Q1 2022 Tri Pointe Homes Inc (Delaware) Earnings Call
Yes.
Yeah.
Greetings and welcome to <unk>.
Tri Pointe homes first quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host David Li Investor Relations for Tri Pointe homes. Thank you you may begin good morning, and welcome to Tri Pointe homes earnings Conference call.
This morning, the company released its financial results for the first quarter of 2022.
Documents detailing these results, including a slide deck are available at www Dot Tri Pointe homes Dot com through the investors link under the events and presentations tab.
Before the call begins I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating performance are forward looking statements that involve risks and uncertainties a.
A discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the companys SEC filings.
As required by law the company undertakes no duty to update these forward looking statements.
Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed your tri Pointe web site and in its SEC filings.
Hosting the call today are Doug Bauer, the Companys, Chief Executive Officer, Glenn Keeler, the company's Chief Financial Officer.
Tom Mitchell, the company's Chief operating officer, and President and Linda May the company's Chief marketing Officer.
With that I will now turn the call over to Doug.
Good morning, and thank you for joining us today as we go over our results for the first quarter of 2022.
And provide some thoughts on the balance of the year.
Tri Pointe homes delivered another excellent quarter of profitability.
Generated earnings of 81 per diluted share in the first quarter of 2022.
Compared to 59 in the prior year period.
We once again came in at the high end or above our stated guidance for key operational metrics, including new home deliveries of 1099.
Average selling price of 660000 in.
Homebuilding gross margin of 26, 8%.
Because of the strong demand throughout the quarter, we continued to sell homes at an elevated pace of five seven homes per community per month.
This sales success resulted in a first quarter ending company record backlog both.
Both in terms of units with 3955 homes in backlog.
And dollar value of $2 9 billion.
Which places us in an excellent position to deliver on our guidance for the full year.
We were also successful in meeting our projected new <unk>.
Projected new community openings.
For the quarter, we opened 22, new communities with excellent initial sales results.
Because of the demand in our differentiated product offering we continue to realize accelerated sales with virtual openings.
We are still on pace to open 90 to 100, new communities for the year, which will contribute significantly to deliver growth in the coming years.
We are extremely pleased with our results this quarter and are encouraged by our team's ability to work through the supply chain issues that persist in our industry.
Demand continued to remain robust in all of our markets in the first quarter, even as mortgage rates have moved materially higher.
The homebuyers in our backlog are well qualified and are pre qualified through our mortgage affiliate prior to purchasing a home.
They have an average debt to income ratio of 39% and an average FICO score of 749 and average loan to value of 82% and average annual household income of 189000.
The majority of our home buyers and millennials in this cohort continues to be a strong source of demand for the industry.
Driven by needs base life changing events, such as marriage, a growing family for a job relocation.
This sizable population of buyers is in the prime home buying phase of their lives and the homebuilding industry stands to benefit from their participation in the markets for years to come.
Demand is also being fueled by what we believe will be the long lasting transformation of homebuyer preferences and needs brought about by the pandemic.
Well there is borne out of a desire for more living space the ability to work from home or need to feel more in control of one's living conditions. The pandemic has created a heightened desire for home ownership in our country.
Another positive dynamic for the industry as the ongoing severe lack of existing home supply in our markets.
This lack of resale competition has caused an increasing number of buyers to consider purchasing a new home.
According to the most recent figures from the National Association of Realtors.
As of the end of March the inventory of unsold existing home stood at 950000 units.
Which is equivalent to two months of supply at the current monthly sales pace and well below historical norms.
Inventory levels for new homes also remained constrained by the ongoing supply chain issues.
It had limited the number of homes that can be brought to the market.
Pricing firm, while maintaining a sense of urgency for each new home site release.
We believe that this supply demand imbalance for both new and existing homes will persist for some time.
Adding the new home industry with a healthy fundamental backdrop for the foreseeable future.
Given this outlook Tri Pointe homes remains focused on consistent operational and financial performance by executing on the five strategic initiatives, we have emphasized for several quarters now.
These include the continued monetization of our long dated California assets.
The growth in build out of our early stage markets.
A disciplined approach to land acquisition.
Further improvements to our cost structure across our homebuilding platform and a consistent share repurchase program.
With respect to our long dated California assets. These communities continue to generate positive cash flow and outsized profits for our company due to their favorable land basis desirable locations innovative new home designs and attractive pricing.
In terms of early stage markets of Austin, Dallas Sacramento in the Carolinas, We made further progress towards greater scale and operational efficiency.
Opening nine new communities in the first quarter.
These divisions are now, making valuable contributions to the bottom line and generating healthy margins.
We continue to be disciplined but active in the land market.
<unk> grew its total lot count by 14% on a year over year basis in the first quarter.
