Greetings and welcome to the TRI Pointe Group's Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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, David Lee, TRI Pointe General Counsel. Please go ahead.

Good morning and welcome to TRI Pointe Group's earnings conference call. Earlier this morning, the company released its financial results for the third quarter of 2020. 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 on this call, which are not historical facts, including statements concerning future financial and operating performance are forward-looking statements that involve risks and uncertainties. A discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the company's SEC filings. Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through TRI Pointe's website and in its SEC filings. Hosting the call today are Doug Bauer, the company's Chief Executive Officer; Glenn Keeler, the company's Chief Financial Officer; Tom Mitchell, the company's Chief Operating Officer and President; and Linda Mamet, the company's Chief Marketing Officer. With that, I will now turn the call over to Doug.

Thanks David, and thank you for joining us today to go over our results for the third quarter of 2020, discuss strategic initiatives, and provide some color on our company's outlook. Before we discuss our third-quarter results, I'd like to express our ongoing appreciation and admiration for the front line workers who are working around the clock, and we hope you and your families are staying well. I don't think any of us thought this pandemic will last as long as it has and despite that, we have a lot to be thankful for. Our industry is thriving as the desire for new homes continues to grow. As a result, TRI Pointe Group delivered strong results for the third quarter of 2020, driven by a combination of excellent housing fundamentals, a highly desirable product profile, and great execution by our team members. We generated earnings per share of $0.61 for the quarter, representing a 39% improvement over last year. Thanks to an 11% increase in homebuilding revenues and a 110 basis point expansion in our pre-tax margin. Home sales gross margin came in at 22.1%, eclipsing the high end of our stated guidance range. Well, SG&A as a percent of home sales revenue improved 180 basis points to 9.8%. These results demonstrate the success we've had implementing price increases to offset cost inflation and the effectiveness of the cost-cutting initiatives we implemented earlier this year. Net orders for the quarter increased 50% year-over-year on a 65% improvement in our order pace to 4.8 per community per month. The order improvement was broad-based across a number of demographic segments and geographies with 38% of our buyers representing the millennial cohort. While the historically low-interest-rate environment is clearly fueling a portion of the demand we are seeing, we believe there are demographic…

Thanks Doug, and good morning everyone. I'm going to highlight some of our results and key financial metrics for the third quarter and then finish my remarks with our expectations and outlook for the fourth quarter and full-year 2020. At times, I will be referring to certain information from our slide deck that is posted on our website. Slide 6 of the earnings call deck provides some of the financial and operational highlights from our third quarter. As Doug mentioned, demand was robust in the third quarter with net new home orders increasing 50% year-over-year, driven by our highest ever quarterly absorption rate of 4.8 homes per community per month. Demand was broad-based but especially strong in our California markets, which reported an absorption rate of 6.6 homes per community per month. California's performance was led by the Inland Empire with the sales pace of over nine homes per community per month resulting from our strong entry-level product offerings with sales prices from the high 200s to the mid 300s. We are fortunate to have a long land supply suitable for entry-level product in the Inland Empire. With these assets, we are also mindful of the potential affordability challenges for the entry-level buyer so we are focusing on pace over price. Conversely, at some of our higher average selling price divisions such as Seattle and San Diego where supply for both new and existing homes is low and demand is strong, we have been pushing price more aggressively, and as a result, both of those divisions have seen in over 200 basis point improvement in gross margins year-over-year. So far in October, we have recorded 326 orders, based on the strong demand we have experienced over the past several months, we are closely managing new phase releases to allow construction…

