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Edited Transcript of TPH earnings conference call or presentation 18-Feb-20 10:00pm GMT

Q4 2019 TRI Pointe Group Inc Earnings Call

Irvine Mar 13, 2020 (Thomson StreetEvents) -- Edited Transcript of TRI Pointe Group Inc earnings conference call or presentation Tuesday, February 18, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Martin

TRI Pointe Group, Inc. - Head of IR & VP of Finance

* Douglas F. Bauer

TRI Pointe Group, Inc. - CEO & Director

* Glenn J. Keeler

TRI Pointe Group, Inc. - CFO, CAO, Treasurer & VP

* Thomas J. Mitchell

TRI Pointe Group, Inc. - President & COO

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Conference Call Participants

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* James A. Morrish

Evercore ISI Institutional Equities, Research Division - Analyst

* Jay McCanless

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Michael Glaser Dahl

RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products

* Ryan Christopher Gilbert

BTIG, LLC, Research Division - Director & Homebuilding Analyst

* Thomas Patrick Maguire

Zelman & Associates LLC - Senior Research Associate

* Truman Andrew Patterson

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to the TRI Pointe Group Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Chris Martin, VP of Finance. Mr. Martin, you may begin.

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Christopher J. Martin, TRI Pointe Group, Inc. - Head of IR & VP of Finance [2]

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Good afternoon, and welcome to TRI Pointe Group's earnings conference call. Earlier today, the company released its financial results for the fourth quarter and full year 2019. Documents detailing these results, including a slide deck under the presentations tab, are available on the company Investor Relations website at www.tripointegroup.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call which are not historical facts, including statements concerning future financial and operating performance, are forward-looking statements that involve risks and uncertainties. A discussion of such risks and uncertainties and other important factors that could cause actual financial and operating results to differ materially from those described in the forward-looking statements are detailed in the company's filings made with the SEC, including in its most recent annual report on Form 10-K and its quarterly reports on Form 10-Q.

Except as required by law, the company undertakes no duty to update these forward-looking statements that are made during the course of this call. Additionally, non-GAAP financial measures will be discussed on this conference call. Reconciliations of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through TRI Pointe's website and its filings with the SEC.

Hosting the call today is 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 Mamet, the company's Chief Marketing Officer.

With that, I will now turn the call over to Doug.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [3]

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Thanks, Chris, and good afternoon, and thank you for joining us today as we go over our results for the fourth quarter and full year 2019, discuss current market trends and provide some insight into the future of our company. TRI Pointe Group delivered outstanding results for the fourth quarter and full year 2019. Highlights from the fourth quarter included earnings per diluted share of $0.85, up 21% year-over-year. Net new home orders of 1,235, an increase of 52%, with an absorption pace of 2.9 orders per community per month, and a quarter ending backlog of 1,752 homes, representing a 31% increase over last year.

We are extremely proud of these results and that we met or exceeded our stated guidance for both deliveries and margins for the fourth quarter and full year 2019. Overall, market conditions were strong in all of our markets at both the entry-level and move-up product segments, as demonstrated by the increased orders and absorption pace.

A consistent theme we've witnessed is improved traffic and demand at our core locations driven by a supply-constrained resale market. These favorable trends have continued through January with orders up 71% year-over-year, giving us great optimism as we move into the spring selling season. We continue to see a very favorable fundamental backdrop for our business, capitalize on a pent-up demand, low supply and a great interest rate environment that is helping affordability.

TRI Pointe Group is well positioned to capitalize on these favorable industry trends thanks to our emphasis on core locations and our premium brand positioning, which allows us to differentiate our homes from the competition through thoughtful design, innovation and customer experience. Great location and product differentiation have been a foundation of TRI Pointe strategy since our beginning, and we will continue to focus on these areas as we diversify our product offerings to achieve lower price points to address a deeper pool of buyers.

We feel that there is a great opportunity to expand the appeal of our premium brand approach to an even wider audience through smaller floor plans and higher density projects. These projects will cater to millennials who want the convenience and connectivity of a home with the latest smart home technology, baby boomers interested in downsizing into a turnkey lifestyle and first-time homebuyers looking for a great location and a thoughtfully designed affordable home. As a result of this shift, we expect first-time buyers and active adults will represent 40% and 10% of our buyer profile, respectively, by 2022, up from today's 30% and 3% respective mix.

