Tri Pointe Homes, Inc. (NYSE:TPH) Q1 2024 Earnings Conference Call April 25, 2024 10:00 AM ET
Company Participants
David Lee - General Counsel and Secretary
Doug Bauer - Chief Executive Officer
Glenn Keeler - Chief Financial Officer and Chief Accounting Officer
Linda Mamet - Chief Marketing Officer
Tom Mitchell - President and Chief Operating Officer
Conference Call Participants
Stephen Kim - Evercore Inc.
Alan Ratner - Zelman & Associates
Michael Dahl - RBC Capital Markets
Carl Reichardt - BTIG
Jay McCanless - Wedbush Securities
Operator
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Tri Pointe’s First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.
I would now turn the call over to your host, David Lee, General Counsel. 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 first quarter of 2024. 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 President and Chief Operating Officer; and Linda Mamet, the company’s Executive Vice President and Chief Marketing Officer.
With that, I will now turn the call over to Doug.
Doug Bauer
Thank you, David, and good morning to everyone on today’s call. During the call, we’ll review operating results for the first quarter, discuss some of our growth initiatives, and provide a market update. In addition, we will provide second quarter and full year outlook for 2024.
We’re pleased to report that Tri Pointe Homes had an outstanding first quarter that met or exceeded the high-end of our guidance across all key operating metrics. We delivered 1,393 homes at an average sales price of $659,000, resulting in home sales revenue of $918 million, a 20% increase compared to the previous year. Home sales gross margins were 23% for the quarter, which was at the high end of our guidance range resulting from lower incentives.
Our increased delivery volume allowed us to benefit from improved operating leverage, resulting a decrease in SG&A has a percentage of home sales revenue to 11.1%, a 40 basis point improvement compared to the prior year. In addition, our strategic shift towards a higher percentage of spec starts to meet the prevailing supply demand gap in the housing market has enabled us to address consumer needs and further increased deliveries. This, along with our ongoing success with reducing cycle times to pre-pandemic levels, creates an efficient engine to generate profits. These outstanding results led to net income of $99 million and diluted earnings per share of $1.03, marking a 41% improvement over the prior year.
Relative to demand, market conditions remain favorable for new homebuilders. Today’s environment is fueled by a strong economy, low unemployment, and an ongoing shortage of housing supply. Tri Pointe Homes’ results reflect our focus on core market locations and innovative product that appeal to well-qualified customers.
During the quarter, we recorded 1,814 net new orders, which was an improvement of 12% compared to the prior year. Our absorption pace remained healthy throughout the quarter, averaging 3.9 homes per community per month.
With our strong demand, we focused on finding a balance between pace and price to maximize our profitability. During the first quarter, we were able to raise net pricing in most of our communities with incentives on orders improving to 3.8%, compared to 4.8% sequentially from the fourth quarter. With a substantial backlog of 2,741 homes and a spring selling season that continues to reflect strong demand.
We are raising our full year guidance for deliveries, ASP, and gross margin percentage. Glenn will give further details on our guidance in a moment. We generated a $145 million of positive cash flow from operations and ended the quarter with $944 million of cash on hand. We have $450 million of senior notes that are maturing in the second quarter, and we plan to pay these notes off in full. This will decrease our annual interest carry by $26 million and reduce our debt-to-capital ratio to the low 20% level.
Our strong balance sheet and liquidity, along with our ability to generate positive cash flow from operations, enables us to grow our business, while also returning capital to our stock repurchase program. During the quarter, we repurchased approximately 1.4 million shares of our common stock at an average price of $34.66 for an aggregate dollar amount of $50 million. We remain committed to our share repurchase program as a key component of our capital allocation strategy, as we continue to drive down our shares outstanding and drive up our earnings and book value per share.
The cumulative benefit of share repurchases continues to show on our results. Since the end of 2016, the first year in which we began repurchasing shares, we have increased our book value per share by 279% or 15% compounded annually. During this same period, our shares outstanding have been reduced by 40%. In addition to strong operating results to kick off 2024, we have also executed on key growth initiatives that we discussed on our fourth quarter earnings call.
During the first quarter, our mortgage company, Tri Pointe Connect, became wholly-owned by Tri Pointe Homes, following the acquisition of the minority stake from loanDepot. This integration allows for an enhanced customer experience and pricing flexibility, while increasing earnings from financial services.
