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

Good morning, and welcome to TRI Pointe Homes earnings conference call. Earlier this morning, the company released its financial results for the second quarter of 2021. The documents detailing these results, including a slide deck, are available at www.tripointehomes.com through the Investors link and under the Events and Presentations tab. Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating performance, are forward-looking statements that involve risks and uncertainties. Discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the company's SEC filings. Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through TRI Pointe's website and in its SEC filings. Hosting the call today are Doug Bauer, the company's Chief Executive Officer; Glenn Keeler, the company's Chief Financial Officer; Tom Mitchell, the company's Chief Operating Officer and President; and Linda Mamet, the company's Chief Marketing Officer. With that, I will now turn the call over to Doug.

Thanks, David, and good morning to everyone joining us on the call today. TRI Pointe Homes delivered strong operating results in the second quarter of 2021, posting significant year-over-year increases to revenues, profits and new home orders. We exceeded our stated guidance of ASPs, homebuilding gross margin and SG&A leverage as our teams did an excellent job executing our business plan, and navigating the operational challenges that persist in our industry. Earnings came in at $1 per share for the quarter representing a 133% increase as compared to the second quarter of last year. We are extremely pleased with these results and believe we're in an excellent position to continue this operational momentum into the second half of 2021, given our sizable backlog, our premium lifestyle brand positioning and the strategic growth initiatives we have in place. We experienced robust order activity during the second quarter as housing demand continued to far outstrip supply in our markets. We averaged 4.7 orders per community per month for the quarter. Similar to the first quarter of 2021, this figure was constrained by our own internal efforts to match sales with construction starts and implement price increases to offset rising costs. These efforts have proved successful as we were able to generate home sales gross margins of 24.6% in the second quarter, a 300 basis point improvement over the second quarter of 2020 and an all-time record for our company. The demand that we saw during the quarter was broad-based in terms of price point and geography, a sign that there is a diverse range of motivated buyers in the marketplace today, along with a widespread lack of available housing supply to satisfy this demand. While we acknowledge that there is price sensitivity in some of our markets, we believe the pricing environment will remain firm given the favorable supply-demand balance we expect to persist for the foreseeable future. In addition, TRI Pointe is a much more diverse homebuilder than in the past with more new home communities positioned in affordable segments of the market than ever before. We have highlighted our focus on improving our return profile on several quarterly calls now, and this focus has continued to bear fruit. Our trailing 12-month return on average tangible equity stood at 18.5% at the end of the quarter, representing a 490 basis point improvement over the second quarter of 2020. The communities within our long-dated California asset base continue to generate strong absorption paces and profits for our company, while our divisions outside of California continue to grow as a percentage of our company's total profits. Our early-stage markets have grown their operations significantly and many are achieving profitability levels at or above the company average. We continue to make investments in these markets and elsewhere, doing so in the most capital-efficient manner possible with an emphasis on lot option agreements, land banking and joint ventures. Our returns are also being enhanced by our continued focus on operational efficiencies. Thanks to our investments in technology and process improvements, we were able to generate more revenue with less overhead expense as evidenced by our SG&A expense ratio of 9.6% in the quarter, the best performance in the second quarter in our company's history. Our ample liquidity and low leverage ratios have allowed us to continue our share buyback program and improve our return on equity. In the second quarter, we deployed $83 million in capital to repurchase just under 3.7 million shares, bringing our total for 2021 to 7.3 million shares repurchased. We plan to continue to be active with our share repurchase program. Earlier today, we announced our Board has approved an additional $250 million for share repurchases through the next year. The second quarter of 2021 was an excellent quarter for homebuilding in general and especially for TRI Pointe Homes. Order activity remains extremely healthy from a historical standpoint due to an ever-increasing demand from millennials, job growth in the post-pandemic recovery and low home supply. As a result, TRI Pointe Homes is experiencing record levels of profitability. Moving forward, we expect the market and our sales pace to trend towards a more normalized and healthy level of 3 to 4 homes per community per month, which is a great cadence for our business. This pace optimizes our operations and creates efficiencies in the sales, construction and delivery process. With this healthy demand backdrop and a significantly growing community count, TRI Pointe is set up for a strong 2022. Our goal at TRI Pointe remains the same: grow our operations in a profitable manner, achieve top 10 market share in each of our geographic segments and generate strong returns while maintaining a healthy capital position. We made positive strides in each of these fronts in the second quarter and believe we can make further progress through the remainder of the year and beyond. With that, I'd like to turn it over to Glenn for more details on our results for this quarter.

