Tri Pointe Homes - Earnings Call - Q1 2019
April 25, 2019
Transcript
Speaker 0
Greetings and welcome to Tri Point Group's First Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Mr.
Chris Martin, Vice President of Finance and IR. Thank you. You may begin.
Speaker 1
Good morning, and welcome to TRI Pointe Group's earnings conference call. Earlier today, the company released its financial results for the first quarter of twenty nineteen. Documents detailing these results including a slide deck under the Presentations tab are available on the company's Investor Relations website at www.tripointgroup.com. Before the call begins, would like to remind everyone that certain statements made in the course of 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 such risks and uncertainties and other important factors that could cause actual financial and operating results to differ materially from those described in the forward looking statements are detailed in the company's filings made with the SEC, including in its most recent annual report on Form 10 ks and its quarterly reports on Form 10 Q.
Except as required by law, the company undertakes no duty to update these forward looking statements that are made during the course of this call. Additionally, non GAAP financial measures will be discussed on this conference call. Reconciliations of those non GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through TRI Pointe's website and in its filings with the SEC. Hosting the call today is Doug Bauer, the company's Chief Executive Officer Mike Grubbs, the company's Chief Financial Officer and Tom Mitchell, the company's Chief Operating Officer and President. With that, I will now turn the call over to Doug.
Speaker 2
Thanks, Chris, and good morning to everyone joining us on the call today as we go over TRI Pointe Group's results for the first quarter, discuss current market trends and update you on our long term strategy. Overall, the housing market demonstrated great resilience in the 2019 as demand picked up from the depressed levels of the fourth quarter last year. Order activity improved as the quarter progressed as our company recorded an order pace of 2.1 homes per community in January, three point zero in February and 3.7 in March. Our operations in California produced a similar sequential improvement during the quarter with an order cadence of two point zero in January, 3.5 in February and 3.9 in March. We saw comparable trends across most of our markets.
And as a result, orders for the quarter came in ahead of our internal projections, thanks in large part to our six premium lifestyle brands, lower mortgage rates and a favorable economic backdrop. Deliveries also came in ahead of our previously stated guidance despite experiencing some adverse weather conditions during the quarter. Homebuilding gross margins came in short of our expectations, largely due to $5,200,000 of expenses related to lot option abandonment. We expect our gross margins to improve significantly as the year progresses and have left our full year gross margin guidance unchanged at 19% to 20% on 4,600 to 5,000 deliveries. The continued confidence we have in achieving our margin and delivery guidance for the year is due in part to the progress we've made with several of our initiatives we discussed in our last call, including our sales and marketing directives, lowering costs and increasing asset efficiency.
Our sales and operational teams did an excellent job in the quarter implementing the strategies from our 12 sales and marketing plan, while focusing intently on lead conversion. Our procurement teams and department heads stepped up to the challenge of lowering direct costs by negotiating price concessions from a number of our vendors, reducing our overhead and value engineering new and existing floor plans. These steps have planted the seeds of success to meet and in some cases exceed our margin expectations in a very competitive environment. Our land acquisition teams were also successful in their efforts to rework the terms on several land deals in ways that should benefit our returns on future projects delivering homes in 2020 and beyond. At TRI Pointe Group, we are always striving for operational excellence and focusing in on these initiatives will help us attain that goal.
California continues to be a strong driver of our order success. In San Diego, we experienced strong demand at all price points as evidenced with a monthly absorption pace of 4.5 homes per community per month. The Inland Empire warmed up during the quarter with an absorption pace of three homes per community per month at our entry level and first time move up projects. The move up segment in Orange County above $1,000,000 continues to be spotty with less international buyers currently in the market. Last November, we introduced four new affordable programs at our Skyline Ranch community in Los Angeles.
These entry level and first time move up programs have been absorbing at a pace of four per month. The Bay Area continues to be challenged at higher price points, but more affordable projects have bounced back nicely during the quarter. Our 10 new communities that opened during the quarter generated combined absorption pace of 7.5 per month. We believe these results reflect our commitment to design and innovation and the execution by our operating teams that provide the premium brand experience at all price segments, which serves as a strong differentiator in our highly competitive industry. Another goal of our company is to steadily grow our operations through a combination of growth within our existing markets, expansion into new markets and the continued development of our long term California assets.
Each of these avenues for growth helped contribute to an 11% year over year increase in active community count to end the quarter. To give you an update on some of our newer markets, we have made significant progress in integrating our recent acquisition in Dallas, and we look forward to growing our presence in this dynamic housing market. Our greenfield expansion into The Carolinas is progressing nicely, and we anticipate opening our first communities in the first half of twenty twenty. In Sacramento, we are in the process of rolling out several new communities with our first opening in June. Affordability is a focus at many of our new communities coming out of our long term California assets, like Skyline in Santa Clarita, Altus in Beaumont, both of which feature housing programs that fit within FHA loan limits.
Our long term California assets give us a distinct advantage in location, affordability and margin. These initiatives will go a long way in diversifying our geographic footprint while continuing to design and develop affordable price points across all product segments. Thanks to the resiliency of the consumer, the strength of our national economy and our ability to adapt to changing market conditions, I am much more optimistic about the near term trajectory of the housing market than I was at the beginning of the year. More importantly, I'm as confident as ever in the long term outlook of TRI Pointe Group, thanks to our strategic focus, strong balance sheet and proven leadership team. With that, I will now turn it over to Mike for more detail on the numbers.
