Tri Pointe Homes, Inc. Q3 FY2022 Earnings Call

Ladies and gentlemen, greetings and welcome to the TRI Pointe Homes Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn the conference over to David Lee, General Counsel. Please go ahead, sir.

Good morning, and welcome to TRI Pointe Homes Earnings Conference Call. Earlier this morning, the company released its financial results for the third quarter of 2022. Documents detailing these results, including a slide deck, are available at www.tripointehomes.com through the Investors link and under the Events & Presentations tab. Before the call begins, I would like to remind everyone that certain statements made on this call that are not historical facts, including statements concerning future financial and operating performance, are forward-looking statements that involve risks and uncertainties. A 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 third quarter of 2022 and provide an update on current business conditions and our strategic plan. TRI Pointe Homes produced outstanding results in the third quarter. We delivered 1,463 homes with an average gross margin of 27.1%, generating net income of $149 million or $1.45 per diluted share. This represented a 24% increase in earnings per share compared to the third quarter of 2021. Our teams did an excellent job managing through a very challenging supply-chain environment, resulting in deliveries at the high end of our guidance range. Our experienced management team has the right strategies in place to continue producing strong results in the fourth quarter, including focusing on the delivery of our high margin homes in backlog while also navigating the housing correction the industry is facing. As the housing market has continued to weaken due to the rapid rise in mortgage rates, our order demand slowed significantly during the quarter, resulting in an absorption pace of 1.8 orders per community per month. Demand was soft at the start of the quarter but picked up in August when mortgage rates went down to the low 5% range and weakened again as rates approached 7% in the back half of the quarter. The volatility in rates along with the growing uncertainty around the economy has put many prospective buyers in a wait-and-see frame of mind and led certain buyers in backlog to reconsider their purchase. We continue to prioritize the preservation of our backlog and are offering solutions to offset monthly payment and affordability challenges buyers are facing. To navigate today's reality we have implemented several tactics to help our customers purchase and close on their homes. We are providing below-market financing solutions to both buyers in backlog and new buyers by utilizing forward commitments, temporary and permanent rate buy downs, and extended rate locks to lower monthly payments, providing buyers with peace of mind leading up to their home closing. In addition, to financing assistance, we are leveraging promotions such as closing cost contributions, design studio credits, and special pricing on homes for year-end deliveries. As we have experienced in past corrections, initial demand is best achieved by utilizing incentives tailored to individual needs. Throughout the third quarter, we have had some success implementing this strategy. However, as rates have continued to increase, we are seeing better results as we focus on price discounts. Going forward, we will continue to implement effective price strategies to improve absorption at all existing and new communities. 96% of our buyers in backlog who are financing their purchase with TRI Pointe Connect for year-end deliveries are currently rate locked. We continue to use a disciplined pre-qualification process for our new home buyers prior to executing purchase agreements. And the quality of our homebuyers continues to be strong. Our average buyer FICO score is 749, loan-to-value ratio is 80%, and average debt-to-income ratio is 40% with an average annual household income of $180,000. Millennial buyers represent 57% of our backlog financing with Tri Pointe Connect, a 3% year-over-year increase. It's important to note that today's buyers value certainty and are looking to shorten the time between sale and closing, so we plan to maintain our balanced approach to building specifications, which have historically trended towards 60% of our total starts. In the third quarter, 67% of our orders were on spec homes. As always, we are focused on managing and maintaining appropriate levels of spec inventory, as well as focusing on pace using a rational and well-informed pricing strategy. For an update on our markets, the West region had some good results with the Inland Empire, San Diego, Las Vegas, and Washington markets performing better than the company average. Sacramento and the Bay Area were weaker performing markets in the quarter. The Central region had mixed results with our Austin division faring relatively well, while demand in Colorado was sluggish. In the East, the Charlotte market continues to have good demand, especially at our newer communities. As we have previously discussed, we have a strong land pipeline and plan to open approximately 90 to 100 new communities over the next five quarters. The majority of these new communities were put under contract prior to 2021 and therefore have an attractive land basis that will allow us to enter the market with competitive pricing. They also have the advantage of being in A locations close to employment, transportation, good schools, and amenities, a standard for TRI Pointe. It is important to note that these new communities have been planned and designed with appropriate product types, features, and amenities to help combat the affordability challenges that a higher interest rate environment presents. Recent examples of this approach are our premium entry-level communities priced from the mid $400,000, including tariffs collection at our Bar W Ranch in Austin, which achieved seven orders per month in the third quarter. We also achieved strong third-quarter order pace of 3.3 per month in the highly desirable, supply-constrained Gilbert submarket in Arizona where our Waterson North planned community serves move-up homebuyers in six communities priced from $600,000 to low $1 million. Lastly, we have seen success at our Lennon Creek single-family detached homes in Dallas with 4.7 orders per month and we have high expectations for our three new planned community offerings in Dallas this month, each with strong interest, such as Union Parking in Little Elm priced from the mid $400,000. In addition to design solutions to help ease today's affordability challenges, we are also implementing intentional cost-reduction strategies across the organization in response to slowing demand. We have established goals to reduce build cycle times and initiate year-over-year cost reductions to bring costs in line with current market conditions. By working closely with our trade partners, we have already seen relief with respect to costs associated with the front end of the build process. In addition, we continue to drive efficiencies in our SG&A spending through the use of technology and process improvements and by reviewing overhead to be in line with future production levels. With respect to our land position at the end of the third quarter, we have 37,000 lots in our land pipeline, 56% of which are owned and 44% are under control via option. We continue our disciplined approach to re-underwrite and stress test all land deals under contract to current market conditions. We are working with land sellers and land bankers to renegotiate the terms of our option agreements, to slow the rate of take-downs, and in some cases, lower the contracted price. We continue to balance our capital allocation between reinvesting in the business and repurchasing shares to maximize shareholder returns while maintaining appropriate levels of liquidity. The sharp increase in interest rates has put a strain on housing affordability and created a more challenging sales environment for our industry. However, we have an experienced management team that is well-equipped to succeed in this new reality. We look forward to closing out 2022 with strong earnings while implementing the strategies for TRI Pointe that will provide success in the current market conditions. With that, I'd like to turn the call over to Glenn, who will provide more details about our results this quarter.

