Q3 2021 Tri Pointe Homes Inc (Delaware) Earnings Call
[music].
Hello, and welcome to the Tri Pointe homes third quarter 2021.
Earnings Conference call at this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded it's now my pleasure to turn the call over to David Lee General Counsel. Please go ahead.
Good morning, and welcome to Tri Pointe homes earnings Conference call.
Earlier this morning, the company released its financial results for the third quarter of 2021.
Documents detailing these results, including a slide deck are available at www Dot Tri Pointe homes dotcom through the investors link and under the events and presentations tab.
Before the call.
All 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.
<unk> 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.
Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through Tri Pointe.
Its website and in its SEC filings.
Hosting the call today are Doug Bauer, the company's Chief Executive Officer, Glenn Keeler, The company's Chief Financial Officer, Tom Mitchell, The company's Chief operating officer, and President and Linda I'm amazed the company's Chief marketing officer with that I will now turn the call.
Over to Doug.
Well, thanks, David and good morning to everyone joining us on the call today.
Tri Pointe homes delivered another quarter of excellent operating results in the third quarter of 2021.
Generally net income of $133 million or earnings of $1 17 per share.
New home.
Companies of 1632 represent a 25% increase compared to the prior year.
And exceeded our stated guidance for the quarter.
As our teams did an outstanding job dealing with the labor and supply chain issues that continue to challenge our industry.
Our focus on returns was evident in our third quarter.
Home dormant with a return on average tangible equity hitting 28% on a trailing 12 month basis, representing a 650 basis point improvement over the same period last year.
Margin expansion has been a key component to our success in driving better returns. This.
Year, and we made even more progress on that front in the third quarter with gross margins hitting 26, 3% a record for our company.
Another factor that continues to improve our returns has been our shift to a more asset light land strategy.
Using option agreements and land banking.
[noise] arrangements to control lots.
At the end of the third quarter the percentage of lots controlled but not one stood at 42% of our total lot count compared to 37% at the end of the third quarter of 2020.
Programmatic share repurchases continue to be an area of focus and.
We repurchased an additional $65 million of stock in the third quarter and have surpassed $850 million of share repurchases dating back to 2015.
We have executed this without sacrificing homebuilding revenue growth, which has increased at a compounded annual growth rate of nine.
10 over the same period.
As a result of this revenue growth coupled with margin expansion and a significant reduction in shares outstanding our book value per share has also grown by a compounded annual growth rate of 13% since 2015.
9% currently we have reduced our current net debt to net capital ratio to 24, 3%.
And continue to accelerate our inventory turns.
We are extremely pleased with the way these initiatives have led to tangible improvements to our return profile and believe they will continue to benefit our shareholders.
New home demand in the third quarter was healthy across all our markets and product segments with our monthly sales pace, averaging 4.1 homes per community per month for the quarter.
We continue to see favorable new home environment in our markets with low levels of home inventory low interest rates.
Heightened interest in single family Homeownership brought about by the pandemic.
In addition, millennials are the most active homebuyers and we expect this to continue over the next several years.
Millennials currently represent 54% of our backlog with our affiliated mortgage company Tri Pointe connect.
That coupled with current demand for entry level and first move up homes in locations that are close to job centers and transportation gives tri Pointe a significant advantage across our markets.
We believe this favorable demand dynamic will be in place for the foreseeable future providing.
Providing an excellent operating environment.
And our company in our industry.
Complicating this positive fundamental outlook for homebuilding. However are they ongoing supply chain challenges that continue to slow the pace of our operations.
While the rate of this slow down varies by market, we are experiencing supply chain issues across our homebuilding.
And footprint.
And expect these issues to persist into 2022.
Fortunately, we have successfully navigated this difficult operating environment. Thanks in part to our focus on being the best of Big and small as a homebuilder.
By that I mean, we strive to take advantage of our size and scale to procure the.
Building for which we need from our national suppliers, while staying nimble enough to work with our local suppliers and contractors to get our backlog close in a timely manner.
As a result of these efforts we have not changed our full year delivery guidance and still expect to deliver 6000.
The empty 300 homes for the year.
Looking forward, we are extremely pleased with our new community pipeline, we plan to open 110, new communities over the next five quarters and in 2022 with between 150 and 160 active selling communities.
Beyond that we have an additional 80 new communities planned to open in 2023.
Which we estimate will grow ending community count in 2023 to between 170 and 180 communities.
Based on the cadence of community openings and assuming a continued strong market we expect year.
Over year order growth to occur starting in Q2 of next year.