Speaker 3
Thanks, Doug. Good morning, and welcome everyone to today's call. I'm going to highlight some of our results and key financial metrics for the first quarter and then finish my remarks with an update on our expectations and outlook for the second quarter and full year 2019. At times, I'll be referring to certain information from our slide deck posted on our website that Chris mentioned earlier. Slide six of the earnings call slide deck provides some of the financial and operational highlights from our first quarter.
Home sales revenue was $493,000,000 on eight fourteen homes delivered at an average sales price of $605,000 Our homebuilding gross margin percentage for the quarter was 14.4% and SG and A expense as a percentage of home sales revenue was 15.7%. Recorded $6,000,000 in other income and ended at roughly breakeven for the quarter reporting $71,000 of net income. Net new home orders were down 12% on a 14% increase in average selling communities on a year over year basis. Our overall absorption rate was three homes per community per month for the quarter, which was ahead of our projected 2.6 we discussed on our last call, but down compared to 3.8 in the first quarter of twenty eighteen. We were encouraged that our monthly net orders and absorption rate increased each month during the quarter with March posting an absorption rate of 3.7 homes per community.
You can see the historical cadence of orders on slide 28. So far through the first April, we've continued to see strong demand and written a total of three thirty six orders. As for our active selling communities, during the first quarter we opened 10 new communities, three in California, three in Arizona, two in Washington, one in Maryland and one in Texas. We also closed 10 communities resulting in an ending active selling community count of 146, up 11% from the first quarter of twenty eighteen. Our active selling communities at the end of the quarter is shown by state on slide seven.
We ended the first quarter with eighteen forty two homes in backlog at an average sales price of $672,000 for a total dollar value of 1,200,000,000.0 During the first quarter, we converted 61% of our fourth quarter ending backlog delivering eight fourteen homes, which was a 12% decrease compared to the same quarter last year. Our average sales price of homes delivered was $605,000 down 4% from last year. This resulted in home sales revenue for the quarter of $493,000,000 a decrease of 15% from the same quarter last year. Our homebuilding gross margin percentage for the first quarter was 14.4% compared to 22.7% in the same period last year. Inclusive of the lot abandonment charges Doug mentioned earlier, our homebuilding gross margin would have been 15.5% for the quarter compared to our guidance of approximately 16%.
Moving forward, we anticipate our homebuilding gross margin to be approximately 17% for the second quarter and then revert to a much stronger margins in the back half of the year as we deliver a higher percentage of our revenues from California and more specifically our long term California assets. For some more color, as of March 3139, our eighteen forty two units in backlog yield a homebuilding gross margin of over 23%. Based on this expected trend and strength of our future margins, we reiterate our full year homebuilding gross margin guidance of 19% to 20%. For the first quarter, SG and A expense as a percentage of home sales revenue was 15.7% compared to 12.9% for the same period 2018. The year over year increase in our SG and A percentage was largely due to lower operating leverage on the fixed components of SG and A resulting from the decrease in home sales revenue and higher overhead costs as a result of our expansion efforts into The Carolinas, Sacramento, Austin and the Dallas Fort Worth markets.
As I mentioned earlier, we recorded approximately $6,000,000 of other income during the quarter related to reducing a liability with Weyerhaeuser associated with a tax sharing agreement, which was amended in March resolving certain matters related to the Ricoh transaction. At quarter end, we owned or controlled approximately 26,700 lots, which represents a five point four year supply based on our last twelve months of deliveries as of March 31. A detailed breakdown of our lots owned will be reflected in our quarterly report on Form 10 Q, which will be filed this week. In addition, there's a summary of lots owned or controlled by state on page 27 in the slide deck. Turning to the balance sheet.
Some of you may have read our eight ks filing from earlier this month regarding extending the maturity of our existing $600,000,000 unsecured revolving credit facility and adding a new $250,000,000 term loan, both of which mature in March 2023. We will draw on the term loan to satisfy a portion of the $382,000,000 in senior notes currently outstanding which mature in June. The balance of the senior notes will be paid off with cash on hand or proceeds from our revolving credit facility. At quarter end, we had approximately $3,200,000,000 of real estate inventory. Our total outstanding debt was $1,400,000,000 resulting in a ratio of debt to capital of 40.7% and net debt to net capital of 38.1.
We ended the quarter with $968,000,000 of liquidity, consisting of $149,000,000 of cash on hand and $819,000,000 available under our unsecured revolving credit facility and term loan facility. With respect to our stock repurchase program, we did not purchase any shares during the quarter as we focused our cash flows towards the maturity of our senior notes, which I just mentioned. Now I'd like to summarize our outlook for the second quarter and full year 2019. The second quarter twenty nineteen, the company expects to open 10 new communities and close out of 13 communities, resulting in 143 active selling communities as of June 3039. Addition, the company anticipates delivering 53% to 58% of its eighteen forty two homes in backlog as of March 3139 at an average sales price of 610,000 Company expects its homebuilding gross margin percentage to be approximately 17% for the second quarter and its SG and A expense as a percentage of home sales revenue will be in the range of 12.5% to 13.5%.