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 fourth quarter of 2022. At times, I will be referring to certain information from our slide deck which is posted on our website. Slide six of the earnings call deck provides some of the financial and operational highlights from our third quarter. We reported outstanding results on all key financial metrics this quarter that either met or exceeded our stated guidance. We delivered 1,463 homes at an average selling price of $723,000, which resulted in home sales revenue of approximately $1.1 billion. Our homebuilding gross margin percentage for the quarter was 27.1% and SG&A expense as a percentage of home sales revenue came in at 9.1%. This resulted in an income before tax as a percentage of home sales revenue of 18.6%, which was a 130 basis point improvement compared to the third quarter of 2021. As we have discussed, order demand slowed significantly during the quarter, resulting in 681 net new home orders, which was a 50% decrease compared to the prior year. Incentives on deliveries during the quarter continued to be low at 1.6% of home sales revenue, but incentives on new orders in the quarter increased to an average of roughly 5%. As rates increased throughout the quarter so did the level of cancellations. We had 258 gross cancellations during the quarter, 40 of which were buyers that transferred to a different lot within the same community. The net cancellation number of 218 represented a 5.7% of our opening backlog for the quarter compared to 3% for the same period a year ago. Turning to communities, we opened 17 new communities during the quarter and closed out of seven to end the quarter with 133 active selling communities. As Doug mentioned earlier, we had a strong new community pipeline that will result in significant community count growth. We expect to end 2022 with between 135 and 140 active selling communities. Looking forward, we anticipate ending 2023 with between 190 and 200 active selling communities. It should be noted that a good portion of that community count increase comes in our more attainable priced premium entry-level and first move-up buyer segments in the Central and East growth markets of Texas and the Carolinas. Accordingly, you will see our average sales price come down over the next few years as these new communities change our mix of deliveries. Looking at the balance sheet, we are extremely focused on managing our inventory levels to match demand trends, being disciplined in our land spending, and ultimately generating positive cash flow. During the quarter, we continued to be opportunistic with our share repurchase program, acquiring another 949,000 shares. Our total outstanding share count has decreased 26% since the start of 2020 and we now have $222 million remaining on our current repurchase authorization. At quarter end, our total outstanding debt was $1.3 billion resulting in a debt to capital ratio of 33.8% and a net debt to net capital ratio of 29.7%. We ended the quarter with approximately $914 million of liquidity, consisting of $228 million of cash-on-hand and $686 million available under our unsecured revolving credit facility. We plan to generate significant positive cash flow during the fourth quarter and end the year with a net debt to capital ratio in the low 20% range, similar to the prior year. During the quarter, we invested $190 million on land and land development. For the full year of 2022, we expect to invest approximately $900 million on land and land development. Given the changing demand environment and our already strong land position, we anticipate land spending next year to decrease by approximately 40% compared to the current year levels. Now, I'd like to summarize our outlook for the fourth quarter. We anticipate delivering between 1,700 and 1,900 homes at an average sales price between $700,000 and $715,000 in the fourth quarter. We expect homebuilding gross margin percentage to be in the range of 25% to 26% for the fourth quarter and anticipate SG&A expense as a percentage of home sales revenue to be in the range of 8% to 9%. Lastly, we expect our effective tax rate for the fourth quarter to be in the range of 24% to 25%. With that, I will now turn the call back over to Doug for some closing remarks.