With strong operational momentum and excellent balance sheet and a sizeable backlog Tri Pointe is in a great position to finish out 2021 on a high note and carry that momentum into 2022.
With that I'd like to turn it over to Glenn who will provide more details about our results for this quarter and give some guidance for the rest of this year in 2022 Glenn.
Thanks, Doug and good morning, I'm going to highlight some of our results and key financial metrics for the third quarter, and then finish my remarks, with our expectations and outlook for the full year.
2021.
At times I'll be referring to certain information from our slide deck that is posted on our website.
Slide six of the earnings call deck provides some of the financial and operational highlights from our third quarter as Doug mentioned earlier demand continued to be strong in the third quarter with an absorption rate of 4.1 homes per community per month, which is in.
The elevated level of demand for a third quarter compared to historical comparisons.
Demand was strong across all geographies with the west reporting an absorption rate of four five homes per community per month.
The central region had a absorption rate of $3 five in the east had an absorption rate of three three.
We reported outstanding.
Performance on all key metrics this quarter and either met or exceeded all of our stated guidance. We delivered 1632 homes, which was a 25% increase year over year home sales revenue was $1 billion also an increase of 25% and our average sales price was 630000, our homebuilding gross.
Margin percentage.
We exceeded the high end of our guidance range at 26, 3%, a 420 basis point improvement year over year. This was a record gross margin for our company and demonstrates the pricing power we experienced in the first half of this year.
Finally, SG&A expense as a percentage of home sales revenue came in at nine 6%, which was a 20.
Basis points improvement compared to the prior year.
We continue to focus on our new community pipeline and opened 16, new communities in the third quarter. We expect to open 20, new communities in the fourth quarter, which will get us to our stated goal of 70, new communities for the full year.
Based on current demand trends, we anticipate closing more communities unexpected and we.
For the cortisol will be lowering our year end community count guidance to between 110 to 115 active selling communities.
For 2022, we expect to open approximately 90, new communities and end the year between 150 to 160 active selling communities for 2023, we expect to open approximately 80, new communities and end the year between.
Between 170, 180 active selling communities.
Looking at the balance sheet at quarter end, we had approximately $3 1 billion of real estate inventory. Our total outstanding debt was $1 3 billion, resulting in a ratio of debt to capital of 36, 3% and our ratio of net debt to net capital of 24, 3%.
We ended the quarter with one.
As a 1 billion of liquidity consisting of $587 million of cash on hand, and $590 million available under our unsecured revolving credit facility.
Now I'd like to summarize our outlook for the full year.
We anticipate delivering between 6000 6300 homes for the full year and we are raising the range of our expected average sales price to 630.
5000 to 640000.
We are also increasing our homebuilding gross margin range to 24, 5% to 25% for the full year our.
Our SG&A expense as a percentage of home sales revenue is expected to be in the range of $9 eight to 10, 2%.
And finally, the company is forecasting its effective tax rate for the full year to be approximately 25%.
0.2, I will now turn the call back over to Doug for some closing remarks.
Well, thanks, Gwen in conclusion I'm extremely pleased with our performance this quarter as we exceeded our guidance for a number of key metrics, despite a difficult operating environment.
We also made improvements to our return profile and laid the groundwork for.
<unk> anticipate will be a year of significant growth in 2022.
While we expect the supply chain issues in our industry to persist for the foreseeable future. We also expect a positive demand dynamics that have emerged during this housing cycle to remain in place for the foreseeable future.
Tri Pointe.
<unk> is in an excellent position to capitalize on these positive industry fundamentals.
Thanks to a significant increase in community count schedule for next year, coupled with our premium brand focus and our shift to more affordable price points.
We're in a great place, both financially and operationally as we head into the end of the year and.
What we decided to capitalize on the opportunities that lie ahead for our company.
Finally, I'd like to thank all our team members for their outstanding performance this quarter.
This is undoubtedly one of the most difficult operating environments from a logistics standpoint that I have witness in more than 30 years in the homebuilding industry.
The fact that we were able to overcome industry wide challenges and meet our delivery goals for the quarter says a lot about the character of this company and the talented and dedicated people who work here.
Truly appreciate your efforts.
That concludes our prepared remarks, and now we'd like to open it up for questions. Thank you.
Thank you well now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad a.
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Pressing star one one moment, please while we poll for questions.
Our first question today is coming from Stephen Kim from Evercore ISI. Your line is now live.
Thanks, very much guys congratulations on a strong quarter.
A lot of good performance I think that's the best.
Bookings were in were particularly impressive, but I guess I would like to ask with respect to the closings and the supply chain commentary you gave.
