Tri Pointe Homes Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 14 speakers on the call.

Operator

Good morning, and welcome to the Tri Point Homes First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to David Lee, General Counsel, please go ahead.

Speaker 1

Good morning, and welcome to TRI Pointe Homes' earnings conference call. Earlier this morning, the company released its financial results for the Q1 of 2023. Documents detailing these results, including a slide deck, Are available at www.tripointhomes.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. A discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the company's SEC filings.

Speaker 1

Except as required by law, the company undertakes no duty to update these forward looking statements. Additionally, reconciliations of non GAAP financial measures 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 Mamey, the company's Chief Marketing Officer. With that, I will now turn the call over to Doug.

Speaker 2

Thank you, David, and hello to everyone on today's call. During the call, we will review operating results for the Q1, provide a market update and reiterate our key strategic drivers for 2023. In addition, we will provide our 2nd quarter and full year outlook. We are extremely pleased with the start of the year as overall market conditions have vastly improved relative to those in the final quarter of 2022. We reported outstanding results for the Q1 where we met or exceeded all of our stated guidance.

Speaker 2

For the Q1, we delivered 10 65 homes, while generating $768,000,000 in home sales revenue. Home sales gross margin for the quarter was 23.5 percent and SG and A as a percentage of home sales revenue was 11.5%. These metrics culminated in a pre tax income of $103,000,000 or $0.73 of diluted earnings per share. We generated positive cash flow from operations of $136,000,000 for the Q1 and we returned $38,000,000 to our shareholders in the form of share repurchases. Our balance sheet remains strong as we ended the quarter with a record low net debt to net capital ratio of 12.6% And total liquidity of $1,700,000,000 While we are pleased with these Q1 financial results, More notably, we are encouraged by our ability to generate new home orders, reduce cancellations and make significant strides in replenishing our backlog pipeline.

Speaker 2

Our key initiative going into the year was to increase our sales base with a returns oriented focus. We achieved this through product repositioning, targeted pricing and incentive strategies that allowed us to adjust price 4.0 orders per community per month, which is firmly above our pre pandemic normal levels for a Q1 and significantly higher sequentially from what we experienced in the back half of twenty twenty two. Overall, We generated 16 19 orders for the Q1, a 2 65% increase We also grew our community count by 17% compared to the Q1 of 2022, Ending the quarter with 136 active communities of which 64% were outside of California. Despite the well publicized stress surrounding the banking system, the uncertainty of higher interest rates In the dialogue on a future recession, the job market appears to remain strong and there are no apparent reductions in credit quality or stress related to our prospective buyers. We believe there are several factors contributing to a tailwind for the homebuilding industry.

Speaker 2

First, on the supply side, the combination of significant reduction in resale inventory compared to historical levels And the continuing slowdown in new home construction starts over the past several quarters has only increased the housing deficit. The limited resale market, which is compounded by the large number of existing homeowners not listing their homes due to low mortgage rates they've According to the National Association of Home Builders, currently 1 third of housing inventory is new construction compared to historical norms of a little more than 10%. This reduction in resale competition is likely increasing our perspective buyer pool And we believe this factor will continue while rates remain elevated. As such, we are focused on increasing our new home starts to meet these favorable market conditions. 2nd, on the demand side, while the rise in mortgage rates over the past has significant impact on traditional mortgage monthly mortgage payments.

Speaker 2

Our rate buy down incentive strategy has been a key component in mitigating that and providing affordability for our customers. Due to the strong demand in the market, we are able to reduce incentives on new orders As the quarter progressed and we have raised base pricing in certain communities where demand has significantly outpaced supply. The 3rd fundamental point relates to the demand for homes from millennials and Gen Z buyers Who are in or approaching their prime home buying years. According to a recent study, With 52% of millennials now owning a home, the majority of our nation's largest generation has transitioned from being renters to homeowners with a notable 64% increase in the number of millennials buying a home in the past 5 years. Consistent with these macro demographics, this cohort currently makes up 59% of TRI Pointe's buyers Financing with our affiliated mortgage company.

