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spk08: Greetings and welcome to the TriPoint Group 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Lee, TriPoint General Counsel. Please go ahead.
spk00: Good morning and welcome to TriPoint 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.tripointgroup.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 TriPoint'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.
spk14: 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 frontline 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 would 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. And as a result, TriPoint 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 61 cents for the quarter, representing a 39% improvement over last year, thanks to an 11% increase in home building 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, while 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 shifts and lifestyle changes that are occurring in this country that will have a positive long-term impact on our industry. Millennials are increasingly embracing the notion of home ownership, while Americans of all ages have placed a greater emphasis on the home due to the current pandemic. As we continue to take advantage of the growth that's occurring in our industry, we are laser focused on five ways to improve our returns. This is an area of emphasis for our company as we have scaled our operations in one that should continue to improve thanks to the progress we're making on a number of fronts. The first area of opportunity we see for better returns comes from several of our projects associated with our long-term California assets. During our 2016 Investor Day, we highlighted the earnings potential of our assets located in Santa Clarita and the Inland Empire, but also emphasized that our returns would be depressed in the near term due to the upfront investment needed to bring them to market. Over the next several years, we set about putting the necessary infrastructure and amenities into these communities to maximize their appeal. Fast forward to today, and we are realizing positive returns on these investments with several communities generating sales bases above the company average and healthy profits. The second avenue we see for better returns is through the maturation of our early stage divisions like Dallas, Austin, the Carolinas, and Sacramento. We have established a foothold in these markets, but as is the case with any new venture, it takes time to scale the operations to a level on which profitability is achieved on a more consistent basis. We have made the necessary investments in these markets to move past the startup phase for these divisions, and we expect their contributions to our profitability and return profile to improve over the next few years. Our third lever to increase inventory turns. We made a conscious effort to increase the number of lots controlled via option over the last few years, and that number now stands at 30% as of the end of the third quarter of 2020, compared to 16% two years ago. We are continuing to grow our option lot percentage by appropriately structuring land deals with sellers, as well as utilizing financing transactions to control more lots in a capital-efficient manner. Based on our current projections, we believe we can get our option lot count up to 40% and improve our inventory turns to one time annually by 2022. A fourth way in which we can specifically improve our return on equity is through our share repurchase program. So far this year, we have repurchased $164 million in stock from our $200 million authorization. We intend to utilize the remaining amount of our current authorization in the fourth quarter. And going forward, we continue to be committed to our programmatic annual stock repurchase program. Based on our strong cash generation and low debt levels, we believe we can continue to utilize a portion of our capital to repurchase stock without sacrificing growth in our home building operations. The final initiative we are focusing on to drive better returns is our ongoing commitment to operational and process improvements across our organization. As we seek to increase efficiencies company-wide and anticipate trends in home buyer behavior, we have evolved into a technology-driven company. Over the past 18 months, we have upgraded our accounting system, our CRM solutions, and implemented a new construction management platform that has made us more streamlined in our field operations. This has given us the ability to centralize certain back office functions that will improve efficiencies and lead to G&A savings. We have also implemented a new option selection software program for an overall improved customer experience. and made enhancements to our virtual sales content as we stay in stride with the consumer's desire to shop from home. Along with technological efficiencies, we will focus on product simplification going forward, which will reduce cycle times and generate cost efficiencies while providing the same personalization that our company is known for. Calving these initiatives I am excited to announce that we have made the strategic decision to start operating nationally as one unified brand, TriPoint Homes. This change will drive more operational efficiency and performance by allowing us to concentrate all our functional efforts around one brand instead of six. It will also create stronger national awareness for the company with the goal of further improving our financial results and driving shareholder value. The merger with Ricoh that we completed in 2014 was transformative for the company, and the multiple brand approach we inherited has served us well over the past six years. During that time, we successfully established an overarching vision and culture across TriPoint Group's six brands, while fostering the long-standing trusted relationships our local leadership teams have forged over the years with land sellers and trade partners. That pillar of operating as the best of big and small with local expertise and relationships backed by our own financial resources and powerful technology platforms will continue to define who we are as we look to the future and continue to broaden our geographic footprint. While evolving in ways that will make us more efficient in key operational strategies and ahead of consumer trends, the pillars that have been central to our success will continue to differentiate us. Along with being the best of big and small, we are a customer-driven company and consider ourselves in the life-changing business. As a premium lifestyle brand, we place a high priority on innovative design and craftsmanship across all price points. All this is possible because of the passionate culture that permeates all aspects of our business, empowers our people to love what they do, and motivates them to perform at the highest levels. We are excited to move forward as TriPoint Homes and take the company to the next level. Through the end of this year, we will continue to operate under our existing brands and will begin transitioning to our new TriPoint Homes brand across the country early in the first quarter of 2021. Finally, I wanted to say I am very proud of how we have grown as a company and of the team for undertaking all these strategic initiatives to put TriPoint in a position for success for many years to come. With that, I will turn the call over to Glenn to provide more details for the quarter.