It sounded like the challenge is obviously continuing into 2022 most likely that's that's consistent with what I think a lot of people are thinking and yet you.
Clearly navigated those well your closings guidance for the year is maintained and so my question is.
Do you at this point feel that you have caught up on the production side sufficient sufficiently.
Sufficiently so that sales restrictions at your.
<unk> could be scaled back you could sort of loosened some of those restrictions sales restrictions on those communities that have them.
Hey, Steven it's Doug.
To begin with we lifted any sales restrictions on all our communities Linda I think.
One or two.
So we we don't have any sales restrictions.
The biggest restriction the industry has is the supply chain.
And we're no different.
Then the rest of the builders.
We were we've got a strong team that we're.
Maybe you know able to substitute and and Bob and weave through the supply chain to get homes done but.
No no more special than anybody else, but we just had.
A very strong team or our head of national purchasing and supply chain management, Kevin Wilson has worked tirelessly with.
Our 15 divisions, so and we expect the same type of environment going into 2022, but we don't have any sales restrictions are in our in our communities right now.
Okay, that's interesting I didn't realize that.
Yeah, It's Tom.
Just to add a couple of things on to that obviously.
We've been in this environment for over a year now I mean, so we started making changes.
To our construction schedules early on.
We've adjusted communication with our trade partners. It's all about early lead time. So I think we have reached a balance point.
Between our starts and our sales releases and so its not business as usual, but this new normal is going to persist as Doug said and we're prepared for that.
Yeah, no that's encouraging now there's certainly to see those strong the strong closings because I don't think that's something.
We're seeing from every other builder.
I'm sure people are going to ask about the gross margin.
I guess, the one aspect of that gross margin that I wanted to get a little clarity on is the breakdown of material basically would be my sense is that one of the ways.
And what you guys are navigating around the supply chain issues as by substituting products, where you need to you know sort of taking from other homes you know in order to that.
That you are parts or things you need in order to close homes.
And maybe expediting and all that incurring some cost and I'm.
I'm curious Glenn if you could give us a sense for whether there was any material or significant costs associated with this scrambling. If you will that the supply chain has created.
Yeah, Theres definitely a cost to that I think what's reflected in the gross margins.
For the quarter is obviously the strong pricing environment, we had in the beginning half of this year in the back half of last year and I think you're seeing in the guidance that you know margins are sequentially forecasted to be down in the fourth quarter, because a lot of those costs are coming through especially peak lumber from the beginning of that this year. So yeah there.
There's a cost associated with all of that and moving around for sure.
Okay, but you're not comfortable quantifying it at this point I guess.
I mean costs overall have risen from the beginning of the year about 15% overall, that's including lumber so.
That's a pretty sharp rise in cost we've been able to offset it.
With price, but costs are definitely up and there continue they're going to continue to go up you know what this is Doug Steven you know one of the things I would caution everybody on is the slumber drop because not only you're substituting products. You mentioned that costs included that but there isn't a week that doesn't go by that between labor.
Mostly their cost input costs that are being managed are going up so lumber, yes has gone down.
From its peak, but there isn't this windfall going forward into 'twenty, two because there's supply chain does not let up and all the other input costs. So b b.
Very wise about that phenomenon going into 2022.
Got it that's helpful. And then lastly for me as capital allocation, you talked about share repurchase being up a little bit I'm curious, though if you know given what we're anticipating you're likely going to be able to do next year I'm curious about how you think about.
The cash balance Glenn I mean, usually it goes up a bit in the fourth quarter, you're already running at a fairly hefty rate or a level of cash should we be thinking that this level of cash we're seeing here in <unk> is about the level of cash you know call. It high five hundreds or something like that is about what we should expect.
You know for the foreseeable future.
Barring a little bit of movement quarter to quarter, just due to seasonality or something like that there's no reason to expect that level of cash to build significantly from here is there.
No no I wouldn't say it would build significantly and I think it's roughly a good estimate you know like.
You said, there could be some ups and downs quarter to quarter, but on average it's a it's a comfortable level for us.
Excellent okay. Thanks, very much guys. Thanks.
Thanks, Steve.
Thank you. Your next question today is coming from Truman Patterson from Wolfe Research. Your line is now live.
Hey, good morning, guys. Thanks for taking my question.
I'm just wanted to follow up on one of Steve's questions. You know based on your closings at it seems like you're performing pretty well on the construction side of the business. So just a couple part question here are there any specific actions you know you all have taken to help navigate the supply chain constraints I think.
