Ladies and gentlemen, greetings and welcome to the TRI Pointe Homes Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to David Lee, General Counsel. Please go ahead, sir.

Good morning, and welcome to TRI Pointe Homes Earnings Conference Call. Earlier this morning, the company released its financial results for the third quarter of 2022. Documents detailing these results, including a slide deck are available at www.tripointehomes.com through the Investors link and under the Events & 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. 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.

Good morning, and thank you for joining us today as we go over our results for the third quarter of 2022 and provide an update on current business conditions and our strategic plan. Tri Pointe Homes produced outstanding results in the third quarter. We delivered 1,463 homes with an average gross margin of 27.1%, generated net income of $149 million or $1.45 per diluted share. This represented a 24% increase in earnings per share compared to the third quarter of 2021. Our teams did an excellent job managing through a very challenging supply-chain environment. Resulting deliveries at the high end of our guidance range. Our experienced management team has the right strategies in-place to continue producing strong results in the fourth quarter, including focusing on the delivery of our high margin homes in backlog, while also navigating the housing correction the industry is facing. As the housing market has continue to weekend due to the rapid rise in mortgage rates, our order demand slowed significantly during the quarter, resulting in an absorption pace of 1.8 orders per community per month. Demand was soft at the start of the quarter, but picked-up in August when mortgage rates went down to the low 5% range and weaken again as rates approached 7% in the back-half of the quarter. The volatility in rates along with the growing uncertainty around the economy has put many prospective buyers in a wait-and-see frame of mind and let certain buyers in backlog to reconsider their purchase. We continue to prioritize the preservation of our backlog and are offering solutions to offset monthly payment and affordability challenges buyers are facing. To navigate today's reality we have implemented several tactics to help our customers purchase and close on their homes. We are providing below-market financing solutions to both buyers…

Thanks, Doug and good morning. 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 of 2022. At times, I will be referring to certain information from our slide deck which is posted on our website. Slide six of the earnings call deck provides some of the financial and operational highlights from our third quarter. We reported outstanding results on all key financial metrics this quarter that either met or exceeded our stated guidance. We delivered 1,463 homes at an average selling price of $723,000 resulted in home sales revenue of approximately $1.1 billion. Our homebuilding gross margin percentage for the quarter was 27.1% and SG&A expense as a percentage of home sales revenue came in at 9.1%. This resulted in an income before tax as a percentage of home sales revenue of 18.6%, which was 130 basis point improvement compared to the third quarter of 2021. As we have discussed, order demand slowed significantly during the quarter resulting in 681 net new home orders, which was a 50% decrease compared to the prior year. Incentives on deliveries during the quarter continued to be low at 1.6% of home sales revenue, but incentives on new orders in the quarter increased to an average of roughly 5%. As rates increased throughout the quarter so did the level of cancellations, we had 258 gross cancellations during the quarter, 40 of which were buyers that transfer to a different lot within the same community. The net cancellation number of 218 represented at 5.7% of our opening backlog for the quarter compared to 3% for the same period a year-ago. Turning to communities, we opened 17 new communities during the quarter and closed out…

Thanks, Glenn. While the rise in interest rates and softening buyer sentiment have made for a more difficult sales environment, we are by no means discouraged by these challenges. The long-term macro-environment for the housing industry continues to be very bright. Due to the lack of supply in the housing deficit that has fallen short a median household formation since 2009. In fact in many ways we are energized by the opportunities that will arise for well capitalized builders like TRI Pointe to establish and strengthen market positions. We have a solid balance sheet and excellent liquidity, which will allow us to operate from a position of strength during this period of uncertainty and to capitalize on any opportunities that could arise as a result of this market correction. We know from experience that the decisions and operational strategies a builder employees during periods of uncertainty sets the stage for how it performs in the next up cycle. We have a comprehensive plan in-place to stay competitive and sell homes in today's market, while simultaneously positioning our company for success over the long-term. Finally, I'd like to thank all our team members for their efforts this quarter. A big reason for the confidence they have in the future of this company stems from the hard work, perseverance and dedication I witnessed across our organization on a daily basis. We have put together a strong and talented team here at TRI Pointe and I truly enjoyed working alongside all of you as we build something great. That concludes our prepared remarks, and now we'd like to open the call up for questions. Thank you.

Thank you. [Operator Instructions] Our first question comes from the line of Stephen Kim from Evercore. Please go ahead.

