Greetings and welcome to Tri Pointe Homes' First Quarter 2022 Earnings Conference Call. It is my pleasure to introduce your host, David Lee, from Investor Relations for Tri Pointe Homes. Thank you, and 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 first quarter of 2022. 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.

Good morning. And thank you for joining us today as we go over our results for the first quarter of 2022 and provide some thoughts on the balance of the year. Tri Pointe Homes delivered another excellent quarter of profitability, generating earnings of $0.81 per diluted share in the first quarter of 2022, compared to $0.59 in the prior year period. We once again came in at the high end, or above our stated guidance for key operational metrics, including new home deliveries of 1,099, an average selling price of $660,000 and homebuilding gross margin at 26.8%. Because of strong demand throughout the quarter, we continue to sell homes at an elevated pace of 5.7 homes per community per month. This sales success resulted in a first quarter ending Company record backlog both in terms of units with 3,955 homes in backlog and dollar value of $2.9 billion, which places us in an excellent position to deliver on our guidance for the full year. We were also successful in meeting our projected new community openings. For the quarter we opened 22 new communities with excellent initial sales results. Because of demand and our differentiated product offering, we continue to realize accelerated sales with virtual openings. We are still on pace to open 90 to 100 new communities for the year, which will contribute significantly to deliver growth in the coming years. We are extremely pleased with our results this quarter and are encouraged by our team's ability to work through the supply chain issues that persist in our industry. Demand continues to remain robust in all of our markets in the first quarter, even as mortgage rates have moved materially higher. The homebuyers in our backlog are well-qualified and are pre-qualified through our mortgage affiliate prior to purchasing a home. They have an average debt-to-income ratio of 39% and an average FICO score of 749. An average loan-to-value of 82%, and an average annual household income of $189,000. The majority of our homebuyers are millennials, and this cohort continues to be a strong source of demand for the industry, driven by needs-based life changing events such as marriage, a growing family, or a job relocation. This sizable population of buyers is in the prime home buying phase of their lives, and the homebuilding industry stands to benefit from their participation in the markets for years to come. Demand has also been fueled by what we believe will be the long-lasting transformation of homebuyer preferences and needs brought about by the pandemic. Whether it's born out of a desire for more living space, the ability to work from home, or a need to feel more in control of one's living conditions, the pandemic has created a heightened desire for homeownership in our country. Another positive dynamic for the industry is the ongoing and severe lack of existing home supply in our markets. This lack of resale competition has caused an increasing number of buyers to consider purchasing a new home. According to the most recent figures from the National Association of Realtors, as of the end of March, the inventory of unsold existing homes stood at 950,000 units, which is equivalent to two months of supply at the current monthly sales base, and well below historical norms. Inventory levels for new homes also remain constrained by the ongoing supply chain issues that have limited the number of homes that can be brought to the market and kept pricing firm while maintaining a sense of urgency for each new home site release. We believe that the supply-demand balance for both new and existing homes will persist for some time, providing the new home industry with a healthy fundamental backdrop for the foreseeable future. Given this outlook, Tri Pointe Homes remains focused on consistent operational and financial performance by executing on the five strategic initiatives we have emphasized for several quarters now. These include the continued monetization of our long-dated California assets, the growth and build-out of our early-stage markets, a disciplined approach to land acquisition, further improvements to our cost structure across our homebuilding platform, and a consistent stock repurchase program. With respect to our long-dated California assets, these communities continue to generate positive cash flow and outsized profits for our company due to their favorable land bases, desirable locations, innovative new home designs, and attractive pricing. In terms of our early-stage markets of Austin, Dallas, Sacramento, and the Carolinas, we made further progress towards greater scale and operational efficiency, opening nine new communities in the first quarter. These divisions are now making valuable contributions to the bottom line by generating healthy margins. We continue to be disciplined but active in the land market. Tri Pointe grew its total lot count by 14% on a year-over-year basis in the first quarter, with most of that increase coming from option agreements and land banking arrangements. Lots controlled as a percentage of our total was 47% at the end of the quarter, compared to 38% at the end of the first quarter of 2021. Additionally, we have been expanding our geographic diversity, and as a result of that strategy, deliveries from our non-California divisions are expected to increase to approximately 70% of the company's overall deliveries by 2024 versus 58% in 2021. Tri Pointe continues to look for ways to utilize technology to drive efficiencies across our homebuilding platform. We have made significant investments in virtual sales tools and expanded our online marketing efforts, which we believe have resulted in long-lasting structural changes to the way we do business. With that, we continue to see efficiencies related to our marketing and advertising spending, and reductions in both the outside broker attachment rate, as well as broker cost per delivery. The final piece of our returns-focused strategy has been to allocate a significant portion of our cash flow to share repurchases. In the first quarter, we repurchased $5.3 million shares for a total of $123 million. With our undervalued stock price and the positive fundamental outlook we see for the industry, we feel this is an excellent use of our capital that further enhances shareholder return. As of March 31, 2022, we had $302 million remaining on our outstanding share repurchase authorization. Currently, we are in a difficult geopolitical inflationary environment in the U.S. The Federal Reserve has made it their top priority to tame this inflation with higher interest rates and any reduction of their balance sheet. As a result, we have seen mortgage rates increase over 200 basis points, and with higher interest rates, the consumer loses purchasing power. While this changing environment is challenging, we have been there before. Our company is led by seasoned executives who know how to successfully operate during these periods. We acknowledge that higher financing costs will be a headwind for the industry. However, we are encouraged that the U.S. economy remains strong and wages continue to rise, leading us to believe that the demand drivers we see in our industry and our markets can continue to propel the housing market forward and present a much more positive fundamental outlook than our current equity valuation suggests. In summary, Tri Pointe Homes delivered excellent results in the first quarter of 2022 thanks to a combination of strong execution, careful planning, and a continuation of our returns-focused strategy. While investors remain focused on mortgage rates, we remain centered on doing what is best for the long-term interests of our company and our shareholders and believe we have the right strategy and leadership teams in place to be successful. With that, I would like to turn the call over to Glenn who will provide more detail about our results and give an update on our forward-looking guidance.