But the bulk of that increase coming by option agreements and land banking arrangements.
Lots controlled as a percentage of our total was 47% at the end of the quarter compared to 38% at the end of the first quarter of 2021.
Additionally, we have been expanding our geographic diversity.
Result of that strategy deliveries from our non California divisions are expected to increase to approximately 70% of the company's overall deliveries by 2024.
Versus 58% in 2021.
Tri Pointe continues to look for ways to utilize technology to drive efficiencies across our homebuilding platform.
We have made significant investments in virtual sales tools and expanded our online marketing efforts, which we believe have resulted in long lasting structural changes to the way we do business.
With that we continue to see efficiencies related to our marketing and advertising spending.
And reductions in both the outside broker attachment rate as well as broker costs per delivery.
The final piece of our returns focused strategy has been to allocate a significant portion of our cash flow.
To share repurchases.
In the first quarter, we repurchased five 3 million shares for a total of $123 million.
With our undervalued stock price and the positive fundamental outlook, we see for industry.
In the long term we feel this is an excellent use of our capital that further enhances shareholder return.
As of March 31, 2022, we had $302 million remaining on our outstanding share repurchase authorization.
Currently we are in a difficult geopolitical and inflationary environment in the U S.
The Federal reserve has made it their top priority pertain this inflation with higher interest rates and.
And a reduction of their balance sheet.
As a result, we have seen mortgage rates increased over 200 basis points.
And with higher interest rates, the consumer loses purchasing power.
While this creates a change environment, we have been there before.
Our company is led by seasoned executives, who know how to successfully operate during these periods.
We acknowledge that higher financing cost will be a headwind for our industry.
However, we are encouraged that the U S economy remains strong.
And wages continue to rise leading us to believe that the demand drivers, we see in our industry and our markets can continue to propel the housing market forward and present, a much more positive fundamental outlook than our current equity valuation which suggests.
In summary, Tri Pointe homes delivered excellent results in the first quarter of 2022.
So a combination of strong execution careful planning.
In a continuation of our returns focused strategy.
Well investors remain focused on mortgage rates, we remain centered on doing what is best for the long term interests of our company and our.
Shareholders and believe we have the right strategy and leadership teams in place to be successful.
With that I'd like to turn the call over to Glenn who will provide more detail about our results and give an update on our forward looking guidance Glenn.
Thanks, Doug and good morning, I'm going to highlight some of our results and key financial metrics for the first quarter and then finish my remarks, with our expectations and outlook for the second quarter and full year of 2022.
Times I'll be referring to certain information from our slide deck, which is posted on our website.
Slide six of the earnings call deck provides some of the financial and operational highlights from our first quarter.
As Doug mentioned earlier demand continued to be strong in the first quarter with an absorption rate of $5 seven homes per community per month.
Order activity was healthy across all geographies with our West region reported an absorption rate of five eight homes per community per month, the central region experienced an absorption rate of six point year old and they used to have an absorption rate of four eight so.
So far in April demand has continued to remain strong with a similar absorption rate for the first quarter.
We reported outstanding results on all key metrics this quarter.
Met or exceeded our stated guidance, we delivered 1000 1099 homes at average selling price of 660000, which resulted in home sales revenue of $725 million.
Our homebuilding gross margin percentage for the quarter was 26, 8%, a 290 basis point improvement year over year.
The strength of our margins continue to demonstrate our ability to price homes to cover all exceed the cost pressures we have experienced.
Finally, SG&A expense as a percentage of home sales revenue came in at 11, 1%, which was a 30 basis point improvement year over year.
Turning to communities, we opened 22, new communities during the quarter, which exceeded our previous guidance of 15, we were able to accelerate several virtual community openings and successfully generate orders using the interactive sales technology that Doug mentioned earlier.
The full year, our expectations for opening between 90, and 100, new communities and have them between 150 to 160 active selling communities by the end of the year remain in place.
Looking at the balance sheet at quarter end, we had approximately $3 3 billion of real estate inventory. Our total outstanding debt was $1 3 billion, resulting in a debt to capital ratio of 35, 7% at a net debt to net capital ratio of 27, 8%.
We ended the quarter with approximately 1 billion of liquidity, consisting of 413 million of cash on hand, and $568 million available under our unsecured revolving credit facility.
Now I'd like to summarize our outlook for the second quarter and full year.
For the second quarter, we anticipate delivering between 200 1500 homes at an average sales price between 670000 680000.
Homebuilding gross margin percentage to be in the range of 26% to 27% for the second quarter of 2022, and anticipate SG&A expense as a percentage of home sales revenue to be in the range of 10% to 11%.
Lastly, we estimate our effective tax rate for the second quarter of 2022 to be in the range of 25% to 26%.
For the full year, we continue to anticipate delivering between 6500 6800 homes.
