Tri Pointe Homes, Inc. Q3 FY2021 Earnings Call

Hello and welcome to TRI Pointe Homes Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded. It's now my pleasure to turn the call over to David Lee, General Counsel. Please go ahead.

Good morning and welcome to TRI Pointe Homes earnings conference call. Earlier this morning, the company released its financial results for the third quarter of 2021. 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 another quarter of excellent operating results in the third quarter of 2021, generating net income of $133 million or earnings of $1.17 per share. New home deliveries of 1,632 represent a 25% increase compared to the prior year and exceeded our stated guidance for the quarter as our teams did an outstanding job dealing with the labor and supply chain issues that continue to challenge our industry. Our focus on returns was evident in our third quarter performance with a return on average tangible equity hitting 20.8% on a trailing 12-month basis representing a 650 basis point improvement over the same period last year. Margin expansion has been a key component to our success in driving better returns this year and we made even more progress on that front in the third quarter with gross margins hitting 26.3%, a record for our company. Another factor that continues to improve our returns has been our shift to a more asset-light land strategy using option agreements and land banking arrangements to control lots. At the end of the third quarter, the percentage of lots controlled but not owned stood at 42% of our total lot count compared to 37% at the end of the third quarter of 2020. Programmatic share repurchases continue to be an area of focus and we repurchased an additional $65 million of stock in the third quarter and have surpassed $850 million of share repurchases dating back to 2015. We have executed this without sacrificing home building revenue growth, which has increased at a compounded annual growth rate of 9% over the same period. As a result of this revenue growth, coupled with margin expansion and a significant reduction in shares outstanding, our book value per share has also grown by a compounded annual growth rate of 13% since 2015. Concurrently, we have reduced our net debt-to-capital ratio to 24.3% and continue to accelerate our inventory turns. We are extremely pleased with the way these initiatives have led to tangible improvements to our profile and believe they will continue to benefit our shareholders. New home demand in the third quarter was healthy across all our markets and product segments with our monthly sales pace averaging 4.1 homes per community per month for the quarter. We continue to see a favorable new home environment in our markets with low levels of home inventory, low interest rates and a heightened interest in single family home ownership brought about by the pandemic. In addition, millennials are the most active home buyers and we expect this to continue over the next several years. Millennials currently represent 54% of our backlog with our affiliated company Tri Pointe Connect. That, coupled with current demand for entry-level and first-move homes in locations that are close to job centers and transportation, gives Tri Pointe a significant advantage across our markets. We believe this favorable demand dynamic will be in place for the foreseeable future, providing an excellent operating environment for our company and our industry. Complicating this positive fundamental outlook for home building, however, are the ongoing supply chain challenges that continue to slow the pace of our operations. While the rate of this slowdown varies by market, we are experiencing supply chain issues across our home building footprint and expect these issues to persist into 2022. Fortunately, we have successfully navigated this difficult operating environment, thanks in part to our focus on being the best of both big and small as a home builder. By that, I mean we strive to take advantage of our size and scale to procure the inputs we need from our national suppliers while staying nimble enough to work with our local suppliers and contractors to get our backlog closed in a timely manner. As a result of these efforts, we have not changed our full-year delivery guidance and still expect to deliver 6,000 to 6,300 homes for the year. Looking forward, we are extremely pleased with our new community pipeline. We plan to open 110 new communities over the next five quarters and in 2022 expect to end the year between 150 and 160 active selling communities. Beyond that we have an additional 80 new communities planned to open in 2023, which we estimate will grow our community count in 2023 to between 170 and 180 communities. Based on the cadence of community openings and assuming a continued strong market, we expect the year-over-year order growth to occur starting in Q2 of next year. With strong operational momentum, an excellent balance sheet and a sizable backlog, Tri Pointe is in a great position to finish out 2021 on a high note and carry that momentum into 2022. With that, I'd like to turn it over to Glenn who will provide more details about our results for this quarter and give some guidance for the rest of this year and 2022. Glenn.