Thanks, Doug, and good morning. I'm going to highlight some of our results and key financial metrics for the first quarter and then finish my remarks with our expectations and outlook for the second quarter and full year of 2022. At times, I will be referring to certain information from our slide deck, which is posted on our website. Slide 6 of the earnings call deck provides some of the financial and operational highlights from our first quarter. As I mentioned earlier, demand continued to be strong in the first quarter with an absorption rate of 5.7 homes per community per month. Order activity was healthy across all geographies, with our West region reporting an absorption rate of 5.8 homes per community per month. The Central region experienced an absorption rate of 6.0 and the East an absorption rate of 4.8. So far in April, demand has continued to remain strong with similar absorption rates for the first quarter. We reported outstanding results on all key metrics this quarter that either met or exceeded our stated guidance. We delivered 1,099 homes at an average selling price of $660,000, which resulted in home sales revenue of $725 million. Our homebuilding gross margin percentage for the quarter was 26.8%, a 290 basis point improvement year-over-year. The strength of our margins continues to demonstrate our ability to price homes to cover or exceed the cost pressures we have experienced. Finally, SG&A expense as a percentage of home sales revenue came in at 11.1%, which was a 30 basis point improvement year-over-year. Turned in communities, we opened 22 new communities during the quarter which exceeded our previous guidance of 15. We were able to accelerate several virtual community openings and successfully generate orders using the interactive sales technology that Doug mentioned earlier. For the year, our expectations for opening between 90 and 100 new communities and having between 150 to 160 active selling communities by the end of the year remain in place. Looking at the balance sheet, at quarter end we had approximately $3.3 billion of real estate inventory. Our total outstanding debt was $1.3 billion, resulting in a debt-to-capital ratio of 35.7% and a net debt-to-net capital ratio of 27.8%. We ended the quarter with approximately $1 billion of liquidity consisting of $430 million of cash on hand and $568 million available under our unsecured revolving credit facility. Now I'd like to summarize our outlook for the second quarter and full year. For the second quarter, we anticipate delivering between 1,300 and 1,500 homes at an average sales price between $670,000 and $680,000. We expect homebuilding gross margin percentage to be in the range of 26% to 27% for the second quarter of 2022 and anticipate SG&A expense as a percentage of home sales revenue to be in the range of 10% to 11%. Lastly, we estimate our effective tax rate for the second quarter of 2022 to be in the range of 25% to 26%. For the full year, we continue to anticipate delivering between 6,500 and 6,800 homes. We are raising our guidance of average sales price to the range of $680,000 to $690,000. We are also raising our expected homebuilding gross margin range to between 26% and 27%. Our SG&A expense as a percentage of home sales revenue continues to be expected to be in the range of 9.7% to 10.2%. Finally, the company is forecasting its effective tax rate for the full year to be in the range of 25% to 26%. I will now turn the call back over to Doug for some closing remarks.