Speaker 2

Furthermore, the next generation entering the home buying life stage is Gen Z, A cohort of 68,000,000 people and only 5% smaller than the millennial population. Gen Z represents 9% of our current backlog. While these dynamics bode well for continuing demand, Our focus on cost savings remains a priority and our operating teams have made solid strides in obtaining lower costs throughout the supply chain. Our goal of a 10% to 20% reduction by year end continues to drive our efforts. We have seen positive results through the Q1 with cost down 8% to 10% on average.

Speaker 2

We acknowledge there are still sticky labor constraints, but we remain committed to pursuing reductions where possible. Cycle time reductions are another key initiative of our 2023 business plan. As we continue to prioritize returns through higher asset turns and increased delivery volume.

Speaker 3

At the beginning of

Speaker 2

the year, we set forth a goal to reduce cycle times by 4 weeks on average by year end, and we are making strides towards meeting this goal. Our team is focused on expanding trade resources, improving the material procurement process and introducing line or phase building in additional markets. Spec Homes currently represents 60% to 65% of our total starts thus far in 2023. Through the Q1, our cycle times have been reduced on average by more than 2 weeks. We are pleased with the improvements we are seeing thus far in 2020 3 and believe further improvements are within reach as the year progresses.

Speaker 2

As for market commentary, We are pleased to report that we are witnessing well diversified demand across all buyer segments and geographic markets. We continue to focus on affordability with 80% of our average community count coming from the premium entry level Our first move up buyer segments. For the quarter, 50% of our orders came from the entry level segment, 33% were from the first move up, 7% were the 2nd move up with the remaining 10% coming from Luxury or active adult. The Q1 of 2023 has been defined as a market in transition. The back half of twenty twenty two was depressed by rapidly increasing interest rate scenario that necessitated a market correction And builders have reacted quickly with price reductions, product repositioning and financing incentives to stimulate demand.

Speaker 2

Beginning in early January, the consumer reengaged and generally new housing demand in early 2023 has been very strong. Supply and demand dynamics remain a tailwind for our industry. Now I'd like to turn the call over to Glenn to further discuss the results for the quarter and provide some insight on our outlook for 2023. Glenn?

Speaker 4

Thanks, Doug, and good morning. I'm going to highlight some of our results and key financial metrics for the Q1 and then finish my remarks with our expectations and outlook for the Q2 and full year. 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 Q1. We delivered 10 65 homes at an average selling price of $722,000 resulting in home sales revenue of Approximately $768,000,000 Deliveries came in above the high end of our guidance range as we are able to take advantage of the strong demand environment and utilize our spec strategy to sell and deliver move in ready homes during the quarter.

Speaker 4

Our homebuilding gross margin percentage for the quarter was 23.5 percent, which was at the midpoint of our guidance range. Finally, SG and A expense as a percentage of home sales revenue came in at 11.5%, which was an improvement compared to our guidance as a result of the increase in deliveries, which gave us better leverage over our fixed costs during the quarter. We recorded 16 19 net new home orders in the Q1 on an absorption pace of 4 per community per month. Demand increased as the quarter progressed. January absorption pace was 3.1, February came in at 4 and March increased to 4.8.

Speaker 4

So far in April, we are experiencing continued strong demand and last week we recorded 192 net orders, which was our highest weekly order number for the year and the best single week for orders since March of 2021. In terms of market color, as Doug mentioned, Demand was broad based across our geographic footprint. In the West, the overall absorption pace was 4.1 with all of our California markets performing well, along with strong results in both Washington and Nevada. Arizona started slower, but saw improvement as the quarter progressed. In the Central region, overall absorption pace was 3.0 with each market with each Texas market showing positive momentum.

Speaker 4

Colorado is a market that is still finding its footing, but we have seen an increase in demand recently. Finally, in the East, absorption pace was 5.7, led by significant demand in Charlotte, but also strong results in Raleigh and the DC Metro area. Turning to communities, We continue to focus on our community count growth and are on target to open between 70 80 new communities for the full year of 2023, of which we have opened 18 in the Q1. This will result in strong community account growth for the full year of 2023. We're in a solid land position with approximately 32,000 lots under controlled, which provide Looking at the balance sheet and cash flow, we ended the quarter with approximately $1,700,000,000 of liquidity consisting of $966,000,000 of cash on hand and $691,000,000 available under our unsecured revolving credit facility.