You mentioned you know ordering products are a little bit earlier I'm thinking if you all are staging the construction differently or anything like that and then then second Doug you also touched on this in the opening remarks, but you know we've always thought you know scale in the local market is extremely important.
Porton, but you know on a national level I'm thinking about this your your larger than your private peers, but your your smaller than the public peers.
Is there any way that you know this might be a benefit in the current environment.
Possibly.
Take the latter half of that pie I would say, possibly hate-listen terminated it is a battle out there. Our teams are battling every day I don't think we have any secret sauce.
As Tom mentioned earlier and he can talk more about it we have been working in this environment for a year, it's just gotten worse and so we.
Oh, it's very proactive instead of reactive as probably the best way to look at it so.
But listen if it's on.
It's Tri Pointe is looking for you know 50 windows in DFW and in one of the bigger boat builders just looking for a thousand.
I bet 50 is probably a little easier than it.
Right so.
I mean, that's yeah that doesn't mean, we're any better but so we're somewhere in between that that that large and definitely obviously bigger than the small local builders. So Tom you want to add anything to it sure Truman.
Like I said, we've been in this environment for a year, it's been a priority for us.
And our operations teams to overcome these challenges I can't stress enough about lead times proactive communication with trade partners.
We adjusted our schedule templates early we've really pushed early construction starts and then we have.
Fairly successful and creative in sourcing alternative materials. So all those things that have added up to some strong results, but we still are.
Relative to normal cycle time, so we don't want to give anybody the opinion that the that that is any different on average.
<unk>, we're a year.
Year over year about 30 days up on cycle times. So it still is having an impact, but so far we've been able to manage through it.
Okay and then.
Secondly on your shift toward more option land I think it's up like 12 percentage points.
Versus a year ago to now 42% of your portfolio is there any target you can give us as to where you want to go you know over the next two three years and any way that you can help us out on what sort of a cash that frees up benefiting your free cash flow.
Yeah.
Truman.
It's a key component.
Of our five strategic Oh strategy points that we've articulated over the last 18 months to really hone in on that consistent R. O E going forward over the next several years. So we would target 50.
Percent 50 50.
On the option land, we continue to harvest, our long term dated California assets, which generate significant cash flow and earnings to allow us to continue with a programmatic share repurchase program, which is the other leg to this.
This is a stool.
And I don't know if it was you or somebody noticed.
The the divisions outside of California are growing like a weed theyre generating huge income.
And that is going to continue to change dramatically over the next couple of years. The other thing that really affects it.
Ro.
Roy.
Oh, I see us getting your inventory turns up higher and.
And some of these markets most of architecturally outside of California.
It's less capital intensive and so you can really focus in on getting those turns up we inherited a lot of long land with Weyerhaeuser, it's been a blessing generate.
Huge cash on earnings, but we're using all of these tools to hopefully benefit the shareholders long term and drive consistent.
Returns and hopefully we can take that Rodney Dangerfield, a label office and the shareholders will really appreciate the type of returns that we're generating.
Yes.
No absolutely and your performance over the past year, especially has been a nice so.
Thanks for the time and good luck on the upcoming quarter.
Thanks, gentlemen.
Yeah.
Thank you. Our next question today is coming from Tyler Batori from Janney. Your line is now live.
Hey, Thanks and good.
I'm, sorry, I wanted to follow up on a comment you made in the prepared remarks, I think you said that you expect year over year order growth to start in the second quarter of next year can.
Can you just expand.
On that a little bit more I mean, I'm, assuming that that inflection is driven by the community count moving higher but I'm just.
Morning.
How youre thinking about sales pace early on next year in relation to order growth.
Yes, you're thinking about the right way, it's it's a reflection of the cadence of when the communities open and looking at how we've kind of plan versus the comps and obviously Q1 is a tough comp because absorptions.
Get us really high this year.
In 'twenty, one and so that creates a little bit of a tough comp in 'twenty. Two we're planning like we discussed before kind of a three and a half to four absorption pace across our divisions and it's a little bit higher in the in the beginning half of the year and lower in the back half of the year assuming normal homebuilding.
Building seasonality trends throughout a year and so that's how we're planning the year next year.
Okay, Okay great.
And then just to follow up on the gross margin discussion certainly very strong performance in the quarter, you mentioned that the pricing strength in the pricing environment contributing to that was there any.
Mix shift that was a positive benefit in the quarter as well, perhaps maybe selling some additional long dated California assets and the unexpected that drove that margin upside versus the guidance.
No I wouldn't say anything in particular on the mix side that drove it up and actually compared to a year ago, our long term, California asset deliveries.