Thanks, Glenn. We have a lot to be proud of in terms of our performance in the first quarter of 2022. As I mentioned earlier, we came in at the high end or above our stated guidance for key operational metrics in spite of the ongoing industry-wide supply chain challenges. We also generated strong profitability and opened new communities ahead of schedule. While interest rates certainly play an important role in our industry, we believe our company remains on solid footing thanks to the combination of strong job growth, healthy income levels, strong demographics, and low levels of new and existing housing supply. These factors combined with our strong balance sheet, excellent liquidity, and experienced management team continue to make me very optimistic about the future of Tri Pointe Homes. Finally, I would like to thank all our team members for their efforts this quarter. Every day, it seems as if we are presented with a new challenge for our industry, and you have consistently shown that you are more than up to the task, and I truly appreciate your efforts. That concludes my prepared remarks. And now we'd like to open the call for questions. Thank you.

Our first question comes from Stephen Kim with Evercore. Please go ahead with your question.

Congratulations on the strong results. I’d like to start by addressing something everyone is likely considering, especially given the recent increase in mortgage rates. Can you share your observations regarding any changes in the sales centers related to mortgage qualification issues, cancellations, or incentives? Are you finding that buyers are more inclined to tap into your waiting lists? It would be helpful to understand if there are underlying adjustments being made to address the higher financing costs, even amid solid sales and good absorption rates.

Hey, good morning, Stephen, this was Tom. A lot there in that question and we're certainly trying to sort that through in our sales hubs as we speak. Certainly, from a demand side we have not seen a falloff in demand but that doesn't mean there aren't concerned consumers out there. We're holding hands and walking people through this rising rate environment, but so far with our needs-based buyers they are still fully engaged and moving forward relative to purchasing their homes. Certainly, relative to incentives, we have not really seen any increase in incentives. Actually, our average incentive, I think was about 1.3% for the quarter, and that compared year-over-year to about 3.2%. So still a very healthy environment out there. There are concerns though, as interest rates continue to rise but we have really done a lot of sensitivity analysis around our backlog and feel strongly that our buyers are very well qualified and committed to their purchases and we don't see anything on the horizon changing that. Relative to those sensitivity tests we've run that up to about a 6% rate, and that's where we do begin to see some impact to our backlog, but it's really very minimal. That would be in the high-single digits, low-double digits relative to a higher risk profile as interest rates go to 6%. I'll see if Linda wants to add anything to that commentary.

I think you've covered it really well, Tom. I mean, as you say, because demand is strong, we're continuing to operate with low levels of incentive and helping to educate homebuyers on the current market, including the low supply of existing resale homes, that's also driving more demand for our new home communities.

I'll finish by saying, Steven, there are many variables affecting the market right now. Higher interest rates reduce purchasing power, which is a fact. We've been spending time on our backlog to ensure people are secured for the rest of this year. Recently, we were in Phoenix talking to our sales teams. At Tri Pointe, we focus on developing and offering products in well-located areas with good transportation corridors and schools. Our salespeople across the nation are offering products that appeal to first-time and premium move-up buyers, who generally have better qualifications than entry-level buyers. However, location is key, as I've learned throughout my 31 years in this industry. While we may face challenges, it's clear that the Fed is determined to address the current economic issues, which will have an effect as the year goes on. The significant concern remains supply; everyone compares this to previous cycles, but there simply is no supply. Our main competitor in the new home market is the resale market. There are only two months of supply available, so for buyers looking for options, the new homebuilder is often their best choice. When we combine well-planned products, communities, and prime locations, the overall outlook for housing remains very positive.

Yes. I couldn't agree more. I really appreciate that. That was very, very helpful, particularly that the stress testing of the backlog, I think that people should find that very, very encouraging. Second question really relates to the supply chain, and we know that Omicron certainly created some problems for folks in winter. My sense is that March, things got a lot better in terms of Omicron cases, and absenteeism and perhaps my feeling was that perhaps you might have seen a little bit of improvement sequentially in March and April, versus what you were seeing in February. Curious if you could comment on that? And then related to overall production, we have been intrigued by the single-family build-to-rent operators just desperate to get a hold of product. And I was curious whether or not you've seen your inbound from that arena increasing over the last few quarters, and what your stance is towards making sales to those sorts of entities?