Thanks, Glenn. I'm very pleased with the progress we made this quarter and I'm looking forward to this next phase of TRI Pointe Homes evolution. We've come a long way from our humble beginnings as a homebuilding start up in the depths of the housing recession just over 11 years ago. Over that time, we have rapidly grown our business in a profitable manner and diversified our operations, both from a product and geographic standpoint. We are now in a great position to leverage our size and scale to produce better returns for our shareholders, while continue to grow our operations in a disciplined manner. We believe this is a prudent approach to the cyclical nature of our industry and is a discipline we are witnessing from our competitors as well. This mindset is a departure from the growth at all costs, operating strategies of previous cycles and should result in a more rational, consistent operating environment over time. Given this dynamic, along with the strong demand trends we are experiencing and changes that were implemented in our company, I am as excited as ever for the future of TRI Pointe Homes. Finally, I would like to express my gratitude to the hard working men and women of this organization. Together, we are building something special. It is due in large part to your entrepreneurial spirit, your dedication and your tireless work ethic. I appreciate your contributions in getting us to where we are today and setting us on a path to where we are going in the future. That concludes our prepared remarks and now we'll be happy to take your questions. Thank you.

[Operator Instructions] Our first question comes from Ivy Zelman with Zelman Associates. Please go ahead.

Doug, just a big picture question that I've been getting from investors, so I'd like you to maybe think through how to respond. Well since the great financial crisis we've had on a regular basis housing starts clearly have not grown as fast as we've seen in prior cycles, and more recently I've been told my forecast for 2021 is too conservative at a 1.1 million single family starts and why I can’t you get back to 1.7 million or 2 million and I certainly can answer but I'd love to hear your answer if you think it can. And if not why not and maybe help the industry or the [technical difficulty] in land development supply chain things of that nature and let us hear your views?

Hi, Ivy. It’s - I think I was a little broken up, but I think your question was around why the industry can't get back up to what I would refer back to 2006 levels is that right.

Yes the peak about 2005.

Yes 2005. I mean it even before the pandemic I think the key phrase I use is the impediments to housing starts and permits nationally to grow is land, labor and the regulatory environment. And you go down kind of a channel on all of those as you look forward into the future. But we have a kind of a natural buffer with those supply chain supply inhibitors when you think about the labor, the land environment, the regulatory environment and in all which are going to probably get potentially get more aggressive in the regulatory environment depending on the political views that you have, so but that that's been true for the housing market before the pandemic and after. And the larger builders are well capitalized to take advantage of their market position to be able to get trades in like ourselves to complete homes when sub supply chain is tough right now because of the pandemic. So those are - that's the primary - those are the primary inhibitors to that growth that we saw in 2005.

And you’re recognizing that while the big guys are predominantly doing soft development and correct me if I'm wrong, but that gives you the advantage where - why the publisher 40% of the market many of the small guys just are really challenged to get land. What could you do as an organization to increase the supply of lots and curtail some of the impediments for recognizing it's just local municipalities that are really listening to our constitute - their constituents and saying no growth in my backyard. Is it just trading and that's even with your soft development there are real impediments to growing any faster than you currently are?

Well, I think this business I’ve been doing it for 31 years. The land business has always been a challenge and the regulatory environment over 30 years continues to be a challenge. But it really comes down to having the right team to manage through that environment. I would challenge anyone to look at California, which has probably the biggest regulatory environment and we've been here for a long time and we can navigate that regulatory environment as well or is probably the one of the best in the business and that's why we create the value that we create in our California assets. We as a company because the land environment is tough, we do look to do more self-develop transactions and anecdotally I've come across some smaller builders that have actually called me and said listen we're actually going to shrink our business. We just cannot get the trades to come work for us like the bigger builders can. So I think you got to see a market share increase to the top 10 or 15 builders for the next several years.

Next question comes from Jay McCanless with Wedbush. Please go ahead.

Hi, thanks for taking my question. And apologies if I missed this, but could you talk about or I guess elaborate more on the pricing power comments you had in the release today and talk about what percentage of your communities you're able to raise price during Q3?

Yes, Jay. We were able to increase price, which is both a combination of price and or decrease in incentives and over 90% of our communities.

And then the second question I had, I guess Doug when you were talking about the five ways to improve the returns and the first one you highlighted was the assets you discussed in 2016, those have finally come to fruition. I mean, are all of those assets you all highlighted in 2016 up and running now the way you wanted or is there a longer runway for those assets than just what we're seeing right now?