Our capture rate with Tri Pointe Connect in the first quarter remains strong at 86%. Our buyers and backlog financing with Tri Pointe Connect demonstrate financial strength with an average FICO score of 753, debt-to-income ratio of 41%, loan-to-value ratio of 80% and an average gross household income of $195,000.
Another exciting development for our business is the expansion of the Tri Pointe brand into new markets. Late last year we announced our entry into the greater Salt Lake City market, and earlier this month we announced the opening of the Coastal Carolinas and Orlando Divisions. We are thrilled to expand into these Southeastern markets, leveraging the strong foundation and successes we have established in both Charlotte and Raleigh. The Southeast has emerged as an economic engine with South Carolina and Florida being the two fastest-growing states in the nation in 2023, growing their populations by 1.7 and 1.6%, respectively.
Both markets boast diverse economies that fuel jobs and drive housing demand. We feel these markets provide an excellent opportunity for our brand that caters to the need for premium entry level and move up housing in both markets. We anticipate first deliveries in both the Coastal Carolinas and Orlando Divisions in 2026.
Looking beyond our first quarter results, order activity in April has remained strong, despite recent increases in mortgage rates. We continue to see the shortage of resale supply as a key factor in the ongoing strength of the new housing market, driving high-quality traffic to our communities.
In the current housing cycle, new homebuilders are continuing to capture share of the total home sales at a historic percentage. Despite near-term inflation-driven rate increases, we remain encouraged about the long-term fundamentals of our business, which are supported by a solid economic environment and ongoing household formations, particularly among the millennials and Gen Z buyers who continue to act as a demand catalyst.
To wrap up, the outlook for Tri Pointe is very positive for 2024 and beyond, as we leverage our strengths to seize opportunities in both existing and new markets. We are also very optimistic about the outlook for our industry as the undersupply of housing continues to fuel demand. As the supply demand gap continues to diverge with no end in sight, we believe our unwavering dedication to long-term growth, coupled with prudent financial management, positions us well for continued success as we create and deliver value for our shareholders and customers alike.
With that, I will now turn the call over to Glenn. Glenn?
Glenn Keeler
Thanks, Doug, and good morning. I’m going to highlight some of our results for the first quarter, and then finish my remarks with our expectations and outlook for the second quarter and full year for 2024.
As Doug mentioned, demand remains strong in the first quarter with net new home orders at 12% year-over-year at an absorption pace of 3.9 homes per community per month. Our cancellation rate remained low at only 7%, and we ended the quarter with 2,741 homes in backlog, which was a 35% increase year-over-year. Despite the recent increase in rates, the current demand environment continues to feel positive and our April absorption pace has remained consistent with the first quarter.
With the strong demand experienced in the quarter, we were able to realize some pricing power by increasing base home pricing and reducing incentives. Overall, we were able to increase net pricing in approximately 80% of our communities for an average amount of 2.5%. Incentives on orders for the first quarter were 3.8%, which was within the range of our historical company average of 3% to 4%.
The use of incentives for some type of financing or rate buy-down continues to be a popular consumer choice. With that said, we have started to see the level of rate buy-downs and frequency of long-term rate locks decline as homebuyers are acclimatized to a higher rate environment.
During the communities, we opened 20 new communities in the quarter and closed 19, ending with 156 active selling communities, which was a 15% increase over the prior year. Consistent with our previous guidance, we plan to open approximately 65 new communities for the full year and expect to close a similar number.
With our strong land pipeline, we anticipate growing our 2025 ending community count by approximately 10%. We ended the quarter with approximately 34,000 total lots, 46% of which were controlled. Our population of controlled lots increased 19% sequentially from last quarter, and we are well on our way to achieving our stated goal of increasing our controlled lot percentage to 50%.
Looking at the balance sheet and capital spend, we ended the quarter with approximately $1.6 billion of liquidity consisting of $944 million of cash, and $703 million available under our unsecured revolving credit facility. Our debt-to-capital ratio was 31.2%, and our net debt-to-net capital ratio was 12.6%.
As Doug mentioned, we plan to use the cash on hand to payoff of $450 million of senior notes that are due in the second quarter. We did not have another debt maturity until 2027, which puts us in a strong position to use our capital to invest in our business and continue to be active in our share repurchase program. During the first quarter, we repurchased 1.4 million shares for a total aggregate dollar spend of $50 million, leaving us with $200 million available under our current authorization.
For the first quarter, we invested approximately $238 million in land and land development. To support our gross targets, we expect to spend approximately $1.2 billion to $1.5 billion annually on land and land development.