Thanks, Glenn. While the rise in interest rates and softening buyer sentiment have made for a more difficult sales environment, we are by no means discouraged by these challenges. The long-term macro-environment for the housing industry continues to be very bright due to the lack of supply in the housing deficit that has fallen short of median household formation since 2009. In fact, in many ways, we are energized by the opportunities that will arise for well-capitalized builders like TRI Pointe to establish and strengthen market positions. We have a solid balance sheet and excellent liquidity, which will allow us to operate from a position of strength during this period of uncertainty and to capitalize on any opportunities that could arise as a result of this market correction. We know from experience that the decisions and operational strategies a builder employs during periods of uncertainty sets the stage for how it performs in the next up cycle. We have a comprehensive plan in place to stay competitive and sell homes in today's market while simultaneously positioning our company for success over the long term. Finally, I'd like to thank all our team members for their efforts this quarter. A big reason for the confidence they have in the future of this company stems from the hard work, perseverance, and dedication I witness across our organization on a daily basis. We have put together a strong and talented team here at TRI Pointe and I truly enjoy working alongside all of you as we build something great. That concludes our prepared remarks, and now we'd like to open the call up for questions. Thank you.

Thank you. Our first question comes from the line of Stephen Kim from Evercore. Please go ahead.

Yeah. Thanks a lot. I appreciate all the color. I was wondering if you could tell us a little bit more about your incentives. I think, Glenn, you mentioned you're running at around 5% right now. I assume that's not including base price reductions, wanted to get a sense of is that true? And if so, how much base price reductions just, taking an estimate, providing an estimate, how much that might be year-over-year? And then also, are you finding the need to offer what you might call late-stage incentives as folks come to the closing table?

Hey, Stephen, that's a good question. This is Glenn. So far, the true base price discounts have been quite small, and we haven't been focusing much on incentives, which is where we get that average of 5% we've mentioned. There have been a few specific communities where we've implemented base price discounts or reduced the base price, but it's minor in the grand scheme of things. Linda, would you like to provide some additional insights on the late-stage incentives?