Speaker 4

Our debt to capital ratio was 32.5 percent and our net debt to net capital ratio was 12.6 percent both record lows for TRI Pointe. For the Q1, we generated $136,000,000 of positive cash flow from While investing $260,000,000 in land and land development, we repurchased 1,600,000 shares during the quarter at an average price per share of $23.87 for a total aggregate dollar spend of $38,000,000 Now I'd like to summarize our outlook for the 2nd quarter. We anticipate delivering between 900 and 1,000 homes at an average sales price between 720,000 and 730,000. We expect homebuilding gross margin percentage to be in the range of 22% to 23% for the 2nd quarter and anticipate SG and A expense a percentage of home sales revenue to be in the range of 12% to 13%. Lastly, we estimate our effective tax rate for the Q2 to be in the range of 26% to 27%.

Speaker 4

For the full year, we are updating our guidance to a range of deliveries between 4,500,051,000 homes at an average sales price between 690,000 With that, I will turn the call back over to Doug for some closing remarks.

Speaker 2

Thank you, Glenn. Our strategic focus on driving increased orders, cost reductions and returns will enable us to capitalize on market opportunities that exist. With this strategic focus in mind, we remain optimistic about the industry's strong long term fundamentals and we are confident that TRI Pointe is well positioned to grow and succeed. I'd also like to thank all of our team members for their excellent work and building our passionate culture. It is because of you that TRI Pointe Homes has been recognized as one of the 2023 Fortune 100 Best Companies to Work For.

Speaker 2

We consider ourselves to be in the life changing business For our customers and equally for our team members, we make it all happen, putting our values and mission into action and delivering outstanding experience. With that, I'll turn the call back to the operator for any questions. Thank you.

Operator

We will now begin the question and answer The first question comes from Stephen Kim with Evercore ISI. Please go ahead.

Speaker 5

Yes. Thanks very much, Cai. Congratulations on the good results. I wanted to talk to you a little bit about your average price. Can you give us a little insight into

Speaker 6

kind of how

Speaker 5

the average price of your orders has trended over the past few months? I know that that's not a number we typically talk about, but just I'm wondering whether or not you've seen it trending down or in the last few months.

Speaker 4

Hi, Stephen, it's Glenn. Well, Like we said on the call, we've lower we've been able to lower incentives and raise base pricing on some communities. And so from that perspective, the ASP It has gone up, but overall throughout the course of this year as we've discussed in the past, you're going to see our ASP go down as there's a higher mix of more Attainably priced product coming from our newer growth divisions like Charlotte, Raleigh and Dallas Fort Worth. So that's kind of the directory direction of price.

Speaker 5

Yes. Makes sense. And then when you talk about your land and your preparation for communities, As we either look out a year or more, we noticed that your land holdings declined both in terms of owned and optioned units. And so curious as to whether or not you think the trajectory of that is going to be sort of up, flat or down In absolute units here over the next few quarters and whether there might be a divergence maybe with Your owns might be flat or down, but your options will be up. Just trying to get a sense for how things are going to trend.

Speaker 4

Good question. You're going to start to see that Trajectory go back up and you'll see it more in the options to start before we take it down. But we are Being more active in the land market as of right now as we've seen more stabilization in pricing. And so you'll start to see that option number go back up.

Speaker 5

Okay. But the owned, what should we think about that?

Speaker 4

Well, owned will it's just a timing issue between when you take it down and when you deliver. Overall, though, I think we're still targeting Over the next couple of years, a more fifty-fifty mix of option to known, if that's what you're asking.

Speaker 5

Okay. That's fine. Yes. Great. And your leverage is incredibly low right now relative to what I think you've sort of talked about in the past.

Speaker 5

Can you talk a little bit about your What your plans are there? How we should expect you to make investments? Maybe what the deal pipeline looks like, both in terms of M and A as well as maybe some other investments. And how patient you think you'd be keeping your leverage That low, should we, for example, be surprised if you're patient and we see a leverage at this team's rate on net debt to cap by the end of the year?