Yeah. Thanks a lot. I appreciate all the color. I was wondering if you could tell us a little bit more about your incentives. I think, Glenn, you mentioned you're running at around 5% right now. I assume that's not including base price reductions, wanted to get a sense of is that true? And if so, how much base price reductions just, taking an estimate, providing an estimate, how much that might be year-over-year? And then also, are you finding the need to offer what you might call late-stage incentives, as folks come to the closing table?

Hey, Stephen, good question. This is Glenn. So, so far base -- true base price discounts have been pretty minimal, we've barely been focusing on incentives and that's that average of 5% that we're talking about. There's been a few select communities where we've taken base price discounts or reduced base price, but it's pretty small in the overall picture. And then for the late-stage incentives, Linda, did you want to add some color there?

Certainly we really work closely with customers as they are approaching their closing to ensure that they're comfortable and ready to move forward and close on the schedule date. So we do typically see more of the renegotiation or assistance, additional financing incentives coming in at the late stage. Other incentives are, of course, on upfront at the time of the purchase with things like forward commitments.

And those late-stage incentives to provide a little bit more detail around that. Are you saying that those would be things like buy downs or things of that nature? Is there anything different about those late-stage incentives that we should know about? And then you also talked about specs. I just wanted to get a sense for how many specs per community in general would you say you target? And how far above that targeted range do you think you might run in the near-term?

[indiscernible] on those late-stage incentives, it might be, Stephen, an example where we gave closing cost incentives at the time of contracts and we're giving some additional incentive before close to further by a rate down if the customer didn't already have a long-term lock in place. Or it might be in the form of a design studio credits as there might have been additional changes in the market from when they originally purchased.

Yes, relative to spec, Stephen, we consistently implement strategies. And as we said in the prepared remarks, about 60% of our starts -- our spec starts, that's largely to fuel the desire from the consumer to have certainty around close and we're seeing in today's environment they really are looking for a close date within 30 to 90 days and so that spec strategy works really well for us. On average our target is about five specs per community.

Okay. Great. Well, that's appreciated. Thanks a lot guys.

Thanks, Stephen.

Thank you. Our next question comes from the line of Alan Ratner from Zelman and Associates. Please go ahead.

Hey guys, good morning. Nice execution considering the tough environment out there. My first question just kind of wanted to touch on the price versus pace equation, and I know in the past give kind of highlighted to us that, push comes to shove you're going to focus on pace and getting a respectable absorption pace. And when I look at your results this quarter 5% incentives, it kind of seems like middle-of-the-road compared to what we're hearing from your competitors maybe even a bit on the lower-end there and yet your order decline of 50% is probably a bit greater than average. So I'm just curious how you're thinking about that equation today, are you seeing the elasticity in the market when you do get more aggressive with incentives where it's making a notable difference to your sales pace and how should we expect that to play-out here over the next couple of quarters?

Yeah, it's a great question, Alan. We were going into the year with an excellent backlog as you pointed out. Produce some excellent numbers for the third quarter and we expect to produce a very strong '22. So it's kind of a tale of two markets, right? I mean, our operators are incentivized to keep their backlog to get the year-end closings. This has been such a rapid interest-rate environment changing from five to six, to seven to six. So we -- it's a little bit more of an art than a science, we were pushing as we mentioned in the remarks more on incentives to hold people in backlog, to test the market. We saw frankly some aggressive pricing behavior that really just created some gross activity, but like amount of cans. So I think as you go -- as we go into the new -- ended the year and going into the new year on existing programs, we will implement rational and effective price strategies to maintain a steady absorption. But it's an interesting environment. The consumer is getting hit on both sides, they read every day, rates are going up and then they think, well, as our price is going down, so sometimes the incremental pace with additional incentives and base price adjustments, don't even do anything. So again it's a, little bit more art than science, but we will focus and continue to focus on pace going into. The new year and with our new communities that we're opening we've got these three new communities we pointed out in Dallas. I mean, there are hundreds of people on the interest list going through pre-qualifications right now. They are well-positioned, great locations, great price. So it's going to be a choppy time, but we're well-prepared for it.