spk13: 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 six 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 performance was led by the Inland Empire with a sales pace of over 9 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 an 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 and sales to be in sync. We are also monitoring increased input costs largely due to lumber to make sure we are pricing new homes appropriately to offset those input costs. While we continue to see strong housing fundamentals in all of our markets, we expect to see some slowing of our sales pace as we head into the end of the year due to normal seasonality and the factors I just discussed. Due to the strong sales we have experienced, we have closed out of more communities this year than previously expected. For the quarter, we opened 13 new communities and closed out of 32, ending the quarter with 126 active selling communities. For the fourth quarter, we expect to open seven new communities and close out of 15, which would result in an ending active community count of 118. In 2021, we are planning to open 70 new communities, 22 of which will be in the first quarter and the rest equally distributed throughout the year. Depending on the timing of community closeout, we estimate ending 2021 with 135 active selling communities, which would represent a 14% increase over our projected year-end 2020 community count figure. For 2022, we currently have 80 planned new community openings. Turning to deliveries for the quarter, we delivered 1,303 homes, which was a 10% increase year-over-year. This resulted in home sales revenue of $826 million, which was an 11% increase year-over-year on an average selling price of $634,000. As we grow our communities outside of California, and especially in our early stage divisions, which focus more on the entry-level and first move-up segments, We are expecting our average selling price as a company to come down over the next few years. We anticipate our full year average selling price to be approximately $585,000 in 2021 and $550,000 in 2022. Our home building gross margin percentage for the quarter was 22.1%, a 50 basis point decrease year over year. The decrease in gross margin was due to the lower mix of the long-term California assets in the quarter. We were encouraged by the strength of our margins despite a lower mix of long-term California assets in the quarter, which we believe demonstrates the progress we have made in increasing our profitability outside of California, and we feel will lead to more consistent quarterly results going forward. SG&A expense as a percentage of home sales revenue was 9.8%, 180 basis point improvement year over year, as a result of the leverage gained from the increase in revenue and savings from some of the efficiency initiatives that Doug mentioned earlier. Net income for the quarter was $79 million, or $0.61 per diluted share, which was an increase of 39% compared to the prior year. Excluding charges related to the early extinguishment of debt that I highlighted on last quarter's call, earnings per diluted share was $0.63 for the quarter. At quarter end, we owned or controlled approximately 32,000 lots, of which 30% were under options. A detailed breakdown of our lots owned will be reflected in our Form 10-Q, which will be filed later this week. In addition, there is a summary of lots owned or controlled by state on page 22 in the slide deck. Looking at the balance sheet, at quarter end, we had approximately $3 billion of real estate inventory. Our total outstanding debt was $1.3 billion, resulting in a ratio of debt-to-capital of 37.8% and a ratio of net debt-to-net capital of 27.6%. Year to date, the company generated $338 million in positive cash flow from operations and ended the quarter with over $1 billion of liquidity consisting of $494 million of cash on hand and $533 million of availability under our unsecured revolving credit facility. Now I'd like to summarize our outlook for the fourth quarter and full year. For the fourth quarter of 2020, the company anticipates delivering between 1,400 and 1,500 homes, and an average sales price of $625,000 to $635,000. Home building gross margin is expected to be in the range of 20.5% to 21.5%, and SG&A expense as a percentage of home sales revenue is expected to be in the range of 9.8% to 10.3% for the fourth quarter. Lastly, the company expects its effective tax rate for the fourth quarter of 2020 to be in the range of 25% to 25.5%. As a result, for the full year, we anticipate delivering between 4,900 and 5,000 homes at an average sales price of $625,000 to $630,000. Home building gross margins are expected to be in the range of 21% to 21.5% for the full year, while our SG&A expense as a percentage of home sales revenue is expected to be in the range of 10.8% to 11.2%. Finally, the company is forecasting its effective tax rate for the full year to be in the range of 24% to 24.5%. I will now turn the call back over to Doug for some closing remarks.