Now, I’d like to summarize our outlook for the second quarter and full year for 2024. For the second quarter, we anticipate delivering between 1,500 and 1,600 homes at an average sales price between $670,000 and $680,000. We expect homebuilding gross margin percentage to be in the range of 22.5% to 23.5% and anticipate our SG&A expense ratio to be in the range of 11% to 11.5%. Lastly, we estimate our effective tax rate for the second quarter to be approximately 26%.
For the full year, we anticipate delivering between 6,200 and 6,400 homes at an average sales price between $660,000 and $670,000. We expect homebuilding gross margin percentage to be in the range of 22.5% to 23.5%, and anticipate our SG&A expense ratio to be in the range of 10.5% to 11%. Lastly, we estimate our effective tax rate for the year to be approximately 26%.
With that, I will now turn the call back over to Doug for some closing remarks.
Doug Bauer
Thanks, Glenn. In closing, I want to express my deepest gratitude to the entire Tri Pointe team. Their dedication, innovation, and hard work are truly the driving force behind our success. As a premium lifestyle brand, our ability to consistently innovate and differentiate ourselves rests on the shoulders of this extraordinary team.
Looking ahead, we have confidence in the future of the housing industry and Tri Pointe’s growth. Our commitment to discipline execution underscores our pursuit of market share expansion within our existing divisions and strategic growth in our three new markets. We’re energized to continue delivering value to our shareholders and customers alike.
Thank you for your time today, and let’s proceed to a Q&A session. Operator?
Question-and-Answer Session
Operator
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Stephen Kim with Evercore. Please proceed.
Stephen Kim
Yeah, thanks very much, guys. Appreciate all the color. But as usual, we’re always looking for a little more. So, I guess, my first question relates to your average selling price. And particularly, I’m interested in your order ASP, which looks like it has averaged about $688,000 over the last 6 months. But the high-end of your full-year guide assumes closing price of only mid-70s or so at a high-end. And so, I’m assuming that means that you’re thinking you’re going to start a lot more lower-priced specs, and you’re going to deliver them in the same quarter. But if that’s the case, I think your backlog turnover ratio would be higher. But you’re not really seemingly guiding to that. So it seems like it’s pretty conservative somewhere, and I’m just trying to figure out where you’re being more conservative. So could you maybe address why your ASP isn’t going to be closer to what your order price has been, and if it’s because of specs, why you’re not taking up your backpack turnover ratio?
Glenn Keeler
Stephen, hey, it’s Glenn. I’ll take a shot at that. And it is just mix when you look at that full-year price guide and even the Q2 price guide compared to our ASP and backlog which is higher. It’s just the mix of the additional deliveries we’re going to get for the full year based on our communities is coming from places like Charlotte, Houston, Dallas as just a bigger mix than what’s currently in backlog based on communities that are opening, and so that is what’s kind of overall drive the rest of the year, because we still have plenty of houses to sell this year to close this year. And there is just a little bit of mix in Q2 as well from timing of delivery of higher ASP homes versus lower ASP homes, so it’s just a mix.
Stephen Kim
Got you. Okay. I think you’re still being conservative, but that’s okay. Next question about the gross margin. So it was really encouraging to see that you raise your full-year gross margin guide by about 100 basis points, but interestingly your 1Q gross margin really just met the high end of your guide, so this seems to imply that selling conditions improved pretty meaningfully over the past 3 months, and I think you basically said that in your opening remarks, so that confirms it. But that’s really encouraging considering that rates, mortgage rates have risen pretty steadily over that time. So I was wondering if maybe you could describe how the strength has unfolded over the course of the quarter in the face of higher rates and, obviously, continuing into April where I think you said you think that customers are acclimatizing to the higher rates. Just love to hear it here a little bit more commentary about that as you progress through the quarter.
Glenn Keeler
Yeah, Stephen, it’s Glenn again. Good question. And like we said, we were able to have some pricing power in the first quarter, we saw really strong demand, and it started right out of the gate, January was a higher than seasonal absorption pace for us, and then that just got better throughout the quarter. But, overall, the quarter was just really strong demand, we were able to take that price. And then into April, we’re seeing like we said consistent absorption that we saw in the first quarter. We’re not seeing an increase in incentives, incentives are actually slightly down compared to where we were in the first quarter. And so, again, it just shows that strong demand that we’re seeing out there in the market.
Stephen Kim
Yeah, that’s super encouraging. Just housekeeping wise, could you just give us the production home information? Thanks very much guys.