We're raising our guidance of average sales price to the range of 680000 to 690000.
We are also raising our expected homebuilding gross margin range to between 26% and 27%.
Our SG&A expense as a percentage of home sales revenue continues to be expected to be in the range of nine 7% to cancel and supercell.
Finally, the company is forecasting that the effective tax rate for the full year to be in the range of 25% to 26%.
I'll now turn the call back over to Doug for some closing remarks.
Thanks Glenn.
We have a lot to be proud of in terms of our performance in the first quarter of 2022.
As I mentioned earlier, we came in at the high end or above our stated guidance for key operational metrics in spite of the ongoing industry wide supply chain challenges.
We also generated strong profitability and open new communities ahead of schedule.
While interest rates certainly play an important role in our industry. We believe our company remains on solid footing. Thanks to the combination of strong job growth.
Healthy income levels.
<unk> demographics, and low levels of new and existing housing supply.
These factors combined with our strong balance sheet excellent liquidity and an experienced management team continue to make me very optimistic about the future of Tri Pointe House.
Finally, I would like to thank all our team members for their efforts this quarter everyday it seems as if we are presented with a new challenge for our industry and you have consistently shown that you are more than up to the task and I truly appreciate your efforts.
That concludes my prepared remarks, and now we'd like to open the call for questions. Thank you.
Okay.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
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Our first question comes from the line of Stephen King Stephen Kim with Evercore. Please proceed with your question.
Congrats on the good results obviously.
I'll I'll start off with what everybody is obviously going to be thinking about wages.
The fact that you have mortgage rates now.
Points plus you know.
You could talk a little bit about what you're seeing if anything in terms of.
Changes in the sales centers around.
Any kind of mortgage qualification issues cancellations incentives.
Are you finding that the buyers.
Or are you having to go deeper into your waiting lists and things like that if you can just sort of talk about how despite the strong sales and good absorptions continuing if there's maybe something below the surface in terms of making adjustments to the fine there would need to address the higher financing costs.
Hey, Good morning, Steven This is Tom a lot there in that question and we're certainly trying to sort that through in our sales hubs as we speak.
Certainly from a demand side, we have not seen a falloff in demand, but that doesn't mean, there isn't concerned consumers out there were holding hands and walking people through this rising rate environment, but so far with our needs based buyers. They are still fully engaged and moving forward.
<unk>.
Relative to purchasing in their homes.
Certainly relative to incentives we have not really seen any increase in incentives are actually our average incentive I think was about one 3% for the quarter and that compared.
Year over year to about three 2%, so still a very healthy environment out there there are concerns, though as interest rates continue to rise, but we have a.
Really done a lot of sensitivity analysis around our backlog and feel.
Strongly that our buyers are very well qualified and committed to their purchases and we don't see anything on the horizon changing that relative to those sensitivity tests, we've run that up to about a 6% rate.
And that's where we do begin to see some impact to our backlog, but it's really very minimal that would be in the high single digits low double digits relative to a higher risk profile as interest rates go to 6% I'll see if linda wants to add anything to that commentary.
I think you've covered it really well Tom I mean, as you say because demand is strong we are continuing to operate with low levels of incentives and helping to educate homebuyers on the current market, including the low supply of existing resale homes.
That's also driving more demand for all new home communities.
I'll finish by saying Stephen I mean, there's so many variables that are going into the market right now.
And interest rates higher interest rates reduce your purchasing power I mean, that's I give it back.
We were spending definitely time.
With our backlog, making sure people are locked in over the.
The rest of this year, but we were just out in Phoenix.
Talking to our sales teams out there for example.
And one of the things that we focus in on and Tri Pointe is really.
Developing and offering products for sale in what I call main and main well located long transportation quarters. Good schools.
And you talk to our salespeople across the nation and we have well located product we offer product, it's kind of a more of a first time premium first move up those buyers typically have better qualification.
And the entry entry level type of buyer, but location trumps all cards and I remember that you know.
From 2009 to all the cycles I've been through in my 31 years. So.
There's going to be a bump in the road.
We're real there's no.
The fed is determined to put out this fire. So that's going to have an impact as as I'm sure the year progresses, but the biggest the biggest thing they say it also is the supply.
Everybody wants to compare to prior year cycles, but there's just no supply our biggest competitor in the new home side as the resale market.
Thank you Andy are just came out two months of supply. So the consumer is on a needs based basis is as Thomas.
<unk> mentioned.
The new homebuilder is kind of the only choice in town so to speak and when you throw in you know well well planned product communities in good locations.
The macro I think is still very good for housing.
Yeah, I Couldnt agree more I really appreciate that that was very helpful.
Typically that the stress testing of the backlog I think that people should find out very very encouraging.
Encouraging second question was.