spk14: Thanks, Glenn. I'm very pleased with the progress we made this quarter, and I'm looking forward to this next phase of TriPoint Homes evolution. We've come a long way from our humble beginnings as a home building startup 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 and diversified our operations from both 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 continuing 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. It should result in a more rational, consistent operating environment over time. Given this dynamic, along with the strong demand trends we're experiencing and changes that we're implementing at our company, I am as excited as ever for the future of TriPoint Homes. Finally, I would like to express my gratitude to the hardworking 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.
spk08: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Ivy Zellman with Zellman Associates. Please go ahead.
spk07: Thank you. Good morning, guys. Congratulations on a great quarter. So, Doug, this is a big-picture question that I've been getting from investors, so I'd like you to maybe think through how to respond. You know, since the great financial crisis, you know, we've had, on a regular basis, housing starts, you know, clearly have not grown as fast as we've seen in prior cycles. And more recently, I've been told, you know, my forecast for 2021 is too conservative at a million-one single-family starts. And why can't it 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 investment chain understand some of the bottlenecks within, you know, land development, supply chain, things of that nature. And let us hear your views.
spk14: Hi, Abby. 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?
spk07: Yeah, the peak of 2005.
spk14: Yeah, 2005. Yeah, I mean, even before the pandemic, I think the key phrase I use is the impediments to housing starts and permits nationally to grow is land loss. labor, and the regulatory environment. And you can go down kind of a channel on all of those as you look forward into the future. But we have kind of a natural buffer with those supply chain supply inhibitors when you think about the labor, the land environment, and the regulatory environment, and all of which are going to probably get – potentially get more – aggressive in the regulatory environment, depending on the political views that you have. But 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 supply chain is tough right now because of the pandemic. So those are the primary inhibitors to that growth that we saw in 2005.
spk07: And recognizing that while the big guys are predominantly doing self-development, and correct me if I'm wrong, but that gives you the advantage where, you know, while the publics are 40% of the market, you know, 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 or recognizing it's just local municipalities that are really, you know, listening to their constituents and saying, you know, no growth in my backyard. Is it just frustrating enough that, you know, even with your self-development, there are, you know, real impediments to growing any faster than you currently are?
spk14: Well, I think this business has 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 environment. that regulatory environment as well or is probably 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-developed 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're going to see a market share increase for the top 10 or 15 builders for the next several years.
spk07: Well, that's really helpful, Doug. Thank you, and good luck, guys. Appreciate it.
spk14: Thanks, Ivy.
spk08: Next question comes from Jay McCandless with Wedbush. Please go ahead.
spk11: Hey, thanks for taking my questions. 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?
spk14: Yeah, Jay, we were able to increase price, which is both a combination of price and or decreasing incentives in over 90% of our communities.
spk11: 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?
spk14: Well, there's a longer runaway because there's 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 basis 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.
spk11: And then one more quick one. Glenn, could you tell me what the authorization was remaining at the end of 3Q?
spk13: Yeah, it's about $36 million. It's between $36 and $38 million, if I remember it. Great. Thanks for taking my questions.
spk11: Thanks, Jay.
spk08: Next question comes from Truman Patterson with Wells Fargo. Please go ahead.
spk10: Hey, good morning, guys. Nice results, and thanks for taking my question. One of the bigger questions that I think a lot of people have is your ability to convert 50% order growth into actually closings and get the homes constructed. you know, is your construction cycle extending? And I'm really thinking about it, you know, 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 on the product side, are there any categories that, you know, you're having difficulty actually finding the product to complete the homes?
