Tri Pointe Homes, Inc. (NYSE:TPH) Q4 2023 Earnings Call Transcript

Tri Pointe Homes, Inc. (NYSE:TPH) Q4 2023 Earnings Call Transcript February 20, 2024

Tri Pointe Homes, Inc. beats earnings expectations. Reported EPS is $1.36, expectations were $1.12. TPH isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to Tri Pointe’s Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce David Lee, Investor Relations for Tri Pointe Homes. Thank you. You may begin.

David Lee: Good morning and welcome to Tri Pointe Homes’ earnings conference call. Earlier this morning, the company released its financial results for the fourth 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. The discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the company’s SEC filings.

Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be 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 fourth quarter and the full year, provide a market update and discuss key operating objectives. In addition, we will provide our first quarter and full year outlook for 2024. 2023 proved to be another strong year for Tri Pointe Homes, capped off by a successful fourth quarter. We reached or exceeded the high end of all of our key operating metrics for the quarter, closing out the year with strong momentum. During the quarter, we delivered 1,813 homes at an average sales price of $685,000, leading to home sales revenue of $1.2 billion and diluted earnings per share of $1.36. Our key — our gross margin for the quarter was 22.9% and our SG&A expense as a percentage of homebuilding revenue was 9.3%.

We also repurchased approximately 1.8 million shares of our common stock during the fourth quarter at an average price of $27.23, for an aggregate dollar amount of $50 million. Despite the macro headwinds of inflation and volatile interest rate swings, 2023 was a strong year for our company, positioning us for further success in 2024. For the full year 2023, we delivered 5,274 homes at an average sales price of $693,000, leading to home sales revenue of $3.7 billion. Our homebuilding gross margin was 22.3% and diluted earnings per share was $3.45. We ended the year with a book value per share of $31.52, a 12% year-over-year increase. Fueled by a 40% rise in net new home orders in 2023, we increased our opening backlog units by 58% heading into 2024.

In the fourth quarter of ’23, there was a significant shift in mortgage interest rates. Initially, peaking at cycle highs in October, rates subsequently declined as market sentiment shifted. As rates began descending in November, home buying activity increased, with December ultimately exhibiting the strongest orders of the quarter. That end of year momentum has been sustained through January and into February and we would characterize the overall demand environment as strong, demonstrated by our January absorption rate of 3.5. In addition, we opened 70 communities in 2023, ending the year with 155 active selling communities, representing a 14% increase compared to the prior year. We anticipate that our higher community count, coupled with the ongoing strong demand will help us achieve our projected 17% year-over-year increase in deliveries in 2024.

Glenn will provide more color on our guidance during his remarks. We remain encouraged about the fundamentals of our business including household formations, strong demand from Millennials and Gen-Z buyers, a more normalized supply chain and shorter cycle times. While each of these factors contributes to the long-term health of our industry, we are particularly optimistic about the ongoing favorable supply and demand dynamics that structurally support new home demand. In addition, the resale market remains locked in as many existing homeowners are holding mortgages far lower than current market rates. These dynamics should continue to support the homebuilding industry with new home market share of total home sales at historical highs. The strength of our balance sheet continues to be a priority.

We ended 2023 with $1.6 billion in liquidity and a net debt-to-net capital ratio of 14.6%. We generated $195 million of cash flow from operations during 2023 and remain committed to producing positive cash flow in the future as we balance our growth initiatives while reducing debt and remaining active in our share repurchase program. With $869 million of cash on hand at year-end, we currently plan to pay off the $450 million of senior notes that are due in June. By deleveraging, we expect to save $26 million annually in interest costs and reduce our debt-to-capital ratio by approximately to 30%. In December, we announced that our Board of Directors approved a new $250 million share repurchase authorization, demonstrating our commitment to returning excess capital to shareholders.

For the full year of 2023, we repurchased 6.3 million shares at an average price of $27.68, representing a total spend of $174 million. Share repurchases have been a key component of our capital plan over the past several years. Slide 19 of our slide deck highlights the impact of our share repurchase program since its inception. From the end of 2015, we have reduced shares outstanding by 41% and growing our book value per share by 200%. That equates to a 15% compounded annual growth rate in our book value per share. Our goal is to continue to increase book value per share by 10% to 15% annually through a combination of share repurchases and consistently generating strong earnings. As a growth-oriented company, we are focused on growing scale in our existing markets and targeting new markets through organic start-ups or M&A.

In our existing markets, our West region is close to targeted scale and is generating strong margins and cash flow. Over the past few years, we have been investing heavily in our Central and East regions to grow community count and we are seeing the benefit from that investment. Over the next 2 years, we expect delivery volumes in Texas to grow over 60% compared to 2023. In the Carolinas, we anticipate delivery volume of over 30% — delivery volume growth of over 30% in that same period. Not only will this provide for strong top line growth but increased profitability, as our Texas and Carolina divisions are currently producing homebuilding gross margins at or above the company average. For new market expansions, we recently announced our organic entry into Utah and we are already seeing positive momentum on the land front.

