Greetings. Welcome to the TRI Pointe Group’s Fourth 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] 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.

Good afternoon, and welcome to the 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’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 the 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; 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.

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 to 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 in 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 in absorption pace. A consistent theme we’ve witnessed has improved traffic and demand at our core location driven by a supply constraint resale market. These favorable trends have continued through January with orders up 71% year-over-year given us great optimism as we move into the spring selling season. We continue to see a very favorable fundamental backdrop for our business, capitalized on 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 in 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 to TRI Pointe’s strategy since our beginning. And we will continue to focus…

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 income from our mortgage, title, escrow, and insurance services. Our tax rate for the quarter improved…

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 made TRI Pointe great. That concludes our prepared remarks and now we’ll be happy to take your questions.

At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Thomas Maguire, Zelman & Associates. Please proceed with your question.

Hey guys, nice job on the strong quarter and an impressive finish to the year. I know there’s a lot of work to be done between now and year-end and we have this selling season coming up which can move things dramatically, but wanted to drill in 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 order is 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?

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

Yes, sir.

Yes, was 3.1. For 2020, our plan is to have an absorption pace at 3.2. Obviously, early results for 2020 are very good. We’re coming in with a strong backlog. But one and a half months doesn’t make a year, especially going into the back half of a 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 a bit 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 in 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.

Got it. That makes sense. I think being conservative as a prudent at this point. And then if we just shift to the margin, there’s mixed and the longer dated assets still swing 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?

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’ll 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 year’s time. I don’t know, Tom, if you want to add anything to that?

Yes. Thomas, this is Tom. I mean, overall we feel really good about where the market 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 and ability to work on the price equation to maximize our potential there.

Awesome. Thanks guys. I appreciate you taking the question.

Our next question is from Truman Patterson of Wells Fargo. Please proceed with your question.

Hey, good afternoon guys. And thanks for taking my questions and nice results. First, wanted to piggyback a little bit on that closing guidance, up only – you are up 5% to 6%. Just waning to follow-up on that. There’s nothing structural that’s kind of keeping your closing guidance cap that only 5% to 6% growth. I’m thinking way under labor constraints. There’s nothing along those lines that are necessarily keeping you all from thinking it could go above that.

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 there are good. I’m not ready to mail in the results for 2020, you got a lot of work ahead of us, but it’s encouraging as we headed into the spring selling season. In addition having 60 new communities open this year, half of which are in the back half of the year, that really affect 2021 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, steady, or as you go every, every year, continue to see some steady growth. And that’s – we’ll take a good market and hopefully ride maybe some upside and on both deliveries and margins by the end of the year.

Okay. Okay. Thanks for that. 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? Or 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?

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 adults is about what you would expect as you move up in price point, entry level and a 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 that 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 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 two new long term California legacy assets.

Right.

One would be Atwell in Banning and that’s kind of a replacement product for our very successful Sundance community in Beaumont. So we’re excited to get five new products into the market and the second half of this year. And then 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’ll be opening the second half of 2021. Relativity amount loss 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 loss remaining there.

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 to the current graph.

Okay, perfect. Thank you, guys. Good luck on the upcoming quarter.

Thank you.

Our next question is from Stephen Kim, Evercore ISI. Please proceed with your question.

Hey guys, it’s actually Trey on for Steve. So, first part is, I didn’t have any catch up you guys gave your land spend for the quarter. And then just broadly about your land spend both the acquisition development really with the past four or five quarters, it seemed to drop in terms of the 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’ve kind of talked about kicking out this year and expanding next year. But I’m wondering, how this moderation land spend you’re seeing now is driving this year flat and maybe, seeing an inflection going forward.

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 of 2019 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 2018, where we just saw left land deals during that period of time.

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 loss 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 land – 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 2009 – 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.

Okay. Thanks, Doug. And I want to mention on capital 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 you – 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 being ultimately active M&A, would we also expect that pull $200 million to be used?

Well, when you look at the capital allocation strategy for TRI Pointe, we have $200 million available to us for share repurchases and we will look at opportunistically. We do generate a lot of cash flow. So, 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.

Yes. Thanks very much guys and good luck to next quarter.

Thanks.

Our next question is from Jay McCanless, Wedbush. Please proceed with your question.

Hey guys, good afternoon. Thanks for taking my question. 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?

No, it just – we’ve talked about before, there’s 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 a wider range.

Okay. The second question I had, I was wondering for both the quarter and for 4Q 2019, 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 a 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?

It doesn’t really have any impact on community count. We could break down that. So, in the fourth quarter, there’s 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 Puerto Rico transaction that’s been on hold. Then 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 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.

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.

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 market shares to get by 2022, could you all give that data again, and also if there’s any geographical right, favoring one geography over another, any kind of color on that would be great.

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.

And that’s a kind – 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’re also very active on the East coast with our Winchester brand. So, it’s across the country.

Okay. That sounds great. I appreciate you all for taking my questions.

Thanks, Jay.

Our next question is from Mike Dahl, RBC Capital Markets. Please proceed with your question.

Hi. Thanks for taking my questions. 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 of the year, even if you really dial down the normal seasonal progression in February and March, you’d be pacing above four on absorption for the first quarter, which is even better than what we saw in 2018, which I think was a peak. So, with respect to, doing a four in 1Q and the three, two 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, be a incremental pricing versus just some sort of maybe, more conservative assumption about market demand.

Mike, this is Doug. 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 at due to the community counts, but community counts are, I mean, I don’t know, it’s a little bit way to get communities can end up closing out at different times. So, then your whole number isn’t going to be just 40, I mean there’s different lights to these communities. So, as we, I think, mentioned the number of communities that we’d open, 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, it’s the spring selling season through June, July, feeds into where we see it right now. We definitely will look at seeing some upside and deliveries, but it’s not off the charts, because you’ve got so many communities with so many lots, lots 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 – it’s a partly art and a little bit of science.

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, are 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?

That’s not always the case. I mean, there’s always some of that if 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.

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 pretty broad range of products. So, we’re pleased and encouraged and hopeful that there is some upside to our guidance.

Right. It’s a great start. Particularly seeing that, it sounds like it’s pretty broad-based across geographies and price points. But last question on my end, I guess just back to the delivery question and at the risk of beating the horse a little, I understand some of the moving pieces and there’s not always perfect visibility, 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?

Yes, this is Tom, Mike. We have again, very conditioned 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.

Okay, thank you.

[Operator Instructions] The next question is from Carl Reichardt, BTIG. Please proceed with your question.

Thank you. This is Ryan on for Carl. First question just on – to the extent that you’re seeing inability to price over cost in the market currently, if there’s any product types or geographies where consumers seem particularly, I guess receptive probably isn’t the right word, but able to absorb price increases.

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 to last year net in the quarter-to-date 2019, they had about a 4% pricing increase, but that was offsetting about 2% to 3% cost increase too. So that’s the strongest market, the rest of the market 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 spend a lot of time last year is a lot of value engineering initiatives and many of our markets actually enjoyed cost savings as well.

And Ryan, I would add that given the very favorable interest rate environment 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 factors. So they’re out in force right now.

Okay. Got it. Thank you. And then I guess just on new 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 the communities? Then how does absorption pace compare with your core move-up product?

Well, year-to-date, 2019 absorption pace, entry level was 4.2%, move-up with 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.

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

Okay, great. Thank you very much.

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.

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.

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