Greetings, and welcome to TRI Pointe Group's Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Martin, Investor Relations. Thank you. You may begin.

Good morning, and welcome to the TRI Pointe Group Earnings Conference Call. Earlier today, the company released its financial results for the third quarter of 2019. Documents detailing these results, including a slide deck under the Presentations tab are available on the company's 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 these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through TRI Pointe's website and in its filings with the SEC. Hosting the call today is Doug Bauer, the company's Chief Executive Officer; Mike Grubbs, the company's Chief Financial Officer; Tom Mitchell, the company's Chief Operating Officer and President; and Glenn Keeler, the company's Chief Accounting Officer. With that I will now turn the call over to Doug.

Thanks, Chris. Good morning, everyone and thank you for joining us today as we go over our results for the third quarter of 2019. And update you on our nextgen strategy and discuss current market trends. TRI Pointe Group delivered strong results and had an outstanding third quarter as we exceeded our stated guidance for deliveries, average sales price, gross margins and SG&A leverage. We continue to see improvements in our business from our focus on operational efficiency, including our 12 point sales and marketing objectives. Order trends remained positive in all our markets, with strong momentum throughout the quarter as evidenced by 25% year-over-year increase driven in part by an 8% improvement in absorption rate. The combination of lower mortgage rates, elevated consumer confidence and tight existing home supply has created a favorable environment for our industry. TRI Pointe Group has taken advantage of this positive backdrop with our premium brand strategy. The focus is on design, innovation and the customer experience to differentiate ourselves from the competition while providing value to our customers. We also made further progress during the quarter in our efforts to grow and diversify our business from both a geographic and product offering standpoint as part of our next-gen strategy with a goal of $6 billion in annual revenue. A large component of that growth will come from increased volume and market share in all of our existing market. This will be augmented by entering new markets through either organic expansion or M&A. In California, we continue to leverage our long-term legacy land position with a number of new communities that offer multiple price points and product segments. Our new land purchases complement our existing pipeline and our focus on core locations with affordable price point. As we look at our California operation and…

Thanks, Doug. I would also like to welcome everyone to today's call. I'm going to highlight some of our results and key financial metrics for the third quarter, and then finish my remarks with an update on our expectations and outlook for the fourth quarter and full year 2019. At times we'll be referring to certain information from our slide deck posted on our website that Chris mentioned earlier. Slide 6 of the earnings call slide deck provide some of the financial and operational highlights from our third quarter. Our home sales revenue was $746 million for the quarter on 1,187 homes delivered at an average sales price of $629,000. Our homebuilding gross margin percentage for the quarter was 22.6% and our SG&A expense as a percentage of home sales revenue was 11.6%. Net income came in at $63 million or $0.44 per diluted share. As for our overall selling communities, during the third quarter, we opened 15 new communities, three in California, three in Texas, two in Maryland and two in Virginia, two in Nevada, two in Washington and one in Arizona. We closed 11 communities resulting in an ending active selling community count of 150. Our active selling communities at the end of the quarter are shown by State on Slide 7. For the quarter, net new home orders increased 25% on a 16% increase in average selling communities. Our overall monthly absorption rate of 2.9 homes per community was an increase of 8% compared to the same quarter in the prior year. Our new home orders are shown by State on Slide 8, and you can see the historical monthly cadence of orders on Slide 28. So far through today, October orders are up 45% year-over-year. We ended the third quarter with 2,312 homes in backlog, up…

Thanks, Mike. In conclusion, I'm very pleased with our results this quarter. Again, we exceeded our stated guidance in all of our key operational metrics for the quarter and are poised to deliver on our original full-year guidance that we gave at the beginning of the year. We posted a 25% increase in overall new home orders, which includes a 26% increase in orders in California. We also made further progress towards our goal of growing TRI Pointe Group into a stronger and more diversified homebuilder. Our quality home, customer experience and customer satisfaction continues to drive referrals sale. We remain confident in our outlook for the homebuilding industry, as well as our company's balance sheet and liquidity. Our top-tier management teams have as well positioned their focus on growing our business while maintaining the flexibility of a modest leverage structure and opportunistic share repurchases over time. In closing, I want to thank all of our TRI Pointe Group team members on an excellent quarter while remaining steadfast in bringing the year towards a successful close. That concludes my prepared remarks and we'll be happy to take your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Hey guys, good morning. Congrats on the strong results and good quarter. Doug, I guess, first question most importantly, wanted to just check-in and see how you and the company and employees are doing with all these various fires in California and less importantly whether there has been any impact to operations as a result of that?