As our product mix evolves over the next few years, so too will our geographic mix. While California continues to be a strong market for us, we have made a concerted effort over the last few years to grow our presence in several of our existing markets outside of the state and establish a foothold in a handful of new markets in an effort to better diversify our operations. This geographic shift will allow us to achieve better efficiencies of scale at the national level and lessen the impact that any one market has on our company results.

In the Carolinas, we started our organic Charlotte and Raleigh presence in November 2018. As of year-end 2019, we have approximately 1,700 lots owned and controlled, representing 22 future communities, 3 of which will open in the second half of 2020. Arizona and Texas are great examples of markets where we believe we can double our annual deliveries over the next 3 to 4 years.

In each of our divisions, which are all located in the top 25 homebuilding markets, our goal is to be a top 10 builder, which is currently the case in many of the markets we build in. In addition, we have strategically managed our balance sheet to allow us to expand our geographic presence through accretive acquisitions, and we will continue to look for opportunities that make sense from an economic, strategic and cultural standpoint.

Our optimism and position with respect to the California markets is very strong. Traffic, orders and absorptions have improved in all of our California markets, with orders up 37% and an absorption pace of 3 orders per community per month in the fourth quarter. We continue to acquire new projects in great core locations at more affordable price points. The redesign and implementation of our long-term assets have proven to be very successful, and we continue to develop and bring these assets to market.

In addition to our active long-term assets, we are excited to open Atwell, our new master plan in Banning as well as starting land development at our Meadowood community in San Diego County. These long-term assets are a key differentiator from our competitors and provide us with a very strong land pipeline with a favorable cost basis in several highly constrained land markets for years to come.

We are also extremely pleased with our organic start-up efforts in Sacramento as the 3 new project openings are off to a strong start. We believe the Sacramento division will further diversify and strengthen our California presence. With this in mind, we remain bullish on the outlook for California, given its strong and vibrant economy and undersupplied housing market and the desirable quality of life that is unique to California.

In summary, TRI Pointe Group is in a great position to capitalize on the strong market conditions of today, and we're taking steps to make sure we are positioned to succeed in the housing market of tomorrow. Our premium brand strategy at lower price points, coupled with our ongoing efforts to diversify our company from a geographic standpoint, give us great optimism about the future of our company. In addition, our strong balance sheet gives us the financial flexibility to both reinvest in our business and return capital to shareholders via opportunistic share repurchases over time evidenced by the 6.1 million shares we repurchased in 2019.

With that, I'd like to turn it over to Glenn, who will provide more detail on our results for the fourth quarter and full year.

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Glenn J. Keeler, TRI Pointe Group, Inc. - CFO, CAO, Treasurer & VP [4]

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Thanks, Doug, and good afternoon, everyone. I'm going to highlight some of our results and key financial metrics for the fourth quarter and then finish my remarks with our expectations and outlook for the first quarter and full year 2020. At times, I will be referring to certain information from our slide deck that is posted on our website, as Chris mentioned earlier.

Slide 6 of the earnings call deck provides some of the financial and operational highlights from our fourth quarter. Net new home orders for the quarter were up 52% year-over-year due to a 40% increase in monthly absorption rate and a 9% increase in average selling community. The increase in monthly absorption rate to 2.9 reflected stronger-than-normal seasonal market conditions during the fourth quarter in each of our markets. Those strong market conditions have carried over into the first quarter, with orders up 71% in January 2020 compared to 2019 as we achieved the highest January absorption pace in our company's history at 3.9 orders per community.

As Doug mentioned, we exceeded the high end of our stated guidance, delivering 1,795 homes in the fourth quarter. This resulted in home sales revenue of $1.1 billion, which was a 2% increase year-over-year. Homebuilding gross margin percentage of 21.9% also exceeded the high end of our stated guidance for the quarter. Adjusted homebuilding gross margin, which excludes interest, impairments and deposit write-off, increased 140 basis points year-over-year to 26.2%. SG&A expense as a percentage of home sales revenue came in at 9.2%, which was a 10 basis point increase year-over-year.

We continue to focus on our -- on expanding our financial services income and are proud to report a 36% year-over-year increase in the income from our mortgage, title, escrow and insurance services. Our tax rate for the quarter improved 400 basis points, 21.8%, largely due to the recent approval of the energy tax credit. Finally, net income came in at $118 million or $0.85 per diluted share compared to $99 million or $0.70 per diluted share in the prior year.