<unk> were lower in the third quarter of <unk> 21 versus 2020, which just really reflects the strength of cross margin across the whole portfolio and not just the long term, California assets.
You are seeing a little bit of a mix in the fourth quarter and and kind of increased lumber pricing.
I stated that's flowing through the P&L in the fourth quarter, but nothing in particular in the third quarter, just really strong results across the board.
Okay, Okay, Great and then maybe one last one if I could just on the demand side of things.
Being remarks, you talk about demand remaining quite strong.
Can you expand.
A little bit more on what youre seeing with demand and traffic perhaps enter into October here.
Are you seeing evidence of a bit more normalized demand environment out there, perhaps some more seasonality impacting the business.
Hi, Tyler this is Linda yes, we are definitely continuing to see that healthy demand.
<unk> so.
So far in October were just over that four per month pace that we're looking to achieve and so it continued strength across market definitely expecting a much more normal seasonality.
Across markets and customer segments.
Okay great.
And I'll leave it there thank you for the detail.
Yeah.
Thank you. Our next question today comes from Alex Rygiel from B Riley. Your line is now live.
Thank you nice quarter gentlemen couple of quick questions here.
Can you help us too.
Better sort of understand some of the.
How.
Or we should think about modeling gross margins over the next handful of quarters coming off of a very very strong quarter here as well help us to think about how to model average selling prices in 2022.
Given the quantity of new communities that are being opened.
Yeah, So I think.
Go into the Asps first for the full year ASP it'll be similar to this year next year on the Asps, even though we're opening more first time and first time move up and entry level communities next year as part of the mix just with the price increases that we've seen this year. We had previously thought asps, we're going to go down but.
It looked like they're going to be more flat this year despite that.
Heavier mix towards entry level, and first time move up and then from a margin perspective, I think you're going to see the peak of the lumber.
<unk> impact the fourth quarter and the first quarter, the most and everything you know the little bit of relief like Doug.
They were seeing on lumber, which largely is being offset by other cost increases.
That kind of started happening for houses we started in the third quarter and Youll start to see those deliveries in the second quarter of next year.
Very helpful and then as it relates to.
The characteristics of.
Your buyers have you noticed any rebound in the international buyer category.
This is Linda and no we have not we continue to see a really strong percentages, but our bias is that 80% about buyers of U S citizens.
Thank you very much.
Thank you. Our next question today is coming from Mike Dahl from RBC capital markets. Your line is now live.
Alright, Thanks for taking my questions I appreciate the balance.
Tenders so far.
I wanted to ask another related question about kind of demand and margin or pricing.
If I look at the monthly absorption.
It seems like it.
It'll in late Summer then bounce back August yes, some business seasonality, but I wanted to ask what you've experienced in terms of.
Pricing power as you've gone through the past few months.
Yeah. This is Doug.
Pricing power has moderated in most of the markets.
Still you know fairly stronger fairly strong stronger strong and in markets in Texas, and Arizona, but.
Since lumber a decrease in the second half of the year.
Well theres have and our competitors have had tempered the pricing environment frankly.
Frankly, which I think is good so we're seeing some modest price increases.
Let the backlog now that they're in good shape, but.
The market overall.
Really good I mean.
All the built on I mean third COVID-19, our absorption was 2.9 and we thought that was a great quarter and it was what four in the third quarter. This year year to date, we're about 1% above our total orders compared to the.
Last year and under with a lot less communities.
I mean, you know the demise of housing, which a lot of pundits have tried to.
To make a headline on I, you know I'm not I'm not sure it's there and.
And I'm not criticizing anybody nobody has come out of a pandemic nobody knows what the outcome of a pandemic is in and obviously the pandemic is going on longer.
So.
It is definitely continue to help the consumers mind get around the need for housing and that's been a big driver of our demand and the second thing is millennials are 54% of our backlog are millennials, 80% of our buyers are captured by our mortgage company by the way so.
Plenty of those are a big big demographic I'm begging demographics, and that's going to drive housing for the foreseeable future.
Yeah, Yeah I appreciate that.
Certainly holding still holding around four months at this point.
Healthy.
Okay.
So I wanted to shift gears and come back to the.
The land position also because I think it's kind of interesting looking at the breakdown as we go state by state a lot of the growth in both total and controlled lots.
It's come from Texas, and I know these.
Good growth market for you, but really a notable increase in inland kantar.
Growth in total off the past few quarters in Texas, a lot of your other markets, maybe a little flatter.
And down so could you elaborate a little bit more on kind of the strategy or where youre seeing success.
And maybe if you could tie that into as we think about that.
