. Once I take into consideration dwelling costs, there’s a few elements that I believe have pushed dwelling costs up. One is, I believe, builders have been in a position to improve their margins over what could have been a historic run charge and a number of their materials prices have run up.
So I believe there’s going to be a — if there’s going to be some worth adjusting downward, I believe there’s room earlier than it will get to the 2 lot costs themselves. To this point, we haven’t seen any pushback on our lot pricing.
And I believe we’ve — once more, a number of our portfolio was tied up and put below contract earlier than 2021. So we really feel actually good about our land bases. And it’ll simply — it’s going to actually be checked out on a — once more on a project-by-project foundation, if we see that costs have fallen considerably. I believe there’s room for builders to present incentives and regulate pricing for fairly a bit earlier than it could impression lot costs.
Asher Sohnen
Thanks. That’s useful. One other query I had was, your full yr information appears to indicate fairly robust a year-over-year decline in volumes within the fourth quarter, and clearly, you’re not going to 2023 but, however you’re simply directionally, so we take into consideration 4Q is being possibly a superb run charge for the following the next yr or it may have been some reacceleration in fiscal 1Q 2023 as possibly among the delays you’re seeing in 4Q sort of get delivered in 1Q. Is that how ought to we give it some thought?
Dan Bartok
Yeah. I don’t — once more, I’m probably not — we’re not given steerage for good cause. That’s — the long run is somewhat bit unclear. We don’t actually know what it’s going to appear to be. We’re going to be positioned to essentially retain the expansion charge that which we may have achieved if the market hadn’t modified on us.
I believe each week we get smarter as we see gross sales outcomes are available in and so what — how that is all going to unfold. Clearly, the fed are nonetheless speaking about additional rate of interest rises. So we simply don’t actually know what to anticipate, however we’re positioned to have the ability to retain the run charges that which now we have been working at and I wouldn’t actually do something for This autumn look ahead at this level.
Asher Sohnen
Okay. Thanks. That’s actually useful. I’ll flip it over.
Operator
Okay. Up subsequent now we have Mike Rehaut with JPMorgan. Your line is dwell.
Mike Rehaut
Thanks. Good afternoon, everybody. Simply curious on the lowered lot supply steerage for fiscal 2022, practically about 3,000 tons, how ought to we consider that when it comes to the 2 completely different causes that you simply cited, being municipal delays versus builders strolling away from the choice contracts?
Dan Bartok
Yeah. I believe reasonably I fill the [ph] second one first. I don’t actually see builders strolling away from choice contracts, at the very least at this stage of the sport for us. What now we have is contracts to promote these tons there, each one in all them remains to be in compliance with the phrases of these contracts. We don’t have any contracts which can be in default. If something, builders received forward of the required takes in these contracts and have somewhat little bit of room to regulate earlier than we must change these contracts and costs.
So, a few of it’s simply sort of a finger within the wind, to be sincere with you. So what we’re anticipating to see in altering demand and a few of it’s these continued delays within the — once more municipalities actually log off. I imply, what we’re — the delays, to say, it went from the much less, probably not seeing something to fairly important delays and getting plats authorised.
I don’t know if it’s understaffing or simply occur to be the summer season months and there are lot of individuals had been on trip or however clearly it was — for us, it was a widespread change within the capability to get these plats recorded and get remaining lot certifications by way of the municipality. I don’t understand how I might handicap one versus the opposite. I believe it’s in all probability a fairly even mix between the 2.
Mike Rehaut
Okay. So in different phrases, possibly it’s roughly 50-50, however apart from the municipal delays, the opposite most important cause not essentially strolling away from the choice contract, however extra simply delays, a slower market and lowered takedowns or pushed out takedowns. Is that honest to say?
Dan Bartok
Yeah. That’s proper. I believe the builders are within the strategy of adjusting their begins and I anticipate that they received’t be accelerating these lot takedowns, like they’d been previously.
