Tri Pointe Homes, Inc. Q3 FY2025 Earnings Call

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 2025. 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. 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 President and Chief Operating Officer; and Linda Mamet, the company's Executive Vice President and Chief Marketing Officer. With that, I will now turn the call over to Doug.

Good morning, and thank you for joining us today as we review Tri Pointe's results for the third quarter of 2025. I want to begin by recognizing our entire Tri Pointe team; their dedication and focus allowed us to deliver strong results in a period that continues to present challenges to the housing industry. In the third quarter, we exceeded the high end of our delivery guidance, closing 1,217 homes at an average sales price of $672,000, generating $817 million in home sales revenue. Our adjusted homebuilding gross margin, excluding $8 million of inventory-related charges, was 21.6%, while adjusted net income was $62 million or $0.71 per diluted share. We remain focused on creating long-term shareholder value. During the quarter, we spent $51 million repurchasing 1.5 million shares, bringing our year-to-date total spend to $226 million, representing a total of 7 million shares. This activity has reduced our share count by 7% year-to-date and by 47% since we initiated the program in 2016, underscoring our disciplined approach to enhancing shareholder returns. Additionally, we also strengthened our liquidity by increasing our term loan by $200 million with optionality to extend the maturity into 2029. We believe this incremental leverage is prudent, supporting capital efficiency, funding for our community count growth, and continued flexibility to return capital to our shareholders. We ended the quarter with $1.6 billion in total liquidity, including $792 million in cash, a debt-to-capital ratio of 25.1%, and a net debt to net capital ratio of 8.7%. Market conditions remained soft throughout the third quarter. Homebuyer interest remains somewhat muted with lower confidence driven by slow job growth and broader economic uncertainty. However, we continue to see underlying demand for homeownership among needs-based buyers. We anticipate that home shoppers are preparing to reengage when conditions stabilize, leading to more normalized absorptions. Our management team has successfully navigated multiple housing cycles, and we remain focused on near-term execution while staying aligned with our long-term growth strategy. In the short term, we are prioritizing inventory management, disciplined cost control, and the sale of move-in ready homes while steadily increasing the mix of to-be-built homes over time. For long-term success, we continue to invest in both our core and expansion markets with the goal of scaling our operations, consistently growing community count, and increasing book value per share to drive sustained shareholder returns. We are encouraged by the progress of our new market expansions in Utah, Florida, and the Coastal Carolinas. Development activity is well underway, and strong local leadership teams are in place. While initial contributions will be modest, we expect these divisions to generate meaningful growth beginning in 2027 and beyond as they gain scale. During the quarter, we are pleased to open our first two communities in Utah, a key milestone for that region. A cornerstone of our strategy is to invest in well-located core land positions close to employment centers, high-performing schools, and key amenities. We currently own or control over 32,000 lots, positioning us well for community count growth in the years ahead. We expect to end 2025 with approximately 155 communities and anticipate growing our ending community count by 10% to 15% by the end of 2026. The majority of this growth will be driven by expansion in our Central and East regions. This disciplined growth strategy enhances our operating scale, increases geographic diversification, and positions Tri Pointe for sustainable, profitable growth as demand improves and our expansion divisions mature. At Tri Pointe, our product is primarily targeted to premium move-up buyers with financial strength, seeking better locations, larger homes, curated finishes, and elevated lifestyles. This segment has demonstrated resilience even amid shifting market conditions, supported by strong income profiles, down credit, and larger down payments, and our backlog reflects this strength. Homebuyers financing through Tri Pointe Connect, our affiliated mortgage company, have an average household income of $220,000, a FICO score of 752, a 78% loan-to-value ratio, and an average debt-to-income level of 41%, consistent with recent quarters. These strong characteristics have reinforced the financial stability and quality of our customer base and the durability of our future deliveries. As consumer confidence improves, we expect pent-up demand to grow the pool of move-up buyers attracted to our premium communities and design-driven offerings that align with their lifestyle aspirations. Our premium brand community locations and innovative product design continue to differentiate Tri Pointe in the marketplace. We have the financial strength and operational discipline to invest through the cycle while returning capital to shareholders. Together, these strengths, along with an experienced management team, position Tri Pointe to drive long-term performance and value creation. With that, I'll turn the call over to Glenn to provide additional detail on our financial results.