I'll take a quick crack in terms here to - first of all our thoughts and prayers are with all the firefighters and families affected. We actually had a young Assistant Superintendent affected from one of the earlier fires a couple - about a month ago, but he and his family are doing fine. As far as their operations, they have not been affected. PG&E up in Northern California has always been victorious except in their meters. So I don't think anything has changed in the 30 years that I've been doing this business in California. But unfortunately for all our communities, everything is okay and our people are most importantly are okay and just our thoughts and prayers are out with everybody. Unfortunately, California has got fires and the rest of the world has got hurricanes and tornadoes and other things like that. So hopefully, we can move on and get some better weather systems coming through the area.

I appreciate that. And good luck with everything there. Second question, you have really strong margin performance this quarter and obviously some of that was mix, but it seems like it was even a bit stronger than you guys were anticipating. I was hoping maybe you could just talk a little bit about what you're seeing in general on the margin front. Maybe looking at the portfolio, excluding the long-dated California assets, what has the trend been there and what does it look like in backlog? And I guess just more broadly heading into 2020. Should we expect a similar year of volatility in terms of the mix from these communities or do you think you're entering a point now where the flow-through should be a little bit more consistent or stable from quarter-to-quarter?

We certainly do see that a lot less volatility moving forward into 2020 as California has obviously had better sales. That's what really drives their margins. More so when you look at margins in general. I mean, California is typically about 24% and margins outside of California around 16% right now. That historically has been a little bit higher because of the additional incentives, a couple of hundred basis points of additional incentives that we saw this year from the back end of last year, as well as to the early part of this year, has brought those margins down outside of California. But we are seeing improving conditions in most of those markets outside of California. Clearly, our margin being 22.6% this quarter, a lot of that was related to pulling forward more of the long-term California assets into the quarter even more specifically PHR. I think we've highlighted before those margins are north of 30%. But we do see a little bit more consistent trend in the fourth quarter, first and second. At least what we see in our backlog right now for margins moving forward.

That's very helpful, thank you for that, Mike. And then if I could just squeeze in one last one. You guys mentioned that the product mix change if you will, your more dense product, smaller more affordable product. I'm just curious as you kind of look at these communities as they're opening up or as the product is introduced. Are you actually seeing a shift in the composition of your buyers? Are you seeing whether it's lower-income, younger buyers or is this more just a function of the same buyer pool, but perhaps just attracting more of those buyers to your communities and then kind of stealing those from other builders or the existing market?

Alan, good question. It's Tom. Certainly, we have not seen a significant shift in our buyer pool. Demographics remain fairly constant from prior years, but we are seeing a continued interest in a younger buyer segment. And so we are anticipating going forward that that is going to be an expanding makeup of our demographics.

Great. All right, guys, thanks a lot.

Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question.

Thanks a lot, guys and good quarter. A few things, so just a follow-up if I could on Alan's question about the margins and the impact of California and outside California; you mentioned that as you go forward here over the next few quarters, margins to be a lot more sustainable. I think you attributed that to the fact that the California related demand is strengthening. It seems I guess you're saying to a level that would allow you a more sustainable share of California deliveries. I just want to make sure I got that right. And then I wanted to ask about the non-California. You mentioned that there was incentives that were elevated. Is there a trend there that you anticipate towards diminishing incentives that would allow the margins to move up from the 16% rate in the near term or is that something that we'll just have to wait and see later into 2020?

Stephen, this is Mike again. Incentives, in general, were up about 200 basis points year-over-year for the quarter and kind of year-to-date for the company on deliveries. That was my comment related to incentives. We have seen incentives trending down. They're down about 20 basis points this quarter over last quarter on deliveries and we see that trend continuing. As it relates to California, margins are down a couple of hundred basis points in California, just like they are in outside market. So it wasn't incentives only outside of California. So we've seen that consistent trend. But we do see California and the long-term California assets delivering a more consistent pace, if you will, into 4Q, 1Q and 2Q. And that's why we think our margins are more representative of kind of the full-year range.

In addition, I'd add, Stephen, that for the divisions outside California as we look at our backlog and orders in certain markets, we've seen it will continue to see slight improvement in their margins over the next year or two as we continue to grow those divisions and they create more operational efficiencies.