Well, there is a longer runway because there is thousands of lots that we own and control in California so that's actually the blessing that we have. We set a path out in 2016 that we would put those assets into play. Santa Clarita, Inland Empire, for example, we have thousands of lots and nobody can touch us as far as our price points and base is out there. So we'll continue to build homes out there for years, and what that does is generate very healthy profits and cash flow for us to implement all the other strategies that we outlined in the call.

And then one more quick one. Glenn, could you tell me what the authorization was remaining at the end of 3Q?

Yes, it's about $36 million. It's between $36 million and $38 million if I remember it.

Next question comes from Truman Patterson with Wells Fargo. Please go ahead.

Nice result and thanks for taking my question. You know, one of the bigger questions that I think a lot of people have is your ability to convert 50% order growth and actually no closings and get the homes constructed. Is your construction cycle extending and I'm really thinking about it from two different areas, one are you seeing outright just labor shortages where you can't get labor and having issues getting you know those starts in the ground and then also one on the product side, are there any categories that you're having difficulty actually finding the product to complete the homes?

Truman, this is Doug. No on both accounts. There is - we have absolutely zero problem getting the labor to our trades and none of those are factors right now. I will tell you that our cycle times have probably drifted up 5% to 10%, which is primarily due to the pandemic and COVID-related instances where cities or suppliers have had impacts on the pandemic. So that's been the supply chain elongation, but it's been 5% to 10%.

Okay. Okay. That's great, but no issues on the labor side I think is very encouraging.

No, not at all.

Is very encouraging.

Yes. When I talked about labor at the beginning, when you look at the macro picture as Ivy and I were talking about, the labor situation in the U.S., the average age of a palmer electrician, so on and so forth, they’re in the mid-50s, and our industry is aging in the construction field and that is the macro-limiting factor. Is it a limiting factor for the top 10 or top 15, 20 builders? No. Because we have the access to the labor, we have the access to the supply chain. Are there disruptions because of the pandemic? Yes. But that's where I think the top 10 or 15 are going to increase market share despite those supply chain and labor inhibitors that are out there.

Okay. Thanks for that. Sorry. Go ahead.

This is Tom. Just as a clarification because we don't want you thinking there are not challenges out there in the supply chain.

Yes.

Every week we're dealing with challenges just like every other builder, but we have been successful in coming up with creative solutions to overcome those challenges relative to product availability. So you've heard about all the ones that are continually happening and we've experienced that as well. But it is certainly not causing any closing delays or any missed opportunities for our deliveries this year.

Also just following up on the pricing comment that it's allowing you to stay ahead of the input cost inflation, could you just walk us through the moving parts of the fourth quarter gross margin decline? If you look at it sequentially and then lumbers up a lot, we're hearing some other fairly significant inflation on interior doors, windows, flooring, roofing, et cetera. How should we think about these costs in the 2021 and are you seeing enough pricing in the market either currently or what you think is happening moving forward to really offset these costs?

Truman, it's Glenn. The slight decrease in the gross margin guide for the fourth quarter is really just mix for us, there is slightly less deliveries in the long term California assets in the fourth quarter, which is impacting that. I think the impact of lumber will more be felt in Q1 and Q2 of next year versus Q4, but I don't know, Tom, if you want to elaborate on that a little bit more.

Yes, fundamentally, we've had a big spike in lumber costs, and for those Q1, Q2 deliveries that will be felt fully, but our expectation is that lumber, as the mills are able to generate additional supply, that lumber will begin to move off of its all-time highs. So we expect that price to come down and we still see a very strong demand profile, which gives us pricing power. So we expect to be able to continue to pass on those cost increases to the consumer.

Next question comes from Mike Dahl with RBC Capital Markets. Please go ahead.

Doug, I probably ask you some variation of this almost every call, and I know the answer is going to be at least in large part, it's community-by-community. But thinking about your absorption pace, you've continue to push this higher, there's certain areas you've highlighted, like Inland Empire, where you can go and continue to push pace, but it seems like you're tracking closer to - I mean, potentially close to four a month for the full year. And historically, I think your peak has been kind of three two, so just from a mix standpoint, when you look out to your mix of communities and geographies next year, has your view changed at all in the current environment and on what a sustainable monthly pace would be for you?

