Earnings Call Transcript - TPH Q1 2023

Operator, Operator

Good morning and welcome to the Tri Pointe Homes' First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this conference is being recorded. I would now like to turn the conference over to David Lee, General Counsel. Please go ahead.

David Lee, General Counsel

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 2023. 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, 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 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.

Douglas Bauer, CEO

Thank you, David, and hello to everyone on today's call. During the call, we will review operating results for the first quarter, provide a market update, and reiterate our key strategic operating drivers for 2023. In addition, we will provide our second quarter and full-year outlook. We are extremely pleased with the start of the year as overall market conditions have vastly improved relative to those in the final quarter of 2022. We reported outstanding results for the first quarter where we met or exceeded all of our stated guidance. For the first quarter, we delivered 1,065 homes, while generating $768 million in home sales revenue. Home sales gross margin for the quarter was 23.5% and SG&A as a percentage of home sales revenue was 11.5%. These metrics culminated in a pre-tax income of $103 million and diluted earnings per share of $0.73. We generated positive cash flow from operations of $136 million for the first quarter, and we returned $38 million to our shareholders in the form of share repurchases. Our balance sheet remains strong as we ended the quarter with a record low net debt to net capital ratio of 12.6% and total liquidity of $1.7 billion. While we are pleased with these first quarter financial results, more notably, we are encouraged by our ability to generate new homeowners, reduce cancellations, and make significant strides in replenishing our backlog pipeline. Our key initiative going into the year was to increase our sales pace with a returns-oriented focus. We achieved this through product repositioning, targeted pricing, and incentive strategies that allowed us to adjust pricing on a community-by-community basis to meet the needs of today's buyers. Order pace for the first quarter was 4.0 orders per community per month, which is firmly above our pre-pandemic normal levels for a first quarter and significantly higher sequentially from what we experienced in the back half of 2022. Overall, we generated 1,619 orders for the first quarter, a 265% increase sequentially from the fourth quarter of 2022, along with a cancellation rate of 10%. We also grew our community count by 17% compared to the first quarter of 2022, ending the quarter with 136 active communities of which 64% were outside California. Despite the well-publicized stress surrounding the banking system, the uncertainty of higher interest rates, and the dialogue on a future recession, the job market appears to remain strong and there are no apparent reductions in credit quality or stress related to our prospective buyers. We believe there are several factors contributing to a tailwind for the homebuilding industry. First, on the supply side, the combination of significant reductions in resale inventory compared to historical levels and the continuing slowdown in new home construction starts over the past several quarters has only increased the housing deficit. The limited resale market, which is compounded by the large number of existing homeowners not listing their homes due to low mortgage rates they have obtained, appears to be providing strong support for the new home market. According to the National Association of Home Builders, currently one-third of housing inventory is new construction compared to historical norms of a little more than 10%. This reduction in resale competition is likely increasing our prospective buyer pool, and we believe this factor will continue while rates remain elevated. As such, we are focused on increasing our new home starts to meet these favorable market conditions. Second, on the demand side, while the rise in mortgage rates over the past years had a significant impact on traditional mortgage payments, our rate buy-down incentive strategy has been a key component in mitigating that and providing affordability for our customers. Due to the strong demand in the market, we were able to reduce incentives on new orders as the quarter progressed, and we have raised base pricing in certain communities where demand has significantly outpaced supply. The third fundamental point relates to the demand for homes from millennials and Gen Z buyers who are in or approaching their prime home buying years. According to a recent study, with 52% of millennials now owning a home, the majority of our nation's largest generation has transitioned from being renters to homeowners, with a notable 64% increase in the number of millennials buying a home in the past five years. Consistent with these macro demographics, this cohort currently makes up 59% of Tri Pointe's buyers financing with our affiliated mortgage company. Furthermore, the next generation entering the home buying life stage is Gen Z, a cohort of 68 million people and only 5% smaller than the millennial population. Gen Z represents 9% of our current backlog. While these dynamics bode well for continuing demand, our focus on cost savings remains a priority and our operating teams have made solid strides in obtaining lower costs throughout the supply chain. Our goal of a 10% to 20% reduction by year end continues to drive our efforts. We have seen positive results through the first quarter with costs down 8% to 10% on average. We acknowledge there are still challenging labor constraints, but we remain committed to pursuing reductions where possible. Cycle-time reductions are another key initiative of our 2023 business plan as we continue to prioritize returns through higher asset turns and increased delivery volume. At the beginning of the year, we set forth a goal to reduce cycle times by four weeks on average by year-end, and we are making strides towards meeting this goal. Our team is focused on expanding trade resources, improving the material procurement process, and introducing line or phase building in additional markets. Spec homes currently represent 60% to 65% of our total starts thus far in 2023. Through the first quarter, our cycle times have been reduced on average by more than two weeks. We are pleased with the improvements we are seeing thus far in 2023 and believe further improvements are within reach as the year progresses. As for market commentary, we are pleased to report that we are witnessing well-diversified demand across all buyer segments and geographic markets. We continue to focus on affordability with 80% of our average community count coming from the premium entry-level or first mover buyer segments. For the quarter, 50% of our orders came from the entry-level segment, 33% were from the first move-up, 7% were the second move-up, with the remaining 10% coming from luxury or active adult. The first quarter of 2023 has been defined as a market in transition. The back half of 2022 was depressed by a rapidly increasing interest rate scenario that necessitated a market correction, and builders have reacted quickly with price reductions, product repositioning, and financing incentives to stimulate demand. Beginning in early January, the consumer re-engaged, and generally, new housing demand in early 2023 has been very strong. Supply and demand dynamics remain a tailwind for our industry. Now, I'd like to turn the call over to Glenn to further discuss the results for the quarter and provide some insight on our outlook for 2023. Glenn?