<unk> to the supply chain.
We know that omicron certainly created some problems for folks you know in the winter My sense is that March now things got a lot better in terms of omicron cases, and absenteeism, perhaps my feeling is that perhaps you might have seen a little bit of improvement sequentially in March and April versus what you were seeing in February it was key.
Curious if you could comment on that and then related to overall production.
We have been intrigued by the single family build to rent operators, just desperate to get a hold of.
Product and I was curious whether or not you've seen your inbound.
From that arena.
Increasing over the last few quarters and what your stance is towards <unk>.
Making sales to those sorts of entities.
So I'll take the supply chain.
I Gotta interviewed last week and the simple answer is no. It's it's whack them all.
The supply chain has it gotten any easier.
And then when you think about the global supply chain with what's going on in China in Shanghai, and so far I mean, it's just.
There is no relief and insight that we see.
And frankly.
Until the world can get back to getting people back to normal.
And I Wanna get off on a political rant, but they put the testing procedures, just create more and more roadblocks into munis.
Municipalities and the supply chain and for the ability for people to consistently come to work so I.
I don't see any relief right now and in a way that current situation is being managed in the supply chain.
As far as build for rent, we we don't see a lot of that in Texas. We've got some master planned communities. We're developing that we may carve out a piece of two time to sell to.
To BFR group, but you know there really pushing for lower price points and in areas that really arent, Maine, and Maine as I mentioned earlier, so we don't see them in our playbook that much at all.
The only thing I'd add Stephen sorry.
Is relative to supply chain. Obviously this is a very strongly relationship based industry and while it is challenging day to day and something different Pops up we've got very experienced management teams field operators that have great relationships and are finding ways to make it happen.
As evidenced by us coming in at the higher end of our range relative to deliveries. So it is challenging but we do think our team has done a fantastic job and creatively sourcing materials looking for alternatives and finding ways to get it done.
I appreciate that thanks, so much guys.
Thanks.
Our next question comes from the line of Truman Patterson with Wolfe Research. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking my questions.
So first just looking at your 'twenty two guidance I'm, hoping that you all can give an operating cash flow target.
When I'm thinking through this you have six years ago.
Below a 30% net debt to total capital shares are below book, which might present, a better risk adjusted return to buying way out and.
And you accelerated share repurchase to $120 million this quarter I'm trying to understand whether this level of share repo is kind of a new normal for the time being or just given.
And given some of the actions that besides doing do you actually just kind of shore up cash bring up your cash balance a bit in 'twenty. Two we're worked down that just trying to understand how you are thinking about it.
Hey trim and good question this is Glenn.
Gonna be positive cash flow from operations for the year. If that was your kind of original question and were still balancing by.
By buying land were active in the land market, but we're continuing our disciplined approach and we are committed to our share repurchase program as evidenced by you know having a little over 100 million in the first quarter that was a little higher than we have done in the past and like you said you know we're in a position to where we could be more aggressive in certain quarters, where we feel like the stock is undervalued.
But overall for the year, we're targeting a $2 $50 million to $300 million in stock repurchases as we've talked about in the past.
And we feel it will be able to do that without.
Still have strong cash and cash balances at the end of the year and we don't have any debt coming due until 2024. So we're in a really good position on the balance sheet side.
Okay, Okay and then.
Add to that Truman I mean.
Yeah.
We talked about our five strategic points.
And in our in our remarks and <unk>.
Compliment the teams we've been executing in a very very difficult environment. Yes, there has been healthy demand, but at the same time as we talked to you and many of you about we've been very focused on on a returns focused strategy.
Since 2015 to put it in perspective.
We bought back what about $1 billion of stock.
On an annual basis, our book value I think our tangibles up 13% per year.
We've created value of about 300 million for this year older. So yeah that programmatic approach that Glen talked about is going to be consistent because you you got to take a step back and look at the macro thesis and when you look at demand and supply.
Long term I think housing housing is going to you know.
It hit us a little more of a bump in the road.
Be real about it but when you look at the macro and that's where the investment community I think with all due respect is missing the macro because of the demand from the millennials.
And the continued supply constraints, so you'll look at that over the next five to 10 years.
We're a big believer in our sock and so we're going to continue on that programmatic purchase program.
Yeah absolutely.
So over a multiyear period, absolutely agree with you and just following up on that last point as rates have increased have you noticed any shifts between consumer segments, because I am thinking.
The entry level, there's absolutely some consumers that get priced out of the market due to affordability, but strong millennial demographics trade down lack of inventory and then on the move up it's more well qualified buyer right, but they also experienced rate lock so I'm trying to understand.
Hey, how you all think about.
Those segments going forward, and b, whether or not you've seen any kind of shift between.
The two recently regarding demand.