Yes, I think our view going into 2021 and 2022 is very positive. We as a company see our average ASP going down. Therefore we see our absorption pace as a company going up on a macro basis. So you know we're very bullish about the housing business for the next couple years. It's really a very great situation that our company is in and many of the other companies it's all really about getting new communities in the ground. We've had tremendous demand the summer sale season really hit us or the spring sale season really hit us in this late summer early fall. And as I look into 2021 and 2022 yes our overall company absorption rate should be on average slightly higher than previous years because our product mix is going more to entry level premium. First move up and we view the housing businesses is going to be the silver lining to the economy for the next couple of years. So I'm excited as ever. It's really comes down to just opening more communities which we outlined we've got tremendous community growth over the next two years and hopefully we can be the multiplier effect to the economy that is going through a lot of suffering.

Good to hear. It makes sense. And then relatedly on the margin side I think if you highlighted 4Q is largely a function of mix. I think if we look at the sales strength regionally on the order side it would seemingly suggest that the long-term asset and this is consistent with your strategy too but long-term assets would contribute more to revenues in 2021 than 2020. Is that fair and should we then think about that as yes there's these moving pieces on certainly lumber and other cost inflation. But so we look at that as setting the stage for an upward margin - gross margin trajectory in 2021?

I think we haven't given margin guidance yet for 2021 but I think one thing to think about from a long-term assets is I think percentage of deliveries will be higher next year just because we have higher communities open. But our ASP is coming down because there's going to be less of the higher end long term California assets in the mix next year, so less specific kind of ranch specifically. But again because of the pricing power like Tom mentioned, we think we do have the ability to fully offset some of these labor price increases that we've seen. The other thing to think about for margins is as we mentioned we're opening about 70 communities next year and so we're turning over a good portion of our communities. And so that does have some impact on margin as well just based on pure…

And I would add Mike our strategy as we - we laid out a strategy in 2016 and putting all the long-term assets I mean in motion which we have. So we now are at a point as we outline the strategic path and really all that can be summarizes we will have all 14, 15 divisions operating in a very consistent manner over the next 12 to 24 months. And what I mean by that is there consistently we have a monitor here. It's the Mitchell line, the 2010 line. But we are - we will be a very consistent generator of both revenues and profits from all divisions and you're seeing that happening outside of California.

Next question comes from Stephen Kim with Evercore. Please go ahead.

The first question relates to price, you talked about raising prices in over 90% of your community as I was curious was the majority of this price action taken later in the quarter or was - do you feel like that was sort of evenly spread throughout the quarter of those pricing actions and somewhat relatedly are you seeing increased option and upgraded spend from your customers in general and how much?

Stephen, it's Tom. And I would say that our pricing increases really began to take hold early in the quarter and we're fairly consistent throughout the quarter. And then our options slightly ticked up from a year over year basis and we’re consistently running in the 11% to 12% range for options as a percentage of the overall revenue.

And then when you talk about the move to the one brand TRI Pointe which I think it makes sense at this point. Can you talk about what the anticipated costs if any we might see that will bring and then similarly other longer term savings that you could quantify for us as a result of that move? And then similarly are there the other longer term savings that you could quantify for us as a result of that revenue.

Stephen it's Glenn. Good question. Some of that or actually a majority of that was contemplated in the reduction enforce that we took that took place in Q2 of this year. There will be some incremental marketing savings since we'll be supporting only one brand versus six going forward. But the majority of that was contemplated in the $33 million of annual savings that we discussed last quarter.

And then lastly I wanted to talk to you a little bit about a theoretical capacity of deliveries for your company I know that always very difficult to predict demand. But I would imagine that if we are trying to think about an annualized tax production capacity figure for you guys the first place that I would look would be your orders that you took this quarter. You mentioned that your cycle times didn't really extend. You're not having some of that as much of the labor issues as maybe some of the some of your other national competitors are experiencing. So would it be reasonable to think that what you took in orders this quarter maybe on an annualized that number maybe times 4 or something like that's kind of like that's a theoretical capacity number for you right now because you wouldn't have taken the orders if you didn't think you could deliver them in a reasonable time. But by the same token you also pride didn't leave any orders on the table either you're probably booked everything that you could. So is that a fair way of thinking about your max production capacity right now.