Thanks, Doug, and good morning, everyone. I'm going to highlight some of our results and key financial metrics for the second quarter and then finish my remarks with our expectations and outlook for the third quarter and full year of 2021. At times, I will be referring to certain information from our slide deck that is posted on our website. Slide 5 of the earnings call deck provides some of the financial and operational highlights from our second quarter. As Doug mentioned, demand remained strong in the second quarter with orders up 22% compared to the prior year and an absorption rate of 4.7 homes per community per month, representing a 53% increase compared to the prior year. Demand was strong across all geographies with the West reporting an absorption rate of 5.3 homes per community per month, the Central had an absorption rate of 4 and the East had an absorption rate of 3.4. We reported an outstanding performance in all key metrics this quarter and either met or exceeded all of our stated guidance. We delivered 1,545 homes, which was a 26% increase year-over-year. Home sales revenue was $1 billion, an increase of 32%. Our average selling price was $653,000, a 5% increase compared to the second quarter of 2020. Our homebuilding gross margin percentage for the quarter exceeded the high end of our guidance range at 24.6%, a 300 basis point improvement year-over-year. SG&A expense as a percentage of home sales revenue came in at 9.6%, which was a 120 basis point improvement compared to the prior year. Our focus on leveraging technology and operational excellence as well as taking advantage of the current market conditions is evident in our reduced sales and marketing expense of 4.5% of home sales revenue in the second quarter compared to 5.9% in the prior year period. We continue to focus on our new community pipeline and opened 13 new communities in the second quarter. For the full year, we expect to open approximately 70 new communities and end the year between 120 to 130 active selling communities. For 2022, we expect to open approximately 90 new communities and end the year between 150 to 160 active selling communities. We had previously provided guidance on anticipated average selling prices in 2022 of approximately $550,000. As prices have increased in all of our markets, we are revising that guidance up to approximately $620,000. Looking at the balance sheet, at quarter end, we had approximately $3.1 billion of real estate inventory. Our total outstanding debt was $1.3 billion, resulting in a ratio of debt to capital of 37.1% and a ratio of net debt to net capital of 25.7%. We ended the quarter with $1.2 billion of liquidity, consisting of $557 million of cash on hand and $593 million available under our unsecured revolving credit facility. During the quarter, we extended both our term loan facility and our revolving credit facility out until June of 2026. As a result, our next debt maturity is not until 2024. Now I'd like to summarize our outlook for the third quarter and full year. For the third quarter of 2021, the company anticipates delivering between 1,450 homes and 1,550 homes at an average sales price of $620,000 to $630,000. Homebuilding gross margin is expected to be in the range of 23.5% to 24.5% and SG&A expense as a percentage of home sales revenue is expected to be in the range of 9.5% to 10% for the third quarter. Lastly, the company expects its effective tax rate for the third quarter to be approximately 25%. For the full year, we anticipate delivering between 6,000 and 6,300 homes, and we are raising the range of expected average sales price to $625,000 to $635,000. We are also increasing our homebuilding gross margin range to 23.5% to 24.5% for the full year. Our SG&A expense as a percentage of home sales revenue continues to be in the expected range of 9.8% and 10.3%. Finally, the company is forecasting its effective tax rate for the full year to be approximately 25%. I will now turn the call back over to Doug for some closing remarks.