Lastly, the company expects effective tax rate will be in the range of 25% to 26%. For the full year, the company reiterates its previous guidance of delivering between 609,000 homes at an average sales price of 610,000 to $620,000 In addition, the company expects homebuilding gross margin percentage to be in the range of 19% to 20% for the full year. We expect full year SG and A expense as a percentage of home sales revenue will be in the range of 11% to 12%. And then finally, the company expects its effective tax rate for the full year to be in the range of 25% to 26%. Now I'd like to turn the call back over to Doug for some closing remarks.
Speaker 2
Thanks, Mike. In summary, we feel very good about the direction of our company and the homebuilding industry as we head into the second half of the spring selling season. The combination of steady job creation, accelerating wage growth and muted inflation provides an ideal backdrop for our industry as it is buffeted by supply, labor and regulatory constraints. Order activity picked up nicely as the quarter progressed, and we've seen good demand trends going into April. We continue to pursue our long term strategic initiatives through a combination of market share gains within our existing operations and expansion into new markets, all while focused on achieving operational excellence in every facet of our business, maintaining a strong balance sheet and generating positive cash flow.
We believe that by adhering to these principles, we can double the size of our business over the next decade and creating significant value
Speaker 3
for our
Speaker 2
shareholders. Finally, I would like to thank all of our team members for their efforts this quarter. There were several obstacles facing our industry as we headed into the New Year, but you continue to overcome these obstacles with passion and energy that continues to change the lives of our homebuyers every day. I'm very appreciative of all your efforts. And that concludes our prepared remarks.
And now we'll be happy to take your questions.
Speaker 0
Thank Our first question comes from Stephen East with Wells Fargo. Please proceed with your question.
Speaker 3
Thanks. Actually, this is Paul Chablisky on for Stephen. First, I was wondering if
Speaker 4
you could give us some color on, you know,
Speaker 3
the monthly progression of incentives in the quarter and into April overall for the company and then for California as well?
Speaker 2
Hi, It's Doug. Overall, as far as in our backlog, it's running around 3.5% to 3.6% for the first three months. So they're very consistent.
Speaker 1
Okay. And then is there could
Speaker 3
you give us a rank order or some sort of type of magnitude for your long term California margin assets versus the company average by project? Yeah. We haven't been doing that by project, Paul. As we mentioned, we talked about an average. The margins are north of 30%, 35% for the long term California assets.
I mean, of those were just getting our basis back, for instance, and some are well outside of the 35%. So overall, what we think we'll deliver this year is about 35% on the long term California assets. Okay, great. And then can you give us a little bit of color on where the lot abandonment charges were? And color on I guess you've retreated some land deals it sounds like?
Speaker 2
Yes. The primary charge on a lot abandonment was up in the Northwest. As you know, Seattle had suffered a lot of price erosion last year. So we took a look at all our deals in escrow and that was the result of some of the action that our land group took.
Speaker 3
Great. Thank you. I appreciate it. Our
Speaker 0
next question is from Alan Ratner with Zelman and Associates. Please proceed with your question.
Speaker 5
Hey, guys. Good morning. Thanks for taking my questions. So Doug, you sound certainly more optimistic about the market today than a few months ago, and I think we've heard that from others as well. Just curious, when you look across your footprint, have you noticed a stronger snapback in any particular price point or geographies?
And are there any parts of your business that have not participated in that trend? Or is it pretty widespread across the business?
Speaker 2
I think as I mentioned in the earnings call, the Orange County $1,000,000 plus in the Bay Area, Tom, I'd say is really still it's come back from the fourth quarter, but it's still a challenge. I characterize the overall market, Alan, though, as it's a grind. I mean, there's no layup. I will say that the death of the move up, first time second time move up buyer is greatly overblown because we continue to sell houses with our six premium lifestyle brands. As far as some of the other markets, I'm very bullish on Phoenix.
San Diego has come back very strong again, but it's a testament to the operating teams and the execution of the product, our focus on design and innovation down there. And those homes are priced 1,000,000 point dollars to $3,000,000 Tom, you want to add some color?
Speaker 6
Basically, Alan, Northern California has been sluggish. It's off about 50% from prior years. But it has accelerated as Doug said from Q4 without a doubt. Certainly, the core Bay Area, we're seeing more of an impact as we get out into more affordable segments. We're seeing better acceleration, but it's still off.
Speaker 2
In on Texas, other comment there, Alan. Trend makers absorption, you can see in the slide deck is actually a good improvement quarter over quarter. We're seeing good absorption in our new Dallas division through the first quarter. Houston keeps plugging along. And Austin had a really good quarter too.
So overall Texas is doing fine.
Speaker 3
And Alan, just to this is Mike, give you some more data on our absorption rates. The entry level we absorbed at 4.1% for the quarter. The move up was 2.8%, luxury was 2.6 and active adult was 1.7 just to give you some more color.
Speaker 5
That's helpful, Mike. And I do have a second question, but maybe after if you have the year over year changes on those that would be helpful as well.