Well look at that in a couple ways first of all, all the builders including us are always battling labor in the supply chain. So if I said that we're a unique company that doesn't have any labor or supply chain issues I'll stand corrected. Number two I guess I don't really deal in theoretical I deal with what the market is providing, and the market is providing an excellent backdrop for the housing business as you know and you’ve kind of talked a lot about that and then it really just comes down to the ability to put the new communities in place and get them up and going and selling. And so we see a tremendous growth pattern in our existing platform not only in our early stage divisions but several of our existing divisions also have a lot of growth whether it's the Inland Empire whether it's Arizona parts of Colorado so on and so forth. So that's how we look at the business is really how we can become a top 10 in market share in each one of our marketplaces.

Next question comes from Jack Micenko with FIG. Please go ahead.

I wanted to talk a backlog conversion a little bit. Obviously we have the pandemic and let's hopefully call it a temporary issue this year. You are mixing into some faster turn lower price point and perhaps arguably a little more spec or spec-ish type inventory. Is it safe to assume that you know some of the slowdown in backlog conversion this year may rebound in 2021 and beyond for the reasons mentioned.

Jack it’s Glenn I think you're going to see some rebound. I don't think it's going to get all the way back to some of the historical levels mainly just because we've had such a strong sales growth in the back half of the year versus the normal spring selling season that there's a lot of unstarted homes being sold and it just takes some time to work through those that conversion. And our spec count is really low, we only have 109 completed specs at the end of the quarter. Usually that number is between 300 and 400. So you're not seeing those sale and close within the same quarter that that benefits obviously your backlog conversion. So we think it'll improve when you compare 4Q next year versus 4Q this year obviously, but it'll take a little bit of time for it to get back to what has been historically normal.

And then on the cost in the labor pricing sort of dynamic, so you've got the mix of underlying assets, land assets long term California and then you've got brick and stick. I guess can you share with us square footage your price increase versus square footage cost increase over the last year?

We’ll get that number to you we don't have it right in front of us Jack. So instead of just shooting from the hip, we'll get back to you on it.

Next question comes from Carl Reichardt with BTIG. Please go ahead.

Steve Kim got my branding question, so I just have one. So Doug you talked about…

Wait a minute Carl, you won the booby prize.

Didn't you mention one brand last call.

Yes I did. But he got my question on that one. I wanted to ask about your goal for inventory turns Doug to get the one-time by 2022. And you talked about that being function of options or moving to options. But if I look at this if you've got the [Raco] land that you've held for a long time beginning to burn off, you're moving to markets where it's easier to get options, you're moving to a more efficient mix of lower end homes? And isn't it feasible that your inventory turns over that time could improve by more than that because there's a lot of leverage to pull here. Can you just kind of build me a bridge between how you get from I think it's 0.8 now or whatever it is to one by 2022 and is it drivers - are there drivers beyond just moving to a greater option mix?

No, I think you hit on all the levers, but it does take a little bit of time, because there's still a lot of lots in that long-term California asset pipeline. And so as like you said, we continue to move through those and add communities and more efficient capital efficient markets like Texas and the Carolinas and some of our new markets. We will get to that one goal, but I think that's - I think that's still a reasonable timeline.

Carl, I would add. I mean it really is setting up for a perfect backdrop for us when we put all those assets in play back in 2016 that we talked about generating significant cash flow and profits to be able to implement those strategic objectives that we have outlined for the street. So it's really - as Glenn pointed out those assets still are out there but still generate great cash flow and profit. So we'll use those to reinvest in those high returning assets and we also pointed out a lot of simplification that we're looking to achieve in our plan execution. We're still going to offer our personalization approach. But still as you know as you get more simplified in your plans and your execution with technology today we think we can get even more simplified. Those cycle times - and it produce better turns as well. So there's a myriad of factors going on there. But the long land is a great backdrop for us going forward as we look to achieve those type of returns.