Well, thanks, Glenn. To sum up, we are extremely pleased with our performance this quarter as we set company records for deliveries, operating margin, net income, orders and backlog value in the second quarter. Demand remained healthy in all of our markets, while supply continues to be constrained. We successfully implemented price increases that more than offset cost inflation and achieved our results in our delivery guidance, thanks to our team's ability to execute and overcome the supply chain issues. Given what we see in our markets today and what we have in backlog, we are extremely optimistic about the remainder of 2021. Longer term, we remain bullish on the housing industry, given the favorable demographic trends and low home supply. We have positioned our company to benefit from these trends through the careful cultivation of our premium lifestyle brand strategy and through the land investments we have made, which will result in double-digit community count growth in both 2022 and 2023. We believe we can achieve growth while maintaining a strong balance sheet and positive cash flows while generating strong returns for our shareholders. As a result, we believe the future of our industry, especially for TRI Pointe, remains bright. Finally, I want to thank all of our talented and hard-working team members who embody our company values and are at the heart of the passionate culture that is so important to our success. I'm extremely proud of how they support and take care of the company, our customers and each other. It is because of them that TRI Pointe recently received its certification as a Great Place to Work, which is a global benchmark for identifying companies with outstanding cultures. It's gratifying to be part of a team that is deeply committed to TRI Pointe's mission of being in the life-changing business. That concludes our prepared remarks. And now we'd like to open the call to questions. Thank you.

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

Yes, strong results. My first question relates to this dynamic of the sales restrictions, which is something we've been observing in the market for many months now. Since the goal of that effectively is to age your inventory in a way and match it to your production, do you feel that process is largely complete? Or do you expect sales restrictions to continue in the September quarter or perhaps beyond at a similar rate or degree of severity as in the second quarter?

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

How are you faring in terms of ramping your production capability? If we look at starts, what should we think about with respect to your ability to increase starts? Would it be reasonable to anticipate that starts would be somewhat consistent with the growth in community count you've laid out for fiscal 2022? Or do you anticipate that your starts growth would be greater or less in 2022?

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

You talked about 3 to 4 absorptions per community as a more normal environment and a sweet spot. Do you believe that level is something you would expect to run at in 2022 because you're currently running well above that now? Is there anything about your community mix that would drive that, such as a higher-end mix, or is that something you're speaking about longer term as a generality?

The pandemic created very significant absorption paces throughout the industry, but a healthy level is 3 to 4 homes per community per month. That's been our business plan forecast going into 2022 and beyond. It optimizes our operations and creates efficiencies in sales, construction and deliveries, which you're seeing now compared with the inefficiencies of a rapid pandemic-induced market. So yes, we think that's the sweet spot.

Got it. Is there going to be any effect from community count or your community mix?

No.

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

First, Tom, in the release you mentioned leveraging technology to improve processes and reduce costs. Can you elaborate on some of the key initiatives across both the gross margin and SG&A lines?

We are making significant strides in our infrastructure through technology to facilitate both gross margin expansion where possible and eliminate some of the historical overhead in our business. We're moving toward a more digital environment, and we're seeing strong results from that.

When thinking more intermediate term into 2022, you are expecting to get 24% more communities open year-over-year, which implies 24% higher starts. I'm thinking about material shortages from suppliers. Have you had discussions with your material suppliers? Will they be able to support that level of growth? Are they expanding capacity?

Truman, when we put together guidance like that, we've already incorporated the current supply chain environment.

Perfect. All right.

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

Very nice quarter. We're getting a lot of questions from investors regarding gross margins and how to think about gross margins increasing or decreasing in 2022. I know it's early and you won't give specific guidance, but can you help us understand some of the dynamics that could affect gross margins in 2022?

Thanks, Alex. I think the setup for 2022 is strong because we'll be going into 2022 with a healthy backlog. There's been a lot of pricing power in our margins in 2021 as evidenced by our increase in our margin guide for the year. So it is a strong setup for 2022. That said, we're opening 90 new communities, and there's a mix impact when you open new communities like that. We haven't given guidance for margins, but it's a strong setup for 2022 with a mix of communities that will impact margins.

On that same topic, can you help us think about whether the movement into the digital environment has permanently lifted gross margins? Are there other changes in the business that could give a permanent step-up in gross margin?