We anticipate first deliveries from Utah starting in 2025. We are also actively looking for growth in the Southeast by expanding our footprint into the coastal Carolinas and Florida markets. Another initiative that will be accretive to our long-term growth goals is with our mortgage company, Tri Pointe Connect. Effective February 1, 2024, Tri Pointe Connect became a wholly-owned subsidiary of Tri Pointe Homes, as we exercise the right to purchase the minority stake in our joint venture with loan depot [ph]. This alignment of mortgage operations with our core homebuilding business offers more flexibility in terms of the customer experience and competitive pricing and will provide increased earnings from our financial services business. Tri Pointe Connect is an integral part of our business with strong customer satisfaction and mortgage capture rate.

We continue to see strength and quality in our homebuyers and backlog financing with Tri Pointe Connect with an average annual household income of $198,000, an average FICO score of 753, 80% loan-to-value and a 40% debt-to-income ratio. In summary, the prevailing positive macroeconomic conditions and strong housing fundamentals make us optimistic for 2024 and beyond. Given this environment, Tri Pointe is in excellent position to expand our scale in each of our markets, particularly considering our well-positioned land holdings and our experienced team members. We are actively taking the necessary steps to capitalize on numerous growth opportunities that exist in the market today and are committed to deploying our capital into accretive long-term growth initiatives.

With that, I’ll turn the call over to Glenn. Glenn?

Glenn Keeler: Thanks, Doug and good morning. I’m going to highlight some of our results and key financial metrics for the fourth quarter and then finish my remarks with our expectations and outlook for the first quarter and full year for 2024. At times, I’ll 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 fourth quarter. We generated 1,078 net new home orders in the fourth quarter which was a 143% increase compared to the prior year. Our absorption pace was 2.3 homes per community per month, a 109% increase compared to the prior year. As Doug mentioned, December was the strongest month in the fourth quarter for order activity and that momentum has carried over with a strong start in 2024.

We reported 536 net new home orders in January which was a 27% increase year-over-year on a sales pace of 3.5 homes per community per month. Demand in January was broad-based across both our markets and buyer segments and February is off to a similarly strong start. We took a disciplined approach with our use of incentives in the fourth quarter, largely targeting incentives towards completed or move-in ready homes. Permanent rate buydowns remain a popular use of incentives for our homebuyers. Full incentives on orders in the fourth quarter were 4.8% of revenue and have trended down to 4.4% in January. For context, our historical incentive levels as a company have been in the range of 3% to 4%. We ended the year with 155 active selling communities which was a 14% increase over the prior year.

We plan to open approximately 65 new communities in 2024 and expect to close a similar number during the year. Our new community openings are weighted more heavily to the first half of the year. So we expect to see a higher community count in the first and second quarter before leveling off in the back half of the year. Based on our strong land pipeline with approximately 32,000 owned or controlled lots, we expect to grow our 2025 ending community count by approximately 10%. Looking at the balance sheet and capital spend. We ended the quarter with approximately $1.6 billion of liquidity, consisting of $869 million of cash on hand and $698 million available under our unsecured revolving credit facility. Our debt-to-capital ratio was 31.5% and net debt-to-net capital ratio was 14.6%.

We continue to be active in our share repurchase program, repurchasing 1.8 million shares during the quarter for a total aggregate dollar spend of $50 million. For the fourth quarter, we invested approximately $275 million in land and land development. Going forward, we expect to spend approximately $1.2 billion to $1.5 billion annually, on land and land development to support our growth targets. I’d like to summarize our outlook for the first quarter and full year for 2024. For the first quarter, we anticipate delivering between 1,200 and 1,400 homes at an average sales price between $645,000 and $655,000. We expect homebuilding gross margin percentage to be in the range of 22% to 23% and anticipate our SG&A expense ratio to be in the range of 12% to 13%.

Lastly, we estimate our effective tax rate for the first quarter to be approximately 26.5%. For the full year, we anticipate delivering between 6,000 and 6,300 homes which would be a 17% increase year-over-year using the midpoint of our guidance. We anticipate our average sales price on those deliveries to be between $645,000 to $655,000. We expect homebuilding gross margin percentage to be in the range of 21.5% to 22.5% and anticipate our SG&A expense ratio to be in the range of 10.5% to 11.5%. Lastly, we estimate our effective tax rate for the year to be approximately 26.5%. With that, I will turn the call back over to Doug for closing remarks.

Douglas Bauer: Thanks, Glenn. In summary, our industry remains positioned for long-term success due to the continued supply shortage and strong consumer demand we discussed earlier. At Tri Pointe, we are focused on steady growth to both the top and bottom lines, while efficiently allocating our cash to support our growth initiatives and share buybacks. We expect this focus will continue to benefit our shareholders by increasing book value per share year-over-year. With a strong balance sheet composed of a land portfolio focused on core locations and ample liquidity, we are well positioned to meet our objectives going forward. Finally, I want to express our gratitude to the entire Tri Pointe team for their hard work and dedication.