Thanks Doug and good morning. I'm going to highlight some of our results and key financial metrics for the third quarter and then finish my remarks with our expectations and outlook for the full year of 2021. 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 earlier, demand continued to be strong in the third quarter with an absorption rate of 4.1 homes per community per month, which is an elevated level of demand for a third quarter compared to historical comparisons. Demand was strong across all geographies with the West reporting an absorption rate of 4.5 homes per community per month. The Central region had an absorption rate of 3.5 and the East had an absorption rate of 3.3. We reported outstanding performance on all key metrics this quarter, and either met or exceeded all of our stated guidance. We delivered 1,632 homes, which was a 25% increase year-over-year. Home sales revenue was $1 billion, also an increase of 25% and our average sales price was $630,000. Our home building gross margin percentage for the quarter exceeded the high end of our guidance range at 26.3%, a 420 basis point improvement year over year. This was a record gross margin for our company and demonstrates the pricing power we experienced in the first half of this year. Finally, SG&A expense as a percentage of home sales revenue came in at 9.6%, which was a 20 basis point improvement compared to the prior year. We continued to focus on our new community pipeline and opened 16 new communities in the third quarter. We expect to open 20 new communities in the fourth quarter, which will get us to our stated goal of 70 new communities for the full year. Based on current demand trends, we anticipate opening more communities than expected, and as a result we'll be lowering our year-end community count guidance to between 110 to 115 active selling communities. For 2022, we expect to open approximately 90 new communities and end the year between 150 to 160 active selling communities. For 2023, we expect to open approximately 80 new communities and end the year between 170 and 180 active selling communities. Looking at the balance sheet, at quarter end, we had approximately $3.1 billion of real estate. Our total outstanding debt was $1.3 billion resulting in a ratio of debt to capital of 36.3% and a ratio of net debt to net capital of 24.3%. We entered the quarter with $1.2 billion of liquidity consisting of $587 million of cash on hand and $590 million available under our unsecured revolving credit facility. Now I'd like to summarize our outlook for the full year. We anticipate delivering between 6,000 and 6,300 homes for the full year, and we are raising the range of our expected average sales price to $635,000 to $640,000. We are also increasing our home building gross margin range to 24.5% to 25% for the full year. Our SG&A expense as a percentage of home sales revenue is expected to be in the range of 9.8% to 10.2%. And 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, Glen. In conclusion, I'm extremely pleased with our performance this quarter as we exceeded our guidance for a number of key metrics, despite a difficult operating environment. We also made improvements to our return profile and laid the groundwork for what we anticipate will be a year of significant growth in 2022. While we expect the supply chain issues in our industry to persist for the foreseeable future, we also expect the positive demand dynamics that have emerged during this housing cycle to remain in place for the foreseeable future. Tri Pointe is in an excellent position to capitalize on these positive industry fundamentals, thanks to a significant increase in community count scheduled for next year, coupled with our premium brand focus and our shift to more affordable price points. We're in a great place, both financially and operationally as we head into the end of the year and we are excited to capitalize on the opportunities that lie ahead for our company. Finally, I'd like to thank all our team members for their outstanding performance this quarter. This is undoubtedly one of the most difficult operating environments from a logistics standpoint that I have witnessed in more than 30 years in the home building industry. The fact that we are able to overcome industry-wide challenges and meet our delivery goals for the quarter says a lot about the character of this company and the talented and dedicated people who work here. I truly appreciate your efforts. That concludes our prepared remarks and now we'd like to open it up for questions. Thank you.

Our first question today is coming from Stephen Kim from Evercore ISI. Your line is now live. This is undoubtedly one of the most difficult operating environments from a logistics standpoint that I have witnessed in more than 30 years in the home building industry. The fact that we are able to overcome industry-wide challenges and meet our delivery goals for the quarter says a lot about the character of this company and the talented and dedicated people who work here. I truly appreciate your efforts. That concludes our prepared remarks and now we'd like to open it up for questions. Thank you.