Certainly we really work closely with customers as they are approaching their closing to ensure that they're comfortable and ready to move forward and close on the scheduled date. So we do typically see more of the renegotiation or assistance, additional financing incentives coming in at the late stage. Other incentives are, of course, upfront at the time of the purchase with things like forward commitments.

And those late-stage incentives to provide a little bit more detail around that. Are you saying that those would be things like buy downs or things of that nature? Is there anything different about those late-stage incentives that we should know about? And then you also talked about specs. I just wanted to get a sense of how many specs per community in general would you say you target? And how far above that targeted range do you think you might run in the near term?

On those late-stage incentives, it might be, Stephen, an example where we gave closing cost incentives at the time of contracts and we're giving some additional incentive before close to further buy down if the customer didn't already have a long-term lock in place. Or it might be in the form of design studio credits as there might have been additional changes in the market from when they originally purchased.

Yes, relative to spec, Stephen, we consistently implement strategies. And as we said in the prepared remarks, about 60% of our starts are spec starts. That's largely to fuel the desire from the consumer to have certainty around close and we're seeing in today's environment they really are looking for a close date within 30 to 90 days and so that spec strategy works really well for us. On average, our target is about five specs per community.

Okay. Great. Well, that's appreciated. Thanks a lot guys.

Thanks, Stephen.

Thank you. Our next question comes from the line of Alan Ratner from Zelman and Associates. Please go ahead.

Hey guys, good morning. Nice execution considering the tough environment out there. My first question just kind of wanted to touch on the price versus pace equation, and I know in the past give kind of highlighted to us that, push comes to shove you're going to focus on pace and getting a respectable absorption pace. And when I look at your results this quarter, 5% incentives, it kind of seems like middle-of-the-road compared to what we're hearing from your competitors maybe even a bit on the lower-end there and yet your order decline of 50% is probably a bit greater than average. So I'm just curious how you're thinking about that equation today, are you seeing the elasticity in the market when you do get more aggressive with incentives where it's making a notable difference to your sales pace and how should we expect that to play-out here over the next couple of quarters?

It's a great question, Alan. We entered the year with a strong backlog, as you noted. We reported impressive numbers for the third quarter and anticipate a robust performance in 2022. It's somewhat of a tale of two markets. Our operators are motivated to maintain their backlog to secure year-end closings. The interest-rate landscape has shifted rapidly, moving from five to six, to seven, and then back to six. It feels more like an art than a science; we've been encouraging retention in the backlog and testing the market. We've observed some aggressive pricing behavior, resulting in increased activity, though not necessarily in substantial volume. As we close out the year and transition into the new one, we'll implement rational and effective pricing strategies to ensure steady absorption. The environment is indeed complex. Consumers are facing pressure, seeing reports of rising rates while questioning whether prices are decreasing, which can diminish the impact of additional incentives and price adjustments. It is more art than science, but we will remain focused on pacing as we move into the new year. Our new developments, particularly the three communities we mentioned in Dallas, have generated significant interest, with many people currently undergoing pre-qualifications. They are in excellent locations and competitively priced, so while we expect some fluctuations, we are well-prepared.

That's very helpful context. Thank you for your comments. Regarding your second question, you hosted a useful Analyst Day in May where you discussed some long-term targets. The situation has certainly evolved since then and will likely continue to change over the next few quarters. I'm trying to consider how your growth plans outlined in May align with your community count guidance for 2023, which you've mentioned earlier in this call. It seems you are still progressing with those plans. Have there been any changes in your outlook for the next few years from a risk, balance sheet, or land perspective? You mentioned significantly reducing land spending next year, but I assume that won’t greatly affect your growth outlook for 2023 and 2024 considering your current land pipeline. I'm not seeking updated targets, just a qualitative sense of whether any aspects you mentioned in May have shifted.