And Doug - the focus on turns/returns impact your thinking on acquisitions at all?

Acquisitions of land or acquisitions of companies?

Builders right?

Oh builders oh okay. Yes, we'll - continue to be opportunistic on the M&A front. So it doesn't change our thinking we have significant amount of capital available, but our primary focus is what we outlined in the earnings script and by the way I should mention one clarification in the earning script. I talked about the net orders Carl increasing about 50% and our broad-based demographic segments and geographies. The interesting fact and I noted that 38% of our buyers are the millennial cohort. It's actually 48%, it gives you a little sneak preview into the demand that we see in this industry for the next couple years.

Our next question comes from Alex Barron with Housing Research Center. Please go ahead.

Yes, thanks guys and great job on the quarter.

Thanks Alex.

I guess we saw that the Carolinas delivered the first orders this quarter. Can you expand on that region and when can we expect the first closings. Does that going to be next quarter or not till 2021 and how many communities are you guys have going and where do you see that going over the next year?

Great question Alex thanks. Yes, we will get closings our first closings on the board this year in Carolina. I'm very excited Gray Shell has done a tremendous job of putting a team together there. It's really a model organic start-up. We have well over 2,000 actually well over 2,500 lots that we own and control. And we have upwards of 8 to 10 more new communities opening actually in the Carolinas next year. So we're very excited. Charlotte and Raleigh is on a significant growth pattern. And by the end of 2022, they will be operating at a very strong level. So great question and thanks for setting that up.

And can you expand more like what's the target buyer base there, is it more entry level, more move up? Are you operating more on a spec basis or built-to-order just, if you can give us some sense there?

Yes, our strategy there is to stay in the core top 10 core submarkets in both Charlotte and Raleigh. But we're focused in the - what I would call - the first time premium and first move up. And that's been the entire focus for both Charlotte and Raleigh. So that will reflect in a more production oriented environment, where you’ll have more specs on ground. You'll see some really attractive townhome product that we're bringing on. So yes, you'll have a lot of production going on there both on a - to be built, but also on a spec level.

Okay. And if I could ask one more on the…?

Yes.

Very purchase that - you said you're going to finish up the capacity next quarter, but how do you see the balance I guess given where the stock price is at? Doesn't seem the market's giving you enough credit for the growth that's coming. How do you see the balance investing into your stock versus land at this point?

Well, as I mentioned in the earnings call, we're going to look to utilize the remaining portion of our current authorization. Glenn I think it's about $34 million, $37 million.

$36 million yes.

And then going forward, we're committed to a programmatic stock repurchase program as one of the four or five levers that we outlined to increase returns to our shareholders. We think a combination of all those levers will yield a much stronger shareholder value going forward in the next couple of years that's for sure. And I'm very proud of the team. We laid out a path in 2016 where we said returns would be flat to weak. So we put those assets in play and now we're going to reap the benefits of the profits and cash flow to be able to not only be programmatic about our stock repurchase program, but also expand in our early stage divisions and throughout the company in a more efficient return oriented environment all under one brand.

Next question comes from Alex Rygiel with B. Riley FBR. Please go ahead.

Quick question, can you talk about the virtual sales process and how that's changed your cost structure or gross margins at all?

Alex, this is Linda. The virtual sales process is contributing more and more of our sales every quarter. In Q3, 50% of our sales came through our online sales program and in terms of costs there are a number of factors in that. Obviously there's a bigger investment in virtual assets for the online shopping process, but we certainly are finding that we can be much more efficient once we are in contact with those home shoppers going to an online process - converting to a sale.

And then ultimately Alex I'd just add that over time we think we're going to be able to decrease our spend in models and model merchandising because of the virtual process. So ultimately we think there will be savings there.

Excellent and then lastly what was the cancellation rate in the quarter?

It was 9%?

9.5%.

Yes.

There are no further questions. I would like to turn the floor over to Doug Bauer for closing comments.

Well, thank you for joining us today. And we wish all of you and your families a safe and - healthy holiday season. Thank you very much and we look forward to talking to you next quarter.

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