Moving on to our active selling communities. During the fourth quarter, the company opened 5 new communities, and as a result of our strong sales success during the fourth quarter, closed out of 18 to end the year with 137 active selling communities. In 2020, we have already opened 6 new communities in January and anticipate opening another 9 during the balance of the quarter for a total of 15 new communities in the quarter. We expect to close 7 communities to end the first quarter with 145 active selling communities.

For the full year 2020, we anticipate opening over 60 new communities, which is a 40% increase compared to the 43 we opened in 2019. And after factoring in community closings, we expect our ending active selling community count will be in the range of 140 to 145.

Looking out to 2021, with the continued growth in our existing markets and our expansion into markets like Sacramento and the Carolinas, we expect to see more meaningful community count growth.

At quarter end, we owned or controlled approximately 30,000 lots. As of year-end, 24% of our lot supply was under option versus 17% in 2018 and 12% in 2017. A detailed breakdown of our lots owned will be reflected in our annual report on Form 10-K, which will be filed this week. In addition, there's a summary of lots owned or controlled by state on Page 32 in the slide deck.

Turning to the balance sheet. At year-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 37% and the ratio of net debt to net capital of 30.4%. For the full year 2019, we generated $316 million in cash flow from operations and ended the year with $896 million of liquidity, consisting of $329 million of cash on hand and $567 million available under our unsecured revolving credit facility.

With respect to our stock repurchase program, during the fourth quarter, we repurchased 3.1 million shares for an aggregate dollar value of $47 million. And as Doug mentioned, for the full year, the company repurchased approximately 6.1 million shares for a total aggregate dollar amount of $89 million. Last week, we replaced our previous stock repurchase program with a new $200 million authorization that will expire in March of 2021.

Now I'd like to summarize our outlook for the first quarter and full year 2020. For the first quarter of 2020, the company anticipates delivering between 875 and 950 homes at an average sales price of approximately $600,000. Homebuilding gross margin percentage is expected to be in the range of 19.5% to 20.5%. And SG&A expense as a percentage of home sales revenue is expected to be approximately 15% for the first quarter. Our SG&A expense as a percentage of home sales revenue normally runs higher in the first half of the year due to the lower delivery volume compared to the back half of the year.

For the full year, we anticipate delivering between 5,100 and 5,300 homes at an average sales price of $605,000 to $615,000. Homebuilding gross margin percentage is expected to be in the range of 19.5% to 20.5% for the full year, while our SG&A expense as a percentage of home sales revenue is expected to be approximately 11.5%. Finally, the company is forecasting its effective tax rate for both the first quarter and full year to be approximately 25%.

I will now turn the call back over to Doug for some closing remarks.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [5]

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Thanks, Glenn. In conclusion, we are very pleased with our results for the fourth quarter and for the full year 2019, particularly in light of how the year began. Order activity rebounded from a period of softness and stayed consistently strong throughout the year, resulting in a 31% higher unit backlog to start 2020 as compared to 2019. We met or exceeded our stated guidance each quarter and delivered on the full year outlook we set forth at the beginning of 2019, demonstrating an ability to plan, manage and forecast our business on a consistent basis.

We have strong momentum as we head into the spring selling season and a strategy in place that positions TRI Pointe for success for years to come, and based on current market conditions, enables shareholder value to increase over time. These factors, coupled with one of the most experienced management teams in the industry and a healthy balance sheet have me excited for what the future holds.

Finally, I would like to thank our team members for everything they did to make 2019 a success. Your hard work, collaborative energy and ability to adapt to an ever-changing housing landscape are what make TRI Pointe great.

That concludes our prepared remarks, and now we'll be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Thomas Maguire, Zelman & Associates.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Research Associate [2]

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Nice job on the strong quarter and impressive finish to the year. I know there's a lot of work to be done between now and year-end, and we have the selling season coming up, which can move things dramatically. But I wanted to drill on the full year closings' guidance and just thinking about that being up in the mid-single-digit range, is there anything you see on the horizon with backlog up 30% plus? And orders really strong in the quarter and continuing into January, that would imply things are going to slow? Or just qualitatively, can you talk about the moving pieces going into that outlook?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [3]

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Sure. This is Doug. Our absorption pace in 2019 -- that is Thomas asking the question, is that right?