Speaker 3
I do, yeah.
Speaker 5
Okay. Do you want to just go quickly on that? Sure.
Speaker 3
Yeah. Was 5.4 on entry, 3.5% move up, 3.3% luxury and 3.5 active adult in the first quarter.
Speaker 5
Great. Thanks. And then Doug, you guys have entered or are in the process of entering a number of new markets. Some you're doing organically, some you've done through M and A. Just curious as you're kind of going through that process, is there any kind of retrospective commentary you can provide as far as which ones might be going along smoother than expected, which ones there's been some bumps in the road?
And going forward, is there preference one over the other between M and A and organic?
Speaker 2
Well, M and A gives you a more immediate result. Whenever you do an M and A transaction, can always find some bones buried in the closet here and there. Organic, you get exactly what you want. So we're going to continue to pursue both. When you look at our game plan for over this next decade that I talked about doubling our size, it really comes in the Southeast portion of the country.
I mean, there's over roughly as we plan it out over a little over $1,000,000,000 of revenue that we're not getting. Texas is a big growth area. Obviously, we made the acquisition of Dunhill. As we forecast out over the next five to ten years, that's another $05,000,000,000 Then you look at the Northwest, there's some areas that we want to pursue in that area. That's another $405,100,000,000 dollars as we plan it out.
Then the balance comes from our existing operations. So we've got a lot of runway for the company And we like our position as a premium lifestyle brand being opportunistic, both entry level, move up, luxury, and active adult, because there's less competition, relatively speaking. I mean, it's super competitive in the business, but there's less people. Everybody's pivoting to the entry level. And we'll let all the folks play in that entry level, and they're going to do just fine.
Speaker 6
Alan, it's Tom. I'd just add relative to our existing new operations. Austin feels like it's gaining momentum now and we're really positive about future results that we expect there. And then we're excited, as Doug said in his remarks, about our launch in Sacramento. We're opening our first project in June and then we've got a couple more after that.
But those markets feel good and the teams that we have in place there are the right teams. So we're pretty optimistic about those two.
Speaker 3
Great. Thanks, guys.
Speaker 0
Our next question is from Stephen Kim with Evercore. Please proceed with your question.
Speaker 4
Yeah. Thanks a lot, guys. Had a couple of housekeeping items to begin. I guess the purchase accounting, can you just remind us exactly what that was in the quarter and whether what you're expecting for that in 2Q? I apologize if you covered that already.
I jumped on the call late.
Speaker 3
No, that's fine. The purchase accounting affected the Dallas margins by about two fifty basis points, Stephen, for the quarter.
Speaker 4
The Dallas margins or is that two fifty basis points okay. What was it for the whole company overall?
Speaker 3
It's roughly 10 basis 10 to 15 basis points overall consolidated.
Speaker 4
Got it. Okay. And is there anything expected in the second quarter or beyond?
Speaker 3
Probably about the same dollar amount, same basis.
Speaker 4
Okay. Will that eventually I mean, will that pretty much dissipate by 3Q? Or what do you expect for the back half?
Speaker 3
Pretty much gone by 3Q, yes.
Speaker 4
Okay. Great. And then I assume in your 2Q margin guide, there's no impairment that additional impairment that you've taken thus far in April in that number, right?
Speaker 3
No, there's not. Yes. Figured. Okay, great.
Speaker 4
And then the commentary about the snap in the snap up in the margins, which, you know, you've been talking about that. And so that's, you know, your comments are consistent. But we weren't expecting the 2Q margin to be as low. We weren't expecting that SNAP Act to be quite so abrupt. And I guess I'm wondering if you can talk about what has changed, if anything, in your projected margin trajectory going from 2Q to the back half of the year?
Or is the guidance you provided today consistent with how you saw things three months ago?
Speaker 3
Yes. It's very consistent with how we saw things and how we talked about it. We thought at the end of the first quarter we talked about our first couple of quarters margins were going to be relatively flat around that 16% range. So the snapback is really related to the amount of revenues that we start delivering from California in the third and fourth quarter. If you remember, last year in the third and fourth quarter we didn't sell that many units in California.
It was relatively weak. And so we're hence we're not delivering that many that much revenue from California in the first couple of quarters this year. I think in 1Q our revenue is down $72,000,000 from California alone. That's where our highest margins are. So that's what's dragging down on the margins as well as the additional incentives that we gave in some of the other markets in 4Q.
Speaker 4
Yes. Okay. No, that's very helpful to understand how things were consistent over the last few months in your outlook. And then as you carry out into 2020, I know you're not giving guidance on 2020, but just conceptually, would it be fair to say that the makeup of your closings in the 2019 is going to be more similar to what you would generally expect for 2020 relative to or versus the makeup of deliveries geographically in the first half of twenty nineteen? Or is it that would it be the case that the bringing on of some of these new areas of expansion would make the margins in 2020 maybe a little bit more similar to the 2019 than the back half of twenty nineteen?