All right. Embedded in that, is there any assumption that some of the new areas like close to my heart, North Carolina would come in at a higher than average margin for the outside of California part of your business? In other words, higher than the 16% level or would there be, what people used to call a dumb tax? Get in there and initially you kind of get a lower margin?

Well, we do underwrite through an 18% to 20% margin. I guess we'll find out if there is a dump tax when we actually start delivering houses there. But right now our full expectations is that our margins would be significantly above that 16% in Carolina and as we start delivering homes.

And I think to answer the dumb tax question which is the good term. That's a function of, in my mind the operating team and we've got a very strong team in the Carolinas. So I'm not anticipating much in, as you call it dumb tax and we are targeting margins north of 16% and we continue to underwrite deals 18% to 20% and higher depending on the risk profile of the asset and what we've got to deliver. So we're pretty optimistic about the Carolinas. Texas is also going to be a big growth market of ours. So we're going to see continued returns - increase in returns over the next several years as we expand into those markets that require less return capital more efficiently.

Sorry, Stephen. It's Tom. Just to add on one thing to that. In general, as we are opening new projects and bringing new projects into the marketplace, we expect a better margin profile than that 16%.

Great. No offense to a grand team. That dumb tax expression is a holdover from Bob Paul from years ago. The last one for me, related to opening up these next round of communities and your land spend has been pretty moderate for a while and I'm wondering whether or not the rate of land spend, not in absolute dollars. I think of it as a run rate of your deliveries or revenue, but relative to the size of your sales, should we be thinking that this is a level of land spend that you can sustain? Or, is it your anticipation that you're going to look to invest a higher level as you go forward to fund a greater acceleration in community count?

Yes, it's a great question, Stephen. This is Mike again. This year we're around $800 million to $900 million, I think our original guidance was probably $900 million to roughly $1 billion at the beginning of the year. But, as you can imagine, coming off the heels of the last six months, last year, we didn't tie up a lot of land at that point in time. So land spend is down this year comparatively to what we think it might be in 2020 and 2021, as we have expectations to grow, as Doug mentioned as part of the Next10, you'll see us spending more money in land spend moving into 2020 and 2021.

But, as we spend money land development, we're very cognizant of the balance sheet, focusing in on positive cash flow, keeping all our levers open to us. So, we are actually quite blast with the long-term assets to generate a lot of cash flow for the company, even though they're sitting out there and they're slowly generating cash flow. It's in earnings, I should say, the cash flow is very strong, so that helps our growth pattern for the next several years.

Great, thanks a lot, good job on the quarter.

Our next question comes from the line of Truman Patterson with Wells Fargo. Please proceed with your question.

Hi, good morning everybody. Nice results. First, I wanted to touch on your SG&A ratio. It's been increasing as you've expanded into Charlotte, Raleigh, Sacramento and DFW. How long do you think it will take for these markets to mature where you could start seeing some SG&A leverage? Or, at the same time, do you think that you'll continue expanding into new metros and that SG&A ratio will continue ticking up?

Yes, good question, Truman. I think we've probably may have talked about this. But in an organic startup nature, we haven't given any guidance for 2020. I can tell you generally speaking, in an organic start-up, you're going to lose money for the first two years, and then year two you breakeven, year three you breakeven, then year four and five, you start generating more profit, it starts leaning out. That's an organic model right there. And that's pretty consistent. And so, that does obviously weigh on our SG&A for the next couple of years, just because we're intentionally growing both organically and through some acquisitions. So, that's the way I would look at it. Mike, if you want to add.

Well, I'd just say that the post ASC 606, our expectations down the road on SG&A would probably be in that 10.5 to 11.5 that was probably 9.5 to 10.5 prior to ASC 606 that added about 100 basis points up in the sales and marketing category. But those expectations wouldn't be achieved probably till we start delivering units from those expansion markets right now. It's not going to be next year, let's put it that way, maybe the high-end of that range will, not certainly the low end of that.

Okay, thanks for that. And then, you've discussed a few points on this call about your effort to bring down prices in several markets. Could you guys just elaborate on that a little bit further? Which markets you're actually going down the price structure, if you will? And does this mean that you're rotating more towards the entry-level product?