Thanks very much, guys. Congratulations, strong quarter. A lot of good performance. I think the closings were particularly impressive. I guess I would like to ask with respect to the closings and the supply chain commentary you gave: it sounded like the challenge is obviously continuing into 2022, which is consistent with what a lot of people are thinking, and yet you clearly navigated those well and your closings guidance for the year is maintained. My question is, do you at this point feel that you have caught up on the production side sufficiently so that sales restrictions at your communities could be scaled back? Could you loosen those sales restrictions on those communities that have them?

Hi, Stephen, it's Doug. To begin with, we lifted any sales restrictions on all our communities. Linda, I think maybe there's one or two, but we don't have any sales restrictions. The biggest restriction in the industry is supply chain and we're no different than the rest of the builders. We've got a strong team that was able to substitute and weave through the supply chain to get homes done. We're no more special than anybody else, but we've just had a very strong team. Our head of national purchasing and supply chain management, Kevin Wilson, has worked tirelessly with our 15 divisions. We expect the same type of environment going into 2022, but we don't have any sales restrictions in our communities right now.

That's interesting. I didn't realize that. Okay. Yeah.

Just to add a couple things onto that, obviously we've been in this environment for over a year now. So we started making changes to our construction schedules early on. We've adjusted communication with our trade partners. It's all about early lead times. I think we have reached a balance point between our starts and our sales releases, and so it's not business as usual, but this new normal is going to persist as Doug said and we're prepared for that.

Yeah, no, that's encouraging to see those strong closings, because I don't think that's something that we're seeing from every other builder. I'm sure people are going to ask about the gross margin. I guess the one aspect of that gross margin that I wanted to get a little clarity on is the breakdown of material. Basically, my sense is that one of the ways in which you guys are navigating around the supply chain issues is by substituting products where you need to, sort of taking parts from other homes to get what you need in order to close homes, and maybe expediting and incurring some cost. I'm curious, Glen, if you could give us a sense of whether there were any material or significant costs associated with this scrambling that the supply chain has created?

Yeah, there's definitely a cost to that. I think what's reflected in the gross margins for the quarter is obviously the strong pricing environment we had in the beginning half of this year and the back half of last year. And I think you're seeing in the guidance that margins are sequentially forecast to be down in the fourth quarter because a lot of those costs are coming through, especially peak lumber from the beginning of this year. So yes, there is a cost associated with all of that moving around for sure.

Okay. But you're not comfortable quantifying it at this point, I guess?

Costs overall have risen from the beginning of the year about 15% overall, that's including lumber. So that's a pretty sharp rise in cost. We've been able to offset it mostly with price, but costs are definitely up and they're continuing to go up.

This is Doug, Stephen. One of the things I would caution everybody on is the lumber drop because not only are you substituting products, you mentioned the cost included that, but there isn't a week that goes by that labor and other input costs are not being managed or going up. So lumber, yes, has gone down from its peak, but there isn't this windfall going forward into '22 because the supply chain does not let up on all the other inputs. So be very wise about that phenomenon going into 2022.

Got it. That's helpful. And then lastly for me on capital allocation: you talked about share repurchase being up a little bit. I'm curious though, given what we're anticipating you're likely going to be able to do next year, I'm curious about how you think about the cash balance, Glen. Usually it goes up a bit in the fourth quarter; you're already running at a fairly hefty level of cash. Should we be thinking that this level of cash we're seeing here in 3Q—call it high five hundreds or something like that—is about what we should expect for the foreseeable future, barring some seasonality? There's no reason to expect that level of cash to build significantly from here, is there?

No, I wouldn't say it would build significantly. I think it's roughly a good estimate. Like you said, there could be some ups and downs quarter to quarter, but on average it's a comfortable level.

Thank you. Next question today is coming from Truman Patterson from Wolfe Research. Your line is now live.