Speaker 4

Yes. So part of it is we're looking out to next year and we have our 2024 bonds coming due. And so we're putting ourselves in a position to pay those down. But that will continue to be opportunistic on that depending on how the debt market looks and what our capital needs are as we get through this year and next year. But we're our capital needs still remain the same.

Speaker 4

We're looking to invest. We're looking to grow. So we're active in the land market. We don't have any M and A eminent now, but we're looking, right. There's markets that we're still interested in.

Speaker 4

It's a long term we're still looking to grow And we're in a good balance sheet position to allow us to do that.

Speaker 5

Okay, great. Thanks very much guys.

Speaker 3

Thanks, Stephen.

Operator

The next question comes from Truman Patterson with Wolfe Research. Please go ahead.

Speaker 7

Hey, good morning, guys. Thanks for taking my questions. First one On spec versus build to order gross margins, some of your peers have suggested that the spread between Hoping you could give some color on what you're seeing in the market today?

Speaker 8

Yes, Truman. This is Tom. And I would tend to agree with our peer set that we are beginning to see normalization in that build to order versus spec gross margin. Historically, it's been around 200 bps for us. We're not quite there yet, but we do expect it to continue to normalize.

Speaker 7

Okay, perfect. And then, I haven't heard a lot of discussion on the new FHFA fee structures. Could you all just kind of give your general thoughts and how it might impact your business going forward?

Speaker 9

Truman, this is Linda. We haven't really seen any big impact from that. I mean, obviously, at the moment, we are Still providing financing incentives to customers that can help smooth out transitions and changes like that.

Speaker 7

Okay, perfect. All right. Thank you.

Speaker 8

One thing, Truman, relative to FHA, It's only about 10% of our backlog portfolio right now.

Speaker 7

Got you. Okay. Okay, perfect. All right. Thank you all.

Operator

The next question comes from Alan Ratner with Thalmann and Associates. Please go ahead.

Speaker 10

Hey guys, good morning. Nice quarter and thanks for all the detail so far. First on the gross margin, the guidance implies A bit of a sequential dip lower. And I'm just trying to figure out, is that more of a timing issue in terms of kind of the mix of deliveries Maybe more of those coming from homes that were sold late last year when pricing was still under pressure or is that more a function of maybe that spec versus build to order SKU or any other type of mix impact from perhaps more closings coming from newer markets that Probably have stronger absorptions, but maybe a little bit lower gross margin?

Speaker 4

Good question, Alan. And it is a little bit of mix. There's A couple of things going on there. There's the Q1 had some higher margins in it from some communities that were older that were closing out. And so that's part of the mix.

Speaker 4

And you're right, Q2 is still reflective of some deliveries that were homes that were started in the May, June timeframe that had peak lumber in them. And so there is a little bit of mix related to that in Q2.

Speaker 10

So Glenn, can I know you're not giving guidance for the full year, but I mean directionally speaking as you look forward, there's a lot of moving pieces? You mentioned your price is probably going to drift lower due to mix. You do have some cost savings. It sounds

Speaker 4

I think there's we want to get through the rest of the spring selling season and see how that goes. We're continuing Based on the demand, look at price and pace and balancing that. So we'll update you at the next quarter with what we're seeing with margins.

Speaker 10

Okay, understood. If I could squeeze in one more maybe for Doug or Tom. Just on the cost side, you and others We have pulled back very sharply on starts in the back half of last year, and it's not terribly surprising to see that resulted in some cost savings. It seems like the industry is beginning to ramp up their start pace given the strong demand we've seen in the spring. Yes.

Speaker 10

I think I still heard there's a hope or an expectation that you could see further cost relief here for the remainder So I'm just curious if you've kind of had conversations with your trades in the last few weeks, as far as What they're seeing or expecting from a cost perspective, and whether this ramp and starts, Whether they're equipped to handle it, because I would imagine coming into this year, they probably had a pretty cautious outlook and maybe Adjusted headcount or did other things in anticipation of a lower start pace?

Speaker 2

Yes. Alan, this is Doug. Good question. As we noted, We've had an overall goal of 10% to 20%, achieved about 8% to 10% on average, And we're going to continue to pursue that. We see the greatest impact on cost improvement through some of the product repositioning and value engineering.