Speaker 3
No. I mean, think overall for the full year, the 'nineteen to 'twenty is a pretty good run rate for our margins moving forward as we bring on other markets where we're more of a merchant builder and buying at that 18% to 22% margin. But I think our margins will be a little bit more consistent next year assuming that California continues to sell at the pace that we're currently seeing that's equivalent to the rest of our markets. I mean, reason we have the spike is because we're just not delivering that many California units in the first half of the year.
Speaker 4
Right. Got it. And then last one for me in terms of the expansion. You mentioned Austin, mentioned Sacramento. You didn't I didn't hear you at least mention anything about The Carolinas.
I know Gray has been working to grow the business there. I was curious as to, a, when you think that the Carolina initiatives initiatives will be a more meaningful contributor to orders? And two, would you be is it your intention to expand beyond Charlotte and Raleigh into broader in the Southeast from that base? Or are you going to be focused on those two metrics?
Speaker 2
As I mentioned, Steven, the earnings call, we'll open our first communities in The Carolinas the first half of twenty twenty. And it will show more meaningful order delivery and bottom line support really late twenty twenty one and 2022. I mean, when you go you start something organic, you've got a lot more lead time as I mentioned in the previous call previous question versus M and A. We continue to look at M and A. As I mentioned previously, we look at the Southeast as $1,000,000,000 as we put together our plan and our math of expansion.
There's $1,000,000,000 plus of revenue in the Southeast. So yes, we will definitely continue to expand in the Southeast, not just in Charlotte and Raleigh.
Speaker 3
Got it. Thanks so much, guys. Appreciate it.
Speaker 0
Our next question comes from Jay McCanless with Wedbush. Please proceed with your question.
Speaker 3
Hey, good morning. Thanks for taking my questions. Good morning, Jay. Hey. So the first one I had, the 23 that you guys talked about as the gross margin in the backlog, how comfortable are you with the backlog?
Are there any contingency issues there that we need to be worried about? Well, we do have some contingent buyers in the backlog, but I mean the strength of the backlog percentages are coming because of the strength of the California deliveries right now. I mean, as we I mean, we probably have a couple thousand more units to sell and close this year. So I would assume that over time that backlog margin is going to start dropping. Hence that's why our overall full year margin is 19% to 20%.
But the strength of the backlog right now is driven by California. I think probably 30 some odd percent of our units are in California right now in the backlog.
Speaker 6
Hey, Jay, this is Tom. We've talked about our 12 sales and marketing initiative and one of those is contingency management. And we've done a great job on really being focused on our contingency management. And we feel really good about those contingencies that we have in backlog as we're managing those on a weekly basis. Overall, about 14% of our backlog is contingency, and about half of those are home to sell and half of them are about home to close.
So we're in really good shape there.
Speaker 7
The second question I had, and
Speaker 3
I think you may have answered this earlier, so apologies if you did. But your incentives now versus this time last year, where are those running? Then also, what are you seeing from your competitors? Are they ramping up their incentives? Are they bringing them down?
So if Doug could discuss that. Well, I'll give you the history, Jay, and Doug or Tom can jump in on maybe the competitors. But so in our deliveries for 1Q, we had 5.8% were incentives. Last year, was 3.4%. And then when you compare it to the fourth quarter, were at 4.6% incentives in our deliveries for the fourth quarter.
So it jumped up 120 basis points. The reason for that primarily is we were able to within the quarter sell and close a lot of our standing inventory units from the end of the year. So they came with higher incentives to get those moved through the system and hence why we probably missed a little bit on margin. Backlog, I think Doug mentioned that already. But in our fourth quarter backlog incentives were 3.5%.
And where we sit today, it's around 3.6%. So pretty consistent. But those range anywhere from 2% to 10% or 11% depending on the markets that we're in.
Speaker 6
In general though, Jay, I would say that sequentially in most of our markets we are seeing improvements relative to incentives required to motivate buyers to purchase.
Speaker 3
Then the sorry, Doug.
Speaker 2
Yeah. Sorry, Jay. I mean, as I mentioned earlier, it's still a very competitive business out there with the consumer. So we're seeing more a little more pricing power in markets like San Diego and Phoenix, but a lot of the other markets. It's competitive with the consumer.
And so we're but we're not losing much ground. It's heading in the right direction.
Speaker 3
And then the last thing, Mike, could you give those absorption by buyer type again for this year and last year? Couldn't write it down test. Yeah. It's for this year 1Q, entry level was 4.1%, move up was 2.8%, luxury was 2.6%, and active adult is 1.7 And then last year in Q1, it was 5.4% for entry, 3.5% for move up, 3.3 for luxury and 3.5% for active adult. But just remember, active adult were like 1% to 2% of our delivery.
That's a growing part of our business, but it hasn't been much of an impact in
Speaker 2
the Yes, first not a big sample set in the first quarter of twenty eighteen.
Speaker 3
Great. Thanks for taking my question.
Speaker 0
Our next question is from Mike Dahl with RBC Capital Markets. Please proceed with your question.
Speaker 8
Good morning. Thanks for taking my questions. I wanted to circle back to a question from both Steve and Alan earlier just around M and A. And I guess it seems like some of the movement over the last six months or so in the industry has shaken some assets loose for some of your competitors. So as you sit here today, could you just give us your insight on kind of how you're viewing near term M and A opportunities and whether kind of the bid ask spread has narrowed over the past three months or so?