That's very helpful context. Thank you for the comments there. Second question, you guys hosted a helpful Analyst Day back in May and gave some longer-term targets and obviously, the world has changed quite a bit since then and I'm sure it will change quite a bit more here in the next handful of quarters. But I'm just trying to about, when you think about your growth plans that you laid in May and you already touched on earlier on this call the community count guidance for '23, so it sounds like you're still kind of moving forward with those plans here. Has anything changed about how you're thinking about the next few years either from a risk standpoint, from a balance sheet standpoint, from a land perspective? You mentioned pulling back quite a bit on land spend next year, but I'm guessing that doesn't impact your '23 and '24 growth outlook a whole lot given your current land pipeline. So just -- I'm not looking for updated targets there, just more qualitatively if any of those items you mentioned back-in May have changed?

Well, I think its change significantly as far as the macro-environment for housing, right? I mean, interest rates have more than doubled for the consumer. It's anybody's guess where the Fed goes with the -- it looks like we're going to continue to see rate increases. So we put together a strategic playbook at the beginning of the year, anticipating this higher-rate environment due to the inflation. So part of our strategy, we have an excellent land position, a number of our communities were purchased two pre '21 as we highlighted in May, Investor Day. Have we pushed those out a little bit? Yes. It's a little bit of that slower execution. We still believe in that growth, we still believe in those communities because they are well-positioned in A locations. They are being able to be priced very attractively, as I mentioned in these communities Dallas and some -- all the other communities we highlighted. So it looks like, Alan, if I was to predict, I think the housing market and stars will pull-back dramatically in '23, we're going -- we've already were under-supplied and I think going into '24, we're going to see a bounce-back because there is no supply, the resale market is effectively locked-in, its sub 3.5%, 4% mortgages, there's still plenty of millennials and buyers that need housing, a lot of them are on the sidelines. So starting these new communities as we look at them in '23 going into '24, I think could be positioned very well to meet that need going into the latter half of '23 and going into '24. So that's the way we're planning, cash though and cash flow positive, cash flow is number one. And we're going to focus on keeping our balance sheet very strong, debt-to-cap ratios net will be in the low 20s because we also sense there could be opportunities for us to change our market position going through the next 12 to 18 months.

Very helpful, Doug. Thanks for all the thoughts there. Good luck.

Thank you. Our next question comes from the line of Carl Reichardt from BTIG. Please go ahead.

Thanks much everybody. On the 90 to 100 new communities coming, can you talk about what percentage of those you think would be sort of more spec focused and more premium entry-level versus move-up? Definitely I'm asking it's a big running growth, is that going to change your mix or move you away from the 60% of total starts back long-term? Or these new communities, sort of come in at the same historic spec and premium entry-level mix that you've had?

Yes. Good questions, Carl. This is Tom. I think it's approximately 60% of the new communities are really coming in the premium entry-level position. As you know, we've been focused on geographic diversity and I think a large portion of these new communities are coming out of our Southeast region, which is really at more attainable and affordable price points. So we're really thinking that this community expansion is going to benefit us through the current market environment.

Yes, Carl, when you look at the Central and East -- Southeast region that, I think we pointed that out back in May, that's a big part of what we were have been repositioning to that premium entry level and as we mentioned in the prepared remarks our ASP will be coming down because of that change in mix.

I understand that, I'm just curious if the ASP is coming down because prices generally are lower in those new markets versus more entry level compared to move up, but I think you got the answer to me. Doug, on the trade side, I mean, I think almost every builder has said the front-end is starting to get more available on loosening up. Are you seeing any anything in the mid-end trades now like rough frame side or rough electrics, things like that. And from a materials perspective we builders complained about pedestals, are there any others that where you're seeing a significant issues in terms of obtaining them or are we starting to see some improvement on things like windows and doors from your perspective? Thanks.

Well, windows have improved. Appliances in some cases have not. I would characterize the backend still a challenge for our teams across the country. My prediction is by the end of the first quarter the backend will realize that housing sales and starts have pulled back dramatically and they'll be looking for work just like the front end. So we are targeting double-digit. We were targeting double-digit decreases to our cost structure going into '23, obviously, with these new communities we're enjoying some of that with the recent lumber drops as well. So -- but it's going to take until the first quarter before the backend realizes that their backlog is not as strong as they thought it would be.

Great. Thanks, Doug, appreciate it.

Thank you. Our next question comes from the line of Alex Rygiel from B. Riley. Please go ahead.

Thank you. Can you quantify the cost reduction actions to date and maybe talk a little bit about future cost reduction actions to take place?

Well as I mentioned, we're targeting from end of this year to the end of next year a double-digit price reduction strategy so we're still in the early stages of that. So it's a little early to quantify, but that's -- we just quantified what we're targeting across the country.

