Tri Pointe Homes, Inc. (NYSE:TPH) Q3 2023 Earnings Call Transcript

Tri Pointe Homes, Inc. (NYSE:TPH) Q3 2023 Earnings Call Transcript October 26, 2023

Tri Pointe Homes, Inc. beats earnings expectations. Reported EPS is $0.76, expectations were $0.54.

Operator: Greetings and welcome to the Tri Pointe Homes Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Lee, General Counsel of TRI Pointe Homes. Please go ahead.

David Lee: Good morning, and welcome to TRI Pointe Homes’ earnings conference call. Earlier this morning, the Company released its financial results, results for the third quarter of 2023. Documents detailing these results, including a slide deck are available at www.tripointehomes.com through the Investors link and under the Events and Presentations tab. Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts. Including statements concerning future financial and operating performance are forward-looking statements that involve risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the Company’s SEC filings.

Aerial view of a neighborhood with newly constructed single-family detached homes.

Except as required by law, the Company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through Tri Pointe’s website and in its SEC filings. Hosting the call today are, Doug Bauer, the Company’s Chief Executive Officer; Glenn Keeler, the Company’s Chief Financial Officer; Tom Mitchell, the Company’s Chief Operating Officer and President; and Linda Mamet, the Company’s Chief Marketing Officer. With that, I will now turn the call over to Doug.

Douglas Bauer: Thank you, David and good morning to everyone on today’s call. During the call, we will review operating results for the third quarter, provide a market update, and discuss key operating highlights. In addition, we will update our fourth quarter outlook. Tri Pointe delivered another strong quarter, achieving 1,223 deliveries and the average sales price of $675,000, leading to home sales revenue of $825 million. We exceeded the high end of our delivery guidance for the quarter, which is a testament to the success, we’ve achieved in efficiently converting our backlog, and to our ability to sell and close move-in ready homes during the quarter. Throughout 2023, our strategy to increase construction starts, combined with improved cycle times has significantly bolstered our inventory of spec homes.

Under the current market backdrop, having availability of quick move-in homes has allowed us to ramp up our delivery potential, and to capture share in today’s under supplied housing market in higher interest rate environment. This topline performance for the third quarter translated into a homebuilding gross margin of 22.3%, pre-tax income of $100 million and diluted earnings per share of $0.76. We are proud of these results and expect a strong finish to the year. We opened 13 new communities during the third quarter, bringing our active selling community count to 163, which is an all-time high for Tri Pointe. The 30 new communities opened during the quarter were well received by our customers, generating average monthly absorption pace of 4.4 homes per community.

Our strategic focus to geographically diversify our business from our historical concentration in California is progressing well. Currently, California represents 29% of our active selling community mix, while our Texas growth markets have Austin, Houston, and Dallas-Fort Worth account for 34% of our total active selling communities. We are excited about our current land position and continue to focus on growth, with a goal of becoming a top 10 builder in each of our market, as measured by annual delivery volume. We are especially pleased with the success we’ve enjoyed this quarter and through the year during an evolving economic climate. Throughout the third quarter and into October, mortgage rates have remained at elevated levels due to continued increases from the Federal Reserve, as well as from ongoing effects of quantitative tightening.

Moreover, concerns have risen regarding the Nation’s Fiscal Deficit and the increasing supply treasury issuance required to fund it. These elements, combined with today’s historically wide spreads that resulted in cycle high mortgage rates on multiple occasions over recent months. Despite these hurdles that have put a strain on housing affordability, the demand for new homes has remained positive throughout the third quarter, extending the trend at first service in January 2023. This demand is fueled by the strong job market, and historically low housing supply. The housing supply shortage has played a crucial role in bolstering the new homebuilding industry’s performance under today’s higher rate environment. Because the existing home buyers who in previous years secured locked in rates well below current levels, and now reluctant to sell.

This locked in effect significantly reduces resale home supply, as trading up to current market rate levels create affordability challenges for a vast number of homeowners. The resilience of the new home markets is further supported by steady demand from millennials and Gen Z. Millennials have reached the age for household formation and home buying and have significant income enable — enabling them to qualify for our homes. In addition, Gen Z has entered the market and currently 30% of 25 year old own a home, according to a recent Redfin analysis. Demonstrating the strong underlying demand that exists, we experienced positive order trends in the third quarter, with net orders up 122% compared to the prior year, on an absorption pace of 3.3 homes per community per month.