I believe the macro-environment for housing has changed significantly. Interest rates have more than doubled for consumers, and it's uncertain where the Fed will go, but it seems likely we will continue to see rate increases. At the beginning of the year, we developed a strategic playbook in anticipation of this higher-rate environment due to inflation. Our strategy includes an excellent land position, with many communities purchased before 2021, as we mentioned in our May Investor Day. Have we delayed some of those plans? Yes, we've experienced slower execution. However, we remain confident in our growth and communities because they are well-situated in prime locations. These communities are competitively priced, especially in Dallas and others we mentioned. If I were to predict, I believe the housing market and starts will pull back significantly in 2023. We're already undersupplied, and I expect a rebound in 2024 due to a lack of supply. The resale market is effectively stagnating, with mortgage rates below 3.5% to 4%. Many millennials and buyers still need housing, although they are currently on the sidelines. As we consider starting new communities in 2023 and moving into 2024, we believe we can effectively address that demand in the latter half of 2023 and into 2024. Our focus remains on maintaining strong cash flow and a robust balance sheet, with debt-to-cap ratios in the low 20s. We anticipate opportunities to adjust our market position over the next 12 to 18 months.

Very helpful, Doug. Thanks for all the thoughts there. Good luck.

Thank you. Our next question comes from the line of Carl Reichardt from BTIG. Please go ahead.

Thanks much everybody. On the 90 to 100 new communities coming, can you talk about what percentage of those you think would be sort of more spec focused and more premium entry-level versus move-up? Definitely I'm asking, it's a big running growth, is that going to change your mix or move you away from the 60% of total starts back long-term? Or these new communities, sort of come in at the same historic spec and premium entry-level mix that you've had?

Yes. Good questions, Carl. This is Tom. I think approximately 60% of the new communities are really coming in the premium entry-level position. As you know, we've been focused on geographic diversity and I think a large portion of these new communities are coming out of our Southeast region, which is really at more attainable and affordable price points. So we're really thinking that this community expansion is going to benefit us through the current market environment.

Yes, Carl, when you look at the Central and Southeast region, which we highlighted back in May, that is a significant part of our shift towards the premium entry-level segment. As mentioned in the prepared remarks, our average selling price will decrease due to this change in mix.

I understand that, I'm just curious if the ASP is coming down because prices generally are lower in those new markets versus more entry-level compared to move up, but I think you got the answer to me. Doug, on the trade side, I mean, I think almost every builder has said the front-end is starting to get more available on loosening up. Are you seeing anything in the mid-end trades now like rough frame side or rough electrics, things like that. And from a materials perspective we builders complained about pedestals, are there any others that where you're seeing a significant issues in terms of obtaining them or are we starting to see some improvement on things like windows and doors from your perspective? Thanks.

Windows have seen improvements, but some appliances have not. I would describe the backend as still being a challenge for our teams nationwide. I anticipate that by the end of the first quarter, the backend will recognize that housing sales and starts have significantly declined, and they will be seeking work similar to the front end. Therefore, we are aiming for double-digit reductions in our cost structure as we head into 2023. Clearly, with these new communities, we are benefiting from the recent drops in lumber prices as well. However, it will take until the first quarter for the backend to realize that their backlog is not as robust as they initially believed.

Great. Thanks, Doug, appreciate it.

Thank you. Our next question comes from the line of Alex Rygiel from B. Riley. Please go ahead.

Thank you. Can you quantify the cost reduction actions to date and maybe talk a little bit about future cost reduction actions to take place?

We are aiming for a double-digit price reduction strategy from the end of this year to the end of next year, and we are still in the early stages of this initiative. It's too early to provide specific numbers, but we have outlined our targets across the country.

I was going to add, obviously that is occurring with rebidding, certainly it's occurring as we're looking at new projects coming forward and focusing on trades that have more availability, certainly a big emphasis is on making sure we have the right product coming to market to achieve the lowest possible retail prices for the consumers. So we've really done a really good job of really looking at all new product types coming into the market, looking at value enhancement, value engineering on all of those products to ensure we're producing the lowest cost structure possible.