Glenn Keeler, CFO

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. 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 operating highlights from our first quarter. We delivered 1,065 homes at an average selling price of $722,000, resulting in home sales revenue of approximately $768 million. Deliveries came in above the high end of our guidance range as we were able to take advantage of the strong demand environment and utilize our spec strategy to sell and deliver move-in ready homes during the quarter. Our homebuilding gross margin percentage for the quarter was 23.5%, which was at the midpoint of our guidance range. Finally, SG&A expense as a percentage of home sales revenue came in at 11.5%, which was an improvement compared to our guidance as a result of the increase in deliveries, which gave us better leverage over our fixed costs during the quarter. We recorded 1,619 net new home orders in the first quarter on an absorption pace of four per community per month. Demand increased as the quarter progressed. January absorption pace was 3.1%, February came in at 4%, and March increased to 4.8%. So far in April, we are experiencing continued strong demand and last week, we recorded 192 net orders, which was our highest weekly order number for the year and the best single week for orders since March of 2021. In terms of market color, as Doug mentioned, demand was broad-based across our geographic footprint. In the West, the overall absorption pace was 4.1 with all of our California markets performing well, along with strong results in both Washington and Nevada. Arizona started slower but saw improvement as the quarter progressed. In the central region, overall absorption pace was 3.0 with each Texas market showing positive momentum. Colorado is a market that is still finding its footing, but we have seen an increase in demand recently. Finally, in the East, absorption pace was 5.7 led by significant demand in Charlotte, but also strong results in Raleigh and the DC metro area. Turning to communities, we continue to focus on our community count growth and are on target to open between 70 and 80 new communities for the full year of 2023, of which we have opened 18 in the first quarter. This will result in strong community account growth for the full year of 2023. We are in a solid land position with approximately 32,000 lots owned or controlled, which provide the foundation for volume growth both for the next several years, while we continue to actively pursue new acquisition opportunities to fuel future growth. Looking at the balance sheet and cash flow, we ended the quarter with approximately $1.7 billion of liquidity consisting of $966 million of cash on hand and $691 million available under our unsecured revolving credit facility. Our debt to capital ratio was 32.5% and our net debt to net capital ratio was 12.6%, both record lows for Tri Pointe. For the first quarter, we generated $136 million of positive cash flow from operations while investing $260 million in land and land development. We repurchased 1.6 million shares during the quarter at an average price per share of $23.87 for a total aggregate dollar spend of $38 million. Now, I'd like to summarize our outlook for the second quarter. We anticipate delivering between 900 and 1,000 homes at an average sales price between $720,000 and $730,000. We expect homebuilding gross margin percentage to be in the range of 22% to 23% for the second quarter and anticipate SG&A expense as a percentage of home sales revenue to be in the range of 12% to 13%. Lastly, we estimate our effective tax rate for the second quarter to be in the range of 26% to 27%. For the full year, we are updating our guidance to a range of deliveries between 4,500 and 5,000 homes at an average sales price between $690,000 and $700,000. With that, I will turn the call back over to Doug for some closing remarks.