This has allowed us to grow our backlog by 10% quarter-over-quarter, and 108% since the beginning of the year. We have over 3,000 units in backlog, valued at $2.1 billion, as we head into the fourth quarter. Based on the level of demand, we experienced in the quarter, we were able to achieve modest price increases in approximately two-thirds of our communities. But our focus remains on maintaining our target absorption pace, while we carefully ensure the quality of our buyers, and mitigate duration risk within our backlog. Further, we are using forward commitments and continuing to employ a range of pricing incentives, including closing cost credits, interest rate logs, and buy downs, which are tools that are not typically available in the resale market, and provide buyers with the opportunity to secure mortgage rates well below market level.

With respect to our backlog that is expected to deliver in the fourth quarter, and its financing with our affiliated mortgage company Tri Pointe Connect 86% are locked at an average fixed rate of 6.6%. In the third quarter 85% of our buyers financed their new home with Tri Pointe Connect. This quarter we announced several exciting initiatives that will be accretive to our long-term growth goals. First, we announced that we exercise the right to purchase the minority stake in Tri Pointe Connect, our mortgage joint venture with loanDepot. This transaction is anticipated to be completed in the first quarter of 2024, at which time Tri Pointe Connect will become a wholly-owned subsidiary of Tri Pointe Homes. This alignment of mortgage operations with our core homebuilding business offers more flexibility in terms of the customer experience, and competitive pricing along with adding a positive impact to the bottom line.

In the interim, our Tri Pointe Connect operations will remain unchanged, and we will continue to operate under our existing joint venture model until the purchase is finalized. We also recently announced our organic expansion into Utah, focusing on the Greater Salt Lake City market. Operations have commenced under the leadership of Ken Krivanec, who has led our Washington division for the past 12 years. Ken is the ideal leader to launch this new division. Having been raised in Utah and with previous industry experience in the state, Ken has maintained strong ties to the market. Our well established corporate infrastructure, built on solid foundation and innovation, adaptability, and a commitment to excellence, as it’s very excited as we expand our footprint into Utah.

Most recently, Tri Pointe has organically entered the Sacramento, Austin, Charlotte, and Raleigh markets with strong success, and we are enthusiastic about adding Salt Lake City to our growing market mix. Looking ahead, we are actively exploring the Florida and Charleston markets, which is always a disciplined and patient approach to our growth initiatives. Our dedication to product innovation remains a core pillar of our Company’s strategy. As a premium lifestyle brand, we consistently evolve and differentiate our product offerings, and customer experience. Our recently announced multi-year design collaboration with celebrity interior designer, Bobby Berk is set to launch in select communities in our Southern California and Charlotte markets in the fourth quarter.

We’re excited about the integration of Bobby Berk’s 10 collections into our design studios nationwide, allowing customers to personalize their homes with Bobby Berk designs and further enhance our award-winning product offering. As we continue to innovate and adapt in the ever evolving housing landscape, our unwavering commitment to delivering a unique customer experience remains a driving force. While we strive to meet the pricing and affordability challenges that are presented today, we have not lost sight of the importance of offering and inspiring premium product, that is differentiated from the competition. Finally, I want to discuss our balance sheet and liquidity position. Our balance sheet remains very strong and we ended the quarter with a record low debt to capital ratio of 32.1%, and a net debt to capital ratio of 15.4%.

Our total liquidity at quarter end was $1.5 billion which provides us with the financial flexibility to execute our strategic plans, and weather potential economic challenges. We remain committed to our share repurchase program and spent $55 million to repurchase 1.8 million shares for the quarter. This brings our year-to-date share repurchases to $124 million which equates to 4.5 million shares or 3.6% of our outstanding shares as of the beginning of the year. We believe that our share repurchase program continues to be a prudent use of capital, and that it will enhance shareholder value over the long-term. This lever in addition to our strong earnings growth has enabled us to grow book value per share from $10.42 on December 31st, 2015 to $30.03 as of September 30th, 2023, representing a compounded annual growth rate of 15%.

We have reduced shares outstanding over the same period by 40%, all while lowering our leverage ratios and increasing our cash and liquidity to all-time highs. Looking ahead to the rest of 2023 and into 2024, we remain focused on operational efficiency, by continuing to improve our cycle times, and maintaining the cost savings we realized throughout the year. Our strategic focus on maintaining a strong balance sheet, and driving increased orders, cost reductions, and improved returns should continue to enable us to address any challenges that higher rates may pose, while capitalizing on opportunities for growth. With this outlook, I am confident we have the right strategy, and the right team in place to create significant value for our shareholders.

With that, I will turn the call over to Glenn.