Well, our mix right now is about 30%, 31% entry-level, 50% for a second time move up 15%, 16% in the balance active adult. What naturally happens, whether we build entry level in the Inland Empire, or as we push east, Truman, to the markets of Dallas and the Carolinas, and even markets of California, where we built higher density solutions, our entry level percentage over the next several years will slowly grow. I haven't gone through and factored it exactly out five years from now, or four or five years, but it's definitely going to be greater than 30. It probably could approach 35%, 40% in the end, as we continue to push forward and really, it's still focus on our premium brand strategy, call it premium brand plus from the entry level versus second move up. Our active adult business is also growing. So those percentages will be shape. The only luxury that we really have is down in PHR and that goes out for another couple of years, but we're well positioned and even in California. As we pointed out, 2/3 of our deliveries are under 750. Actually, I know for people in Carolina, that's an entry level price point for California for most people. So we are continuously working on higher density solutions, especially in the infill markets in California, DC and other areas like Seattle, while also pushing on smaller product, more efficient product to hit more affordable price point.

Okay. And then just following up on the order incentives, I believe you said that they were down 20 bps quarter-over-quarter. Do you have the number in front of you what that was down year-over-year?

The incentives for this year, year-to-date is 5.4% and that's on delivery. And it was 3.4% last year in 2018 year-to-date for the nine months.

I was hoping, on the order side, if you can give what was down year-over-year?

It's roughly down about 180 basis points.

Okay, great. Thank you.

And then, just to talk about that but option revenue year-over-year about 90 basis points. A lot of times we're giving away options as part of the incentive package. So, that kind of offset some of that basis points decrease.

Okay, thank you.

Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Hi, thanks for taking my questions. I wanted to follow up on partially on one of Steve's questions. And then on a comment that was made around community count in the opening remarks, understanding it's an incredibly hard metric to forecast with a certainty, but it sounds like to the extent that you slowed land spend, it's not going to be an impact on 2020 necessarily, but potentially you'll have to fill in for '21 and beyond. I guess with the 60 communities slated to open next year, could you give us some sense of cadence around that. And to your best guess, if we're traveling in this absorption around 2.9 or a little better, what should we expect in terms of close out? Effectively, just cadence of net community count growth as we make our way through next year?

Mike, perhaps answered the community count question. As we pointed out in the earnings call, we're in pretty good shape for both 2020 and 2021. Our land acquisition efforts are really for '22 and beyond.

Yes, it's Mike. So the cadence is relatively flat, next year. So, it's a pretty good number of communities on a quarterly basis, 1Q is obviously a larger quarter for us. We're opening 20 plus communities in that quarter. We think that our communities here will be up about 4% to 5% year-over-year.

Okay, that's helpful. And then, the follow-on question is just looking for a little more clarity around the comments on margins and the normalization based on the mix of California, which obviously should be less lumpy moving forward than it has been this year. But, given the puts and takes that you've outlined already, I think the plan has still been for the mix of long-term deliveries on a long-term California land to increase year-on-year in '20 versus '19, which would still argue that the margin trajectory should be heading north. So when we're talking about stabilization or normalization of margins, is it in the 19% to 20% range that we should be thinking about? Or given that mix dynamic that you have over I think next year and the year after, is there still potential for higher than that?

Well, there is always potential for higher margins, good market conditions. But I mean, right now we're just giving guidance on the full year this year at 19% to 20%, but you can probably see as California has picked up, the trajectory should be on the positive side of that.

Is it fair to still think about 2020 and 2021 as still having a plan that includes higher percentage of deliveries on the long-term land?

Yes, it's a moderate higher percentage on long-term assets. It's fairly consistent, it's not a material difference. Definitive of units in California might be higher, but for the company in total, since we are growing outside of California, is probably the same percentage.

Our next question comes from the line of James McCanless with Wedbush. Please proceed with your question.

Hi, good morning. Thanks for taking my questions. First question I have is around pricing power. We've heard numbers all over the match for your competitors would love to hear. What kind of pricing power you're getting it on entry level as well as to move up into the [indiscernible]?

Well, pricing power overall are really market specific. Jay, we've had more pricing power in markets like Phoenix, ranging from anywhere from 2% to 4%, but the entry level, move up, luxury segment, all those markets have had various puts and takes. I would categorize this, about 40% of our communities had some sort of pricing power this year, year-to-date. But that's also net effect our pricing is offsetting any cost increases, whether it's labor or materials.