There's a couple aspects of the digital environment that affect gross margin and operating margin. On the growth side, our digital platform for options has a significant impact; we continue to offer choice to our customers as a premium brand builder. On the pretax margin side, there are efficiencies in the digital customer journey in buying homes. Linda, our CMO, can elaborate on this. It's reflected in our current SG&A numbers as well. Those are the two ways the digital environment impacts our business.

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

First, can you talk about demand and traffic trends through the quarter and perhaps in July as well? There are concerns demand might be choppy or volatile with price or seasonality impacting demand. Your results are positive, but can you give more detail on what you're seeing on the ground with respect to demand and buyer traffic?

Demand remains very strong. We don't feel any weakness in demand; 4.7 orders per community per month for the quarter is above our company thought process. What is causing the year-over-year order change is that people are comparing the industry to the pandemic period, which was unprecedented. We and others are restraining sales releases. When you restrain sales releases and rapidly sell homes in late 2020 into 2021, and you see new community counts coming in 2022, the math is straightforward. There's not a cyclical downturn here; it's math. Demand is there, and we continue to see it through the end of the year for many of our communities. We'll continue to monitor sales through the rest of this year.

Can you talk about the price environment, how you're thinking about affordability, and the commentary on price for 2022? You took that outlook up quite a bit. How much of that is market driven versus mix shifts?

Tyler, the raise in the selling price guidance for the full year is mainly the pricing power we've been able to have this year and covering cost increases with price increases. It's not really mix; it's price increases.

One more quick one: you mentioned cycle times and how they trended in the quarter versus 2020 or versus the first quarter. We've seen timelines extend a bit. Are any specific markets or geographies being impacted more than others?

Tyler, we've seen cycle times increase about 10% to 20% this year, fairly uniform across all of our markets. All markets have been impacted by labor constraints, material shortages and general supply chain issues. We don't see that 10% to 20% increase limiting our ability to deliver our target volumes for this year.

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

With lumber prices starting to tick down, when do you think we'll see the maximum gross margin benefit from that? What are you seeing or hearing in the field about lumber prices staying at current levels?

We've seen dimensional lumber down 20% to 30%, and it continues to fall. OSB and some truss pricing have seen relief as well. However, engineered wood products (EWP) and other materials have remained relatively elevated. There are other trades that have offset some of the cost savings. I think you'll see some margin improvement from the lumber decline by the end of this year and into the first quarter of next year, because starts in the third quarter will lead to deliveries in the first and second quarter next year.

Any commentary around July orders or traffic, what you're seeing so far for the third quarter?

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

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

Doug, if we look at your pace, June came down to around 4 sales per month. First, was that incremental constraints or supply that was implemented versus earlier in the quarter? Or was that seasonality or price sensitivity? Second, should we already be using that 3 to 4 per month cadence for the back half of this year?

We continue to restrain sales releases, which has affected that absorption pace like the rest of the industry. There is also seasonality in that coming out of a post-pandemic world.

Mike, our cadence this year was 5.2 in April, 4.8 in May and 4.1 in June. Going forward, we expect a normalized 3 to 4 for the back half of the year.

Given the margin progression and community ramp, trends look decent heading into next year. From an order standpoint, year-on-year comparisons will be tough early in the year. If pace normalizes and community count ramps steadily, is it fair to think units could plateau in 2022 versus 2021 because of that normalization and timing?

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

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

Really strong quarter, congrats. Tom, you commented earlier that starts pace for next year should largely track community count growth of about 20%. Doing that math, if absorptions normalize to 3 to 4, it seems starts might not be up 20%. Are you aiming to build inventory, or are you getting inventory on the ground in case demand remains at 4 to 5 so you can support it?

That's a good question. It may not track exactly to a 20% sequential increase in starts, but we are going to try to maximize our starts relative to the demand profile we see. We have the operational capacity to do that.

So you're starting as many homes as you can now, and if that pace is above the 3 to 4 range you view as normal longer term, you're okay with that?

What Tom and I are saying is we're going to continue to optimize our business based on the level of demand we see. We are trying to start as many homes as we can right now. We don't have many spec homes now, as you can see from our financials, and we're trying to maximize cadence based on the demand environment.