Speaker 2

And we are as we bring in New product that we're opening quite a few new communities this year that have gone through that process and continue to do so. We have a really strong subcontractor involvement in the bidding and purchasing process. We still have a goal of getting to that 20% number, but it's going to depend on the year and how Builders continue to start and the market ramps up.

Speaker 10

Understood. All right. Appreciate it. Thanks a lot.

Speaker 4

Thanks, Alan.

Operator

The next question comes from Carl Reichardt with BTIG. Please go ahead.

Speaker 3

Good morning, guys. Nice to talk to you.

Speaker 6

Good morning. You had I think you said 60% to 65% spec starts this Quarter, I think I got that right. I'm just sort of thinking about whether or not the spec start strategy is a reflection of Relatively recent market conditions that might be transitory or over time is your expectation that 2 thirds of your business will be And 1 third build to order, how do you think about that strategically as you gradually move out of California, move to the rest of the country, change your product mix up?

Speaker 8

Hi, Carl. This is Tom. Yes, I think you're hitting on something that is more of a directional influence where we do anticipate in the future continuing to drive to that spec start model, specifically as we Diversified geographically into Texas and the Carolinas. And then of course, you know, given our phase building in California, That's largely spec start driven as well.

Speaker 2

Carl, I would add. This is Doug. Tom hit it spot on. It is an important thing that we're very returns focused. And so as you implement more line and phase building in some of these markets outside of California, which you're very familiar with, you can definitely improve your cycle times And your returns.

Speaker 2

So going forward, as Tom said, it'll continue to be about probably 65% of our business. Now we still, Depending on the stage of those homes, still can maximize our option revenue and achieve option margin. So we can utilize that even with our entry level premium product.

Speaker 6

Okay. Thank you. Do you all have an inventory Turn or asset turn goal relative to where you are right now?

Speaker 4

Yes, definitely, Carl. And that's something we've been focused on. And it's been historically a little bit impacted by some of the longer term land that we inherited through the merger, which has been great for us and obviously provided strong margins. But As we work through a lot of that, our focus now is to turn inventory over one time a year. And we got close to that over the last couple of years, but that's continued to be a

Speaker 6

Okay. And if I could squeeze one more in, I think you have not quite 14,000 lots under option contract. What percentage of those do you intend to self develop?

Speaker 8

Yes, Carl. Currently, self development is the majority of our business. I'd say 70% of that is probably Self developed.

Speaker 6

Okay, great. I appreciate it guys. Thanks so much.

Operator

The next question Comes from Mike Dahl with RBC Capital Markets. Please go ahead.

Speaker 3

Good morning. Thanks for taking my questions. Just a question on the closings cadence and

Speaker 11

the guide. I mean, you'd be pretty handily in the quarter. Your spec starts are up. Your pace comments are pretty strong. The full year guide on closing is unchanged on units.

Speaker 11

So can you

Speaker 3

just help us understand some

Speaker 11

of the puts and takes and that's conservatism or is there something we should be thinking about As you kind of work through what was maybe a little elevated level of specs, do you see lower backlog conversion in the back half of the year? Just help us understand that a little more.

Speaker 4

Good question, Mike. I think what happened in the Q1 relative to our guide was we did enter the Q1 with an level of specs and move in ready homes. And so with the strong demand, we were able to sell and close those homes in the quarter. And then for Q2 with that guide between $900,000 $1,000 some of that's just impacted by the fact that it was slower in the 3rd Q4 and so we were coming into the quarter with a lower backlog for the Q2. And we have a little bit less of the move in ready homes than we did enter in the Q1, although still have a healthy spec mix going into the Q2.

Speaker 4

That's the cadence. And then the back half of the year, we're going into kind of a normal seasonality cadence Cadence where you've seen in the past where the majority of our deliveries will be in the Q4 due to the strong spring selling season.

Speaker 3

Got it. Okay. Thank you.

Speaker 8

And Mike, I would add that sorry, Mike, I was just going to add, as you See demand beginning to normalize and we've got a much clearer picture. Our starts are going to normalize as well. So On a comparative basis, back in Q4, we were only starting about 400 homes, and we've more than doubled that in Q1 to Starting over 1,000. So I think you'll begin to see that normalize now. And that's more of a part of

Speaker 11

the point, Tom, being that, that will be more 2024 impact to closings?