That community count trajectory for the next two years.
How much should we think of this as.
Being a little bit more skewed towards Texas versus some of the other regions.
Well, it's definitely going to be skewed towards.
Towards the central and eastern regions I mean, we.
We talked about this 18 to 24 months ago, guys I think.
And we.
California, We've got incredible land book, Nobody can compete with us on our old Rico land basis, which I continue to talk about the cash on Earth.
And in California is a very regulatory environment Nobody's.
A hall pass here when it comes to entitlement. So we had pushed dramatically in Arizona Wes areas and then you know of our divisions. Our goal is to be in the top 10 market share and in Texas.
Its own Colorado, and now the Carolinas East Coast I mean, we we arent there. Okay. So we will be there by the end of 'twenty three 'twenty four I mean, that's that's been our goal.
It's a lot less capital to grow in those markets. It's much more efficient we've done a lot of ventures.
We've done a lot of land banking. So again, it's part of those strategic alternatives alternatives points that I've made two to continue to enhance our return so you'll see tremendous growth.
When you look sit here today and look at 'twenty, three the central and east regions are.
Our growing like a weed.
Eric It's Tom just a couple of add ons to strategy relative to Texas specifically.
We have in house capability to do some self development and we're shifting in that direction quite a bit and that's enabled us to take some larger positions in really well located.
Project, So I think.
Some of the scale of the projects that we're gonna be bringing to the market in the future is going to be really helpful. In capturing additional market share that Doug talked about it I would finish with the land position.
Positioning the company has Tom.
Our 30 plus years of being in the business I don't think we've ever had as strong of a land position.
Where we own and control our growth through 'twenty three.
So all the land efforts, we are I mean, we're being we're always very disciplined as you know and really focus on 24 and 25. So it's got a good setup.
As we mentioned is and with the demand demographics and supply constraints that we keep battling.
Tri Pointe in a really really strong position.
And without a doubt that's a differentiator for us I think one of our strong suits is really the strength of our acquisition teams and as Doug said, we've got the best pipeline that we've ever had.
Okay. Thank you really appreciate the color.
Thank you. Our next question today is coming from Carl Reichardt from <unk>. Your line is now live.
Good morning, everybody.
Hey, Glenn or anybody.
The 3500 49 orders you took in the quarter what percentage of those do you think where like say slab or frame up in other words, what percentage of your specs versus.
Pre sales under.
What are you.
Yes, I can answer that.
This is Linda.
Although Q3 construction stats actually 44% have been with big stats, but they fell very quickly.
So we have a very very low number of.
[laughter] completed unsold Han's point to pick community at this time.
Okay, great. Thanks, Linda and then.
On the lot options that you've got can you distinguish between the percentage that would be.
Say with either third party lot developers or the land seller, where youre going to stop develop.
This land banking transactions, where you effectively have a financial partner.
We'd have to dig into that garage that off top my head.
Okay. Thank you and then just one more and I want to go back to the to the guidance beat this quarter, Glenn particularly on the on the margin. So I think you were 230 basis.
Points above the midpoint of the range. This quarter can you just help me understand that that $2 30, what was what exceeded your expectations like specifically, what what improved relative to what you told US you thought you'd do.
Well I think really it's just how we were looking at things and the timing of certain deliveries.
Liberty is coming in.
Relative to the price appreciation I think to be honest, we went a little bit conservative because costs were rising quickly, but also price and so it.
It ended up just coming in higher than what we expected once we got through everything. So it was really just weighing the price increase versus the cost.
It increases and it exceeded our expectations. Okay. Thanks, and then youre not anticipating that same dynamic to occur in Q4 of them.
Not right now but.
While this division pleasantly surprised.
I appreciate it thanks everybody.
Okay.
Thank you. Our next question today is coming from Ivy Zelman.
From Zelman and Associates. Your line is now live.
Thanks for taking my question Hey, guys. So can you tell me on the land that you purchased during the quarter.
Pollute land that you purchased how much.
Have you seen lot prices increase and what's your assumptions on absorptions that you are underwriting for.
So absolute number of watch lift year over year, a lot of inflation and underwriting assumptions. Please.
Well on the absorption side Ivy, we continue to underwrite all our well it depends on the price point of product. It is a it's a multifaceted.
Equation, but it ranges from.
Three and a half to a very and it's more of an entry level.
Product, maybe up to four and a half five.
So that that's that's kind of the underwriting assumptions.
What was the other I don't I don't have the number of lots right in front of me I V, but as far as price appreciation in the land what do.
There's a lot of Oh.