On specs versus built-to-order, we've seen builders temporarily shift to more spec to gain visibility on costs. Can you talk about your mix right now, spec versus build-to-order, what the margin differential looks like, and when you restrict sales are you holding back until homes have started and reached a certain stage or just holding back to manage start pace?

Margins are the same between spec and built-to-order. When we restrict sales, it's similar to phased building throughout the country: once you have your costs known, you release those homes and sell them. We continue to see strong demand through that process because the supply chain is still unsettled.

We'd like to get back to our normal 2 to 4 specs per community. We run our business that way because we sell a lot of options and upgrades and like to give consumers the chance to choose. It's also wise to have some spec inventory for quick move-in homes, and that's what we're trying to get back to.

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

When you look at 2022 and 2023 new community openings on a gross basis as store count growth, can you talk about whether the mix geographically or by price point is likely to change from where you are now? Also, what percentage of those communities will be on land you purchased pre-pandemic?

It's mostly expansion in the Central and East regions of the country, and most—actually all—of that land was tied up at pre-pandemic prices.

In terms of price points, any shift toward high-end, low-end, or move-up significantly?

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

Based on those markets, like Doug said, our growth markets include Charlotte, Raleigh, Dallas, Austin and similar areas.

On staffing at the sales level and division management, how are you positioned to add stores and hire people in this environment?

Due to our team's tremendous work, TRI Pointe was certified as a Great Place to Work, and we have a very strong culture. That helps us attract people even in a tight talent environment for supply chain and recruitment. That's one of our advantages.

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

First, closings for the full year seem to be tracking at the low end of the range, which includes Q3 outlook and implies at midpoint a strong Q4 ramp. Is there enough visibility to keep the upper end of the range, or should we think the full year is more likely to track toward the low end? Your community count is unchanged, but supply chain constraints are pushing out delivery. How should we think about your $620,000 to $630,000 unit closing guide for Q3?

Deepa, the fourth quarter is a ramp in deliveries if you look at the full year guidance compared to the third quarter. Some of that is the supply chain pushing deliveries from the third quarter to the fourth quarter. The range of delivery depends on the supply chain and how we're able to navigate it. Many competitors are in the same position building a lot of houses in the back half of the year, so our ability to hit the higher or lower end of the range will depend on the supply chain.

On tone, previously I thought there was more cautious commentary from Doug and Glenn last quarter. It looks like you're feeling a lot better now. What changed in the last few months that's improved the tone?

I'm very bullish on housing. Millennials represent just over 50% of our buyers and are buying homes at an average price over $600,000, and we're well positioned to tap that demographic. The rhetoric comparing rapid pandemic-induced absorption to a more normalized absorption is overblown. We don't have a demand problem; we have supply chain challenges. We're very bullish about the long-term nature of housing over the next five to ten years. There will be bumps, but we've positioned the company for tremendous growth with double-digit community count growth over the next two years. That's credit to the team.

One final question: you mentioned operational channels and challenges. Are these the same persistent challenges or did you see any new operational challenges in the quarter?

No, it's the same challenges—supply chain and labor constraints we've discussed.

Our next question comes from the line of Alex Barrón with Housing Research Center.

Good job on the quarter. On the production side, can you share how many homes you started? Is there an intent to get ahead of the curve by starting more homes and letting them age before you sell them?

We're always starting as many homes as we can to meet demand. We're continuing to restrain order pace with sales releases structured because of the supply chain. With increased community count growth, we'll see a continued ramp-up of starts.

Alex, we're operating our business as normally as possible. We would like to increase our spec count to our normal 2 to 4 specs per community, but we're not doing anything drastically different than our normal operating procedures. We're matching production capacity to the demand levels we're experiencing.

On the actual sale and pricing of homes, what mechanism are you using? Lotteries, wait lists, first come first serve, highest and best offer—how are you managing pricing and who gets to buy homes?

We use a priority system.

Alex, we believe customer experience is extremely important for the long-term health of our business. We invite customers to prequalify with our affiliated mortgage company, and we base the order of sales on the timing of when they prequalified.

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

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

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