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Research Associate [4]

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Yes, sir.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [5]

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Yes, was 3.1%. For 2020, we -- our plan is to have an absorption pace of 3.2%. Obviously, early results for 2020 are very good. We're coming in with a strong backlog. But 1.5 months doesn't make a year, especially going into the back half of the year with an election and uncertainty. But should orders continue to be strong through June, July, we would anticipate upside to our deliveries and possibly margins. We are also straddling community growth. We have 60 communities we're opening this year that we gave guidance, they're balanced between the first half and the second half. It's not a perfect science when those things come online. So it's something we totally balance as we go forward. And then 2021, we've got an increase as we look into the new year. So it's all a matter of continue to fine-tune our ability to introduce new communities going into the rest of this year and next year.

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Thomas Patrick Maguire, Zelman & Associates LLC - Senior Research Associate [6]

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Got it. That makes sense. And I think being conservative is prudent at this point. And then if we just shift to the margin. There's mix in the longer-dated assets still swinging things around a little bit quarter-to-quarter. Can you just talk about how you feel about pricing costs in the market now? And I think you just alluded to it, but if we just took out all the impact, what kind of margin environment directionally does it feel like we're in today? And if there's any pricing power at all?

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Glenn J. Keeler, TRI Pointe Group, Inc. - CFO, CAO, Treasurer & VP [7]

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On the margin side -- Thomas, this is Glenn. On the margin side, I don't think you'll see the same lumpiness in our margin that you saw as in 2019, as you'll see in 2020. I think it will be a little bit more consistent along the lines of our guidance in each quarter. And on the cost side, we're still seeing some headwinds. Obviously, lumber, labor, it's not getting any easier. But I think we have a handle on it, and I don't think it's as big of a headwind as it has been in years' time.

I don't know, Tom, if you want to add anything to that?

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Thomas J. Mitchell, TRI Pointe Group, Inc. - President & COO [8]

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Yes, Thomas, this is Tom. I mean overall, we feel really good about where the market is positioned. Most of our markets are seeing the ability to have some price elasticity. Without a doubt, incentives are trending downward. And where we have strong market conditions, you're really just seeing the traditional closing costs, financing incentives in those marketplaces. So we anticipate, as demand holds strong through the spring selling season, an ability to work on the price equation to maximize our potential there.

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Operator [9]

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Our next question is from Truman Patterson of Wells Fargo.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [10]

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Nice results. First, I wanted to piggyback a little bit on that closing guidance, up only -- or up 5% to 6%. I just wanted to follow up on that. There is nothing structural that's kind of keeping your closing guidance capped at only 5% to 6% growth. I'm thinking land or labor constraints. There's nothing along those lines that are necessarily keeping you all from thinking that it could go above that?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [11]

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No, not at all, Truman. But as I said, I mean, we have our business plan at 3.2 monthly orders. The first 45 days are good. I'm not ready to mail in the results for 2020. We've got a lot of work ahead of us, but it's encouraging as we head into the spring selling season. In addition, having 60 new communities to open this year, half of which are in the back half of the year that really affects '21 and beyond. So all those factors come in play as you look at running your business.

One of the things that we focus in here at TRI Pointe is to be a little more predictable, steadier as you go. Every year, continue to see some steady growth. And that's -- we'll take a good market and hopefully ride maybe some upside on both deliveries and margins by the end of the year.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [12]

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Okay, okay. And then California orders were up nicely, 37%. Could you just break out a bit more detail on the more affordable price points, more inland versus the coastal market health? Are you seeing a return of the international buyer on the coast? And then one other item that I think is making your gross margin cadence a little bit more even than maybe past quarters is the Pacific Highlands Ranch deliveries. Could you just give us what kind of pipeline, what kind of land pipeline you have there ahead of you?

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Thomas J. Mitchell, TRI Pointe Group, Inc. - President & COO [13]

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Yes. Truman, this is Tom. All good questions. And as you would expect, the results relative to the absorption pace and demand from entry-level through luxury and active adult is about what you would expect as you move up in price points. Entry-level and first- and second-time move-up has been very strong throughout California. And with the exception of Pacific Highlands Ranch, we have very little in the luxury category. So we feel we're really well positioned throughout California. And certainly, the buyer demand has been strong.