Thanks, Doug, and good morning. I'd like to highlight key results for the third quarter and then finish my remarks with our expectations and outlook for the fourth quarter and full year. The third quarter produced strong financial results for the company. We delivered 1,217 homes, exceeding the high end of our guidance. Home sales revenue was $817 million for the quarter, with an average sales price of $672,000. Gross margin adjusted to exclude an $8 million impairment charge was 21.6% for the quarter. SG&A expense as a percentage of home sales revenue was 12.9%, which is at the lower end of our guidance, benefiting from savings in G&A and better top-line revenue leverage as a result of exceeding our delivery guidance. Finally, net income for the year was $62 million or $0.71 per diluted share, also adjusted for the same inventory-related charge. Net home orders in the third quarter were 995, with an absorption pace of 2.2 homes per community per month. Regionally, our absorption pace in the West was 2.3, with the Southern California markets outperforming and the Bay Area experiencing softer market conditions. The Central region averaged a 1.8 absorption pace for the quarter, with an increased supply of both new and resale homes in Austin, Dallas, and Denver impacting pace during the quarter, while Houston continued to outperform in the region. In the East, absorption pace was 2.8, led by strong results in our D.C. Metro and Raleigh division, while Charlotte was consistent with the company average. We invested approximately $260 million in land and land development during the quarter and ended with over 32,000 total lots, 51% of which are controlled via option. Looking at the balance sheet, we ended the quarter with $1.6 billion in liquidity, consisting of $792 million of cash and $791 million available under our unsecured revolving credit facility. As of the end of the quarter, our homebuilding debt-to-capital ratio was 25.1%, and our homebuilding net debt to net capital ratio was 8.7%. As Doug mentioned, we increased our term loan by $200 million to a total outstanding amount of $450 million and added extension rights that if exercised could extend the due date to 2029. The term loan is an effective source of additional liquidity to help fuel our future community count growth and other capital needs. Now I'd like to summarize our outlook for the fourth quarter and full year of 2025. For the fourth quarter, we expect to deliver between 1,200 and 1,400 homes at an average sales price of between $690,000 and $700,000. We anticipate homebuilding gross margin percentage to be in the range of 19.5% to 20.5%. We expect our SG&A expense ratio to be in the range of 10.5% to 11.5%, and we estimate our effective tax rate for the fourth quarter to be approximately 27%. For the full year, we expect deliveries between 4,800 and 5,000 homes with an average sales price of approximately $680,000. We anticipate our full year homebuilding gross margin to be approximately 21.8%, which excludes the inventory-related charges recorded year-to-date. Finally, we anticipate our SG&A expense ratio to be approximately 12.5%, and we estimate our effective tax rate for the full year to be approximately 27%. With that, I will now turn the call back over to Doug for closing remarks.

Thanks, Glenn. In closing, I want to thank our team members, customers, trade partners, and shareholders for their ongoing trust and support. We're proud to have been recognized once again as one of Fortune's 100 best companies to work for in 2025. A reflection of the culture and values that drive our performance. While the near-term environment remains uncertain, our long-term outlook is very positive, and we are confident that our strategy, our people, and our financial and operating discipline position Tri Pointe Homes to deliver sustainable growth and long-term shareholder value. With that, I'll turn the call over to the operator for any questions.

Our first question is from Paul Przybylski with Wolfe Research.

I guess, first off, could you provide some color on the monthly cadence of your orders and incentives through the quarter?

Sure, Paul, this is Glenn. The monthly cadence was pretty consistent actually through the quarter. If you look at absorption, it was roughly the same each month, with September being a little bit better than August. And then on incentives, incentives were also consistent throughout the quarter. Incentive on deliveries were 8.2% for the quarter.

And then I guess your absorptions are getting down close to the 2 level. Is there an absolute floor that you want to maintain on your sales pace, i.e. increase incentives to keep a level?

Paul, it's Doug. That's a great question. The industry is currently navigating a challenging phase. Most companies seem to be operating within a range of 2 to 2.5. However, we anticipate significant community count growth in '26. As we look ahead, even in similar market conditions, we expect to see substantial growth in orders moving forward.