This is Tom. I'd add, it's fairly stable throughout most of our operations. We have seen a slight reduction of incentives on the year as we've gone forward, but pricing seems to have been stabilized.

And then actually incentive is going to be the next question, just want to see what you're seeing from competitor's year-end, everyone trying to close out too much for homes. But, are you seeing a level of incentives in the market for any price point, that's above what you would normally see at this time of year?

No, again, fairly stable.

Our next question comes from the line of Carl Reichardt with BTIG. Please proceed with your question.

Thanks. Hi. I want to ask about specs. First, what are you running in terms of under construction and finished specs per community now? And then, spec strategy too, you've got some peers out there who are running now 30-40 houses ahead of demand, with finished back and others who adjusted price and basis super low and trying to make up numbers on options. So, how do you look at your spec strategy and recognizing it's different California to Texas, especially at the entry-level?

We have just some numbers, we had 295 completed homes at the end of the quarter. That's roughly two per community and we had been running probably three in the previous quarter. So, we've kind of worked down on our specs. Our range on our guidance of deliveries didn't move a whole lot for that reason, because there wasn't a lot of units that we had, that we could sell and close within the quarter, really more so building backlog. Doug or Tom, you want to talk about specs strategy?

I would add on that. We're not going to be a company that's going to run out a bunch of specs, because we offer more of a personalization to our product offering. Numbers of specs per community will probably, I mean, it's a little lower right now too, but it'll probably range around three to four, going forward in the future. Because again, as part of our premium brand strategy, we want to give that personalization to our buyers, whether it's entry-level, all the way up to active adult and luxury.

Thanks, Tom. And then, let's go to Banning for a second. Last quarter, I think you've got 4000 plus lots there and I think you in the quarter you said you started delivering houses in 2020 there. Can you just give us an update on what kind of product you're planning on putting out there, given that's your largest contiguous land position?

Yes, Carl. This is Tom. Banning development is going very well. We're on pace and we're scheduled to start our first set of models here shortly. And the product will be very consistent with what you see right across the street in Beaumont, we've predominantly got five different product segments that we're working through. It definitely skews towards the more affordable price point and there's great values out there, as you know. But, if you just took a look at what we're offering in Sundance, it's basically updated versions of that.

Great. Thanks, Tom. Thanks Douglas.

[Operator instructions] Our next question comes from the line of Alex Barron with Housing Research Center. Please proceed with your question.

Yes, thanks. I was wondering if you had any way to break down how the orders have been improving by price range? Like you said, you have a third entry level, I guess 50% move up and the rest more luxury and active adult. Do you have anything you can offer as far as how those different segments grew year-over-year?

Yes, Alex it's Mike, I can give you some stats on that. When you looked at Doug talked about entry level was 31% of our order mix, absorption rate was 4.1% on the entry-level products. On move up, it was about 50% of our mix and absorption was 2.7% for the quarter. Luxury was 15% and it was 2.4% and then, our active adult was 4% of our market overall orders and it was 2.1% on the absorption rate. When you compare that to year-over-year, obviously, it's an easier comp, that last third quarter was relatively weak. Just running down, entry with 3.5, move up 2.5 last year, luxury was 2.6 and active adult was 2.7.

Got it. That's very helpful, Mike. If we look within California, especially Southern California, are you seeing a pick up more in the coastal areas? I'm certain Inland has probably been picking up earlier, but I'm wondering what you guys been more inland versus coastal in Southern California?

Alex, I would say, your comments with regard to Inland in the more affordable price points, picking up the most without a doubt, Northern California, particularly the Bay remains choppy and we have not seen the same level of increase relative to absorption in demand there. San Diego, our coastal market there, we've got a very unique offering and we have seen continued stabilized absorption there. In Orange County, LA, with lower price points under $1 million, demand has been good. As you move up in price point, demand is a little softer.

All right, very helpful. And how about which has been your best-performing market. Is that Arizona, I'm guessing.

Yes.

Okay, great. Thank you.

There are no further questions in queue. I'd like to hand the call back to Doug Bauer for closing remarks.

Well, thank you. And I'd like to close with a thank you to my partner of 30 years. Mike is retiring on January 1st. We tip our cap to Mike and toast him with a glass of champagne [Technical Difficulty] taken too many a river in Utah. We will miss him and we wish him all the best and look forward to talking to you next quarter.

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.