Relative to the foreign national buyers specifically, we really saw that tail off about 18 months ago. So for the last 12 months, it hasn't had a significant impact on our business. Overall, it's only about 7% of our orders for the annual basis for 2019. So we really haven't seen much of a change relative to that. But fundamentally, we just feel really good about our positioning.

I think in the prepared remarks, we mentioned the opening of 2 new long-term California legacy assets. One would be Atwell out in Banning, and that's kind of a replacement product for our very successful Sundance community in Beaumont. So we're excited to get 5 new products into the market in the second half of this year. And then also, we mentioned about land development being underway in Meadowood, which is in North San Diego County Inland, which is going to be a very, very affordable alternative, and we're super excited about that. And that will be opening the second half of 2021.

Relative to the amount of lots that we have remaining at PHR, we are managing that to optimize that over the next several years, and we're down to just under about 400 lots remaining there.

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Glenn J. Keeler, TRI Pointe Group, Inc. - CFO, CAO, Treasurer & VP [14]

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Yes. I don't have it in front of me, but you could review our project table in the 10-K when it's filed later this week, Truman, and it'll show what's left at Pacific Highlands Ranch.

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Operator [15]

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Our next question is from Stephen Kim, Evercore ISI.

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [16]

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It's actually Trey on for Steve. So first part is, I didn't -- I haven't caught if you guys gave your land spend for the quarter. And then just broadly about your land spend, both acquisition and development, really, over the past 4 or 5 quarters, it seemed to have dropped in terms of year-over-year growth and relative to kind of what your peers have been doing. Just wondering what your thoughts are behind the moderation. And I know you kind of talked about [taking] out this year and expanding next year. But I'm wondering how this moderation in land spend that we're seeing now is driving this year flat, and maybe you see an inflection going forward.

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Glenn J. Keeler, TRI Pointe Group, Inc. - CFO, CAO, Treasurer & VP [17]

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So let me give you some of the details. We didn't give it on the call. But in Q4, we spent about $114 million on land acquisition and $45 million in development. Next year, we're estimating about $900 million to $1 billion in total land ac and land development. And the number in '19 was down a little bit compared to years past, but I think that reflects the slower market that we saw in the back half of '18, where we just saw less land deals during that period of time.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [18]

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And I'd also add to it with our appetite of growing outside of California, the absolute dollars actually have gone down. And I think we also would note that our percentage of lot option has increased to 24%. So one of the things that we're spending a lot of time on is looking at ways to maximize our returns through land banking, partnerships with other builders and rolling options, so we can maximize the return. So those all come into play as far as dollars spent. As we look forward into 2020, we do project to be cash flow positive, and we're blessed to be cash flow positive by the long-term assets to generate a significant amount of cash flow for us from California.

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James A. Morrish, Evercore ISI Institutional Equities, Research Division - Analyst [19]

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Okay. And I want to mention on cap allocation a bit. You highlighted in the press release a new repurchase program of $200 million and you made the comment how it will be used opportunistically. So I'm wondering how -- if you could reconcile those comments with your comments last quarter about how -- it seemed like you were trying to be more aggressive on the M&A front. And if you are ultimately active M&A, would we also expect that full $200 million to be used?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [20]

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Well, when you look at the capital allocation strategy for TRI Pointe, we have $200 million available to us for share repurchases that we will look at opportunistically. We do generate a lot of cash. Also, we will look at accretive M&A opportunities in markets, especially markets in the Southeast that we're targeting right now. And then thirdly, look at our own land acquisition efforts to grow our division.

So it's a balanced approach, and we'll continue to look at it that way while we keep our balance sheet very strong. We're very proud of the fact that our net debt-to-cap was roughly 30% at year-end, which gives us a lot of -- it's all powder available for acquisitions or other means of growth.

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Operator [21]

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Our next question is from Jay McCanless, Wedbush.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [22]

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The first question I had, the gross margin guidance for the first quarter, it seems like with roughly 45 days left to go, 19.5% to 20.5% seems like a big range. Are you guys trying to close out some communities? Or what's going on there?