And then as it relates to the spec strategy with a target of about five per community, is that finished or under development and where did you stand coming out of the third quarter?

Yes, Alex, that is for in-process specs standing at the end of the third quarter, we ended right around 100 completed units which was less than one per community.

Thank you.

Thank you. Our next question comes from the line of Jay McCanless from Wedbush. Please go ahead.

Hey, thanks for taking my questions. The first one I had, when we think about the ASP going into '23, is it going to have more of a call it a mid sixes type feel or is it still going to be low-sevens? Any help you can give us on that?

Well it depends on kind of the pricing environment going into next year Jay, but where we sit today, I think you'll see it in the sixes probably mid to high sixes is kind of the best range if you think about where we sit today.

And then I think Tom talked earlier about lumber prices coming down. I guess when should we expect that to be a tailwind for gross margin?

Yes, the lumber prices we've seen over the last couple of quarters have been the lowest in years for sure and so you'll start seeing that coming through margin in the first half of next year.

I have a question. It seems like you might be adjusting some of the base prices as you launch new communities. Can you give me an idea of how the new prices compare to the old ones? Are they about 5% lower or 10% lower? I'm just trying to understand how much you're adjusting the base pricing to enhance affordability.

Yes, Jay, that's a great question and we're all trying to determine exactly what that price is. Certainly different communities are performing differently and have different market expectations. But I would say that you're going to be looking at price discovery that's in the 5% to 20% range is our best estimate right now.

And in some cases Jay, it actually still may be above underwriting because it was underwritten two or three years ago, but below where we thought it was going to be a couple of months ago, six months ago. So it depends on when the community was underwritten to.

Okay. Great. That's all I had. Thanks for taking my questions.

Thank you. Our next question comes from the line of Truman Patterson from Wolfe Research. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. First question, regarding the 5% incentive level, is there any way you can help us think through that how the September or October kind of exit rate was? And then also could you go across your markets and discuss maybe which regions or states you're seeing the highest level of incentives potentially quantify some of those regions?

Sure, Truman, this is Linda. And certainly incentives have increased during the quarter in line with the increase in interest rates and levels of consumer confidence. Generally, we're certainly seeing that all markets and all buyer segments are impacted by rapidly increasing rates. So it would be difficult to say that there was any one particular market where there was a greater level of incentive. It is very much community-by-community depending on the level of competitive supply in the market, what stage construction is at in particular communities for unsold spec homes. But in general, at some point, as Doug said earlier, we can only go so far with incentives and the levels that we could buy interest rates down to, so at that point we would also be looking at layering in base price changes as we discussed.

Okay. Thanks for that. And then Doug, you mentioned earlier in Q&A that you're expecting the housing market will pull back dramatically in 2023. Given the widespread and mortgage rates versus a 10-year treasuries, if mortgage rates settled let's just say around the 6% level in 2023. Does that really change your thinking much or has kind of the negative buyer psychology permeated where your view doesn't change that much? I'm just trying to understand the potential elasticity of buyer demand?

I believe the cancellations and their reasons are largely psychological rather than financial. Our buyer profile remains strong. If consumers see interest rates stabilizing around 6%, it’s straightforward math to reach the right price and payment. Currently, buyer psychology is disrupted as they are concerned about rising rates and fluctuating prices. The situation in the mortgage market is affected by liquidity issues, with the Fed and banks stepping back, leading to a higher-risk premium. Some mortgage REITs are facing mark-to-market calls as well. Once this settles, there is significant demand on the sidelines waiting for stability to enter the market. Stability is my primary concern. I would communicate to the Fed that creating a stable environment will encourage consumer engagement in the housing cycle, which is crucial for the economy. A substantial drop in housing starts could negatively impact the economy, which is the current trend. It's an interesting time, and I feel positive about our position since we are well-prepared with ample liquidity. We are looking to bolster our liquidity and are hopeful for strong opportunities to enhance our market position. We'll see what unfolds.