Hey, good morning guys. Thanks for taking my question. Just wanted to follow up on one of Steve's questions. Based on your closings, it seems like you're performing pretty well on the construction side of the business. So just a couple-part question here. Are there any specific actions you have taken to help navigate the supply chain constraints? I think you mentioned ordering products a little bit earlier—I'm thinking if you are staging construction differently or anything like that. And then second, Doug, you also touched on this in the opening remarks, but we've always thought scale in the local market is extremely important. On a national level, you're larger than your private peers but smaller than the largest public peers. Is there any way that this might be a benefit in the current environment?

Possibly, I'll take the latter half of that: possibly. Listen, it is a battle out there. Our teams are battling every day. I don't think we have any secret sauce. As Tom mentioned earlier—and he can talk more about it—we've been working in this environment for a year. It's just gotten worse. So we are very proactive instead of reactive, which is probably the best way to look at it. If one of the bigger builders is looking for 1,000 windows and DSW is looking for 50, well, 50 is probably a little easier to source than 1,000, right? That doesn't mean we're any better, so we're somewhere in between that large and definitely bigger than the small local builders. Tom, you want to add anything to it?

Truman, like I said, we've been in this environment for a year. It's been a priority for us and our operations teams to overcome these challenges. I can't stress enough about lead times and proactive communication with trade partners. We adjusted our schedule templates early. We've really pushed early construction starts, and we have been fairly successful and creative in sourcing alternative materials. All those things have added up to some strong results, but we still are off relative to normal cycle time. We don't want to give anybody the impression that that's different. On average we're year over year about 30 days up on cycle times, so it still is having an impact, but so far we've been able to manage through it.

Okay. And then on your shift toward more option land—it's up about 12 percentage points versus a year ago to now 42% of your portfolio—is there any target you could give us as to where you want to go over the next two to three years and any way you can help us on what sort of cash that frees up benefiting your free cash flow?

Yeah, Truman, it's a key component of our five strategy points that we've articulated over the last 18 months to really hone in on consistent ROE going forward. So we would target 50% on option land—50/50 owned versus controlled. We continue to harvest our long-dated California assets, which generates significant cash flow and earnings to allow us to continue with a programmatic share repurchase program, which is the other leg of the stool. The divisions outside of California are growing rapidly and generating huge income. That is going to continue to change dramatically over the next couple years. Another thing that really affects ROE and ROIC is getting inventory turns up higher and in many of these markets, especially outside of California, it's less capital intensive. So you can really focus on getting those turns up. We inherited a lot of long-held land with warehousing positions. It's been a blessing; it generates significant cash on earnings. We're using all these tools—option land, harvesting California assets, repurchases, growing outside California—to benefit shareholders long term and drive consistent returns. Hopefully we can change perceptions and shareholders will appreciate the returns we're generating.

Yeah, no, absolutely. Your performance over the past year has been nice. Thanks for the time and good luck on the upcoming quarter.

Thanks, Truman.

Our next question today is coming from Tyler Batory from Janney. Your line is now live.

Hey, thank you. Good morning. I wanted to follow up on a comment you made in the prepared remarks. I think you said that you expect year-over-year order growth to start in the second quarter of next year. Can you expand on that a little bit more? I'm assuming that inflection is driven by the community count moving higher, but I'm trying to get a sense of how you're thinking about sales pace early next year in relation to order growth.

Yes. You're thinking about it the right way. It's a reflection of the cadence of when communities open and how we've planned versus the comps. Q1 is a tough comp because absorptions were really high this year in '21, which creates a tougher comp in '22. We're planning a roughly 3.5 to 4 absorption pace across our divisions. It's a bit higher in the first half of the year and lower in the back half, assuming normal home building seasonality. That's how we're planning the year next year.

Okay, great. And then on gross margin discussion—very strong performance in the quarter—you mentioned pricing strength contributing to that. Was there any mix shift that was a positive benefit in the quarter as well, perhaps selling additional long-dated California assets which drove that margin upside versus the guidance?

No, I wouldn't say anything in particular on the mix side drove it up. Actually compared to a year ago our long-dated California asset deliveries were lower in the third quarter of '21 versus 2020, which reflects the strength across margin across the whole portfolio and not just the long-dated California assets. You are seeing a little bit of a mix in the fourth quarter and increased lumber pricing is flowing through the P&L in the fourth quarter, but nothing in particular in the third quarter—just strong results across the board.