Chairman. Thank you. This is Linda great question, we can send it continuing to see a pretty even mix in all segments in the first quarter. We were 35 for the same entry level with a six per month per community per month order pace, 52% of the mix with new that at a 5.3 pace and <unk>.
With luxury at five pace and active adult with 5% of the mix with a pace of six point for what so really healthy demand across the segments and you said you know the move that demand continues to be strong and while rates are increasing those buyers also have healthy amounts of equity in their existing homes.
We're seeing you know that that premium entry level and premiums.
That segment is very strong for us at Tri Pointe.
One of the things that drove that I think benefit US is obviously, our diversified product strategies no. All of our operating teams really are contributing to all of those product segments and so as demand shifts as Doug said, when we were out in.
Phoenix yesterday, we have a diversified product offering that people will be able to shift within <unk>.
Our own company and still purchase a home should they need to adjust to a different payment.
Perfect. Thank you and good luck with the Reorders.
Yes.
Our next question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question.
Hey, guys. Good morning, and congrats on the really impressive execution in this tough operating environment on the supply chain.
Doug I really appreciate your comments your balanced view on kind of the Oh here is your history in the industry, it's usually not wise to fight the fed and it sounds like that's the approach we're taking here. So I'm curious if obviously rates have continued to move post quarter end. So maybe this is more of a go forward thinking.
Point as opposed to anything that's changed up to this point, but.
Are you at all kind of adjusting the strategy, whether that's in terms of land acquisition I noticed this quarter. Your lot count was pretty flat, which is the first time it hasn't grown in a while sequentially or you know in your start pace as far as building up more spec inventory has anything changed on your strategy in response to what's.
Seeming like it's going to be a tough interest rate environment for the foreseeable future.
I would say that we went into 2022 and I think we've talked about this tour island.
As Tom and I've said, we've never been in as good of a land position for our growth. This community count growth that we mentioned in our remarks, a physical and a 100.
90% to 190 to 100 this year and many more in 'twenty, three we own and control all of that growth all the way through 'twenty four.
It's just about 100% even in 'twenty four or so so from a current land strategy.
I use baseball terminology and and we're focused on hitting singles.
We continue to be very disciplined I mean, the cash we're using today for land is land that we tied up 123 years ago right. So we're not buying land today at today's land prices unless they meet our underwriting criteria.
So we're being much more disciplined in today's environment, because whatever we tie up today is really affecting 25 and 26. So that's our.
<unk> on the land side.
The other thing is as we mentioned our are we have been very very focused on putting more and more land off balance sheet, we're up to almost 50% our goal is to be at 50% or greater.
And when you look at the diversification of our company as I mentioned in my remarks, 70% of our deliveries will be outside of California by the end of 'twenty for all of that land, we own and control.
And that land is much more efficient from a capital standpoint, so again it gets back to those strategic points I keep mentioning returns returns returns being efficient on operations and and diversifying our portfolio of product and price points as Tom mentioned so.
But the current land strategy is as I said in the baseball terminology, it's hitting singles.
Got it Yeah, and then I guess the second part of that question.
I think you guys were kind of operating under a similar strategy I know a lot of your peers are just as far as trying to ramp up spec starts and maybe holding those those are sales off market until they are further along in the construction process given the cost inflation. So I'm. Just curious are you changing that thinking at all have you changed your piece of starts it all over to Lee.
Last four to six weeks, given given any uncertainty out there what's the general thinking there.
Alan This is Linda we've not changed our philosophy on this we are able to get similar speak steps into the ground as we get more construction capacity, so in the quarter or 50% of our stats with too to be build and 50% speak we started a total of 1849 stats, which was the third.
The 7% increase over the fourth quarter and up 10% from Q1 of 2021, and so we were happy to see that level continue.
Great I appreciate that Linda and then if I can squeak in one more here.
I heard a comment earlier from Tom maybe it was you Doug about locking buyers in backlog and.
Admittedly I'm not sure what the current norm is but I thought generally maybe 60 days out is where buyers can typically lock in their mortgage rates. So where are you starting to do maybe extended locks or anything like that to ensure that buyers that might be several months out from delivery are locked in at a lower mortgage rate or did I did I misunderstand that.
No you're right on Alan This is Tom locking has been a key initiative of ours and we continue to work every day trying to educate buyers that it would be who have them to lock as soon as possible.
Traditionally buyers are interested in locking in 60 days out we do offer longer term rate locks and we think it is wise to do so we've allocated some of our typical financing incentive dollars to help them with those longer term locks, but we have the ability to lock in longer term for.
270 days so.
We think that's a wise strategy for our buyers and we continue to work on that.
Got it and just to be clear that cost right. Now is it sounds like it's being split amongst you guys in the consumer depending on the circumstance.
Correct.