Speaker 2
Well, I mean, we've always become a very attractive candidate for a lot of the small regional builders with our six premium brands and how we really focus in on the best of big and small and having a strong local presence. So we continue to see activity in the M and A market, but we're staying very disciplined, Mike. We found the right opportunity in Dallas. I generally would say the ask is a little bit north of where the buyer would want to be. But I think generally speaking, the small and medium regional sized builders are finding that they're short on the capital to grow in their markets.
And so selling themselves or joining up with a company like TRI Pointe becomes very attractive. But we continue to be very disciplined. We want to do look at M and A deals that are accretive in the long term. And at the same time, we will look at organic greenfield expansion too if we can find the right talent. I always say there's the talent is the number one priority and then the real estate assets are easy to understand after that.
Speaker 8
Okay. That's helpful. My second question, just around the monthly order cadence. Clearly, tone and the numbers suggest that there's been a nice bit of improvement. And so not to be too nitpicky, but if I look at April, the first three weeks, it seems like running out what the rest of the month would look like.
It's kind of a coin flip as to whether April is kind of better or on par or worse than the trends that you were seeing in March from a year on year standpoint. So do you think that you're seeing that seasonal improvement kind of level off at this point? Or is that maybe more a reflection of kind of the Easter impact or something else?
Speaker 2
Well, you definitely have the Easter impact and you also have an extra weekend in March. So if really want to get technical Most
Speaker 3
people don't realize that in March you actually had five weekends. And we write a lot of orders on weekends, not really on weekdays. We're currently sitting here three weeks. We're running at what 3.3, 3.4 for April. We'll see how we close out.
I don't think that's a huge indicator of a massive drop off or anything from an absorption perspective.
Speaker 2
I would say that generally speaking, the markets are steady. I mean, it's fair to grind, though. You got to be on your A game, as we mentioned in the earnings call, focusing on our sales and marketing. We're focusing quite intently on cost management and reducing costs in certain areas. We get some reduction versus others.
This is there's a lot of wood to chop for the rest of the year. But we're, as I mentioned in the earnings call, optimistic and looking forward to the rest of the season.
Speaker 5
Our
Speaker 0
next question comes from Jack Micnoe with SIG. This
Speaker 9
is actually Selham on for Jack this morning. So just continuing on the sales base. I guess, think last quarter you talked about 2.8 as being your target for the year. So just wanted to see if that's still the expectation or are you more optimistic today given the outperformance in the year?
Speaker 3
Well, no, I think we probably pulled forward some orders. We're not really to say that we're much expecting much higher than 2.8 right now. I think we're happy that we delivered three the quarter. Our projection was 2.6 for the quarter. When we looked at that comp from the previous year, that five seventy one number, that was a high bar and we got really close to that.
And I think what was helpful again, we talked about the number of weekends. If you're running probably 110 to 120 Fortunately we had five of those in March, we had five fifty six orders I think. Think 2.8, we still feel pretty productive with that number.
Speaker 9
Okay. And then Tom, in the press release you talked about sales and marketing strategy being just as important as the decline in rates to drive absorptions. We do see the product differentiation through our checks. But I guess what we've also seen is one of your larger peers being particularly aggressive on incentives across your price points. So I guess how difficult is it today to compete with buyers somewhat being trained to expect incentives, I guess, when they walk through the door?
Are you having to turn those buyers away or in order to retain the value of the brand?
Speaker 6
Well, Doug said, it certainly is a competitive market out there and it's definitely challenging. I think our sales advisers do a great job engaging with each and every one of our customers and finding out what their specific needs are. We are offering incentives and we're packaging those to tailor to each and every individual buyer's needs. So it's not that we're turning them away and saying if you want to buy an incentive, go elsewhere, but we do stress our premium lifestyle brand, the design and innovation that we have in each and every one of our products. And I think we're being pretty successful as demonstrated by our sales rates.
Speaker 2
Yes. Would add to that, Jack. We run around every quarter to do asset reviews. We're recently up in Las Vegas. And to your point, I mean, of the competitors get a little more aggressive in incentives in certain market areas of Las Vegas.
But Cliff and his team have done a very, very good job differentiating ourselves with our premium lifestyle brand by providing designs, floor plans and innovation that the consumer will be attracted to and pay for it. Does that mean they will go in there with no incentive? Yes, they'll need an incentive. But that differentiation has a big impact in our ability to sell homes. And then what we do is we do surveys of these buyers and we actually have all that data to support that type of differentiation.
So again, we'll feel it, but we still differentiate ourselves with our design innovation mantra as we push through all our divisions.
Speaker 7
Got it. And if I could
Speaker 9
just sneak one in, Mike, for SG and A, sounds like correct me if I'm wrong, it sounds like you had some additional headcount reductions in this quarter, which should be a net benefit, but then you add in Dunhill and the start up costs. So should we think of SG and A dollars to be something more flat year over year despite deleveraging on a percentage basis?
Speaker 3
Yes, it's relatively flat. I think our G and A runs around 38,000,000 to $40,000,000 a quarter roughly. Got it. Thanks.
