Greetings, and welcome to TRI Pointe Homes Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Lee, General Counsel for TRI Pointe Homes. Thank you. You may begin.

Good morning, and welcome to TRI Pointe Homes earnings conference call. Earlier this morning, the company released its financial results for the second quarter of 2021. The Documents detailing these results, including a slide deck are available at www.tripointehomes.com through the Investors link and under the Events and Presentations tab. Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating performance, are forward-looking statements that involve risks and uncertainties. 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 good morning to everyone joining us on the call today. TRI Pointe Homes delivered strong operating results in the second quarter of 2021, posting significant year-over-year increases to revenues, profits and new home orders. We exceeded our stated guidance of ASPs, homebuilding gross margin and SG&A leverage as our teams did an excellent job executing our business plan, and navigating the operational challenges that persist in our industry. Earnings came in at $1 per share for the quarter representing a 133% increase as compared to the second quarter of last year. We are extremely pleased with these results and believe we're in an excellent position to continue this operational momentum into the second half of 2021, given our sizable backlog, our premium lifestyle brand positioning and the strategic growth initiatives we have in place. We experienced robust order activity during the second quarter as housing demand continued to far outstrip supply in our markets. We averaged 4.7 orders per community per month for the quarter. And similar to the first quarter of 2021, this figure was constrained by our own internal efforts to match sales with construction starts and implement price increases to offset rising costs. These efforts have proved successful as we were able to generate home sales gross margins of 24.6% in the second quarter, a 300 basis point improvement over the second quarter of 2020 and an all-time record for our company. The demand that we saw during the quarter was broad-based in terms of price point and geography, a sign that there is a diverse range of motivated buyers in the marketplace today, along with a widespread lack of available housing supply to satisfy this demand. And while we acknowledge that there is price sensitivity in some of our markets, we believe the…

Thanks, Doug, and good morning, everyone. I'm going to highlight some of our results and key financial metrics for the second quarter and then finish my remarks with our expectations and outlook for the third quarter and full year of 2021. At times, I will be referring to certain information from our slide deck that is posted on our website. Slide 5 of the earnings call deck provides some of the financial and operational highlights from our second quarter. As Doug mentioned, demand remained strong in the second quarter and orders up -- with orders up 22% compared to the prior year and an absorption rate of 4.7 homes per community per month, representing a 53% increase compared to the prior year. Demand was strong across all geographies with the West reporting an absorption rate of 5.3 homes per community per month, The Central had an absorption rate of 4 and the East had an absorption rate of 3.4%. We reported an outstanding performance in all key metrics this quarter and either met or exceeded all of our stated guidance. We delivered 1,545 homes, which was a 26% increase year-over-year. Home sales revenue was $1 billion, an increase of 32%. And our average selling price was $653,000 a 5% increase compared to the second quarter of 2020. Our homebuilding gross margin percentage for the quarter exceeded the high end of our guidance range at 24.6%, a 300 basis point improvement year-over-year. SG&A expense as a percentage of home sales revenue came in at 9.6%, which was a 120 basis point improvement compared to the prior year. Our focus on leveraging technology and operational excellence as well as taking advantage of the current market conditions is evident in our reduced sales and marketing expense of 4.5% of home sales revenue in…

Well, thanks, Glenn. To sum up, we are extremely pleased with our performance this quarter as we set company records for deliveries, operating margin, net income, orders and backlog value in the second quarter. Demand remained healthy in all of our markets, while supply continues to be constrained. We successfully implemented price increases that more than offset cost inflation and achieved our results in our delivery guidance, thanks to our team's ability to execute and overcome the supply chain issues. Given what we see in our markets today and what we have in backlog, we are extremely optimistic about the remainder of 2021. Longer term, we remain bullish on the housing industry, given the favorable demographic trends in low home supply. We have positioned our company to benefit from these trends through the careful cultivation of our premium lifestyle brand strategy and through the land investments we have made, which will result in double-digit community count growth in both '22 and '23. We believe we can achieve growth while maintaining a strong balance sheet and positive cash flows while generating strong returns for our shareholders. As a result, we believe the future of our industry, especially for TRI Pointe, remains bright. Finally, I want to thank all of our talented and hard-working team members who embody our company values and are at the heart of the passionate culture that is so important to our success. I'm extremely proud of how they support and take care of the company, our customers and each other. It is because of them that TRI Pointe recently received its certification as a great place to work which is a global benchmark for identifying companies with outstanding cultures. It's gratifying to be part of a team that is deeply committed to TRI Pointe's mission of being in the life-changing business. That concludes our prepared remarks. And now we'd like to open the call to questions. Thank you.