Okay, great. And then maybe lastly on the demand side: in the opening remarks you talked about demand remaining quite strong. Can you expand more on what you're seeing with demand and traffic perhaps into October? Are you seeing evidence of a more normalized demand environment with seasonality impacting the business?

Hi, Tyler, this is Linda. We're definitely continuing to see that healthy demand environment. So far in October, we're just over that four-per-month pace that we're looking to achieve. Continued strength across markets. Definitely expecting a much more normal seasonality across markets and customer segments.

Okay, great. I'll leave it there. Thank you for the detail.

Thank you. Our next question today comes from Alex Rygiel from B. Riley. Your line is now live.

Thank you. Nice quarter, gentlemen. A couple quick questions. Can you help us better understand how we should think about modeling gross margins over the next handful of quarters coming off a very strong quarter here? Also help us think about how to model average selling prices in 2022 given the quantity of new communities being opened?

Yes. On ASP first: for the full-year ASP next year it'll be similar to this year even though we're opening more first-time move-up and entry-level communities next year as part of the mix. With the price increases we've seen this year, ASPs look like they're going to be more flat next year despite the heavier mix toward entry-level and first-time move-up. From a margin perspective, you're going to see the peak of the lumber rise impact the fourth quarter and the first quarter the most. Any relief on lumber, which has largely been offset by other cost increases, started to occur for houses we started in the third quarter and you'll begin to see those deliveries in the second quarter of next year.

Very helpful. And then as it relates to the characteristics of your buyers, have you noticed any rebound in the international buyer category?

No, we have not. We continue to see a really strong percentage of U.S. buyers. Over 80% of our buyers are U.S. citizens.

Thank you very much.

Thank you. Our next question today is coming from Mike Dahl from RBC Capital Markets. Your line is now live.

Alright, thanks for taking my questions. Appreciate the balance and candor so far. I wanted to ask another related question about demand and margin or pricing. If I look at the monthly absorption, it seems like it dipped a little in late summer and then bounced back in August. Some of this is seasonality. What have you experienced in terms of pricing power as you've gone through the past few months?

This is Doug. Pricing power has moderated in most markets. Still fairly strong in markets like Texas and Arizona. Since lumber decreased in the second half of the year, builders—including us—have tempered the pricing environment, which I think is good. We're seeing modest price increases. The market overall is really good: for context, third quarter 2019 our absorption was 2.9 and we thought that was a great quarter; this year it was about 4 in the third quarter. Year-to-date we're about 1% above total orders compared to last year even with fewer communities. The pandemic has continued to increase interest in housing, and demographics—millennials—remain a big driver: 54% of our backlog are millennials, and about 80% of our buyers are captured by our mortgage company. That's a big demographic and will drive housing for the foreseeable future.

Got it. Appreciate that. Shifting to land: a lot of the growth in both total and controlled lots has come from Texas. Many other markets are flat or down. Could you elaborate more on strategy and where you're seeing success? As we think about the community count trajectory for the next two years, how much of that should we think is skewed towards Texas versus other regions?

It's definitely going to be skewed toward the Central and Eastern regions. We talked about this 18 to 24 months ago. California gives us an incredible owned land book on a cash-on-earnings basis that nobody can easily replicate, but California is highly regulated and entitlements are challenging. So we have pushed dramatically into Arizona and the West and we're growing in Texas, Colorado and the Carolinas on the East Coast. Our goal in those divisions is to be in the top 10 market share in those markets—Texas, Arizona, Colorado and the Carolinas—and we expect to be there by the end of 2023 and 2024. It takes less capital to grow in these markets and it's more efficient. We've done a lot of ventures and land banking. You'll see tremendous growth in our Central and East regions when you look out to 2023.