Glenn Keeler
Yeah. We had – are you talking about – at the end of the quarter we had 232 completed unsold homes, and then we had another 1,321 under construction unsold homes. Is that what you’re looking for?
Stephen Kim
Yeah. So that would mean that you had a total of 1,553?
Glenn Keeler
Of unsold specs. Correct.
Stephen Kim
Okay. These are unsold specs. Okay. Got you. Appreciate it. Thanks.
Operator
Our next question is from Alan Ratner with Zelman & Associates.
Alan Ratner
Hey, guys, good morning. Congrats on the strong quarter and the entry into Florida. I know that’s been a long time coming, so great to see that. My first question, we’ve been hearing a little bit of mixed messaging around kind of the quality of the buyer today, and I know you gave some helpful stats there, but some builders have kind of signaled that they’re starting to see maybe a little bit more stress among the consumers in their financial condition, a few other builders have kind of cited a pretty meaningful pickup in FHA share, which depending on your interpretation of that might suggest maybe the down payments are becoming a little bit more challenging.
So I’m just curious if you would be willing to kind of opine on what you’re seeing in your consumer today in terms of their credit quality, and if you’re seeing any signs that affordability constraints are beginning to have an impact on buyers’ ability to qualify.
Doug Bauer
Hey, Alan, it’s Doug. How are you?
Alan Ratner
Great.
Doug Bauer
Good. We have not seen any change in our buyer profile, actually our consumer profile for our product, our entry-level premium all the way up to the first and second move-up, does resonate with a more qualified buyer. I think we pointed out our buyers have some pretty strong mortgage statistics, and when you look at average household income of $195,000, that’s very healthy when you have an ASP in the mid-to-high-700s. So the buyer profile is very strong right now.
Linda, do you want to add anything to that?
Linda Mamet
Yes, thanks. Alan, FHA is still a relatively low percentage of our backlog, it’s currently at 11%. So by far, conforming is the most typical loan type for our homebuyers.
Alan Ratner
Great. I appreciate that feedback there. Second question, I guess, from the SG&A, really nice improvement on the leverage this quarter. It came in much stronger than you were expecting. And I know some of that was top-line driven, you delivered more homes than expected, but, A, I’m curious if there’s anything kind of one-time in nature there that kind of drove that number a bit lower; and B, as we think about some of the new market expansions that you’ve announced here, are there going to be any kind of upfront expenses or any kind of headwinds from that that we should be aware of, either later this year or into 2025, before you start to deliver the product in those markets?
Glenn Keeler
Yeah, Alan, this is Glenn. Good question. No one-time events in Q1 that led to that, probably a little bit more savings on advertising. And then we had budgeted just because of the strong demand that we saw, so maybe a little bit of savings there. And then for the startup markets, it’s going to be minimal cost this year, and that’s baked into our full year SG&A guide. And then next year, you’re probably looking around $5-ish-million of maybe operating costs, some G&A related to the 3 new startup divisions. So, overall, not a huge burden to our overall SG&A number. And then, you’ll start to see some deliveries and revenue in 2026, so that will help offset those costs.
Alan Ratner
Perfect. Thanks a lot, Glenn. Thanks a lot. Good luck, guys.
Glenn Keeler
Thanks, Alan.
Doug Bauer
Thanks, Alan.
Operator
[Operator Instructions] Our next question is from Mike Dahl with RBC.
Michael Dahl
Good morning. Thanks for taking my questions. A couple follow-ups here, just on the selling environment. Maybe if you could give us a little more color kind of the cadence of absorption through the quarter, and how that looked on a monthly basis. And then when you look at April, I appreciate the comments on the absorption. We heard from one of your peers that absorption’s kind of held, but there’s maybe some early signs of traffic moderation. I think that was more an entry-level comment, but maybe can you just address kind of traffic trends that you’ve seen and if there’s any sort of flashing yellow that you’re starting to see over the past week or so in terms of buyers through the door in response to this recent one [ph]?
Doug Bauer
Hey, Mike, this is Doug. As we reported, the housing market was very strong in the first quarter. We averaged absorption pace of 3.9 homes per community per month. And we’re going into the quarter with very similar results. So the consumer is still very engaged. I think Wall Street, the analysts, everybody else, we all are guilty of watching the 10-year treasury go up and down, mostly going up lately. And the buyers are very acclimatized to what’s going on in the market. So right now, we’re seeing consistent demand with where we saw it in the first quarter.