Perfect. Thanks, guys I appreciate it.
Our next question comes from the line of Carl Reichardt with <unk>. Please proceed with your question. Thanks.
Thanks, Good morning, everybody.
Wanted to ask Glenn about SG&A that the you added the 20% drop in sales and marketing expense and I think G&A was up 17, just a big big mix shift there and the two components and I was just curious with your cost deferral, there some reallocation or.
With how with sales and marketing down from a on a dollar basis, so much relative to delivery volume.
On the sales and marketing side, it's really just that.
What we talked about in the prepared remarks.
Our advertising and marketing spend just because the demand is still so strong that you know we're not needing to spend those dollars and we are seeing lower broker dollars. So the both the attachment rate is lower than it was a year ago and the cost per delivery is lower than it was a year ago. So that's a good sign for us and for the industry.
Okay, and then on the gross on the gross margin guide.
We've got an overall annual guide that's not dissimilar from what your second quarter Guide is are you effectively not expecting the typical seasonal bump in GM in the back half of the year.
Specially as your as your volumes ramp so the portion of your fixed that you cover should you should get some leverage there and is that a function of mix or a function of conservatism.
Or.
Or just what either geographic mix or product mix why your margins wouldn't at least see the typical seasonal expansion.
Well for us it is a little bit of mix, but it's also.
Some builders are different in how they have a certain fixed cost that they you.
Expense on a on a quarterly basis and so as revenue grows our margin grows for us that's baked into what we the way we allocate our costs that doesn't have as big of an impact for us as it does some other builders thats just more of an accounting difference.
So for US, it's really just mix them. So all things being equal you know what you shouldn't see a seasonality margin change for for US the way, we do the accounting.
Okay, great. Thanks, Glen Thanks, everyone.
Yeah.
Our next question comes from the line of Jay Mccanless with Wedbush. Please proceed with your question.
Hi, Thanks for taking my questions.
Sticking on gross margin cash lumber has been coming down for several weeks now and like Karl I would've thought maybe some of these costs coming in would help drive higher gross margin I guess you know what.
What are you seeing in the field on lumber pricing.
Could it be a tailwind at some point if the prices keep going down like they have.
Hey, Jay it's Tom.
Would love to see lumber become a tailwind and we have seen at a you know me.
Move off of the highs for the year, but as you know it's cyclical based on demand as well and right now everybody is putting their yearend starts in the ground and so we see it following a similar trajectory as we did last year. So the hope is that it will continue to to move off of.
As we get later into two <unk> and <unk> and that certainly will be a benefit for us that being said obviously.
Other costs are challenging as well so we continue to see increases in other material cost and labor.
Got it.
And then the other question I had maybe just sorry go ahead, Doug Yeah, J I'll add for the quarter. Tom I think it was our costs direct building costs went up 10% to 15% right. So it's still a very healthy cost environment. So.
Hum.
The lumber question is interesting, but there's so many components and sir so many input costs that are changing and then you throw in the <unk>.
The cost of oil and gas products or related products on the LDC side that people aren't talking that much about so there you see input costs across.
Across the equation going up still.
Got it.
And then I guess the other question just on where cycle times gone in and.
Are you seeing any improvement there.
Yeah, Jay cycle times are certainly a challenge relative to a year over year stats our cycle times are running about three weeks longer than they were a year ago overall, our cycle times are about two months longer than pre pandemic schedules. So we're still.
<unk> the on cycle times, we have.
Done some new initiatives around our sale to start and we've seen some improvement in those timeframe. So that's benefiting our overall cycle times as well as our complete to close our Timeframes, we've improved on and so overall, we've been able to take a few weeks back out of the schedule because.
Of that.
A little bit smiling here, Jay because we can talk about all the challenges on the supply chain and you get you get kind of negative a little bit but to be honest with you.
I mean, I'm Super proud of the team delivering as Tom mentioned earlier on our guidance and we're we're sticking to our guidance for the rest of this year. We've got a lot of wood to chop, but we've got an excellent management team that knows exactly what they're doing.
Pulling out all the stops across the supply chain.
And we're very you know we were experiencing at that plans plans plans and we're not the only ones.
Everybody should be doing it but I'm really proud of US yeah, you know hitting our numbers and exceeding them in most cases.
Great. Okay. Thanks, guys I appreciate it.
Thanks Jay.
Our next question comes from the line of Mike Dahl with RBC capital markets. Please proceed with your question.
Good morning, Thanks for taking my questions.
First one I appreciate all the color on some of the financing environment.
It's kind of a two part follow up.
So it seems pretty clear that you're scrubbing the backlog thoroughly in terms of looking at those DTI requirements and true cut offs.
You talked about rate box.