[Operator Instructions]. Our first question comes from the line of Stephen Kim with Evercore.

Yes. strong results. I guess my first question relates to this dynamic of the sales restrictions, which is obviously something that we've been observing in the market for many months now. I was curious -- I mean, since the goal of that effectively is to age your inventory in a way, basically match it to your production. I'm curious as to whether or not you feel that, that process is largely complete? Or do you expect sales restrictions to continue in the September quarter or perhaps beyond at a similar rate or a similar degree of severity as it was in the second quarter?

Yes, Stephen, this is Doug. Yes, I would expect that to continue through the third quarter and probably through the rest of the year.

And how are you faring in terms of ramping your production capability? If we look at, let's say, starts, for example, what should we think about with respect to your ability to increase starts? Would it be reasonable to anticipate that, that would be somewhat consistent with the growth in community count that you've laid out for fiscal '22? Or do you anticipate that your starts growth -- or you be able to start more homes, your growth would be greater than what you see with your community count or less in '22?

Stephen, this is Tom. Yes, I think it would be very consistent with our community count growth. That's our expectation.

Okay. And then you talked about 3 to 4 absorptions per community. Doug, I think, as being in sort of a more normal kind of environment. I believe you sort of characterized it almost as that, that is sort of the sweet spot. I don't want to put words in your mouth, though. So I'm curious is to -- do you -- number one, I guess, do you believe that this level of 3 to 4 absorptions per community is something that you would expect to run at in 2022 because you're obviously running well above that now? And is there anything about your community mix that would drive that? In other words, like maybe higher-end mix or something like that? Or is that just something that you were speaking about longer term sort of as a generality? I guess I would basically be -- we can make that the question.

Well, obviously, the pandemic created some very significant absorption paces throughout the industry, but the sweet spot is -- and in a healthy level is 3 to 4 homes per community per month. And that's been our business plan forecast going into '22 and beyond. It's always been our forecast. And it really optimizes our operations, creates efficiencies in sales, construction deliveries which you're seeing right now, the inefficiencies of a rapid pandemic-induced market. So yes, we think that's a sweet spot.

Got it. And that's something that you -- Is there going to be any effect from community count or your community mix?

No.

Okay. So in other words, you're basically just saying that, that's a level that you expect because that's sort of what your business plan runs at, but it doesn't sound like you're going to take any specific action to try to get your absorptions back down there. Would that be a fair comment?

That's correct.

Our next question comes from the line of Truman Patterson with Wolfe Research.

So first, Tom, I wanted to ask you. In the release, you mentioned leveraging technology to improve the processes, reduce costs. I'm just hoping you can elaborate a little bit on some of the key initiatives across both the gross margin and SG&A lines.

Yes. We are making significant strides in the infrastructure of our company through technology to really facilitate both gross margin expansion when possible and eliminate some of that overhead that historically has been in our business. We're really moving towards a more digital environment, and we're seeing strong results from that.

Okay. Got you. And whenever I'm thinking more intermediate term right into 2022, and you all are expecting to get 24% more communities open year-over-year, which implies 24% higher starts. I'm really thinking about material shortages from your suppliers. There are a handful of products that seem fairly constrained depending on which market you're in, right? But I guess, have you all had those discussions with your material suppliers? Will they be able to actually support that level of growth? Are they expanding capacity, et cetera?

Truman, this is Doug. When we put together guidance like that, we've already incorporated the current supply chain environment.

Perfect. All right.

So, yes. So I mean, that's what a strong management team should be doing.

Fair enough.

Our next question comes from the line of Alex Rygiel with B. Riley.

Very nice quarter. We're getting a lot of questions with -- we're getting a lot of questions from investors with regards to gross margins and how they should think about gross margins either increasing or decreasing in 2022? I know it's early here, and I know you're not going to give us any specific guidance, but can you help us to understand some of the dynamics that could affect gross margins as you think about it in 2022?

Sure. Thanks, Alex. This is Glenn. I think the setup for '22 is strong because we're going into -- we'll be going into '22 with a healthy backlog. There's been a lot of pricing power in our margins in '21 as evidenced by our increase in our margin guide for the year. And so it is a strong setup into '22. That said, we're opening 90 new communities. So there's a mix that happens there. when you open new communities like that. And so we obviously haven't given guidance for margins, but it's a strong setup for '22, but there is going to be a mix of communities that impact margins.