Speaker 0
Our next question comes from Karl Reichardt with BTIG. Please proceed with your question.
Speaker 10
Good morning. Thanks. I wanted to ask one big picture question to you, Doug. We'll talk about the ten year plan to double the size of the company. If you kind of sketch that out, how much of that is just increasing penetration within the markets where you already have a decent size presence versus trying to expand into new markets?
Speaker 2
About $6 to $800,000,000 Let's say roughly you're painting a picture of $3,000,000,000 of growth over the next five to ten years. As I broke it down, it's about $1,000,000,000 in the Southeast, 500,000,000 in Texas, 500,000,000 in the Northwest. We're at 3.2 if you want to do the math. It's about $800,000,000 in the balance of the markets. So that's kind of the roadmap that we've picked.
But we
Speaker 3
planted the seeds in a lot
Speaker 2
of those markets. Yeah, we've already Exactly. I think that's what he's asking. That's part of that $800,000,000
Speaker 10
Yeah, that is. And then just a little picture question on incentives. And you guys were kind enough to break out the four subsets the product offering. And if you look at either geography or those subsets, where you've seen the incentives come off most strong, one or two geographies and what one segment would you say your ability to drag incentives down over the course of the quarter has been strongest?
Speaker 2
Yes, I would say that the net pricing improvement for the first quarter and it's it's in just three months, Carl, it's about 1% net positive pricing power in the San Diego markets and Phoenix. I would say that Seattle, NorCal, rest Inland Empire, Vegas, that's it's the net pricing power is down about 1%, which would be offset by some cost improvements. The rest of the markets are flat. So it's as we said earlier, our incentives and backlog are running 3.5% to 3.6%. So it's still going to be a grind.
There's no layup here as we go through the rest of the year. But we're encouraged by the activity that we're seeing in our models as we open 10 new communities. We had very strong activity in Phoenix, out in the Inland Empire, in a new community up in Seattle, Cedar Landing. So it's across the market you're seeing puts and takes. So it's just a classic housing market right now.
Speaker 10
Would you say traffic conversion rates picked up during the quarter, Doug?
Speaker 2
Traffic conversion rate.
Speaker 10
Yes. So percentage of traffic you're turning into Yes. An
Speaker 3
Yes.
Speaker 0
Our next question comes from Nishu Sood with Deutsche Bank. Please proceed with your question.
Speaker 11
Thanks. So the improvement in the order pace in March, obviously, a pretty strong improvement there. You mentioned the weekend issue, which obviously gives that a bit of a boost. Obviously, rates went down and benefited demand generally. Were there any price or incentive adjustments which might have boosted March as well?
Just kind of thinking trying to understand the timing of the incentive and price adjustment patterns that might have affected the trends of the quarter, particularly March?
Speaker 2
No, not at all.
Speaker 11
Got it. Got it. Okay. And California specifically, since there's been a lot of focus, you folks have a pretty diverse operation in California. And you mentioned earlier just a general color that the move up buyer and the California market has not has impacted a lot of folks have talked about.
How did California specifically trend through the quarter? Kind of product segment type, different submarkets. Was the improvement more notable in California? And if so or less notable? And if so, were there specific product types or regions of California where it
Speaker 4
might have been more notable than not?
Speaker 2
Well, as I mentioned in the earnings script, the Inland Empire, San Diego, LA all had strong very good sequential improvement from the end of the year. The Bay Area continues to be a challenging market in Orange County. I call Orange County over $1,000,000 has been softer. But as you go out to the IE, as I mentioned, it's sequentially gotten better every month. Mean, when you go down to San Diego and we're selling houses at 1,000,000 point dollars to $3,000,000 that's a pretty international buyer profile down there.
So you can't just paint a brush with California and say, the Asian buyer or the Chinese buyer has left. I mean, we have a very diverse buyer profile here. The homes in San Diego and that luxury price point are doing very well.
Speaker 11
And then so do I take from that that price point wise, the improvement since
Speaker 10
the
Speaker 11
end of the year was more notable in the lower price point regions or product type than it was in higher price point product type?
Speaker 3
No. I think you see it in our backlog, Ashwin, issue our backlog average sales price is actually up. I think we've seen it broad based across most of the markets. And Doug talked about in the opening comments, our order cadence sequentially was two point zero, 3.5, 3.9 from January to March throughout the quarter. We've seen pretty good absorption.
Mean inland has really picked up as of late and those price points are obviously lower than San Diego. But San Diego has continued to sell very well through the market.
Speaker 11
Okay, thank you.
Speaker 0
Our next question comes from Scott Schrier with Citi. Please proceed with your question.
Speaker 12
Hi, good morning. First, quick follow-up on the absorption question. If I look from January through March and understanding that the five weekends, the overall sequential pickup is it's also it's a lot more than what we saw in 'eighteen, 'seventeen and 'sixteen. And I know you said there's not really anything in terms of trends there. I know that California had some really bad weather maybe earlier in the quarter.
So I'm wondering if weather played any kind of role also in the meaningful pickup in absorptions as you went through the quarter.
Speaker 6
Yes, Scott. This is Tom. I would say that weather could have played a part of some of the California improvement sequentially, but we're not chalking it up to a big weather driven deal. Traffic remained fairly constant throughout the quarter. As Doug said, we've done a great job on lead generation and lead conversion.