I'll take the supply chain, and I got interviewed last week and the simple answer is, no. It's whack-a-mole. The supply chain hasn't gotten any easier, and then when you think about the global supply chain what – what's going on in China and Shanghai, and so far, I mean, it's just there's no relief in sight that we see. And frankly, until the world can get back to getting people back to normal, and I want to get off on a political rant, but the testing procedures just create more and more roadblocks into municipalities and the supply chain, and for the ability for people to consistently come to work. So, I don't see any relief right now in the way that current situation is being managed in supply chain. As far as build for rent, we don't see a lot of that. In Texas, we've got some master plan communities we're developing that we may carve out a piece or two, Tom to sell to a BFR Group. But they're really pushing for lower price points and in areas that really aren't main and main, as I mentioned earlier. So, we don't see them in our playbook that much at all.

Okay.

The only thing I would add to that Stephen, sorry, is relative to supply chain obviously, this is a very strongly relationship-based industry. And while it is challenging day-to-day and something different pops up, we've got very experienced management teams, field operators that have great relationships and they're finding ways to make it happen, as evidenced by us coming in at the higher end of our range relative to delivery. So, it is challenging, but we do think our team has done a fantastic job and creatively sourcing material, looking for alternatives, and finding ways to get it done.

Yes. Appreciate that. Thanks so much, guys.

Thanks.

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

Hey, good morning, everyone, and thanks for taking my questions. So first, just looking at your 2022 guidance, I'm hoping that you all can give an operating cash flow target. And when I'm thinking through this, you have six years of own land or over 30% net debt to total capital. Shares are below book, which might present a better risk adjusted return than buying land, and you accelerated share repurchase to $120 million this quarter. I'm trying to understand whether this level of share repurchase is kind of the new normal for the time being, or just given some of the actions that the Fed is doing, do you actually just kind of shore up cash, bring up your cash balance a bit in 2022, or work down debt? Just trying to understand how you are thinking about it.

Hey Truman, good question. This is Glenn. We're going to be positive cash flow from operations for the year if that was your kind of original question. And we're still balancing buying land, we're active in the land market but we're continuing our disciplined approach and we are committed to our share repurchase program as evidenced by having a little over $100 million in the first quarter that was a little higher than we have done in the past. And like you said, we're in a position to where we could be more aggressive in certain quarters where we feel like the stock is undervalued. But overall, for the year we're targeting a $250 million to $300 million in stock repurchases as we've talked about in the past, and we feel we'll be able to do that without – still have strong cash and cash balances at the end of the year. And we don't have any debt coming due until 2024, so we're in a really good position on the balance sheet side.

Okay, okay. And then...

I'd add to that, Truman, I mean, we talked about our five strategic points in our remarks, and I compliment the teams we've been executing in a very, very difficult environment. Yes, there's been healthy demand. But at the same time, as we talk to you and many of you about, we've been very focused on a returns-focused strategy. Since 2015 to put it in perspective, we bought back what about $1 billion of stock. On an annual basis, our book value, I think our tangibles are up 13% per year. We've created value of about $300 million for the shareholder. So that programmatic approach that Glenn talked about is going to be consistent because you got to sit, take a step back, and look at the macro thesis. And when you look at demand and supply, long-term, I think housing – housing is going to hit a little more of a bump in the road, let's be real about it. But when you look at the macro, and that's where the investment community, I think, with all due respect is missing the macro because of the demand from the millennials and the continued supply constraints. So, you'll look at that over the next five to 10 years. We're a big believer in our stock and so we're going to continue on that programmatic purchase program.

Absolutely. I completely agree with you. Following up on that last point, as rates have increased, have you noticed any shifts in demand between consumer segments? I'm considering that in the entry-level market, some consumers may be priced out due to affordability, but we also see strong millennial demographics, trade downs, and a lack of inventory. Additionally, the move-up market consists of more qualified buyers who are also experiencing rate locks. I'm trying to understand how you view these segments moving forward, and if you've noticed any recent shifts in demand between the two.

Truman, thank you. This is Linda. Great question. We're continuing to see a pretty even mix in our segments. In the first quarter, we were 35% entry level with a 6 per month – per community per month order pace. 52% of the mix was move-up at a 5.3 pace, and 8% was luxury at a 5 pace and active adult was 5% of the mix with an order pace of 6.4. So, really healthy demand across the segments, as you said the move-up demand continues to be strong. And while rates are increasing, those buyers also have healthy amounts of equity in their existing homes. So, we're seeing that that premium entry level and premiums this move up segment is very strong for us at Tri Pointe.