Mike, it's Tom. A couple of add-ons specific to Texas: we have in-house capability to do some self-development and we're shifting in that direction. That's enabled us to take larger positions in well-located projects. The scale of projects we're bringing to market will be helpful in capturing additional market share, as Doug mentioned.

To finish on land position: in our 30-plus years, I don't think we've ever had as strong a land position where we own and control our growth through 2023. We're disciplined and focused on 2024 and 2025 as well, and the setup is good. With demand demographics and the supply constraints we continue to battle, Tri Pointe is in a really strong position.

Without a doubt, that's a differentiator. One of our strong suits is the strength of our acquisition teams. As Doug said, we've got the best pipeline we've ever had.

Okay, thank you. I appreciate the color.

Thank you. Our next question today is coming from Carl Reichardt from BTIG. Your line is now live.

Thanks. Good morning, everybody. Glenn, of the 1,349 orders you took in the quarter, what percentage of those do you think were slab or frame-up—in other words, what percentage were spec versus presales under contract?

Carl, this is Linda. Our Q3 construction starts: 44% of them were spec starts, but they sell very quickly. We have a very low number of completed unsold homes—about 0.2 per community at this time.

Okay, great. And then on the lot options that you've got, can you distinguish between the percentage that would be with third-party lot developers or land sellers where you're going to stop development versus land banking transactions where you effectively have a financial partner?

I'd have to dig into that; I don't have that breakdown off the top of my head.

Okay, thank you. And one more on the guidance: you were 230 basis points above the midpoint of the range this quarter on margin. Can you help me understand of that 230 basis points what specifically improved relative to what you had expected?

I think it's really how we were looking at things and the timing of certain deliveries coming in relative to price appreciation. To be honest, we went a little conservative because costs were rising quickly, but price increases outpaced costs in the quarter, so it ended up coming in higher than we expected once we got through everything. So it was primarily price increases relative to cost increases that exceeded our expectations.

Okay. You're not anticipating that same dynamic to occur in Q4 then?

Not right now, but I'd be pleasantly surprised if we do.

Okay, I appreciate it. Thanks, everybody.

Thank you. Our next question today is coming from Ivy Zelman from Zelman and Associates. Your line is now live.

Thanks for taking my question. Guys, can you tell me on the land that you purchased during the quarter—absolute land that you purchased—how much have you seen land prices increase? And what's your absorption underwriting assumption for those lots? Please provide absolute number of blocks, year-over-year land inflation and underwriting assumptions.

On the absorption side, Ivy, we underwrite differently depending on product and price point. It ranges from about 3.5 for entry-level product up to 4.5 or 5 for some other products, so that's the range of underwriting assumptions. Regarding the number of lots and year-over-year land price appreciation, I don't have the exact lot count figure in front of me.

I don't have the number of lots right in front of me, Ivy, but on the price appreciation in land—Doug?

Fifteen to twenty percent. I mentioned this before: the land we're closing on now was land that was really tied up in late 2019 and early 2020 and then got extended during the pandemic. This land position gives us huge flexibility going forward in a market that could create some uncertainty. If you're looking for just-in-time land right now, you're going to pay dearly for that. That's part of the reason why Tom and I feel we're in an excellent position. That land has the flexibility to be repositioned to more affordable products and different products. That's easier outside California, where most of our growth is happening, so that provides security going forward.

So if I understand you correctly, you're not purchasing real-time incremental lots at today's prices because you're concerned about inflation—so you're not incrementally signing new contracts that will close at these inflated prices—or you are?

We're definitely in the land business and we underwrite against current revenues and current costs. But we're looking for land positions that probably have more of a self-developed component and a stronger margin profile. Those positions don't deliver homes until 2024 and beyond.

We are staying disciplined in our underwriting, Ivy. We don't include inflation in our underwriting. We're using historical absorption paces and we're not using increased absorption paces to make underwriting work. We're staying very disciplined.

Perfect. Switching gears: recognizing you did a great job this quarter achieving closings in a challenging market, with respect to sales caps that you lifted, are you seeing a pickup in the need for incentives in the market to maintain velocity and sales pace? If so, Linda, can you tell us what percent of your orders had incentives associated with them?