Glenn Keeler: Thanks, Doug and good morning. I’m going to highlight some of our results and key financial metrics for the third quarter, and then finish my remarks with our expectations and outlook for the fourth quarter. At times, I will be referring to certain information from our slide deck, which is posted on our website. Slide 6 of the earnings call deck provides some of the financial and operational highlights from our third quarter. We delivered 1,223 homes at an average sale — selling price of $675,000, resulted in home sales revenue of approximately $825 million. Deliveries came in above the midpoint of our guidance range by 16%, as we were able to take advantage of the strong demand environment and deliver move-in ready spec homes during the quarter.

Gross margin percentage for the quarter was 22.3%, which was above our guidance range due to a favorable mix of the additional deliveries, we were able to pull into the quarter. Adjusted gross margin was 25.6% for the quarter and represented a 70 basis point improvement sequentially from the second quarter, resulting from the pricing power we experienced during the spring selling season. SG&A expense as a percentage of home sales revenue was on the lower end of our guidance range at 12.3%. And finally, net income for the third quarter was $75 million or $0.76 per diluted share. We generated 1,513 net new home orders in the third quarter, which was 122% increase compared to the prior year. Our absorption pace was 3.3 homes per community per month, and 84% increase compared to the prior year, and higher than we would normally expect seasonally for third quarter.

In terms of market color, demand was broad-based based across our — both our product and market segments. Absorptions were 3.7 for our entry-level offerings in the quarter, and 3.1 for both first and second move up segments. Moving to the market, absorptions were 3.5 in the West, 2.8 in the Central, and 3.7 in the East. In the West, our Inland Empire, Orange County, San Diego, Arizona, and Nevada markets showed particular strength during the quarter. In the Central region, Houston and Dallas displayed strong demand as did our DC Metro, and Charlotte divisions in the East. So far in October, absorption pace has been 2.3%, interest rates have increased but normal seasonality is also a factor. For context pre-pandemic absorptions in the fourth quarter averaged 2.5 for Tri Pointe and the current demand environment feels similar to that normal seasonal level, and much stronger than the fourth quarter last year when absorptions were 1.1. As Doug mentioned, we had robust community count growth in the quarter opening 30 new communities, and ended the quarter with 163 active selling communities, which was a 23% increase compared to the prior year.

We expect to open an additional eight communities in the fourth quarter, and anticipate ending the year between 150 and 160 active selling communities, depending on the timing of community close up. We are in a solid land position with over 32,000 lots under control, which provides the foundation for volume growth for the next several years. Looking at the balance sheet and capital spend, we ended the quarter with approximately $1.5 billion of liquidity, consisting of $849 million of cash on hand and $700 million available under our unsecured revolving credit facility. Our debt to capital ratio was 32.1% and net debt to net capital ratio was 15.4%. We continue to be active in our share repurchase program, repurchasing 1.8 million shares during the quarter for like total aggregate dollar spend of $55 million.

We have spent $124 million on share repurchases year-to-date and have $126 million of remaining availability on our current repurchase authorization. For the third quarter, we invested approximately $284 million in land and land development, and going forward, we expect to spend approximately $1.2 billion annually on land and land development to support our growth target. Now, I’d like to summarize our outlook for the fourth quarter. For the fourth quarter, we anticipate delivering between 1,600 and 1,800 homes at an average sales price between 670,000 and 680,000. We expect homebuilding gross margin percentage to be in the range of 22% and 23% and we anticipate SG&A expense as a percentage of home sales revenue to be in the range of 10% to 11%.

Lastly, we estimate our effective tax rate for the fourth quarter to be in the range of 25.5% and 26%. With that I will now turn the call back over to Doug for some closing remarks.

Douglas Bauer: Thanks, Glenn. In closing our industry is positioned for long-term success with the continued supply imbalances and strong consumer demand. At Tri Pointe, we are focused on steady growth to both the top and bottom line. This focus will continue to benefit our shareholders with a very simple formula of increasing book value per share year-over-year. I would also like to thank all of our team members for their excellent work and commitment to building our passionate culture. Tri Pointe has earned distinguished recognition from Great Place to Work and Fortune Magazine. On 2023 Best Workplaces in Construction, Best Workplaces for Millennials, and Best Workplaces for Women. We are extremely proud of these designations and of our people who put into action Tri Pointe values, mission, and beliefs that we are in a life changing business by delivering an outstanding customer experience.

Now, I’d like to turn the call back over to the operator for any questions. Thank you.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from Joe Ahlersmeyer with Deutsche Bank. Please go ahead.

Joe Ahlersmeyer: Hey, good morning everybody. How are you?

Douglas Bauer: Yes. Great.

Joe Ahlersmeyer: Great, yes. I appreciate you highlighting the tripling of the book value there do that a few more times and you will really be in business. The, the question I had though, first — the question I had, first off was on community count in the third and fourth quarter here. I think you had said before, 155 to 165 by year end. It looks like you were ahead of that even in the third quarter, but now then you’re saying it might be a little bit lower sequentially. I know there’s timing in there, but maybe you could just go through some of what those timing puts and takes were around the communities?