One of the things, Truman, that I think benefits us is obviously our diversified product strategies. All of our operating teams really are contributing to all those product segments. And so, as demand shifts, as Doug said, when we were out in Phoenix yesterday, we have a diversified product offering that people will be able to shift within our own company and still purchase a home should they need to adjust to a different payment.

Perfect. Thank you and good luck in the coming quarters.

Thanks.

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

Hey, guys, good morning, and congrats on really impressive execution in this tough operating environment on the supply chain. Doug, I really appreciate your comments, your balanced view on kind of the – your history in the industry, it's usually not wise to fight the Fed and it sounds like that's the approach you're taking here. So, I'm curious if, obviously rates have continued to move post quarter end. So maybe this is more a go-forward thinking point as opposed to anything that's changed up to this point. But are you at all kind of adjusting the strategy whether that's in terms of land acquisition? I noticed this quarter, your lot count was pretty flat, which is the first time it hasn't grown in a while sequentially? Or, you know, in your start pace as far as building up more spec inventory. Has anything changed on your strategy in response to what's seeming like it's going to be a tough interest rate environment for the foreseeable future?

I would say that we went into 2022 and we've talked about this Alan. As Tom and I've said, we've never been in as good of a land position for our growth, this community can grow that we mentioned in our remarks they’re going 90 to 100 this year, and many more in 2023. We own and control all that growth all the way through 2024. It's just about 100%, even in 2024. So, from a current land strategy, I use baseball terminology and we're focused on hitting singles. We continue to be very disappointed, I mean, the cash we're using today for land is land that we tied up one, two, three years ago, right. So, we're not buying land today at today's land prices unless they meet our underwriting criteria. So, we're being much more disciplined in today's environment because whatever we tie up today is really affecting 2025 and 2026, so that's our strategy on the land side. The other thing is as mentioned, we have been very, very focused on putting more and more land off-balance sheet, we're up to almost 50%. Our goal is to be at 50% or greater. And when you look at the diversification of our company, so I mentioned in my remarks, 70% of our deliveries will be outside of California by the end of 2024. All that land we own and control, and that land is much more efficient from a capital standpoint. So again, it gets back to those strategic points, I keep mentioning, returns, returns, returns being efficient in operations and diversifying our portfolio, product and price points as Tom mentioned. So, but the current land strategy is, as I said in the baseball terminology it's hit and single.

Got it? Yes. And then I guess this is the second part of that question. I think you guys were kind of operating under a similar strategy. I know a lot of your peers are just as far as trying to ramp up spec starts and maybe holding those sales off the market until they're further along in the construction process, given the cost inflation. So, I'm just curious are you changing that thinking at all? Have you changed your piece of starts at all over the last four to six weeks given any uncertainty out there? Well, what's the general thinking there?

Alan, this is Linda. We've not changed our philosophy on this. We are able to get some more spec starts into the ground as we get more construction capacity. So, in the quarter, 50% of our starts were to be built and 50% spec. We started a total of 1,849 starts which was a 37% increase over the fourth quarter and up 10% from Q1 of 2021. So, we're happy to see that level continue.

Great. I appreciate that one. And then if I can squeak in one more here. I thought I heard a comment earlier from Tom maybe it was you Doug about locking buyers in backlog and admittedly I'm not sure what the current norm is. But I thought generally, maybe 60 days out is where buyers can typically lock in their mortgage rates. So, are you starting to do maybe extended locks or anything like that to ensure that buyers that might be several months out from delivery are locked in at a lower mortgage rate or did I misunderstand that?

No, you're right on Alan. This was Tom. Locking has been a key initiative of ours and we continue to work every day trying to educate buyers that it would be helpful for them to lock as soon as possible. Traditionally buyers are interested in locking in 60 days out. We do offer longer-term rate locks, and we think it is wise to do so. We've allocated some of our typical financing incentive dollars to help them with those longer-term locks. But we have the ability to lock in longer term for 270 days. So, we think that's a wise strategy for our buyers, and we continue to work on that.

Got it? And just to be clear, that cost right now is, it sounds like it's being split among you guys and the consumer depending on the circumstance?