I'm wondering what portion of your backlog or are you able to get into extended rate locks, where theyre not really absorbing full brunt of what's happened over the past months and then the second part is are you seeing any other changes in terms of either ltvs or loan types adjustable rate versus.
<unk> fixed.
<unk> else on that side that buyers are kind of using to offset.
The full impact of what we've seen on the headline rates.
Yeah, Mike all good questions relative to the latter first we starting to see some inquiries around adjustable rate, but nobody is really engaging and we haven't seen anybody shift to any alternate products everybody is still firmly plant.
It into a 30 year fixed mode and mentality right now, but we do anticipate that that could become a.
Something that is a desirable in the future. So we will keep you. We'll keep you posted on that relative to to locks I don't have it broken down.
By exact longer term locks, but right now we've got for our Q2 backlog, 70% of that in a locked position and then as we go out into Q3, so you're starting to look at some of those longer term rate locks were in the mid 30 percents relative.
To locked.
Buyer.
Okay. That's very helpful. Thank you.
And then Mike.
My second question is back on the demand side.
Syed.
I appreciate your kind of the moving pieces in your balance.
If we look back at.
Arguably arguably the last time, we see kind of a bump in the road was 18 19 and your sales pace was running about three of them and I know your product mix is just it environments.
But I guess in light of what you're kind of experienced in the past.
And arguably that may be.
<unk>.
How are you thinking about pace here, 60% above that 2018 19 level today, so maybe a.
What did you see how is April tracking, but when you talk about kind of acknowledging that there's there's probably going to be some some choppiness.
What is your framework for thinking about where were your pace should be.
So the pace and I think we mentioned in our remarks in April are similar to what we experienced in the first quarter. It's a good question. Mike. We continue to you know historically, we ran our business at our price point in the three to three and a half range for business planning.
We run it today at closer to three and a half for because our ASP and our growth of our non California deliveries is dominating the playbook as I mentioned earlier.
And we need to look at that and then you you know we assume better absorption. So yeah. We're enjoying some outsize absorption now, but you know as as the fed is as I said earlier, you know locked and loaded to continue to to tamper this inflation and bug and and and Theyre going.
To.
Put more some more you know calling on on the demand side of housing.
You know you'll see those pace has come down.
At least the way we're looking at it in our business planning and as Doug said earlier, where we're demonstrating that in our disciplined underwriting relative to our land acquisition. So we are underwriting to that three and a half to four and a half pace the interesting thing Mike and we.
We can talk about this for hours, we're almost getting up to the top of the hour. You know there is so many variables you've got the geopolitical concern you've got inflation, you've got interest rates, you've got gas prices, you've got a labor market. That's very very constrained you've got a supply chain you go back to 2018 there was.
We didn't we had a lot more supply.
There is the the resale market was was much greater Linda there is a lot of product available mortgage rates got into the low 555% range back in those days as you remember, Mike and it really tampered kind of pulled back demand. So all of these cycles, we go through our different.
I continue to believe on the macro basis that there are.
More there's more demand in this millennial group that we're still just tapping into and there's just no supply when you look at the resale of the new home side. The constraints that we are facing as new homebuilders are significant.
So when you factor all those things and yeah, we're gonna hit a bump in the road, but when you look at the long term macro.
I continue to think it's going to be very good for the new homebuilders.
Alright, Thanks, Doug I appreciate that.
Our next question comes from the line of Depot Ross cabin with Wells Fargo. Please proceed with your question.
Hi, good morning, everyone.
Just given all the supply chain comments I'm hearing from you.
Curious on your delivery.
Kittens Q2 sequentially. After there is a little lower versus historically in second half deliveries are on the higher side, even at mid point.
Curious what drives the confidence in keeping the full year guide range for closings at this time.
Also within are you, assuming any easing of supply of labor constraints and any color. There that you could provide on the confidence that you have in the second half.
Delivered EBIT Yeah. This is Doug I mean, the competencies our teams I mean, we we delivered on our guidance in the first quarter end and it is taking longer to build homes as Tom said, So we've got a very strong team and we have a very strong confidence in our guidance for the second quarter and the rest of the year.
Got it.
Clearly Doug.
And then Glenn you're preparing to get defensive here a little bit.
But how are you are but how about your vendors and ecosystem. I mean are you seeing maybe a land prices starting to maybe moderate given the rate headwind or any of your product suppliers of lenders getting a little bit more cautious.
Just curious what kind of defensive moves that you could also deploy showed a slowdown become kind of evident maybe later on the most.
Yeah whenever.
Well I'll take part of that question I mean land prices are a function of a land residual based on.
Current revenues and current costs and we underwrite to a very strict guidelines.
As I mentioned earlier talking Alan we're hitting singles now whenever we're looking at today really doesn't deliver until 'twenty five 'twenty six so we've got a very strong land position at a very.