And then sort of on that same topic of gross margins, earlier you referenced the movement into the digital environment. Can you help us to sort of bracket or think about whether or not the movement into the digital environment has sort of permanently lifted gross margins? And are there other things inside your business that you are changing right now that could give us a sort of a permanent step-up in gross margin?

Yes, Alex. This is Doug, I mean there's a couple of aspects of the digital environment that affects gross margin and operating margin. On the growth side, it's the digital platform that we have for options has a significant impact, and we continue to be offering choice to our consumers as a premium -- America's premium brand builder. As far as pretax margin, there's significant efficiencies in the digital customer journey in buying homes. Linda Mamet, our CMO, can talk for hours on it. But that's been reflective in our current SG&A numbers as well. So those are the two ways that the digital environment impacts our business.

Our next question comes from the line of Tyler Batory with Janney Capital Markets.

First question I have, interested if you could talk a little bit more about demand and traffic and how those trended through the quarter and perhaps in July as well. I think there's a lot of folks out there that are concerned about demand perhaps being a little bit choppy, perhaps being a little bit volatile, some concern the maybe price or seasonality or something else might be impacting demand. And clearly, the results that you put up and your commentary thus far is really good and certainly quite positive, but just interested if you can give a little bit more detail in terms of what you're seeing on the grounds with respect to demand and buyer traffic as well.

Yes. Demand remains very strong. We don't feel any weakness in demand, 4.7 orders per community per month for the quarter is above the company thought process and where we think a sweet spot for the market is, as I mentioned earlier, and we continue to see that demand. What's causing the order change year-over-year is everybody is comparing the industry to a pandemic, which we've never been through. And frankly, we're all restraining sales releases. So when you restrain sales releases and rapidly sell homes to the end of 2020 into '21, and you see all these new community counts coming in '22, the math is pretty easy. There's not a cyclical downturn here, it's just pure math. And the demand is there, and we continue to see it through the end of the year, as I mentioned earlier, for many of our communities. We'll continue to monitor sales through the rest of this year.

Okay. Excellent. And just to follow up. Can you talk a little bit more about the price environment right now, talk about perhaps how you're thinking about affordability? And then the commentary on price for 2022, you took that outlook up quite a bit. So interested if you can talk a little bit more about how much of that is market driven or maybe there's some mix shifts that are going on there as well?

Tyler, it's Glenn. I'll take that one. The raise in the pricing guidance for the full year -- the selling price guidance for the full year is mainly just the pricing power we've been able to have this year and covering our cost increases with price increases. So nothing really to do with mix. It's more just that price increase.

Okay. And then one more quick one, if I could. You talked about cycle times, how those are trending or how those did trend in the quarter versus 2020 or even versus the first quarter. We've seen timelines to get extended even a little bit more. And then other specific markets or geographies, but that is having more of an issue than others?

Yes, Tyler, this is Tom. I'll take that one. We have seen cycle times increase this year about 10% to 20% and it's fairly uniform across all of our markets. All of our markets have been impacted by labor, material shortages and general supply chain issues. But again, we don't see that 10% to 20% really limiting our ability to deliver our target volumes for this year.

Our next question comes from the line of Jay McCanless with Wedbush.

The first question I had with lumber prices finally starting to tick back down, when do you think we'll see the maximum gross margin hit from that? And I guess, what are you seeing or hearing in the field in terms of lumber prices staying at these levels?

Jay, this is Doug. We've seen dimensional lumber down 20% to 30%. And it continues to fall, but OSB and some trust pricing has also seen some relief. But EWP citing other materials have gone, still stayed pretty healthy. And then there's other trades that have offset some of those cost savings. But I think you'll see some margin improvement and some improvement from the lumber drop to the end of this year going into the first quarter of next year as you, you -- really actually now I think about it, you're going to have it in the first quarter next year because you're going to get it in starts in the third quarter that will be delivered in the first and second quarter.

Okay. Great. And then the second question I had, just any commentary around July orders or traffic, what you're seeing so far for the third quarter?

Very seasonal, very strong demand throughout the marketplace is very normal. We're continuing to monitor our sales releases due to the supply chain.

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

Doug, I appreciate the color so far. I'm sorry to beat the horse on the demand side, but if we look at your pace, obviously impressive in the quarter, it does look like June did come down already to around that 4 sales per month. So I guess a 2-part question would really be, was that incremental constraints or supply that was implemented versus early in the quarter? Or was that the seasonality or the price sensitivity that you kind of alluded to earlier in the call? And the second part is then, I think, piggybacking off a few others so far if we were already at June and seasonally, you tend to slow a little from there, should we -- that 3 to 4 per month, should we already be using that for the back half of this year?