Correct.

Okay, perfect. Thanks, guys. Appreciate it.

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

Thanks. Good morning, everybody. I wanted to ask Glenn about SG&A. You had a 20% drop in sales and marketing expense. And I think G&A was up 17%, which is a big mix shift there in the two components. And I was just curious, was there a cost deferral there or some reallocation or how was sales and marketing down from on a dollar basis so much relative to delivery buying?

On the sales and marketing side, it's really just what we talked about in the prepared remarks. Lower advertising and marketing spend, just because the demand is still so strong that we are not needing to spend those dollars, and we are seeing lower broker dollars. So, both the attachment rate is lower than it was a year ago, and the cost per delivery is lower than it was a year ago. So that's a good sign for us and for the industry.

Okay. And then on the gross margin guide, we've got an overall annual guide that's not dissimilar from what your second-quarter guide is. Are you effectively not expecting the typical seasonal bump in GM in the back half of the year, especially as your volumes ramp? So, the portion of your fixed that you cover you should get some leverage there? And is that a function of mix or a function of conservatism? Or you're just what, either geographic mix or product mix, why your margins wouldn't at least see the typical seasonal expansion? Thanks.

Well for us it is a little bit of mix. But it's also, I think, some builders are different in how they have a certain fixed cost that they expense on a quarterly basis and so, as revenue grows, or margin grows. For us that's baked into with the way we allocate our costs that doesn't have as big of an impact for us as it does some other builders. That's just more of an accounting difference. So, for us, it's really just mix. So, all things being equal, you shouldn't see a seasonality margin change for us the way we do the accounting.

Okay, great. Thanks, Glenn. Thanks, everyone.

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

Hi. Thanks for taking my questions. Sticking on gross margin cash lumber has been coming down for several weeks now. And like Carl, I would have thought maybe some of these costs coming in would help drive higher gross margin. I guess, what are you seeing in the field on lumber pricing? And could it be a tailwind at some point if the prices keep going down like they have?

Hey, Jay it’s Tom. We would love to see lumber become a tailwind. And we have seen it move off of the highs for the year. But as you know, it's cyclical based on demand as well. And right now, everybody is putting their year-end starts in the ground. And so, we see it following a similar trajectory as we did last year. So, the hope is that it will continue to move off as we get later into Q2 and that certainly will be a benefit for us. That being said, obviously, other costs are challenging as well. So, we continue to see increases in other material costs and labor.

Yes Jay, I'll add for the quarter, Tom, I think, it was our cost, direct building cost went up 10% to 15%.

Right.

So, it's still a very healthy cost environment. So, the lumber question is interesting, but there's so many components and there are so many input costs that are changing and then you throw in the cost of oil and gas products or related products on the LD side that people aren't talking that much about. So, there you see input costs across the equation going up still.

Got it. And then the other question I had, maybe, sorry, go ahead Doug.

Yes Jay, cycle times are certainly a challenge relative to year-over-year stats, our cycle times are running about three weeks longer than they were a year ago. Overall, our cycle times are about two months longer than pre-pandemic schedules. So, we're still challenged on cycle times. We have done some new initiatives around our sales to start, and we've seen some improvement in those timeframes. So that's benefiting our overall cycle times, as well as our complete to close timeframes we've improved on. And so overall, we've been able to take a few weeks back out of the schedule because of that.

A little bit smiling here, Jay, because we can talk about all the challenges on the supply chain, and you get kind of negative a little bit. But to be honest with you, I'm super proud of the team delivering, as Tom mentioned earlier on our guidance, and we're sticking to our guidance for the rest of this year. We got a lot of wood to chop, but we've got an excellent management team that knows exactly what they're doing. Pulling out all the stops across the supply chain. And we're a very experienced team that plans, plans, plans. In the end, hey, we're not the only ones, everybody should be doing it. But I'm really proud of us hitting our numbers and exceeding them in most cases.

Great. Okay. Thanks, guys. Appreciate it.

Thanks Jay.

Next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Good morning. Thanks for taking my questions. First one, I appreciate all the color on some of the financing environment. I have kind of a two-part follow-up. So, it seems pretty clear that you are scrubbing the backlog thoroughly in terms of looking at those DTI requirements and true kind of cutoffs. And you talked about rate locks. I'm wondering what portion of your backlog were you able to get into extended rate locks, where they not really absorbing the full brunt of what's happened over the past month? And then the second part is, are you seeing any other changes in terms of either LTVs, or loan types, adjustable rate versus fixed? Anything else on that side that buyers are kind of using to offset the full impact of what we've seen on headline rates?