Glenn Keeler: Yes, it’s just the stronger absorption that we experienced this year, Joe. This is Glenn. The — there’s about 15 to 20 communities that are close to close out in the fourth quarter. We’re opening eight new communities in the fourth quarter so that’s — it’s just timing of when those communities close will depend on the ending number. But overall we opened the total number of communities we thought we were going to open this year, with the additional eight in the fourth quarter. So it’s just the timing of close out.

Joe Ahlersmeyer: Got it. And then you referenced the absorptions on the ones that you opened which were higher than the average. But then, as you’re kind of talking about the October absorption and what you used to do prior to the pandemic, I would think those were lower absorption communities on average to begin with. So maybe just talk about the mix of your communities in the fourth quarter, and, and how that would play into comparability versus that 2.5 history?

Glenn Keeler: Well, I think what we try to highlight there is usually you do get a nice talk when you initially opened a community right? There is some pent-up demand there. And we were just trying to highlight that those 30 communities were well received within the quarter. But it’s still a mix of an overall 163 communities. And we just try to highlight that, that seasonality that we’ve seen so far in October feel similar to pre-pandemic level of the seasonality.

Joe Ahlersmeyer: Got it. All right, well congrats on the good results.

Glenn Keeler: Thank you.

Operator: Our next question comes from Stephen Kim with Evercore ISI. Please go ahead.

Stephen Kim: Yes, thanks very much guys. Congrats on the good results. You talked about being prepared to do, maybe a little more with incentives given the market environment, in order to maintain sort of targeted sales pace. And I gather you talked about, you talked about forward purchase commitments, which I think is something you haven’t really done much since, maybe early in the year. So as you talk — as you introduce these rate buy downs through forward purchase commitments, can you give us a sense for how you’re doing that? How — what kind of significant — what the — what the magnitude is of the buy downs? And what the uptake seems to be so far in October?

Linda Mamet: Hello Stephen, this is Linda. Yes, thank you. So we use forward commitments on a very limited basis at select communities, and even on the select home sites. And to give you an idea of the magnitude, only 7% of the loans that we funded in the third quarter used a forward commitment. So most of our homebuyers are using a permanent rate buy down. And our typical incentive level is in the third quarter was 3.8% of homebuilding revenue, and customers were typically using approximately 2% of that, the closing costs and overall financing.

Stephen Kim: Got it. Now, has any of that changed in, as you’ve moved into October and into the fourth quarter?

Linda Mamet: Not significantly, month-to-date in October, our incentive is at 3.9% of revenue. So we expect it to be similar, but we will adjust if we see there is changes in mortgage interest rate.

Glenn Keeler: And, and Just to clarify that rather it is order revenue, not delivery revenue.

Linda Mamet: Yes.

Stephen Kim: That’s really helpful. Yes, thanks. That was going to be my — yes.

Glenn Keeler: But, yes, fairly, fairly consistent so far in, in October from what we experienced in the third quarter Stephen.

Stephen Kim: Oh, that’s really encouraging. So yes, I appreciate that, that color. Moving on to SG&A, your guide was a little higher on SG&A than we expected, even though the closings were kind of looking like in line. But the — I’m curious as to whether or not you’ve seen an increase in your agent commissions, and also with the, the court case playing out in Texas, curious — curious as to, how you guys are positioned relative to moving with the market if you were to see agent commissions broadly across the market comes down, particularly on buyer agency?

Glenn Keeler: Stephen, I’ll take a chance on that and Linda could chime in as well. But overall, we’ve seen a slight uptick in outside broker commissions, just the percentage of usage. Overall though, compared to our peers said, we’re a pretty low we’re on the lower end of, of usage of outside brokers, so I think we’ve done a pretty good job with that historically. And then, and related to the Texas Tri Pointe, Linda, do you have any color there?

Linda Mamet: We’ll say, right, we’ll be watching the outcome of that that. But as Glenn said, I mean our broker’s sales on third quarter orders was 71%. So we are typically in that high 60s, low 70 percent range for broker attachment to sales.

Stephen Kim: And that’s typically times like a 3% incentive, right? Sorry, not incentive but 3% commission, right?

Linda Mamet: Actually no. We aim to, to really keep that under control and our average commissions as a percentage of the home price in the third quarter was 2.3%.

Glenn Keeler: A lot of times in certain markets, Stephen we’ll just give a flat fee or a fixed amount versus an actual percentage, just, just depends on the market, the community, the demand for the community and things like that.