I was going to add obviously that is, occurring with rebidding, certainly it's occurring as we're looking at new projects coming forward and focusing on trades that have more availability, certainly a big emphasis is on making sure we have the right product coming to market to achieve the lowest possible retail prices for the consumers. So we've really done a really good job of really looking at all new product types coming into the market. Looking at value enhancement, value engineering on all of those products to ensure we're producing the lowest cost structure possible.

And then as it relates to the spec strategy with a target of about five per community, is that finished or under development and where did you stand coming out of third quarter?

Yes, Alex, that is for in-process specs standing at the end of the third quarter, we ended right around 100 completed units which was less than one per community.

Thank you.

Thank you. Our next question comes from the line of Jay McCanless from Wedbush. Please go ahead

Hey, thanks for taking my questions. The first one I had, when we think about the ASP going into '23, is it going to have more of a call it a mid sixes type feel or is it still going to be low-sevens. Any help you can give us on that?

Well it depends on kind of the pricing environment going into next year Jay, but where we sit today, I think you'll see it in the sixes probably mid to high sixes it's kind of the best range if you think about where we sit today.

And then I think Tom talked earlier about lumber prices coming down. I guess when should we expect that to be a tailwind for gross margin?

Yes, the lumber prices we've seen over the last couple of quarters have been the lowest in years for sure and so you'll start seeing that coming through margin in the first half of next year.

And then just the other question I had. It sounds like you guys maybe resetting some of the base pricing as you're opening the newer communities. Any sense of what that -- what the new prices relative to the old price you may have underwritten it out, is it 5% lower, 10% lower. Just trying to get a sense of how much having to work on based pricing to drive affordability?

Yes, Jay, that's a great question and we're all trying to determine exactly what that price is. Certainly different communities are performing differently and have different market expectations. But I would say that you're going to be looking at price discovery that's in the 5% to 20% range is our best estimate right now.

And in some cases Jay, it actually still maybe above underwriting. Because it was underwritten two or three years ago, but below where we thought it was going to be a couple of months ago, six months ago. So it depends on when the community was underwritten to.

Okay. Great. That's all I had. Thanks for taking my questions.

Thank you. Our next question comes from the line of Truman Patterson from Wolfe Research. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. First question, regarding the 5% incentive level, is there any way you can help us think through that how the September or October kind of exit rate was? And then also could you go across your markets and discuss maybe which regions or states you're seeing the highest level of incentives potentially quantify some of those regions?

Sure, Truman, this is Linda. And certainly incentives have increased during the quarter in line with the increase in interest rates and levels of consumer confidence. Generally we're certainly seeing that all markets and all buyer segments are increase -- are impacted by rapidly increasing rates. So it would be difficult to say that there was any one particular market where there was a greater level of incentive. It is very much community-by-community depending on the level of competitive supply in the market, what stage construction is at in particular communities for unsold spec homes. But in general, at some point, as Doug said earlier, we can only go so far with incentives and the levels that we could buy interest rates down to, so at that point we would also be looking at layering in base price changes as we discussed.

Okay. Thanks for that. And then Doug, you mentioned earlier in Q&A that you're expecting the housing market will pull-back dramatically in 2023. Given the widespread and mortgage rates versus a 10-year treasuries, if mortgage rates settled let's just say around the 6% level in 2023. Does that really change your thinking much or has kind of the negative buyer psychology permeated where your view doesn't change that much? I'm just trying to understand the potential elasticity of buyer demand?

Well, I think when you look at the cancellation activity and the reason -- reasonings for cancellation its Linda, I would say it do highly psychologically more than that financially, our buyer profile is really strong. So I am of the belief Truman that the consumer -- if they saw that there was a leveling of interest rates, pick a rate 6% like you said. It's pretty simple math, you just get to the right price and the right payment after that. Right now the psychology of the buyer is a little bit disruptive because they're reading on one-hand how far rates go there and then on the other hand where the prices go. The spread to the mortgage market right now by the way and I'm sure you're aware of this, has a lot to do with the liquidity in the mortgage market. The Fed and the banks are effectively out, so you've got the MBS reach out there and so there's a higher-risk premium, right, to what's going on in the mortgage market. And some of those mortgage REITs are having mark-to-market calls as well. So once that settles down, there is a tremendous amount of demand sitting on the sidelines just deciding where can we enter and that we're at a stable place and stability is my biggest concern. If I was talking to the Fed today to say, hey, this just create a more stable environment because the consumer will then engage into the housing cycle and housing is the tip of the spear for the economy, right? I mean we have a significant multiplier effect and if housing starts go down, double-digit fashion next year that's going to have a significant impact on the economy, which is where we're trending. So it's a fascinating time. I'm actually energized by the whole darn thing, because we've got a very well oil machine with a lot of liquidity, we're going to build more liquidity and frankly, I hope there is tremendous opportunities to increase market position. So, we'll see what happens.