15% to 20%.
And I think I pointed this out to you before Ivy.
The land that we're closing on now.
And that was really tied up in late 19 in early 'twenty 'twenty and then there was that pandemic moment, where everything got X.
Do you think.
And so you know we've got and I've mentioned this several times. This land position that gives us huge flexibility going forward in a market that could create some uncertainty obviously.
Interest rates are always the bogeyman out there, but we have tremendous amount of flu.
And the ability and we have a lot of.
Strong basis in there because of the strong inflationary environment, if you're if you're looking for just in time land right now yeah, youre going to pay.
Dearly for that so that's part of the reason why Tom and I have said a number of times a little our career, we're in an excellent position.
Flex opinion, and then when you look at that land and air.
I'm always looking at the upside and the downside that's just the way we want to be proactive that land has the flexibility to be repositioned to even more affordable products different products are.
Obviously, that's a lot easier outside of the state of California.
Position when it comes to doing that and that's where most of our growth is so that's another reason why I feel very secure going forward based on the ups and downs that the housing business can give us.
No that's really helpful. Doug So if I understand you correctly, you are not purchasing real time right now incremental.
At today's prices because you are concerned about the inflation, so you're not incrementally signing new contracts that are going to close in the future. At these inflated prices are you are.
Well, we're definitely in the land business and we are underwriting to current revenues and current cost, but we're looking for the land positions that are probably.
Well I have a little more of a self developed components. So it's probably got a stronger margin profile and it doesn't deliver homes until 'twenty four and beyond we are staying disciplined in our underwriting Ivy. We don't include inflation in our underwriting we're using.
Historical absorption paces, not we're not using.
You know kind of inquiry.
Creased absorption paces to make underwriting work, we're staying very disciplined in our underwriting.
Perfect.
Switching gears for a moment you know recognizing that you did a great job this quarter, achieving your closings in a very challenging market.
With respect to the sales caps the restrictions that you lifted.
Are you seeing a pickup in the need for incentives.
In the market to move and get the velocity and sales pace that you are achieving and if so maybe Linda can tell us what percent of your orders had incentives associated with them.
Yeah. Thank you Ivy.
We're still seeing very low levels.
And then sometimes I would say just continuing customary lender lender incentives there's been some incremental increase in incentives in our D. C metro market that suddenly nothing untoward and still at lower levels than prior years. So in Q3, our incentive pay delivery, but one.
7% have ramping and that's down from the prior year and September was 4.3%. So incentives are really low.
Right got it and last one to sneak another one in for you Doug if you'd like to just opine on your perspective, I mean, the market with community count is poised to grow pretty significantly.
Lee in 'twenty, two by many of your peers.
Peers and yourself included.
Are you concerned about getting those communities ramped up it feels like a lot of communities right now are not builders not hitting the targets that they had anticipated due to the constraints in the market and municipalities and if you'd give us some confidence level of your ability to get to the community.
Calls that you've you've articulated at the same time everybody is doing the same thing. So it's the hardest thing for you to forecast and we appreciate you even attempting it but what's your conviction level, that's a pretty big increase percentage wise, maybe not an absolute but kind of hearing your perspective of U N. The industry and the challenges that you face when it comes to not the construction.
<unk> the homes, but the actual development of land and getting municipalities, who are approved and get those communities rolled out a lot.
Lot to unpack there. Thank you guys for taking my questions.
Yeah, No. It's a great question and in a listen it's it's a daily grind, where the supply chain and you mentioned municipalities. That's obviously also a big delay are not only.
Councillor Muni started an open but also human Guinea getting homes final then signed off so you're spot on but you know confidence factor in you know Tom and I.
Our management system here as he and I play that regional presence. So we can tell you right now our growth going into 'twenty two as is.
The 90% confidence level.
You got a little bit of a 10% cushion in there because of the municipalities in supply chain, but very very very very confident.
And the reason it gets back to what Tom was talking about.
We've started I mean, we have been dealing.
Getting your supply chain and municipality issues for a year. So that means you just need to be more forward thinking. So you know we want to have most of our year started much earlier in.
In the year next year than than what would be normal we want community started much earlier and we started that planning process. So if.
With that planning process six to 12 months ago, you're never going to open the communities, we talked about in 'twenty. Two so it's really about being proactive in your planning process and and the other point, you're making is yeah, there's going to be a ramp up of communities for all the builders and yeah. I mean, we're all out there doing the same thing but on.