Yes. We're still seeing very low levels of incentives—just customary lender incentives. There's been some incremental increase in incentives in our DC Metro market, but certainly nothing untoward and still at lower levels than prior years. In Q3, our incentives for delivery were 1.7% of revenue.

And that's down from the prior year—September was 4.3%—so incentives are really low.

Last question: the market community count is poised to grow significantly in 2022 by many peers and yourselves. Are you concerned about getting those communities ramped up? Many builders are not hitting targets anticipated due to constraints in municipalities and other delays. Can you give us confidence level of your ability to get to the community count goals you've articulated given those challenges?

Great question. It's a daily grind with supply chain and municipalities, which can delay community starts and permits. Tom and I can tell you our growth going into 2022 is at about a 90% confidence level. There's a little 10% cushion because of municipalities and supply chain, but we are very confident. We've been dealing with these issues for a year, so you need to be more forward-thinking. We want most of our year started earlier than normal and communities started much earlier. If you didn't start that planning process 6 to 12 months ago, you won't open the communities we talked about in 2022. There will be a ramp-up of communities industry-wide, but proactive planning makes it achievable.

The team is 100% focused on that. The future lifeblood of the company is increasing community count. By the end of next year and into 2023, we put ourselves in a whole different league and we're excited to increase our volume and get stores open on a timely basis.

Well, good luck, guys. Thanks.

Thank you. Our next question today is coming from Alex Barrón from Housing Research Center. Your line is now live.

Good morning, everyone, and great job in the quarter. I wanted to ask about one component few focus on, which is the share buybacks. You guys have been consistently and aggressively buying back stock and driving down the share count. If you expanded the share buyback authorization, should we expect that to be a consistent program every quarter or more opportunistic? Also, have you considered starting a dividend?

Hey Alex, it's Glenn. The share buyback is a key component of our strategic goals, and the level of buyback you're seeing each quarter is a good run rate to use going forward. We think it's a good place to put capital right now, especially with where our stock has been trading; it makes a lot of sense and it's driving returns. Regarding a dividend, we've looked at that. I don't think it makes sense right now; we'd rather focus on the share buyback at this time. It's something we may look at in the future once we achieve more growth goals. Right now we're focused on growing our early-stage divisions and our central and east divisions, and focusing on share buybacks.

Thank you. Our next question today is coming from Deepa Raghavan from Wells Fargo Securities. Your line is now live.

Hi. Good morning, everyone. Good quarter. A couple of questions: As I think through your 2022 gross margin setup, it feels like it could grow year-over-year. The positive being lumber benefits for the good part of next year, and there is operating leverage from the big community uplift even with initial ramp costs, while additional commodity inflation elsewhere seems like it can only be a partial offset and you mentioned pricing is flat. Are there any big moving parts that would contradict that view? Any comments on whether margins are biased higher next year?

We haven't given gross margin guidance for 2022. One thing to note is that costs are still rising, so that's something to watch. We're opening 90 new communities next year, so there's a mix change. We're ending the year between 110 to 115 active communities, so it's a big mix shift and that plays a factor. We'll provide guidance next quarter on where margins are going for 2022.

Okay. Can you talk through cycle times and whether supply chain issues are impacting starts and cycle times? Any updates on cycle times year-over-year?

As I said earlier, we are reaching a balance point between our sales releases and start pace. We've lifted restrictions. Municipalities and permitting have been probably the biggest impediment to getting starts. Once we get started we have the normal supply chain issues which are leading to on average about a 30-day cycle time delay year-over-year.

Okay, got it. That's it for me. I'll follow up later. Thanks so much.

Thank you. We reached the end of our question-and-answer session. I would like to turn the call back over to Doug for any further closing comments.

Well, thanks, everyone, for attending today's call. I hope everyone has a wonderful holiday season; it's been a fast-moving year and we look forward to reporting our 2021 results next year. Thank you and have a great weekend.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.