Mike Rehaut
Proper. Okay. Subsequent, simply on the gross margins, making an attempt to, possibly the SG&A as properly and this could be extra of a query for Jim. However if you sort of triangulate the 14.25% pretax margin, it looks as if, you probably did on the SG&A facet, $24 million this quarter and final, in the event you sort of extrapolate and hold that at $24 million, you’re 6.5% SG&A after which that may require a 20 share kind of gross margin for the fourth quarter for it to stream by way of. Is that the correct method to consider it or ought to we anticipate any kind of great greenback lower run charges off of the $24 million SG&A that, that you simply posted every of the final couple quarters?
Jim Allen
No. I believe the best way you’re desirous about it’s proper. I imply, our gross margin was somewhat increased within the third quarter. We simply actually did a mixture. We had some communities with simply increased margins within the combine this quarter and we anticipate that to sort of revert again to extra what the margin was in Q2. However once more, we’re having — we had — additionally had a robust supply of Forestar sourced tons, which helped and no lot banking.
So I believe fourth quarter margins in all probability look extra much like Q2 and our SG&A run charge when it comes to {dollars}, in all probability, very related, however — on decrease quantity, so we in all probability received’t have the working leverage that we initially anticipated to have.
Mike Rehaut
Proper. I suppose simply extrapolating and understanding and never giving steerage but for subsequent yr. However to the extent that you simply proceed to place out like plus or minus $300 million 1 / 4 run charge, because it appears such as you’re sort of roughly going to hit within the again half. Would that — if that had been to persist, ought to we expect any kind of cuts off of the SG&A on a $1 foundation or simply with a view to preserve the infrastructure that you simply’ve constructed and what you need to attempt to create over the following a number of years, you’re okay with somewhat little bit of deleveraging?
Jim Allen
Yeah. I believe for proper now, we — what we don’t need to do is overreact. We’ve constructed an amazing platform. You’ll discover, in the event you have a look at our headcount, we had been fairly flat quarter-over-quarter for the primary time and in lots of — truly for the reason that time of the transaction with Horton 4 and a half years in the past, we anticipate to in all probability maintain that flat.
A minimum of for now, clearly, we are able to regulate later down the street, however what we don’t need to do is overreact and begin dismantling the fabulous group that now we have. So we intend to maintain that group intact.
Mike Rehaut
Proper. One final one, if I may, and I do know it’s somewhat repetitive, could be somewhat troublesome to reply. However you’re sort of now forecasting with the fourth quarter, lots supply charge of plus or minus 3,500 1 / 4. I do know you mentioned earlier within the name that you simply anticipate the lowered deliveries to be a short interval, outdoors of additional market slowing or deterioration, is that this a quantity that all the pieces else equal, if the market stabilizes right here must be somewhat increased within the subsequent few quarters or relying on municipal delays and additional conservatism, it might be at this degree or decrease?
Jim Allen
Once more, I believe, we’re going to adapt as want be. However we’re positioned to speed up our lot deliveries sooner or later again to that run charge. We don’t anticipate that these municipal delays will proceed. We predict that it’s one thing that’s actual right this moment, however I wouldn’t suppose that, six months or 9 months from now that they are going to nonetheless be as extreme as they been lately. So we anticipate that that may come to fruition.
And once more, at this stage, we’re nonetheless seeing the demand for the tons. Our anticipation is that it’ll soften. However, once more, proper now, I don’t actually suppose it’s going to be that lengthy. I believe the builders are going to attempt to proper dimension their stock on a project-by-project foundation. And as their constructing prices come down, we anticipate begins to sort of reaccelerate. So — however we’re nonetheless be to — proceed to monitoring on a week-to-week and month-to-month foundation and adjusting as we are able to.
Mike Rehaut
Proper. Thanks a lot. Respect it.
Jim Allen
Thanks.
Operator
Okay. We’ve no additional questions in queue. I’d like to show the ground again to Dan Bartok for closing remarks.
Dan Bartok
Thanks, John. And thanks to everybody on the Forestar group to your focus and exhausting work. We admire everybody’s time on the decision right this moment. I stay up for talking with you once more in November to share our fourth quarter outcomes. Thanks.
Operator
Thanks, girls and gents. This does conclude right this moment’s occasion. It’s possible you’ll disconnect right now and have an exquisite day. Thanks to your participation.
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