Speaker 2

Correct. Yes, that's correct. Mike, this is Doug. I think part of your question was also on the guide on the closings for the year. We bumped the lower end of the range Openings, which we have quite a few between second, third and fourth quarter.

Speaker 2

And so that will feed right into 2024 as you mentioned.

Speaker 3

Got it. Okay. Makes sense. And then on the land comments, I think

Speaker 11

a lot of your peers have still kind of signaled that there is A little bit of a standstill in the land market and everyone's also kind of still been evaluating their own land book. It sounds like you're already potentially getting more active. And so I'm curious just what you're seeing, whether it's geographically or otherwise. What's allowed you to have Some success getting back into market today. Is it just, hey, you're able to underwrite today's higher pace, so more deals pencil?

Speaker 11

Or have you seen So you've seen sellers come off ask price and a little more narrowing of bid ask, maybe just a little more color on what you're seeing there?

Speaker 2

Yes, that's a good question. And it's really market specific. Now that we're feeling pricing has Stabilized in certain of our markets and most of our markets actually have stabilized. We feel more confident, I mean, Underwriting land deals, land residuals are all function of house revenue as you know. And we have an excellent Land pipeline for growth in 2024 2025.

Speaker 2

So we're really looking for land deals that would be New communities maybe late 'twenty five, but for sure 'twenty six. So we'll be very selective. We've got our Normal underwriting standards, but we'll continue to be very disciplined as we use a mix of margins and return

Operator

The next question comes from Tyler Batory with Oppenheimer. Please go ahead.

Speaker 12

Thank you. Good morning. Just wanted to put a finer point on the price incentive commentary. Can you talk A little bit more, give some numbers around your incentive activity on orders in Q1, how that compared with Q4? And then Talk about how much more you can reduce incentives the rest of the spring here.

Speaker 9

Thanks, Tyler. Yes. As we mentioned, we have been able to reduce incentives during the Q1. And we'll just have to see how that goes and what interest rates from here because we want to remain nimble and ensure that we're providing month attainable monthly payments for our homebuyers.

Speaker 12

Okay, great. And then in terms of the buyer segment commentary, I mean, you mentioned demand Pretty broad based strength there across entry level move up. I wanted to focus on that move up piece a little bit more. I mean, when you look So far year to date into April with rates a little bit more stable, you're starting to see a little bit more improvement, a little more interest, a little more traffic In some of those communities?

Speaker 9

Yes, certainly. 1st move up was very strong as we talked about. So yes, we're seeing very good interest from both entry level and move up. And our new community openings are reflective of that. We're Seeing strong demand in openings for move up communities as well as entry levels.

Speaker 12

Okay. And then last one for me just from a market perspective. I mean, California still a big part of the mix. You have a lot of noise headlines out there. Just talk a little bit more what you're seeing on the ground, sales pace, traffic, etcetera, on the last month and a half or so out there?

Speaker 8

Yes, Tyler, good question. I think California is very misunderstood, and our results have been strong in California across all product segments and geographic regions. So we're really encouraged by the depth of demand in California. I think We've proven up that there are buyers in plenty when we're offering 5% to 6% interest rates and the incentives have worked well. Our product repositioning has hit head on.

Speaker 8

And then just remember, we have a focus on design and innovation and core market locations that I think has been very well So we expect California to continue to be strong going forward this year.

Speaker 12

Okay, great. That's all for me. Thank you.

Operator

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

Speaker 13

Hey, good morning, everyone. So TRI Pointe and several of your peers have talked about increasing starts And into the spring, but I haven't heard anybody talk yet about labor availability, especially on the front end. Is that labor to drive those starts, is that coming from the private builders? Do you think you're taking meaningful share, you and the other publics are taking meaningful share From the privates right now to drive those starts?

Speaker 8

Good question, Jay. This is Tom. Certainly, Labor has been impacted pre pandemic levels, for sure. And it continues to be a stress point for all builders. But I think the publics in particular are gaining more and more market share and driving more and more that labor to their jobs.