You don't start relative basis, there's been such a huge drop off in communities across the marketplaces, I mean with Charlotte Linda I think about 30% and so when you go up 20% to 30%, you're you're really getting back to where you were maybe in the early part of 2020 as an industry. So yes, theres going to be a lot of commotion.
On a run new community started but it all comes to comes back to proactive planning and don't you think Tom.
Absolutely. The team is 100% focused on that you know the future lifeblood of the company is based on increasing our community count and I think by the end of next year and then we've even messaged about.
<unk> I mean, he's going into 'twenty, three we put ourselves in a whole different league. So we're excited to.
To move forward and increase our volume and get those stores open on a timely basis.
Well good luck guys and wish you the best and look forward to a follow up thanks.
Thanks Savi.
Thank you next.
Our question today is coming from Alex Barron from housing research Central Your line is now live.
Good morning, everyone and great job on the quarter.
I wanted to.
So great job in some of your great job in some of your write ups too by the way.
Okay.
Thank you Doug I appreciate that.
Yeah, I wanted to ask about I guess, one component that I think people focus on which is the share buybacks.
I think you guys have been more consistently and aggressively buying back your stock and driving down the share count.
I guess as you guys just expanded the share buyback.
Authorization.
Should we expect that to be a fairly consistent thing going forward every quarter or is it expected to be more opportunistic and my second question is.
Along the lines of giving back capital have you guys considered starting a dividend.
Thank you.
Hey, Alex it's Glenn.
Glenn and I will take that one.
And good to mentioned the share buyback like Doug mentioned, it's a key component of our strategic goals.
And the level of buyback that you're seeing each quarter that we've been consistently doing that as a good run rate to use going forward. We do think that is a good.
Place to put capital right now, especially.
Where our stock has been trading it makes a lot of sense for us and its driving part of the equation to drive returns.
Yeah, we you know.
You can expect that same level going forward.
And then what was the second question dividends dividends out we've looked at that we've done the math I don't think right now that makes sense I think we'd rather focus on the share buyback.
Especially with this time, but it's something we may look to in the future. Once we kind of achieve some of our growth goals right. Now we're focused from a capital standpoint, and growing our early stage divisions growing in our central and east divisions, like Doug said and focusing on the share buyback.
Okay, Thanks, and best of luck.
Thanks.
Backup.
Okay.
Thank you. Our next question today is coming from Deepa Raghavan from Wells Fargo Securities. Your line is now live.
Hi, good morning, everyone last quarter.
Couple of questions from me.
I think two years 2020 gross margin.
It feels like it should grow year on year.
Sure.
The positive thing.
Comp and benefits for a good part of the next year and then there's a little bit of an operating leverage that comes with a huge community count, but even if it doesn't make sure the bank card.
And the offset.
Thanks.
Offset by <unk>.
Additional commodity inflation out there, but that seems like it can only be a question Austin.
You mentioned pricing is flat.
Are there any big moving parts with as clean a thought.
Or do you have any comments back your gross margins actually our bias.
She could go next year.
So we haven't given gross margin guidance for 2022, but you know the one thing I'll say is you know costs are still rising so that's something we have to watch.
There's we're opening 19, new communities next year. So there's definitely a mix change you know we're ending the year between 110 to 115.
<unk> active communities, so that's a big mix shift.
Shift around their in communities.
And so that plays a factor, but we will give guidance next quarter on where margins are going for 2022.
Okay.
Can you talk to your stock.
So that probably lined up with your backlog and take back any dynamics that impacted by the supply chain and incremental supply chain.
And also any updated thoughts on if your cycle times have increased or decreased because of the supply chain.
Goodbye.
I heard you right or you're asking you're kind of breaking up a little bit it doesn't sound like.
What in particular in the supply chain is causing the cycle times to increase is that what you're asking I'm sorry.
That's one part of it but anything and so has that is that impacting you start space.
They'll start space.
Yes.
As I said I think we're reaching a balance point between our sales releases and starts pace. We've lifted restrictions are certainly as Doug mentioned municipalities and processing to get permits for starts has been probably the biggest impediment.
Got it.
Once we get started we've got the normal supply chain issues that are leading to you know.
On average about a 30 day cycle.
Cycle time delay year over year year over year.
Okay got it.
But just tell me I'll follow up later, thanks, so much thanks.
Thanks Deepa.
Pediment, we reached the end of our question and answer session I'd like to turn the floor back over to Doug for any further or closing comments.
Well thanks, everyone for attending today's call I hope everyone has a wonderful holiday season can't believe it's a we're looking at the holiday season already its been a fast moving year.
Thank you look forward to our 2021 results reporting those next year. So thank you and have a great weekend.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Yeah.