Tri Pointe Homes, Inc.

Greetings and welcome to the TriPoint 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. 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. I will now turn the conference over to David Lee, General Counsel. Please go ahead, sir.

Good morning and welcome to TriPoint 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.tripointhomes.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. The 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.

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. TriPoint Homes produced outstanding results in the third quarter. We delivered 1,463 homes with an average gross margin of 27.1%, generating 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 and backlog, while also navigating the housing correction the industry is facing. As the housing market has continued to weaken 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 weakened 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 led 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 and backlog and new buyers by utilizing forward commitments, temporary and permanent rate buy-downs, and extended rate locks to lower monthly payments, providing buyers with a peace of mind leading up to their home closing. In addition to financing assistance, we are leveraging promotions such as closing cost contributions, design studio credits, and special pricing on available homes for year-end deliveries. As we have experienced in past corrections, initial demand is best achieved by utilizing incentives tailored to individual needs. Throughout the third quarter, we have had some success implementing this strategy. However, as rates have continued to increase, we are seeing better results as we focus on price discounts. Going forward, we will continue to implement effective price strategies to improve absorption at all existing and new communities. 96% of our buyers in backlog who are financing their purchase with TriPoint Connect for year-end deliveries are currently rate locked. We continue to use a disciplined pre-qualification process for our new home buyers prior to executing purchase agreements. And the quality of our home buyers continues to be strong. Our average buyer FICO score is 749, loan to value ratio is 80%, and average debt to income ratio is 40%, with an average annual household income of $182,000. Millennial buyers represent 57% of our backlog financing with TriPoint Connect, a 3% year-over-year increase. It's important to note that today's buyers value certainty, and are looking to shorten the time between sale and closing, so we plan to maintain our balanced approach to billing specs, which have historically trended towards 60% of our total starts. In the third quarter, 67% of our orders were on spec homes. As always, we are focused on managing and maintaining appropriate levels of spec inventory, as well as focusing on pace using a rational and well-informed pricing strategy. For an update on our markets, the West region had some good results with the Inland Empire, San Diego, Las Vegas, and Washington markets performing better than the company average. Sacramento and the Bay Area were weaker performing markets in the quarter. The Central region had mixed results with our Austin division faring relatively well while demand in Colorado was sluggish. In the East, the Charlotte market continues to have a good demand, especially at our newer communities. As we have previously discussed, we have a strong land pipeline and plan to open approximately 90 to 100 new communities over the next five quarters. The majority of these new communities were put under contract prior to 2021. And therefore have an attractive land basis that will allow us to enter the market with competitive pricing. They also had the advantage of being in a locations. Close to employment, transportation, good schools and amenities. a standard for TriPoint. It is important to note that these new communities have been planned and designed with appropriate product types, features, and amenities to help combat the affordability challenges that a higher interest rate environment presents. Recent examples of this approach are premium entry-level communities priced from the mid-$400,000s, including Terrace Collection at our Bar W Ranch in Austin, which achieved 4.7 orders per month in the third quarter, and Meijer Townhomes in San Diego County, which attained five orders per month. We also achieved strong third quarter order pace of 3.3 per month in the highly desirable supply constraint Gilbert Submarket in Arizona, where our Waterston North Plan Community serves move-up homebuyers in six communities priced from the $600,000s to low $1 million. Lastly, we have seen success at our Lennon Creek single-family detached homes in Dallas, with 4.7 orders per month, and we have high expectations for our three new planned community offerings in Dallas this month, each with strong interest lists, such as Union Park and Little Elm, priced from the mid $400,000s. In addition to design solutions to help ease today's affordability challenges, We are also implementing intentional cost reduction strategies across the organization in response to slowing demand. We have established goals to reduce build cycle times and initiate year-over-year cost reductions to bring costs in line with current market conditions. By working closely with our trade partners, we have already seen relief with respect to costs associated with the front end of the build process. In addition, we continue to drive efficiencies in our SG&A spending through the use of technology and process improvements and by reviewing overhead to be in line with future production levels. With respect to our land position at the end of the third quarter, we have 37,000 lots in our land pipeline, 56% of which are owned and 44% are under control via option. We continue our disciplined approach to re-underwrite and stress test all land deals under contract to current market conditions. We are working with land sellers and land bankers to renegotiate the terms of our option agreements, to slow the rate of takedowns, and in some cases lower the contracted price. We continue to balance our capital allocation between reinvesting in the business and repurchasing shares to maximize shareholder return while maintaining appropriate levels of liquidity. The sharp increase in interest rates has put a strain on housing affordability and created a more challenging sales environment for our industry. But we have an experienced management team that is well equipped to succeed in this new reality. We look forward to closing out 2022 with strong earnings while implementing the strategies for TriPoint that will provide success in the current market conditions. With that, I'd like to turn the call over to Glenn, who will provide more details about our results this quarter. Glenn?