spk14: Hi, Jeremy. It's Doug. No on both accounts. There's 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 from the pandemic. So that's been the supply chain elongation, but it's been 5% to 10%.
spk10: Okay, that's great, but no issues on the labor side, I think, is pretty encouraging. It is very encouraging.
spk14: 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 plumber, electrician, so on and so forth, they're in their 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? Yeah. But that's where I think the top 10 or 15 are going to increase market share despite the those supply chain and labor inhibitors that are out there.
spk10: Okay. Okay. Thanks for that.
spk01: This is Tom, just as a clarification, because we don't want you thinking there are not challenges out there in the supply chain. 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, 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.
spk10: Okay. Okay. That's extremely helpful. Also, just following up on the pricing comment that, you know, 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, you know, sequentially, and then, you know, lumbers up a lot. We're hearing some other, you know, fairly significant inflation on interior doors, windows, flooring, roofing, et cetera. How should we think about, you know, these costs into 2021, and are you seeing enough you know, pricing in the market, you know, either currently or what you think is, you know, happening moving forward to really offset these costs.
spk13: Hey, Truman. It's Glenn. Really, the slight decrease in the gross margin guide for the fourth quarter is really just mixed for us. There's 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.
spk01: Yeah, I mean, 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. Perfect. Thank you, guys, and good luck on the upcoming quarter.
spk10: Thanks, Truman.
spk08: Next question comes from Mike Dahl with RBC Capital Markets. Please go ahead.
spk02: Hi. Thanks for taking my questions. I've probably asked 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 continued to push this higher in 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 mixed 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 guys?
spk14: Yeah, I think our view going into 21 and 22 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 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 sales season really hit us, or the spring sales season really hit us in this late summer, early fall. And as I look into 21 and 22, 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 business as going to be the silver lining to the economy for the next couple of years. I'm excited as ever. It 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.
spk02: Good to hear. That makes sense. And then, relatedly, on the margin side, I think if you – you highlight that 4Q is largely a functional 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 21 than 20. Is that fair? And should we then think about that as, yes, there's these moving pieces on certainly lumber and other costs inflation, but should we look at that as setting the stage for an upward gross margin trajectory in 21?
spk13: I think we haven't given margin guidance yet for 21, but I think one thing to think about from the 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 Pacific Highlands 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 and margin as well, just based on pure ethics.
spk14: Yeah, I would add, Mike, our strategy as we, you know, we laid out a strategy in 2016 of putting all the long-term assets of a meeting in motion, which we have. So we now are at a point, as we outline the strategic path, And really all that can be summarized is 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 they're consistently – we have a mantra here. It's the Mitchell line, the 2010 line. But we will be a very consistent generator of both revenues and profits from all divisions, and you're seeing that happening outside of California. Okay.
spk02: Okay, got it. Thanks, Doug. Go ahead.
spk08: Next question comes from Stephen Kim with Evercore. Please go ahead.
spk09: Thanks very much, guys. First question relates to price. You talked about raising prices in over 90% of your community. I was curious, was the majority of this price action taken later in the quarter, or do you feel like that was sort of evenly spread throughout the quarter, those pricing actions? And somewhat relatedly, are you seeing increased option and upgrade spend from your customers in general, and how much?
spk01: Hey, Stephen, it's Tom. And I would say that, you know, our pricing increases really began to take hold early in the quarter and were fairly consistent throughout the quarter. And then our options, you know, 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.
spk09: Okay, got it. That's helpful. And then when you talk about the move to the one brand, TriPoint, which I think makes sense at this point, can you talk about what the anticipated costs, if anything, we might see that will bring. And then similarly, are there longer-term savings that you could quantify for us as a result of that move?
spk13: Hey, Stephen, it's Glenn. Good question. Some of that, or actually a majority of that, was contemplated in the reduction in force 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.
spk09: That's great. Helpful. And then lastly, I wanted to talk to you a little bit about a theoretical capacity of deliveries for your company. I know that it's always very difficult to predict demand, but I would imagine that if we are trying to think about an annualized max 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 as much of the labor issues as maybe 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 four or something, 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 probably didn't leave any orders on the table either. You probably booked everything that you could. So is that a fair way of thinking about your max production capacity right now?