All right. Well, thanks for the time. And good luck in the coming quarter.

Thanks, Truman.

Thank you. Our next question comes from the line of Alex Barron from Housing Research Center. Please go ahead.

Yes, thanks, gentlemen, and Linda. Can you guys provide the starts for the quarter and versus last year? Just curious about that.

Starts for the quarter was around 900, Alex, and compared to the last quarter was, I don't have that in front of me.

We were down about 65% from the prior, the second quarter. So we've cut back on starts quite a bit, obviously, we have a significant number of in process and it is our goal to balance our absorption pace and our start pace.

Okay, that's good. And then I guess given the limitations that you mentioned on being able to buy down rates. I was just curious what are those limitations? Are you able to buy them down, say, 200 basis points or it's not quite that far?

Yes, Alex, this is, Linda. Certainly as rates increase, it gets harder to buy them down substantially and becomes more expensive to do so and then we also will have seller concession limits based on the loan type where there is a limit to how much we can contribute in closing costs for the buyer. So that's when -- we can still use some things like temporary rate buy downs that could get you a lower initial rate, the buyers are still qualifying at the note rate. But there is interest in that as well as some growing interest in arms, especially in the jumbo area.

Yes. Okay. So I was just trying to get a sense of rates are 7%, is it possible to buy them down to 5% or is that too extreme in other words. Because if you can are you able to do price cuts, then?

Yes, at 7%, we can still buy down to about 5.25%. And we can still provide some additional incentives for paid closing costs. So yes, there is still room to do that in today's market, it's getting more challenging to get rates into the [indiscernible]. And we can really only get there with some things like arm, products or temporary buy downs.

And Alex, I'd just add that the longer the term that you're trying to lock-in the rate. The more difficult it is to get to those lower rate structures that you're talking about. So another reason that buyers are looking for certainty of close.

All right. So related to that, what is right now your average build time and what's the range, which are the best markets with the shorter build times, which are the markets with the longest build times?

Yes, quarter-over-quarter we're kind of flat on our cycle times right now. Year-over-year we're probably a couple of weeks long, in general across the company on average, we're about two months over our regular construction cycle times. The shorter-cycle times are really down in the Southeast and the Carolinas. And the longest cycle times we have right now are in the Arizona market.

On average, Alex, this is Doug, our company's construction start to completion time is around seven months.

I was just asking because of that whole issue that buyers I guess want something that can close relatively quickly and also what you mentioned about being able to lock-in rates. I was just curious how hard it was in those longer build time markets to be able to do that.

But that's -- it's a good question and so we're focused on two strategies there, one is to maintain a healthy spec level as we mentioned in the call, 60% of our starts. Our spec and where we have higher demand communities. We may push that -- we will push that button even further. The other things that we're looking at going into '23 is the shorten those cycle times. Hopefully we can bring those in by a month or so. So that will help create that certainty date that we were talking about and what you're asking about. So the combination of those factors will definitely help in the grand scheme of things.

Sorry to ask one more, but if I could. So on that front, let's take the market like Phoenix. Is there any -- I know historically yourselves and other builders have outsourced most of the labor. So is there any possibility to maybe consider changing that and bringing some people on your staff that would help shorten that cycle time rather than depend on outside subcontractors?

My personal opinion is, no. I think with the pullback in starts and I think you've done a really good job of documenting some of that in some of your reports that I like reading. There's going to be an excess labor market and the subs will pool and we already seen in the front-end, we'll be very hungry. So I'm not looking to add overhead in the anticipation of that shrinking our cycle times, it will naturally happen, whether you're in Arizona, Texas, California, Carolina, there'll be access labor supply as you go into the first half of next year.

Got it. Thanks a lot. Best of luck guys.

Thanks.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And now, I would like to turn the conference over to Mr. Doug Bauer for closing comments.

Well, thanks everybody for attending today's call and we look forward to reporting strong 2022 earnings early next year. Have a great weekend. Thank you.

Thank you. The conference of Tri Pointe Homes has now concluded. Thank you for your participation. You may now disconnect your lines.