Our next question is from Stephen Kim with Evercore.

If I could follow up on Paul's question about the incentives, you mentioned 8.2% of revenues or home sales. How much of that was attributed to financial incentives, including closing costs and rate buydowns for purchase commitments?

Stephen, it's Glenn. You're correct. It was 8.2% of revenue in the quarter and about 1/3 of those were financing related, including closing costs.

Okay. How about forward purchase commitments? Do you use them frequently?

Stephen, this is Linda. Yes, we do. We primarily use forward commitments for advertising purposes, and they do have good value in driving additional interest in traffic. But ultimately, as Glenn said most of our customers really don't need to have a significantly lower interest rate to qualify for the home, so they prefer to use more of their incentive dollars and design studio personalization.

Yes. So like if you think of 1/3, let's say, the 35% or whatever that are financial incentives, how much of that 1/3 would you say is forward purchase commitments?

It's very small, under 1%.

Yes, very small number.

Yes. That's great. And then your average order ASP, not your closings ASP but your order ASP has come down to, call it, a 654, I think, this quarter. Last quarter, it was like about 665. So is it reasonable to think that eventually your closings ASP is going to be at roughly that kind of level, 650, 660?

The mix within the quarter does play a part. However, when you look at our growth next year in many Central and East regions, those areas typically have a lower average selling price compared to the West. So, it's really just a matter of mix for us more than anything else.

Our next question is from Jay McCanless with Wedbush Securities.

First one, the SG&A guide for the fourth quarter, it looks like you guys are getting much better leverage than what the top line would suggest. Are there some one-times in there? Can you talk about how you're able to potentially get this figured SG&A to sales number?

No. We're all specific one-time there, Jay. It is just a little bit more revenue in the quarter with a higher delivery number, and that's what's really driving it.

Okay. That was actually going to be my next question. The gross margin guidance is better than we were expecting. Is there some mix in there, more movement up? Anything you can provide on that?

A little bit of mix. I think some of the divisions that continue to outperform our strong margin divisions like when you look at like Houston, Inland Empire, and Southern California things like that have driven the mix of margin to our benefit. So that plays a little part into it, Jay.

And then one more, if I could. Just kind of thinking about the newer markets you all discussed and just wondering what you all think ASP might look like next year, just given some of the smaller medium price markets that you're going to be expanding into?

We'll give that guidance next time, Jay, as we kind of roll out the plan and see what that looks like. But I don't think you're going to be too different than where we're at this year.

No, we're not getting significant contributions out of our new expansion divisions yet next year. So it should have a minimal impact.

Our next question is from Alan Ratner with Zelman & Associates.

Can you just update us on your spec position and strategy and how you're thinking about spec just in terms of the contribution to the business? And I guess just thinking forward to '26, you're going to enter the year with a backlog that's down quite a bit. So, are you going to lean heavily on spec next year to kind of bridge that gap? Or is that kind of a TBD based on what happens in the spring?

It's Doug, Alan. We've got about 3/4 of our orders are running at specs as into the end of the year. All the builders have a little bit more inventory than what they anticipated. So we'll burn through that inventory going into the first quarter or so of next year and then get to a more balanced approach. Again, demand is very inelastic, and we're going to continue to focus on price over pace as we go into the new year. We're just assuming similar market conditions. What we're really focused on is that strong community count growth even at similar market conditions, as I mentioned earlier, we'll have a really good order growth going into '26 and then '27. So we're really looking to the future while we've been dealing with some of the obviously, the challenges the market has posed to the entire industry. So that's kind of how we're looking at our approach.

And just to add to that, Alan, we did reduce our total spec inventory by 17% quarter-over-quarter.

Got it. Linda, is that total specs under construction or completed homes specifically?

Both together.

Got it. That's the total number. Perfect. Doug, you mentioned community count growth next year several times. I'm just curious about your pricing strategy. You've been very consistent in your approach. When you open new communities, how do you consider the pricing? Is the plan to start with more attractive pricing to build up a backlog and then raise prices over the project's lifecycle? Or are you maintaining a strategy similar to your current communities, knowing the value and coming to market with that price, letting absorption determine the situation for now? Tri Pointe is positioned as a premium brand, so we focus on our value proposition as we enter the market. While having some initial momentum is ideal, our pricing strategy is not centered on material changes since we are building in prime locations with excellent access to employment and amenities. My focus is on the future, and we've experienced fluctuating market conditions for roughly 18 months. If next year mirrors that, we will adjust accordingly, but we are committed to maintaining a strong number of communities and pricing our products to align with the market, ensuring the value we offer is appropriate.