We continue to restrain sales releases, which has affected that absorption pace like the rest of the industry. And there's definitely some seasonality in that coming out of a post-pandemic world.

And Mike, for normal cadence, we're at 5.2 in April. May was at 4.8. And then June, you're right on at 4.1. And going forward, we expect that normalized 3 to 4 for the back half of the year.

Okay. And the follow-up is related just because it certainly seems like with the margin progression and with the community ramp that you're going to have, it does look like decent trends heading into next year, but from an order standpoint, the year-on-year change while, yes, the pandemic provided some unprecedented times, it is still going to produce a fairly tough comparison for you guys, at least through the first half of the year. So if pace is in that 3 to 4 and communities kind of ramped steadily through the year, is it fair to think that units could more or less plateau in '22 versus '21, just because of that pace normalization and timing of community ramp?

I think based on the timing of communities and the communities we're going to open the back half of this year in the front half of next year, even at that absorption levels we're talking about in a more normalized market, you're going to see higher orders next year based on the community count.

Our next question comes from the line of Alan Ratner with Zelman & Associates.

Really strong quarter, congrats. Maybe just continuing on Mike's question just there because I think earlier in the call, Tom, you made a comment in response to a question about your starts pace for next year that it should largely kind of track the community count growth of 20%. And just doing that math that you just kind of gave to Mike, I mean while orders could be up, it would seem like if absorptions are back in that 3 to 4 range that they're not going to be up 20%. So I'm just curious if I'm thinking about that correctly, like is the goal to build inventory? Or is there -- just you want to get inventory on the ground in case the demand remains at this 4 to 5 level just so you have that -- the supply to support it?

Yes. That's a good question, Alan. I'm not sure that it would track sequentially to a 20% increase in starts exactly, but we are going to try to maximize our starts relative to the demand profile that we see. And I think we've got the operational capacity to do that.

Got it. So I mean, just to clarify that then. So you're starting right now as many homes as you could start. And if that level is above the 3 to 4 range per month that you kind of view as normal longer term, you're okay with that?

No. I mean I think what Tom is saying and what we're all saying is that we're going to continue to optimize our business based on the level of demand we see, right? So we are trying to start as many homes as we can right now. We don't have many spec homes right now as you can see from our financials. And so we're just trying to maximize that cadence based on the demand environment we're in.

Got it. Okay. Maybe on that spec point because that was where I was going to go next. We've seen a number of builders that are predominantly built to order builders kind of temporarily shift the sales strategy to more of a spec model because they get more visibility in costs. And obviously, you benefit from extra price appreciation given how strong the inflation has been in the market. Can you talk a little bit about the mix of your business right now, spec versus build to order, what the margin differential looks like on those different homes? And then when you talk about restricting sales, are you holding back sales until the home has started and is at a certain point of construction? Or are you just holding back sales to manage a certain start pace, but it's not really affecting the mix of your business?

Margins are the same, Alan. And when we restrict sales, we're basically -- it's like California, you're doing phase building throughout the country. And so you're -- once you have your cost known, you release those homes and you sell them out. And we still continue to see strong demand in that process right now because the supply chain is still pretty wonky.

And Alan, let me add to that. We'd like to get back to our normal 2 to 4 specs per community. That's how we like to run our business because we are -- we do sell a lot of options and upgrades. So we like to sell our homes in the front end of that process. So we give the consumers a chance to have that choice. But we do think it also is wise to have some spec inventory for those quick move-in homes. And so that's what we're trying to get back to.

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

When you look at the '22 and '23 new community openings kind of on a gross basis as store count growth, can you talk about 2 things: one, whether or not the mix geographically or from a price point perspective is likely to change much from where you are now? And two, do you have a sense of what percentage of those communities will be on land that you purchased pre-pandemic?

Carl, this is Doug. It's mostly expansion in the Central and East regions of the country. And most of that, almost all that -- actually all that land was tied up at a price pre-pandemic.

And in terms of price points, Doug, is there any shift towards high end, low end? Or move up any significant [indiscernible]

It's primarily entry-level plus and first move-up.

Based on those markets, like Doug said, our new kind of growth markets like Charlotte, Raleigh, Dallas, Austin, places like that.