Very very strong margin profile going into the next few years, which is another big difference by the way and then 2018 and in other cycles I mean, when Youre looking at you know.
Goalposts of 22 to 26, 28% of margins, that's a pretty good buffer going into an uncertain market environment, which is.
Our very strong land position that we own and control through 'twenty four or so.
Today's land prices are based on today's land residual.
Got it if I can sneak one quick one any thoughts on your April order trends.
And I'll leave it at that thank you very much and it was a great quarter. Thanks.
Yeah, we mentioned on the prepared remarks that so far in April .
<unk> been consistent with the first quarter on an absorption basis, so I'm continuing to see really strong demand in April .
Our next question comes from the line of Alex Rigel with B Riley. Please proceed with your question.
Thanks, guys.
My questions have been answered, but if you could just clarify.
Can you comment on how rates the rising rates that impact in your new community count opening plans.
It has not impacted our new community opening plan.
And then any quick thoughts on average selling prices.
The strength in pricing, obviously pricing has been really really strong for the last couple of years.
With.
Existing home inventory so low.
Do you still feel like you've got a little bit of pricing power out there to cover.
Additional or future rising building material costs.
Through the first quarter, we were able to cover our cost Alex.
With price increases and so we you know based on our strong buyer profile that that we've mentioned today on the call. We still feel that there is some pricing power out there.
But we're.
We're really in the environment, we're trying to cover costs, we're not trying to raise price just to raise price right now because we are being mindful of affordability.
Yeah.
Excellent very helpful. Thank you.
Our next question comes from the line of Alex Barron with housing Research Center. Please proceed with your question.
Good morning, gentlemen, and great great results.
I wanted to ask whether you guys track.
What percentage of the buyers.
You're seeing are coming in from a different state.
That's my first question. My second question is you know assuming rates were to keep moving higher from here. How are you guys thinking about your product in the future are you going to be building smaller homes or how would you know.
<unk> yeah.
<unk> of higher interest rates to try to keep their homes affordable. Thanks.
I'll take Alex's, Doug I'll take the latter part of that question first because it's actually strategically something we focus on several years ago by diversifying our product offering.
The offering you know.
I mentioned earlier, 70% of our deliveries are going to be outside of California by the end of 'twenty. Four we have intentionally focus on more of that entry level premium first move up.
Across the nation kind of and even in California. So I think we mentioned in the first call. You know we're about $100000, maybe it was $200000 I can't remember the exact number we we we have very affordable price points in the inland Empire, even down in San Diego, we're really out of the luxury our homebuilding business, so and when you.
Think about our product offering and where it's located it affords a buyer when you you've got average incomes wetland of $188000. We have very strong buyer profile at that kind of main and main cut type of real estate location. So as interest rates go up.
As Tom mentioned, we've stress tested at 6%, but our buyer profile versus being at the very very entry level, they're very payment sensitive no doubt about it we don't we're not we're not hitting that that type of buyer profile. So my personal opinion is we're set up very well for a higher interest rate.
And remember.
Hey by the way some of the stuff you're right as is great I Love Reading. Your your your reports I think they are spot on in and one of the things you're going to see is the consumer eventually will be going as we saw what 10 15 years ago, Tom and Linda variable rate programs and so forth.
So I think we're positioned really in our sweet spot going forward in a higher interest rate environment. Linda you can talk about the other question, yes, Alex in terms of the out of state buyers in the first quarter, 16% of all homebuyers head on the Dresden. Another state when they purchased their home with us and that's up from 14.
In the first quarter of last year.
Some interesting changes in the mix of locations for US we were seeing more out of state buyers and this quota, Maryland, and then Las Vegas Route Raleigh, and Charlotte and then Houston and Austin, you may recall that.
In Austin out of state buyers really peaked for us in the fourth quarter of 2020 with a less 80 515 about bias, but thats, a moderating somewhat with that 22% at Boston by its out of state this quota.
Okay great.
If I could ask one more.
Sure in terms of.
That's fair.
What's your policy in terms of selling to investors and if you do sell to them you know what what percentage of your maximum I guess.
Alex. Thank you. This is Linda that's a really great question and we do not sell to Linda says, we do a very thorough job of pre qualifying all of our home buyers through our affiliate mortgage company prices and purchasing so it would be less than 1% of our buyers to our investors.
And we've been able to maintain that very consistently scrubbing all prequalified by us prior to writing purchase agreements.
Okay excellent and Beth best of luck for the year. Thank you.
Thanks, Alex.
Yeah.
There are no further questions in the queue I'd like to hand, the call back to Mr. Bauer for closing remarks.
We're at the top of the hour is a good hour of discussion and I appreciate everybody joining us today and we look forward to.
Up with everybody. After Q2, thank you and have a great weekend.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.