Our next question is from Mike Dahl with RBC Capital Markets.

Is Chris on for Mike. Can you just talk through your initial thoughts around the administration's affordable housing push? What conversations have you had to date? And how are you thinking about the opportunities and risks to your operating and capital allocation strategy?

Yes, several builders have commented on this, and we are certainly influenced by the broader industry. We agree with the administration's aim to increase housing availability in the U.S. The industry has been underbuilt for 35 years, a situation that began after the financial crisis. We are eager to collaborate with stakeholders at the federal, state, and local levels. The discussion is quite complex and primarily occurs at the local and state levels, but we are ready to support the administration in any way we can. We have 32,000 lots under our control and are anticipating substantial community growth of up to 15% next year. We are committed to contributing to the development of more communities that align with our buyer profile.

Makes sense. Yes, the community count growth was definitely encouraging. And just shifting to the 4Q gross margin guide. Could you just help bracket some of the big moving pieces moving pieces around the sequential step down in gross margin? How much of that is incremental incentives, mix, stick, and brick? Just help frame that for us.

Yes. This is Glenn. Good question. And it's not really stick and bricks or anything like that. I think it's a little bit of mix but also just we've increased incentives as we've gotten through the year. We have spec homes to sell and close within the quarter, and those generally carry a little bit higher of an incentive. So all that kind of goes into that margin guide.

Our next question is from Ken Zener with Seaport Research.

I would appreciate it if you could explain the reasoning behind the current situation without providing guidance, just to help me understand the trends. This quarter, it appears you had around 500 starts compared to a higher number of orders. As we approach the end of the year, how do you view the relationship between starts and orders, especially considering that your inventory has decreased by about 30% year-over-year? I am trying to grasp your approach to opening new communities, and I believe Doug mentioned a potential community growth of over 15% for next year.

We indicated that community count growth will be 10% to 15%...

So I'm just trying to see how we actually get these right, the units in the ground, which could portend future closings. So that's why I'm focusing on the starts versus the order and how you're thinking about that.

Yes, Ken, this is Tom. It's a great place to focus on as we've been focused on it as well. As Doug mentioned earlier in the Q&A, we're focused on getting our business back to a more balanced approach of spec to be built. And you're right on with our starts for Q3 was about 577 and that's down significantly from where we were in Q1 and Q2. But again, it's relative to that balanced approach. I think you'll see Q4 starts more comparable with what Q3 was just because of the amount of in-process under construction homes that we have available, and that's our #1 goal to move through that inventory. And then after that, we'll move to a more normalized strategy, which takes into account absorption on a community-by-community basis.

What I heard you say is that the starts for Q4 are expected to be similar to Q3. Is that correct? This implies you're ending inventory. I'm trying to understand the growth in community count alongside the actual decrease in your inventory units. I guess I'm looking for some greater clarification that I might be missing.

No, I don't think you're missing anything there. I mean as you look at it on a community-by-community basis, obviously, when we're moving into new communities, we're making the necessary starts relative to our anticipated demand. But where we have existing communities, obviously, we have excess inventory that we're going to be working through before we move to a more normalized balance start strategy.

Appreciate it. And then on the community count growth, most of that G&A, the fixed G&A already kind of loaded in there. Is there any big lift we should expect there?

There isn't much of an increase in General and Administrative expenses, possibly just a small addition related more to field operations than sales, which will help us open those communities.

There are no further questions at this time. I'd like to turn the floor back over to Doug Bauer for closing remarks.

Well, thank you, everybody, for joining us today. We're looking forward to sharing our growth plan and strategy for 2026 and beyond with you at our next quarter's call. And as we go into 2026, we're very excited and bullish about the future for housing. So thank you, and talk to you next quarter.

Thank you. This concludes today's conference. You may disconnect your lines at this time.