Okay. And then -- but on Alan's question, given the ramp in communities that you're anticipating, how are you feeling about staffing both at the sales level and at the division management level by putting additional stores on top of what the folks you've got, how is hiring internally? We know it's tight in the subcontractor trade side, but just for a builder managing a large business, how are you looking at the ability to add people in this environment?

Well, as we noted, we were, due to our team's tremendous work, certified as a great place to work, and we have a very strong culture. So that gives us the ability to attract people to TRI Pointe. And even in this tough environment of the supply chain and talent recruitment, that's one of the great advantages we have is our culture and a great place to work.

Our next question comes from the line of Deepa Raghavan with Wells Fargo.

First question, closings for the full year. It seems like it's tracking at the low end of the range. That includes Q3 outlook. That also implies a -- at midpoint it implies a pretty strong Q4 ramp. Just curious, is there enough visibility to keep the upper end of the range? Or should we think about the full year more tracking towards the low end of the range? I mean your community count is unchanged, but you have all the supply chain constraints that are pushing out delivery. So just curious how to think about your $600,000 to $630,000 unit closing delivery guide.

Deepa, it's Glenn. Yes, I think the fourth quarter is obviously a ramp in deliveries if you look at the full year of guidance compared to the third quarter. And some of that is the supply chain pushing deliveries from the third quarter to the fourth quarter. But the range of delivery is well depend on the side, the supply chain and how we're able to navigate that. And there's going to be a lot of our competitors in the same boat as far as building a lot of houses in the back half of the year. So our success of getting to the higher or the lower end of the range will depend on the supply chain.

Okay. Got it. Right now, Q4, it's still TBD, but it just depends on the supply chain. Okay. My second follow-up is your general tone, I think on the last call -- previous call, Doug and Glenn, I thought there was a decent dose of cautious tone from a macro perspective. It looks like you're feeling a lot better. And I'm just curious what changed last few months that changed your tone for the better, not that I'm complaining, just so to be clear, but it seems to feel a lot better than you did last quarter.

Well, I'm not here to judge a tone, but I can tell you, I've been very bullish, continue to be very bullish on the housing industry. When you look at the demographics of the millennial buyers that represent just over 50% of our buyers that are buying houses at an average price of over $600,000, and we're just tapping into that demographic. I think the rhetoric around comparing the rapid absorption in a pandemic world to a more normalized absorption, it is greatly overblown. We don't have a demand issue. We've got challenges in the supply chain. And we're very, very bullish about the long-term nature of housing over the next 5 to 10 years. It's going to be a good housing market. There will always be some bumps in the road. But long term, we've got a company here that's positioned for tremendous growth, when we laid out our community count growth to double digit over the next 2 years. So -- and that's credit to the team here, not -- we've got a great team.

Great. A final one, if I can squeeze in. You talked to some of the operational channels. You mentioned some operational challenges. Is that more of just the same challenges persisting? Or did you witness any newer challenges in the quarter?

No, it's the same challenges.

Our next question comes from the line of Alex Barrón with Housing Research Center. Alex Barrón: Good job on the quarter. I guess my first question was on the production side. Curious if you guys could share how many homes you guys started. And is there an intent to kind of get ahead of the curve by starting more homes and letting those homes age before you sell them? That's my first question.

We're always starting as many homes as we can to meet demand. And right now, as I mentioned, we're continuing to restrain that order pace with sales releases that are being structured because of the supply chain. And then with the increased community count growth, we're going to see continued -- a ramp-up of starts.

Alex, this is Tom. As Glenn mentioned, we're operating our business in a normalized environment as possible. Yes, we would love to increase our spec count to our normal of 2 to 4 per community per month. But we're not doing anything drastically different than our normal operating procedures, and we're definitely trying to match our production capacity to the demand levels that we're experiencing. Alex Barrón: Got it. And then on the actual sale and pricing of the homes, I've seen various approaches, I guess, in the last quarter. So I'm curious if you guys have switched or what you're using? Are you using lotteries or wait list, first come, first serve or highest and best offer. Like, how are you guys managing the pricing side and who gets to buy the homes?

Alex, we use a priority system.

Alex, I'll add to that. This is Linda. We think that the customer experience is extremely important for the long-term health of our business. So as Doug said, we invite our customers to prequalify with our affiliated mortgage company, and we base the order of our sales on the timing of when they prequalified.

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

Well, thank you, and thank you to the team at TRI Pointe. Great quarter. Looking to have a great year, and we look forward to talking to everyone next quarter. Appreciate it. Thank you.

This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.