All right. Well, thanks for the time. And good luck in the coming quarter.

Thanks, Truman.

Thank you. Our next question comes from the line of Alex Barron from Housing Research Center. Please go ahead.

Yes, thanks, gentlemen, and Linda. Can you guys provide the starts for the quarter versus last year? Just curious about that.

Starts for the quarter were around 900, Alex, and compared to the last quarter, I don't have that in front of me.

We were down about 65% from the prior, the second quarter. So we've cut back on starts quite a bit. Obviously, we have a significant number in process and it is our goal to balance our absorption pace and our start pace.

Okay, that's good. And then I guess given the limitations that you mentioned on being able to buy down rates. I was just curious what are those limitations? Are you able to buy them down, say, 200 basis points or it's not quite that far?

Yes, Alex, this is Linda. As rates rise, it becomes more challenging and costly to buy them down significantly. Additionally, we have limits on seller concessions depending on the loan type, which restrict how much we can contribute towards the buyer's closing costs. We can still utilize options like temporary rate buy downs to offer a lower initial rate, but buyers will still qualify based on the note rate. There is interest in this, along with increasing interest in adjustable-rate mortgages, particularly in the jumbo sector.

Yes. Okay. So I was just trying to get a sense of rates are 7%, is it possible to buy them down to 5% or is that too extreme in other words. Because if you can are you able to do price cuts then?

Yes, at 7%, we can still buy down to about 5.25%. And we can still provide some additional incentives for paid closing costs. So yes, there is still room to do that in today's market; it's getting more challenging to get rates into the lower figures. And we can really only get there with some things like arm products or temporary buy downs.

And Alex, I'd just add that the longer the term that you're trying to lock in the rate, the more difficult it is to get to those lower rate structures that you're talking about. So another reason that buyers are looking for certainty of close.

All right, so related to that, what is right now your average build time and what's the range, which are the best markets with the shorter build times, which are the markets with the longest build times?

Yes, quarter-over-quarter, we're kind of flat on our cycle times right now. Year-over-year we're probably a couple of weeks longer, in general across the company on average, we're about two months over our regular construction cycle times. The shorter-cycle times are really down in the Southeast and the Carolinas, and the longest cycle times we have right now are in the Arizona market.

On average, Alex, this is Doug, our company's construction start to completion time is around seven months.

I was just asking because of that whole issue that buyers I guess want something that can close relatively quickly and also what you mentioned about being able to lock in rates. I was just curious how hard it was in those longer build time markets to be able to do that.

That's a great question. We're focused on two strategies: one is to maintain a healthy level of speculative homes, as we mentioned, which is 60% of our starts, especially in communities with higher demand. We may increase that even further. The other strategy we are considering for 2023 is to shorten cycle times. Ideally, we aim to reduce those by about a month. This will help establish the certainty regarding closing dates that we discussed. The combination of these factors will certainly contribute positively overall.

Sorry to ask one more question, but if I could. Regarding the market in Phoenix, is there any possibility of considering bringing some labor in-house instead of relying on outside subcontractors, as historically has been the case? This might help reduce the cycle time.

My personal opinion is, no. I think with the pullback in starts and I think you've done a really good job of documenting some of that in some of your reports that I like reading. There's going to be an excess labor market and the subs will pool and we have already seen in the front-end, we'll be very hungry. So I'm not looking to add overhead in the anticipation of that shrinking our cycle times; it will naturally happen, whether you're in Arizona, Texas, California, Carolina, there'll be access to labor supply as you go into the first half of next year.

Got it. Thanks a lot. Best of luck guys.

Thanks.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And now, I would like to turn the conference over to Mr. Doug Bauer for closing comments.

Well, thanks everybody for attending today's call and we look forward to reporting strong 2022 earnings early next year. Have a great weekend. Thank you.

Thank you. The conference of TRI Pointe Homes has now concluded. Thank you for your participation. You may now disconnect your lines.