Yes, Mike, all good questions. Relative to the latter first, we started to see some inquiries around adjustable rate. But nobody is really engaging. And we haven't seen anybody shift to any alternate product, everybody is still firmly planted into a 30-year fixed mode and mentality right now. But we do anticipate that that could become something that is desirable in the future. So, we will keep you posted on that. Relative to locks, I don't have it broken down by exact longer-term locks. But right now, we've got for our Q2 backlog 70% of that in a locked position. And then as we go out into Q3, so you are starting to look at some of those longer-term rate locks. We're in the mid 30%, relative to a locked buyer.

Okay, that's very helpful. Tom, thank you. And then my second question is back on the demand side. And I appreciate kind of the moving pieces in your balance. If we look back at arguably the last time, we could see kind of a bump in the road was 18,19. And your sales pace was running about three a month. And I know your product mix has shifted and the environment is different. But I guess in light of what you've kind of experienced in the past, and arguably that may be even been mild. How are you thinking about pace? You are 60% above that 2018-2019 level today. So maybe a) what did you see and how is April tracking? But b) when you talk about kind of acknowledging that there is probably going to be some choppiness, what is your framework when thinking about where your pace should be?

So, the pace, I think we mentioned in our remarks in April, similar to what we experienced in the first quarter schedule. It’s a good question Mike. We continue to – historically we ran our business at our price point in the 3 to 3.5 range for business planning. We run it today at closer to 3.5, 4, because our ASP and our growth of our non-California deliveries is dominating the playbook, as I mentioned earlier. And when you look at that we assume a better absorption. So yes, we're enjoying some outsize absorption now, but as the Fed, as I said earlier, locked and loaded to continue to tamper this inflation bug and they are going to put some more cooling on the demand side of housing. You'll see those paces come down, at least the way we're looking at it in our business planning.

And as Doug said earlier, we're demonstrating that in our disciplined underwriting relative to our land acquisition, so we are underwriting to that 3.5 to 4.5 pace.

The interesting thing, Mike, and we can talk about this for hours, we're almost getting up to the top of the hour. There are so many variables, you've got the geopolitical concern, you've got inflation, you've got interest rates, you've got gas prices, you've got a labor market that's very, very constrained, you've got a supply chain. You go back to 2018, there was – we didn't have a lot more supply, the resale market was much greater, Linda, there was a lot of products available, mortgage rates got into the low 5%, 5.5% range back in those days, as you remember Mike. And it really tampered, kind of pulled back demand. So, all these cycles we go through are different. I continue to believe on a macro basis that there is more demand in this millennial group that we're still just tapping into. And there is just no supply when you look at the resale, the new home side, the constraints that we are facing as new home builders are significant. So, when you factor all those things in yes, we're going to hit a bump in the road. But when you look at the long-term macro, I can continue to think it's going to be very good for the new home builders.

All right, thanks, Doug. I appreciate that.

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

Hi, good morning, everyone. Just given all the supply chain comments, I'm hearing from you, curious on your delivery cadence. Q2 sequentially appears a little lower, versus historically and second half deliveries are on the higher side, even at midpoint. Curious, what drives the confidence in keeping the full year guide range for closings at this time? And also, whether are you assuming any easing of supply labor constraint or any color there that you could provide on the confidence that you have in the second half delivery?

Yes, Deep, this is Doug. I mean, the confidence is our teams. I mean, we delivered on our guidance in the first quarter, and it is taking longer to build homes as Tom said. So, we've got a very strong team and we have very strong confidence in our guidance for the second quarter and the rest of the year.

Got it. Clearly the Doug, Tom, and Glenn, you are preparing to get defensive here a little bit. But how about your vendors and ecosystem? I mean, are you seeing maybe land prices starting to moderate given the rate headwind or any of your product suppliers or vendors getting a little bit more cautious? Just curious what kind of defensive moves that you could also deploy? Should a slowdown become kind of evident maybe later in the year, next year, whenever?