So I wouldn't place too much emphasis on the pickup due to improving weather conditions.
Speaker 12
Got it. And can you also comment on maybe in the back half of the year how you're thinking about community count growth?
Speaker 3
Yeah. We've already you saw what we did. We opened 10 new communities in the first quarter and we're guiding to 10 in the second quarter. Overall, do about 50 new communities this year.
Speaker 12
Great. And then with Lastly, on capital allocation, can you give any comments on what you're thinking in terms of whether it's operating cash flow and how you're thinking about leverage or some other items like book value accretion from land sales from the longer dated California assets versus holding and developing them?
Speaker 3
Yes. We don't have any intention to have any land sales. We've talked about in daylight of the fact that we think we'll be positive cash flow by about 100,000,000 this year. That's our focus. We want to continue on our debt pay downs.
We have $382,000,000 of bonds that are due in June. That's why we put the term loan in place and the balance of that we'll pay with operating cash or a draw from the revolver. So our focus right now is debt paydown for that June maturity. Great. Thanks.
Speaker 0
Our next question comes from Alex Rygiel with B. Riley. Please proceed with your question.
Speaker 11
Thank you. First question, as it relates to the buyers that are coming back into the marketplace in February, March and April, are any of those buyers that may have walked away twelve months ago? And are you seeing any similarities in their return?
Speaker 6
Not to a huge degree, but we have seen some returning buyers coming back into the market for those that were not able to convert their contingent sales in the third and fourth quarter because of market conditions last year. So we have been successful reengaging with that buyer. And there has been people relative to the decline in rates that have spurred some renewed interest in buying activity.
Speaker 11
And the homes completed unsold of three seventy four is down from four seventeen at year end. How should we think about this? Are you pleased with it?
Speaker 3
Yeah. Actually, you look at the numbers compared to 4Q, 4Q, I think we had about 1,600 units that were unsold, under construction and completed. And now we're sitting here with 1,300 under construction that are unsold and under construction completed, sorry. So we've made a lot of progress. We've reduced that number by over 300 units.
And like I said, we sold and closed a lot of units that were standing during the period. Obviously, some more units completed during the period as well. That's why the number is only about a 40 unit difference.
Speaker 11
Perfect. Thank you.
Speaker 0
Our next question is from Alvaro Lacayo with G. Research. Please proceed with your question.
Speaker 13
Good morning. Just a question on SG and A. If you can quantify the dollars that you spent on the market expansions as well as deal costs to get an understanding of how inflated those SG and A dollars may have been due to those factors?
Speaker 3
Well, I think we said on the last call that this year incremental G and A across all the expanding markets is probably 10,000,000 to $12,000,000 when you add it in total. Mean that includes expanding Dallas, expanding Austin, Sacramento, The Carolinas.
Speaker 13
It. And then I might
Speaker 3
have So missed it, we're but revenue.
Speaker 13
Right, of course. On land spend, have you provided any color on what that might look like for the year? And if not,
Speaker 11
what was it for the quarter?
Speaker 3
We did have a number I don't have a number for the quarter offhand in the release. But this year, we'll spend about $800,000,000 to $900,000,000 maybe $1,000,000,000 Last year, we guided to $1,000,000,000 to $1.2 We ended up right about $897,000,000 I think. So it should be pretty consistent with last year.
Speaker 7
Okay, great. Thank you.
Speaker 0
Our next question is from Alex Barron with Housing Research Center. Please proceed with your question.
Speaker 7
Yeah. Hey, guys. Hey, Doug. So I heard your comments about the entry level, and I guess other builders moving in that direction. So I just kinda wanted to get your take on the entry level.
Are you not in agreement that that's a good place to be? Or you just don't see as much opportunity? Or like what are your general thoughts about it?
Speaker 2
Well, mean, TRI Pointe is driven by our premium brand proposition. We generate about 30% of our orders and deliveries from entry level, 45%, fifty percent first time, second time move up, 15% or so luxury and the balance is active adult. We continue to believe that a balanced portfolio, balanced approach is the best opportunity for growth. So pivoting a company into entirely the entry level is a strategy for some. And we have our strategy and it's clearly differentiating ourselves from our competitors as we continue looking for land, attract homebuyers.
I mean, we look at housing as it's not just it's not a shelter business. It's really a life changing business for families. And that's going to be continuing our culture, and it helps differentiate ourselves in all facets of our business.
Speaker 7
Okay. So as we look forward to the next year or two, or for example, the communities that are rolling out, should we expect a similar mix to what you just said?
Speaker 2
Yes.
Speaker 7
Okay. Great. Thanks so much.
Speaker 2
Yep. Thanks, everybody. Oops. Oh, go ahead.
Speaker 0
That's okay. That's okay. Ladies and gentlemen, we reached the end of the question and answer session. And at this time, I'd like to turn the call back to Doug Bauer for closing comments.
Speaker 2
Well, thanks, everybody. It was a good quarter to talk about where the market is going and we look forward to reporting our results in July. Have a great weekend and thank you very much.
Speaker 0
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.