Michael Dahl
Got it. Okay. That’s good to hear. And then another follow-up on Steve’s question on ASPs. When you look at the guide for the year now and the increase, obviously, mix plays a big role, but is the increase in the full year guide, is that really reflective of primarily the net pricing actions that you took over the past few months or are there also mixed impacts good or bad that are either netting that up or down?
Glenn Keeler
Yeah. I would say that the increase to the guide was mainly pricing power. There may be a little bit of mix of that, but overall the increase of the ASP versus our original plan was just some of that pricing power we saw.
Michael Dahl
Okay. That makes sense. Thanks.
Operator
Our next question is from Carl Reichardt with BTIG.
Carl Reichardt
Good morning. How are you all? Thanks for taking my question. Could you talk a little bit about just mix of deliveries and orders this particular quarter between the premium entry level and the remainder of your product types?
Glenn Keeler
Sure. So it was actually fairly consistent. So at entry level, absorption was around 4 for the quarter, and move up was around 3.7, 3.8. And so, that’s how you got to about the 3.9. We have a pretty minimal mix of luxury and active adults, so it doesn’t really factor into the overall metrics, but pretty consistent between entry level and move up.
Carl Reichardt
All right. Thanks, Glenn. And then, when you’re looking at the pricing dynamic that you’re seeing in the market now, can you differentiate between those two segments? Are you seeing more potency in one or the other? Or is it pretty consistent across the board?
Linda Mamet
Carl, thanks. This is Linda. It’s really consistent across the board, so that’s great to see.
Carl Reichardt
Okay. Thank you, Linda. Thanks all.
Glenn Keeler
Thanks, Carl.
Doug Bauer
Thanks, Carl.
Operator
Our next question is from Jay McCanless with Wedbush Securities.
Jay McCanless
Hey, good morning, everyone. Thanks for taking my questions. So, Linda, could you talk about what percentage of customers took some type of mortgage rate buy-down in the quarter and how that compared to last year?
Linda Mamet
Yes, Jay. We are still seeing interest in rate buy-downs, but the degree of reduction that customers are seeking is not as great as it was same time last year. They are more accustomed to the current interest rate environment, so typically they’re using less of their incentive dollars for the rate buy-down of our incentive in the first quarter that 3.8% incentive. They were using half of it towards financing and closing costs and half towards discounts, where a year ago they would have been spending a higher proportion of that towards the financing incentives.
Jay McCanless
Got you. Okay. That’s helpful. Thank you. And then my next question, your competitors have been talking about how land costs and land development costs are moving up. I guess, what’s your take on that that issue and if there is going to be a step higher in land costs, when should we expect that to start affecting the gross margin?
Tom Mitchell
Yeah, Jay, good question. This is Tom. We’ve definitely seen approximately about 5% to 10% increase in land cost year-over-year depending on markets. Thankfully, we’ve had enough pricing power to really be able to offset that, so we don’t anticipate any headwinds going forward in margin relative to additional land costs.
Doug Bauer
Jay, this is Doug. I would add, I mean, the land costs that you’re buying or the land you’re buying today is generally being delivered and what we’re looking for is really late, really early 2027, some 2026 for some of the early stage division. So those land deals are being underwritten at current market conditions at current underwriting metrics that we require. So I don’t see a big difference between margin today and 3 or 4 years from now.
Jay McCanless
Okay. Thanks, Doug. And then last question I had, could you talk about the 20% of markets where you didn’t raise price this quarter? Was that more entry-level focused? Was that more geographically focused? Anything you can give us on that would be appreciated.
Linda Mamet
Jay, this is Linda. It really is on a community-by-community basis versus any one particular geography, so we did find the opportunity to either reduce incentives or increase in price broadly across our geographies.
Jay McCanless
Yeah.
Glenn Keeler
I’d like just to add to that, Jay, like she said, it’s more community-based. There’s some communities, even in good markets that might not have that pricing power. Or there’s a lot of units to move through, so you’re being a little bit more pace over price. And so those decisions are done on a community-by-community basis.
Jay McCanless
Got it. Okay, great. Thanks for taking my questions.
Glenn Keeler
Thanks, Jay.
Doug Bauer
Thanks, Jay.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Doug Bauer for closing remarks.
Q - Doug Bauer
I’d like to thank everybody for joining us today. We look forward to chatting with all of you next quarter. Have a great weekend and a great day. Thank you.
Operator
Ladies and gentlemen, this concludes today’s conference. You may disconnect your line at this time, and thank you for your participation.