Well, I'll take part of that question. I mean, land prices are a function of the land residual based on current revenues and current costs, and we underwrite to very strict guidelines. As I mentioned earlier, talking now and we're hitting singles now, whatever we're looking at today really doesn't deliver until 2025 or 2026. So, we've got very strong land position at very, very strong margin profile going into the next few years, which is another big difference, by the way, than 2018 and other cycles. I mean, when you're looking at goalposts of 22% to 26%, 28% of margins, that's a pretty good buffer going into an uncertain market environment, which is our very strong land position that we own and control to 24%. So, today's land prices are based on today's land residual.

Got it. If I can sneak one quick one in, any thoughts on your April audit trends? And I'll leave it at that. Thank you very much. And it was a great quarter. Thanks.

Yes, we mentioned on the prepared remarks that so far, in April, demand has been consistent with the first quarter on an absorption basis. So, we continue to see really strong demand in April.

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

Thanks, guys. Lot of my questions have been answered. But if you could just clarify, can you comment on how rates, the rising rates have impacted your new community account opening plans?

It has not impacted our new community opening plan.

And then any quick thoughts on average selling prices strength in pricing. Obviously, pricing has been really, really strong for the last couple of years. With existing home inventory so low, do you still feel like you've got a little bit of pricing power out there to cover additional or future rising building material costs?

Through the first quarter, we were able to cover our costs, Alex, with price increases. And so based on our strong buyer profile that we've mentioned today on the call, we still feel that there is some pricing power out there. But we're really in the environment, we're trying to cover costs; we are not trying to raise price just to raise price right now because we are being mindful of affordability.

Excellent, very helpful. Thank you.

Our next question comes from the line of Alex Barron, with Housing Research Center. Please proceed with your question.

Good morning, gentlemen. And great results. I wanted to ask whether you guys track what percentage of the buyers you are seeing are coming in from a different state? That's my first question. My second question is assuming rates were to keep moving higher from here, how are you guys thinking about your product in the future? Are you going to be building smaller homes? Or how would you counteract the effect of higher interest rates to try to keep the homes affordable? Thanks.

Alex it’s Doug. I’ll take the latter part of that question first, because it's actually strategically something we focused on several years ago by diversifying our product offering. I mentioned earlier 70% of our deliveries are going to be outside of California by the end of 2024. We have intentionally focused on more than entry-level premium first move-up across the nation kind of and even in California, as I think we mentioned in the first call, we’re about $100,000, maybe it was $200,000. I can't remember the exact number. We have very affordable price points in the Inland Empire even down to San Diego, we're really out of a luxury home building business. And when you think about our product offering and where it's located, it affords a buyer you've got average incomes of $188,000, we have very strong buyer profile at that kind of main and main cut type of real estate location. So as interest rates go up, as Tom mentioned, we've stress tested at 6% but our buyer profile versus being at the very, very entry level, they are very payment sensitive, no doubt about it. We're not hitting that type of buyer profile. So, my personal opinion is we're set up very well for a higher interest rate environment. And remember – by the way, some of the stuff you write is great. I love reading your reports. I think they are spot on. And one of the things you are going to see is the consumer eventually will be going, as we saw, what, 10, 15 years ago Tom and Linda, variable rate programs, and so forth. So, I think we're positioned really in a sweet spot going forward in a higher interest rate environment. Linda you can talk about the other question.

Yes, Alex in terms of the out-of-state buyers in the first quarter 16% of our homebuyers had an address in another state when they purchased their home with us. And that's up from 14% in the first quarter of last year. Some interesting changes in the mix of locations for us, we were seeing more out of state buyers, in this quarter, Maryland, and in Las Vegas, Raleigh and Charlotte, and in Houston and Austin, you may recall that, in Austin out-of-state buyers really peaked for us in the fourth quarter of 2020, where they were 35% of our buyers, but that's moderating somewhat with 22% of Austin buyers out of state this quarter.

Okay, great. And if I could ask one more.

Sure.

In terms of investors, what's your policy in terms of selling to investors? And if you do sell to them, what percentage is your maximum, I guess?

Alex, thank you. This is Linda, that's a really great question. We do not sell to investors. We do a very thorough job of pre-qualifying all of our homebuyers through our affiliate mortgage company prior to them purchasing. So, it would be less than 0.1% of our buyers that are investors and we've been able to maintain that very consistently scrubbing our pre-qualified buyers prior to writing purchase agreements.

Okay, excellent. And best of luck for the year. Thank you.

Thanks, Alex.

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

We're at the top of the hour. It was a good hour of discussion and appreciate everybody joining us today. We look forward to catching up with everybody after Q2. Thank you. And have a great weekend.

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