Tri Pointe Homes, Inc.

Greetings and welcome to the TriPoint Second Quarter 2024 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, General Counsel at TriPoint's home. Please proceed.

Good morning and welcome to TriPoint Homes earnings conference call. Earlier this morning, the company released its financial results for the second quarter of 2024. The 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. Opposing 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 President and Chief Operating Officer, and Linda Mamet, the company's Executive Vice President and Chief Marketing Officer. With that, I will now turn the call over to Doug.

Thank you, David, and good morning to everyone on today's call. During the call, we will share the operating results for the second quarter, provide a market update, and discuss the progress on some of our growth initiatives. In addition, we will provide our third quarter and full year outlook for 2024. We're extremely pleased with TriPoint's outstanding results in the second quarter, which were driven by our focus on building scale and efficiencies within our existing markets as we continue to lay the foundation for organic growth in three new markets. We delivered 1,700 homes at an average sales price of $666,000, resulting in home sales revenue of $1.1 billion, a 38% increase compared to the previous year. This growth was fueled by a 45% increase in deliveries, resulting from strong market conditions, increased community count, and improved cycle times. Our gross margin expanded by 320 basis points to 23.6% compared to the prior year, driven by the pricing power we have experienced over the past several quarters which has enabled us to increase base pricing and moderate incentives. Higher revenue provided operating leverage to SG&A, as our ratio as a percentage of home sales revenue improved by 90 basis points to 11% for the quarter. This helped generate a 420 basis point improvement in home building operating margin, which was 12.6% for the quarter. The combination of strong revenue disciplined cost management, and strong operational execution led to diluted earnings per share of $1.25, or a 108% increase compared to the prior year. Our net new orders for the quarter were 1,651, with a monthly absorption rate of 3.6 orders per committee per month, reflecting continued healthy demand levels despite mortgage rates that averaged 7% during the quarter. Incentives on orders in the quarter were 3.7%, which was down slightly from 3.8% in the first quarter, indicating the strength of demand in our core market locations, coupled with a strong buyer profile that is financing with our mortgage company, TriPoint Connect. Our buyers in backlog with TriPoint Connect have an average FICO score of 753, debt-to-income ratio of 40%, loan-to-value ratio of 79%, and an average gross household income of $207,000. First-time homebuyers are 55% of our backlog. And from a generational perspective, 63% are millennials and 6% are Gen Z. Our capture rate with TriPoint Connect in the second quarter remains strong at 85%. With mortgage rates remaining elevated and nearly 80% of existing mortgage holders enjoying rates below 5%, the lock-in effect continues to bolster demand for new construction homes and influence overall selling conditions across most of our markets. These dynamics support both sales volume and pricing as the share of total home sales garnered by new home builders remains elevated compared to historical norms. We have seen normal seasonal demand trends take shape as June drew to a close and so far into July. Historically, we have experienced lower absorption rates in the summer months, and we will continue to focus on balancing pace and price to meet our overall sales objectives. We have been pleased to see that traffic and orders have improved throughout July as mortgage rates dipped below 7%. Considering how strong demand trends have been with elevated rates, the possibility of lower rates in the back half of the year would be a positive for the consumer and our business. Long term, we maintain a very optimistic outlook for the industry and our company. The ongoing demand for new housing from millennials and Gen Z, coupled with persistent supply constraints in the resale market, land availability, and labor resources, create a strong foundation for sustained growth in the new housing market. These factors position our company favorably for future success as we continue to address the increasing need for new homes in the face of limited existing inventory. During the second quarter, we repaid $450 million of senior notes, eliminating $26 million in annual interest payments. This was accomplished using existing cash, demonstrating our ability to generate positive cash flow to deliver the balance sheet while still investing in our business to grow community count and staying active in our share repurchase program. Our home building debt to capital ratio improved to 22.9% while maintaining strong liquidity of 1.2 billion. Speaking of our share repurchase program, we repurchased just over 1 million shares during the quarter for a total spend of 37 million. We have reduced our share outstanding share count by 5% over the past 12 months, bringing the total reduction to 42% since the beginning of 2016. Through this reduction in shares and strong profitability, we have achieved a 15% growth in book value per share compounded annually over this same period. As we discussed in the prior earnings call, we are committed to growing our scale and share in existing markets while further diversifying our company and positioning us for ongoing strategic growth in our three new expansion markets of Utah, Coastal Carolinas, and Orlando. In Utah, we are pleased with our progress towards meeting our goal of first deliveries in 2025. We have our first projects under control, including a community in the highly desirable city of Holiday in central Salt Lake, which will offer premium detached homes and townhomes. It's still early innings in both the coastal Carolinas and Orlando markets, but our teams are attracting talent and identifying core market land opportunities for our premium products. We are enthusiastic about these new divisions and confident that they will contribute significantly to further growth and geographic diversification for our company. We started TriPoint Homes in California in 2009 and as the fourth largest builder currently in the state measured by deliveries, we continue to produce strong revenue and profits. With that said, We have seen the benefits of growing our business outside of California to diversify our customer base and price points while always focusing on land and core market locations. Revenue from non-California divisions previously represented less than 50% of the total company revenue. Currently, revenue generated outside of California is expected to grow to approximately 70% of our business by 2026. demonstrating our successful expansion into other top MSAs across the country. In conclusion, TriPoint Homes is poised for a very positive second half of 2024 and beyond, as we continue to capitalize on our strengths and pursue opportunities in both existing and new markets. The housing industry's underlying fundamentals remain robust, with a persistent undersupply of homes driving demand. Our strategic focus on profitability, growth, and shareholder returns, combined with a strong industry outlook, fuels our optimism. We remain committed to our goal of increasing book value per share by 10% to 15% annually, while generating strong returns, driving incremental value for our shareholders. With that, I will turn the call over to Glenn. Glenn?