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Glenn J. Keeler, TRI Pointe Group, Inc. - CFO, CAO, Treasurer & VP [23]

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No, it's just -- we've talked about before, there is -- a big impact to our margin are the long-term California assets. And so if some of those move in or out of the quarter, it could have an impact, especially because the first quarter is a lower delivery number for us. So it just has a bigger impact on the number, which is why we went with the wider range.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [24]

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Okay. The second question I had, I was wondering for both the quarter and -- for 4Q '19 and then also for the full year, your impairments and options were up pretty meaningfully over the prior year. What's the split on those numbers between impairments versus lot options? And did some of this increase -- is that -- is part of this increase the reason that you're thinking community count is basically going to be flat for the full year?

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Glenn J. Keeler, TRI Pointe Group, Inc. - CFO, CAO, Treasurer & VP [25]

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It doesn't really have any impact on community count. We could break down that. So on the fourth quarter, it was roughly about $18 million of impairment and deposit write-off, $7 million of that related to a legacy asset in Sacramento that we purchased as part of the WRECO transaction that's been on hold. And now that we have a Sacramento team up there, it made sense to activate that. So that's actually an added community going forward for us because we're able to activate that now.

And then we had about $3 million for some underperforming projects in Houston that were just towards the end of their life and it made sense to lower some pricing and get out. It doesn't reflect the broader Houston market. Our margins in Houston are very strong. And finally, we had some deposits in the Seattle area that we walked from, that was kind of the remainder of the balance. And those were, again, kind of unique transactions that don't really reflect on our community count going forward.

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Thomas J. Mitchell, TRI Pointe Group, Inc. - President & COO [26]

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Yes. Jay, this is Tom. I can give you a little more color. Up in Seattle, it's an extremely complex entitlement arena. And those that we walked from were really entitlement-related issues or delays, where it just didn't make economic sense to try to keep pushing that ball forward. Relative to the project in Sacramento, we're excited about that. That's just a small single asset, 94 small lots, single-family detached. That's going to be great for us getting that into the marketplace.

Our story is not too much different on the softness in community count, Q3, Q4 of 2018 had a significant impact on everyone. And when that happened, we just pulled our foot off the gas a little bit. But by Q2 of 2019, everybody was back in play. And that's why we're guiding that 2021 and beyond we'll have more significant community count growth going forward.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [27]

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Got it. The last question I had, I couldn't write fast enough when you were talking about where you guys expect active adult and first-time buyer of market shares to go by 2022. Could you all give that data again? And also, if there's any geographical -- favoring one geography over another, any kind of color on that would be great.

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Glenn J. Keeler, TRI Pointe Group, Inc. - CFO, CAO, Treasurer & VP [28]

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Sure. I think we said we were moving first-time buyer up to 40% versus around 30% is where it's at now, and active adult to 10% versus 3%, which is where it's at now.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [29]

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And that's -- Jay, this is Doug. I mean that's across the country. There's -- obviously, we've got a big exposure here in California, but we also are very active on the East Coast with our Winchester brand. So it's across the country.

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Operator [30]

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Our next question is from Mike Dahl, RBC Capital Markets.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [31]

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First question is great results in terms of the recent order strength. I guess if I'm looking at it seasonally based on the start to the year, even if you really dial down the normal seasonal progression in Feb and March, you'd be pacing above 4 on absorption for the first quarter, which is even better than what we saw in '18, which I think was a peak. So with respect to doing a 4 in 1Q and the 3.2 for the year, I guess, just trying to reconcile how to think about the balance of the year and how much you're really looking to actively manage that pace down via incremental pricing versus just some sort of maybe more conservative assumption about market demand.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [32]

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Mike, this is Doug. I mean we're always managing both pricing and pace -- and margin and pace, I should say. And the other thing that -- and again, this is -- we give active community counts. But community counts are -- I mean, I don't know -- it's a little misleading because communities can end up closing out at different times, so then your whole number isn't going to be just 4.0. I mean there's different lives to these communities. So as we, I think, mentioned the number of communities that we'd opened, but we also talked about our active community count at the end of the year. So we're closing out a lot of communities this year, too. So that all has an effect on how you look at the overall business.

But as I said earlier, I mean, if the spring selling season through June, July, feeds into where we see it right now, we definitely will look at seeing some upside in deliveries. But it's not off the chart because you've got so many communities with so many lots left to build, while you're bringing on new communities. So it's -- we'll also be pushing margin as I mentioned in that comment as well. So it's partly art and a little bit of science.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [33]

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Fair enough. And I guess on the absorption point, are there -- to your comment on community count, are there any specific kind of larger projects that are particularly fast turning or fast paced that are closing out in the first half and being replaced by a different mix or a newer community where the absorption would start slower? And is that potentially driving some of that shift lower as well?