I’m especially proud that their steadfast commitment to operational excellence led to Tri Pointe being named to the 2024 list of Fortune’s World’s Most Admired Companies. This is especially gratifying is that — those on the list are ranked and chosen by industry peers for their financial soundness, long-term investment value, innovation, ability to attract and retain top talent among many factors. We couldn’t be more prouder of this team and what that — their talent and dedication promises for the future of our company. Now, I’d like to turn it back to — turn the call back over to the operator for any questions.

See also 15 Worst Countries to Live in as an Expat and 15 Best Countries to Move to from US that Speak English.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Joe Ahlersmeyer with Deutsche Bank.

Joe Ahlersmeyer: Yes. The comments on the land spend, if you don’t mind, maybe just going into a little more detail about where that’s going to be deployed maybe from a buyer standpoint, buyer level standpoint and geographically, just a little more details on that.

Glenn Keeler: Joe, it’s got to be more concentrated to the Central and the East like we talked about but there’s still — and we still need to resupply the community count in the West as well. So it’s fairly spread across our communities and it’s about half land [ph] and half development, is that kind of spend going forward.

Joe Ahlersmeyer: Okay, understood. And does that include any potential deployment to M&A of smaller builders?

Glenn Keeler: It does not include that, no.

Joe Ahlersmeyer: Okay, understood. And then just a quick follow-up, if I could. On the decision to retire the debt, maybe just a little surprising kind of in the context of deploying capital to more accretive avenues. I mean, the kind of after-tax cost of debt pretty low relative to incremental returns on your business. So just maybe talk about why you may be taking that out? Is it difficult to refinance? I mean you could probably put it on the revolver even? Just any thoughts there?

Glenn Keeler: Yes. It’s definitely not difficult to refinance. It’s just where the rates are at right now are not that attractive to refinance it, especially considering we have almost $900 million of cash. And so, we always have the ability to be opportunistic and do a new debt issuance later on if rates are in a better place and we need the capital. So as of right now, we have plenty of capital. We’re going to pay them off. And then if we have different capital needs down the road, we can be opportunistic.

Operator: Our next question comes from the line of Truman Patterson with Wolfe Research.

Truman Patterson: Just wanted to run through the gross margin guidance, down, I think, about 70 bps year-over-year in ’24. Could you just help us understand what’s embedded in that land versus stick and brick inflation? And any thoughts on potential pricing power as we move through the year. The pricing power portion is, I’m trying to understand you’ve got kind of a step down embedded in your gross margin guidance in 2Q through 4Q versus the first quarter?

Douglas Bauer: Yes, Truman, this is Doug. Our forecast — business plan forecast is for margins to be slightly down compared to ’23 but it’s early and with good market conditions which we are currently seeing. We should see those margins tighten subject to cost conditions as well, obviously. But that’s where we see right now. But it’s — we had a long way to go.

Truman Patterson: Yes, understood. And when I’m thinking about your oldest community count over the past couple of years, I think, is quite a bit like 40% or so. Could you just talk about your kind of targeted absorption pace? Is it still in that 3.5 range. And I’m trying to understand if that might be kind of an upper bound limit based on labor, lot availability and anything above that, you kind of start pulling on the pricing lever a little bit harder?

Douglas Bauer: This is Doug again. There is no upper bound limit for labor supply chain. It’s actually quite normal, if anything is normal in today’s world. So — but our pace, years and years and years ago, we kind of targeted 3 but our pace today target is 3.5.

Truman Patterson: Okay. Got you. And if I could just sneak one more in there. You said we’re off to a good start in January and February. Just trying to understand with the pullback in rates and kind of the demand rebound that you’ve seen so far. Have you all been able to reduce or pull back on incentives at all, the past several weeks? Or are you kind of taking a bit more of a wait-and-see approach not to disrupt kind of the momentum building ahead of the spring selling season.

Linda Mamet: Thank you, Truman. Good question. This is Linda. So yes, we are pulling back on incentives. In January, we were at 4.4% incentives and continuing to reduce that to under 4% month to date in February. So still seeing a good opportunity to keep a strong pace while pulling back on incentives community by community.

Operator: Our next question comes from the line of Stephen Kim with Evercore.

Stephen Kim: Appreciate all the color so far in the guidance. I wanted to ask a couple of longer-term questions. Just trying to get a sense for how you’re trying — thinking about positioning the company once the dust sort of settles here with the rate volatility over the last couple of years. So I’m curious if you could give us a sense for longer-term goals for, let’s say, community count growth and the growth in the business. I mean, throughout a 10% number, it sounds like we’re going to see in ’25 because it sounds like 2024, we’re going to be kind of flat by the end of the year on community count but then growing 10%, it sounds like in 2025. Wondering if that 10% is a good level that we should be thinking about for you guys for growth.

Similarly, curious if you could give us a sense of what your target is for like leverage, what you’re sort of thinking longer term? And then also, what do you think the longer-term operating margin can kind of be? So kind of top line growth, leverage you want to run the business at and kind of what you think is a sustainable kind of operating margin for the company?