spk14: Well, I'll 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 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. 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 ten in market share in each one of our marketplaces.
spk09: Yeah. Okay, great. Well, thanks very much.
spk08: Next question comes from Jack Masenko with SIG. Please go ahead.
spk12: Good morning, guys. I wanted to revisit backlog conversion a little bit. Obviously, we have the pandemic, and let's hopefully call that 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 some of the slowdown in backlog conversion this year may rebound significantly in 21 and beyond for the reasons mentioned?
spk13: I think, hey, Jack, this is 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 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 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.
spk12: Okay, and then on the cost and 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. Can you share with us square footage, price increase versus square footage, cost increase over the last year?
spk14: Let us... We'll get that number to you. We don't have it right in front of us, Jack. So instead of shooting from the hip, we'll get back to you on it.
spk12: Okay. We can talk on a follow-up. All right. Thanks, guys.
spk08: Next question comes from Carl Reichart, BTIG. Please go ahead.
spk05: Thanks. Good morning, guys. Steve Kim got my branding question, so I just have one. Doug, you talked about – Wait a minute.
spk14: Wait a minute, Carl. You won the booby prize.
spk13: Didn't you mention one brand last call?
spk05: Yes, I did. Okay. But he got my question on cost. I wanted to ask about your goal for inventory turns, Doug, to get to one time by 22. And you talked about that being a 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. I mean, isn't it feasible that your inventory turns over that time could improve by more than that because there's a lot of levers 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 1 by 22? And are there drivers beyond just moving to a greater option mix?
spk13: 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 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 newer markets. You know, we will get to that one goal, but I think that's still a reasonable timeline.
spk14: Hey, 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 profits. So we'll use those to reinvest in those higher turning assets. And we also pointed out a lot of simplification issues. 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 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.
spk05: Okay. And does the focus on turns slash returns impact your thinking on acquisitions at all?
spk14: Acquisitions of land or acquisitions of companies?
spk05: Builders, right?
spk14: Oh, builders. Okay. Yeah, we'll continue to be opportunistic on the M&A front so it doesn't change our thinking. We have a 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 earnings 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%. So that gives you a little sneak preview into the demand that we see in this industry for the next couple years. Great. Thanks a lot, Doug. Thanks.
spk08: Our next question comes from Alex Barone with Housing Research Center. Please go ahead.
spk03: Yeah, thanks guys and great job in the quarter. I guess we saw that the Carolinas delivered the first orders this quarter. Can you expand on on that region and when can we expect the first closings? Is that going to be next quarter or not till 2021? And you know how many communities are you guys have going and where do you see that going over the next year?
spk14: Great question, Alex, thanks. 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 startup. We have well over 2,000, actually well over 2,500 lots that we own and control. And we have upwards of eight to ten 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 22, they will be operating at a very strong level. So great question, and thanks for setting that up.
spk03: 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, you know, if you can give us some sense there.
spk14: Yeah, 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.
spk03: And if I could ask one more on the dairy purchase. You said you're going to – I finish up the capacity for next quarter, but how do you see the balance, I guess, given where the stock price is at? It 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?
spk14: Well, as I mentioned in the earnings call, we're going to look to utilize the remaining earnings portion of our current authorization. Glenn, I think it's about $34, $37 million. And then going forward, we're committed to a programmatic stock repurchase program as one of the four or five levers that we outline 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 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, but 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 manner. return-oriented environment all under one brand. Okay, great. Well, best of luck for those changes. Thanks. Thanks, Alex.
spk08: Next question comes from Alex Rigel with B. Reilly SBR. Please go ahead.
spk04: Thank you. Good morning, gentlemen. Hey, Alex. Quick question. Can you talk about the virtual sales process and how that's changed your cost structure or gross margins at all?
spk06: Hello, 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 through an online process to converting to a sale.
spk01: 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.
spk04: Excellent. And then lastly, what was your cancellation rate in the quarter? It was 9%. Yep. Great.
spk06: Thank you.
spk04: Thanks, Alex. Thanks, Alex.
spk08: There are no further questions. I would like to turn the floor over to Doug Bauer for closing comments.
spk14: 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'll look forward to talking to you next quarter.
spk08: Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.
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