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Glenn J. Keeler, TRI Pointe Group, Inc. - CFO, CAO, Treasurer & VP [34]

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That's not always the case. I mean there's always some of that, but you're going to have that every year, though, in that mix, up and down. But in January, specifically, we did have a couple of really good openings which boosted that number pretty well. And so we've got 54 more to go openings this year. So it just depends on how all those hit. They're not all the same.

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Thomas J. Mitchell, TRI Pointe Group, Inc. - President & COO [35]

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Well, we don't want to downplay order pace either. We're really pleased with where we're at. And for the most part, we're getting that at a pretty broad range of products. So we're pleased and encouraged and hopeful that there is some upside to our guidance.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [36]

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Right. It's a great start. Particularly seeing that it sounds like it's pretty broad-based across geographies and price points. Last question on my end. I guess just back to the delivery question, and at the risk of beating the horse a little, the -- I understand some of the moving pieces and there's not always perfect visibility. But in terms of cycle times, could you quantify what you're seeing with cycle times right now and how that compares to what you were at last year?

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Thomas J. Mitchell, TRI Pointe Group, Inc. - President & COO [37]

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Yes. This is Tom, Mike. We have, again, varied conditions by marketplace. But we're certainly seeing the pressure with the labor force out there, and it's very competitive. I think our teams are doing a great job. But all in all, in some of the higher-volume markets, cycle times have continued to increase, and we're working to get more than our fair share of that labor pool to help us deliver the products that we need to make our plans happen. We're doing a really good job trying to manage our specs that we're bringing to the market as well. And we're certainly positioning ourselves to be ahead of it so that we're not going to have a 4Q crunch. So we're encouraged, but it is a constant battle on a week-to-week basis.

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Operator [38]

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(Operator Instructions) Our next question is from Carl Reichardt, BTIG.

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Ryan Christopher Gilbert, BTIG, LLC, Research Division - Director & Homebuilding Analyst [39]

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This is Ryan on for Carl. First question just on -- to the extent that you're seeing an ability to price over cost in the market currently, and if there's any product types or geographies where consumers seem particularly, I guess, receptive probably is the right word, but able to absorb price increases.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [40]

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Yes, this is Doug. I think our strongest market that has been able to see continued pricing lift would be Phoenix, but that's offset with cost increases, too. Last year, net in the quarter-to-date 2019, they had about a 4% pricing increase, but that was offsetting about a 2% to 3% cost increase, too. So that's the strongest market. The rest of the markets were either breakeven to slightly ahead on price. Many of our markets actually enjoyed a lot of cost savings. One of the things that we spent a lot of time last year is a lot of value-engineering initiatives. And many of our markets actually enjoyed cost savings as well.

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Thomas J. Mitchell, TRI Pointe Group, Inc. - President & COO [41]

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And Ryan, I would add that given the very favorable interest rate environment, it is a little easier to have the consumer absorb some of those price increases. And there's certainly a high degree of demand at all of our price points. But the entry-level, it really helps the qualification factor. So they're out in force right now.

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Ryan Christopher Gilbert, BTIG, LLC, Research Division - Director & Homebuilding Analyst [42]

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Okay. Got it. And then, I guess, just on the affordable communities that you've been opening, I think you said that they're pretty geographically dispersed. But is there any market in particular where you've had particular success opening those communities? And how does absorption pace compare with your core move-up product?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [43]

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So year-to-date 2019 absorption pace, entry-level was 4.2; move-up was 2.9; luxury, 2.6; and active adult, 1.8. So that was year-to-date 2019, which pretty much all trended better than 2018, except for active adult.

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Thomas J. Mitchell, TRI Pointe Group, Inc. - President & COO [44]

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And then at both of those product levels, entry and early move-up, Phoenix has been a strong performer for us. As Doug mentioned, the Vegas market also had [strong] performance in those product types. As well as California, Inland Empire and our San Diego County both performed very well.

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Operator [45]

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We have reached the end of the question-and-answer session. I will now turn the call back over to Doug Bauer for closing remarks.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [46]

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Well, thank you for joining us on today's call. We look forward to sharing our results after the first quarter coming up here in April. So thank you very much, and have a great week. Thank you.

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Operator [47]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.