Speaker 8

So, it's improved from pandemic times, but it was a challenge Pre pandemic and we expect that to continue. But again, we are looking to position ourselves as a builder of choice For the trades and I think we're being very successful in that.

Speaker 2

Jay, this is Doug Jay. I would On a macro, you actually hit on a key point and I don't think it's being felt this early, but With the banking crisis of the small regional banks, for the smaller builders, which I think you're alluding to, I think it's going to be the second half of this year going into 2024 where You're going to continue to see the larger or the public builders that have plenty of capital to continue to increase Market share during this effectively a credit crunch for especially the small Regional Small Private Builders. I'm not saying they're larger private, but builders that are doing under 500 closings a year.

Speaker 13

We actually stole my second question, Doug. I was going to ask what if you'd seen the ability To start taking down some finished lot projects or maybe a little looser terms around land deals coming your way. So If you could just maybe give an expanded answer there, especially as it relates to like opportunistic Project buys or something like that?

Speaker 2

Yes. I think it's early. The even if you're a small regional builder, you're having success selling homes, right? So you're generating cash flow, but I think the opportunity will be felt more in the second half of this year where even some of the smaller regional land developers in the central region and in the east region will probably find Some issues in obtaining capital and so our land teams are in the market Being very disciplined, but looking for and hopefully being opportunistic, I'm sure all our brethren are doing the same thing.

Speaker 13

Right. And then the other question I had, just excellent lumber. Can you talk about what you're seeing from cost trends, concrete, drywall, etcetera?

Speaker 8

Yes, Jay, this is Tom. As you know, lumber has been a key driver to our Cost reductions, but we are seeing reductions on other areas of our costs as well. Doug alluded to it in our To simplify and see some significant reductions there, our national team is working really well on those larger scale relationships and we're seeing some reductions from some of our big suppliers, and it's being displayed in our product offerings currently. So We feel pretty good about our costs and we're looking forward to continuing our efforts there and hopefully we'll see some continuation of those savings.

Speaker 13

Okay, sounds great. Thanks guys.

Speaker 3

Thanks, Jared.

Operator

The next Question comes from Alex Barron with the Housing Research Center. Please go ahead.

Speaker 3

Yes. Thanks guys and good job on the numbers. I was in Southern California a few weeks ago and I heard about a Program the state launched, I think it was called Cal, FHA or HFA or something like that, where they give buyers like 20% of the home payment. I was wondering to what extent you guys were able to

Speaker 9

Yes. Thanks, Alex. We did take advantage of that program, but the funds did run out very quickly. So clearly, there is housing demand there when people can get additional assistance for their down payment.

Speaker 3

But was it like significant or did it run out to where it really didn't amount?

Speaker 9

Yes. In

Speaker 3

All right. And then, I guess, towards the end of last year, there was talk among builders about reducing starts and Understandably so, but there was also expectation that for those builders who would start more specs, they would be able to capture some Cost savings from subs looking for work. I'm just curious to what extent that's been achievable or not?

Speaker 2

Alex, this is Doug. I mean, as we saw the housing engine slowdown Roughly 8% to 10% in cost savings, from a combination of existing programs, Existing Communities and New Community Stars.

Speaker 3

Okay. But it sounds like that's, I guess, the extent of it, because if things are reaccelerating, then I suppose

Speaker 2

Well, no. Yes. I mean, as we mentioned in our prepared remarks, our goal, as we said at the beginning of the year and it's still today to get up Towards 20%, and in certain markets, we may achieve that. But you're right, I mean, as the market improves, Cost and pricing as we see will firm up, but we're seeing the most success In cost improvement, when we reposition product and bring out new product for the trades to bid on. And there's plenty of trades that are looking for work and bidding on and being very aggressive in So that's where we're seeing the most success in cost improvement compared to what we had underwritten a year ago.

Speaker 3

Got it. If I could ask one other one. Let's say, hypothetically, the Fed does one more hike rate and they're done, And then something leads them to start lowering interest rates, whether it be they feel inflation is done or whether it's a crisis or whatever. I guess the question is, if rates were to go back down significantly, do you feel like the industry has Capacity to handle a ramp up in starts or do you feel like We're just going to go back to supply chain bottlenecks and all that stuff.

Speaker 2

My personal opinion is, I think the industry does have, Especially the publics will and they'll be very measured as we are increasing our starts as Tom mentioned. And I think it'll be more of a normal market condition. I don't my own personal forecast is I don't think rates are going to change much, Unless there's a some sort of other banking or other crisis out there, I think the Fed inflation is sticky and my own personal opinion is they're going to probably see another rate increase, a modest one and then probably stay flat. But hey, it's anybody's guess, this has been the most anticipated recession I've ever seen in my life, right?

Speaker 13

Okay.

Speaker 3

Yes, just wanted to get a sense if there was a if you felt there was an opportunity to ramp up

Speaker 8

Yes. I think based on demand, if demand is there, the industry has capacity to increase starts and Capitalize on volumes that we've proved over the last couple of years, and I do believe that supply chain is being normalized and the labor is normalizing, so we feel good about the opportunities in the future for growth.

Speaker 3

All right, great. Well, let's hope so. Thanks. Take care. Thanks, Alex.

Operator

And we have a follow-up from Truman Patterson with Wolfe Research. Please go ahead.

Speaker 7

Hey, just a quick follow-up. In Denver, Colorado, your orders were down about 70%. I'm just hoping you can give an update of what you're seeing on the ground there, As well as your all's kind of strategy in the market, it looks like community count dropped a little bit to about 6 communities. Is that a target area of this community count growth going forward?

Speaker 8

Yes, absolutely, Truman. Good questions and you're right on with your assessment. A large portion of that order decline was due to lower community counts and then just Selling out and being at the tag end of some communities as well. We've got new product offerings that are coming into the market This quarter, that we're very excited about and we have seen a pickup, in demand overall across the market and specifically At our new product offerings as well. So expect that to improve.

Speaker 7

Okay, got you. So it sounds like the market on the ground, it might be a little bit more internal constraints than Overall market conditions.

Speaker 8

Yes. I think the market lagged some of the rebound early on in Q1, But it gained footing as the quarter moved through. And then that coupled with our lack of offerings, I think Why you're seeing the decline in orders for us. But yes, we'll both be seeing an improved overall market condition as well as our offerings that will lead to Better orders for us.

Speaker 7

Perfect. Thank you all for the time and good luck in the coming quarters.

Speaker 2

Thanks, Drew. Thanks, Drew. Thanks, Drew. All right.

Operator

And we have a follow-up from Stephen Kim with Evercore ISI. Please go ahead.

Speaker 5

Yes. Thanks a lot, guys. I know we talked about starts, and I think you said there were about 1,000, maybe a little less is what I'm calculating. But that was a number that kind of averaged around, I don't know, 1700 or Post pandemic, I believe, and was curious as to whether or not you felt like you could pretty effectively get back there, how quickly, that sort of thing.

Speaker 8

Yes, Stephen, this is Tom. As we've talked about, starts are a function of demand, and We certainly have the capacity to improve starts and we're going to balance it with our absorption paces. So I think as you see Q2, we will improve upon, but average A little over 500 starts a month. So we'll be getting closer to your 1700 normalized number in Q2 going forward.

Speaker 5

Perfect. And then on a similar note, production homes per community, I think, I believe they were down to about or so, a little less than 18 for community. That's a that level you were kind of running between 18 22, I think, pre pandemic. But with your with more spec building, I'm curious what level of sort of production homes per community should we be thinking Might be normal for you going forward?

Speaker 4

Stephen, We'll have to look at that. I think what you've seen historical shouldn't be any different going forward, but a lot of that is timing of when we're getting starts out. And so It's not a perfect number to look at, at a point in time because it really depends on the timing of when that goes. But like Tom said, our whole goal is just balance starts With demand and that's how we look at it on a community by community basis.

Speaker 5

Okay, that's fine. All right, perfect. Thanks so much.

Speaker 3

Thanks, Steve. Thanks, Steve.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Doug Bauer for any closing remarks.

Speaker 2

Thank you, Andrew, and thank you for joining us on today's call. We look forward to Updating you all on the spring selling season next quarter and have a great weekend. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Tri Pointe Homes Q1 2023
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