Douglas Bauer, CEO

Thank you, Glenn. Our strategic focus on driving increased orders, cost reductions, and returns will enable us to capitalize on market opportunities that exist. With this strategic focus in mind, we remain optimistic about the industry's strong long-term fundamentals, and we are confident that Tri Pointe is well positioned to grow and succeed. I'd also like to thank all of our team members for their excellent work in building our passionate culture. It is because of you that Tri Pointe Homes has been recognized as one of the 2023 Fortune 100 Best Companies to Work For. We consider ourselves to be in the life-changing business for our customers and equally for our team members who make it all happen, putting our values and mission into action and delivering an outstanding experience. With that, I'll turn the call back to the operator for any questions. Thank you.

Operator, Operator

We will now begin the question-and-answer session. The first question comes from Stephen Kim with Evercore ISI. Please go ahead.

Stephen Kim, Analyst

Yes. Thanks very much, guys. Congratulations on the good results. Wanted to talk to you a little bit about your average price. Can you give us a little insight into kind of how the average price of your order has trended over the past few months? I know that that's not a number we typically talk about, but I'm just wondering whether or not you've seen it trending down or up in the last few months?

Glenn Keeler, CFO

Hey, Stephen, it's Glenn. Well, like we said on the call, we've been able to lower incentives and raise base pricing on some communities, so from that perspective, the average selling price has gone up. But overall throughout the course of this year, as we've discussed in the past, you're going to see our average selling price go down as there's a higher mix of more attentively priced product coming from our newer growth divisions like Charlotte, Raleigh, and Dallas Fort Worth. So, that's kind of the direction of price.

Stephen Kim, Analyst

And then when you talk about your land and your preparation for communities as we look out a year or more, we noticed that your land holdings declined, both in terms of owned and optioned units. And so curious as to whether or not you think the trajectory of that is going to be sort of up, flat, or down in absolute units here over the next few quarters and whether there might be a divergence, maybe your owned might be flat or down, but your options would be up? Just trying to get a sense for how things are going to trend.

Glenn Keeler, CFO

Good question. You're going to start to see that trajectory go back up and you'll see it more in the options to start before we take it down. But we are being more active in the land market as of right now as we've seen more stabilization in pricing, and so you'll start to see that option number go back up.

Stephen Kim, Analyst

Okay. But the owned, what should we think about that?

Glenn Keeler, CFO

Well, it's just a timing issue between when you take it down and when you deliver. Overall, though, I think we're still targeting a more balanced mix of options to owned over the next couple of years, if that's what you're asking.

Stephen Kim, Analyst

Okay, that’s fine. Yes. Your leverage is currently very low compared to what you've discussed in the past. Can you provide some insight into your plans regarding this? How do you intend to approach investments, and what does your deal pipeline look like for both M&A and other investments? How patient do you anticipate being in maintaining such a low leverage? Should we be surprised if you remain patient and we see leverage at this team's rate of net debt to capitalization by the end of the year?

Glenn Keeler, CFO

Yes, we are looking ahead to next year with our 2024 bonds coming due. We are positioning ourselves to pay these down, but our approach will depend on the state of the debt market and our capital needs as we progress through this year and next. Our capital requirements remain unchanged; we are focused on investing and growing. We are active in the land market and while we do not have any mergers or acquisitions imminent, we are still exploring opportunities. Overall, we are committed to long-term growth and are in a solid balance sheet position to facilitate that.

Stephen Kim, Analyst

Great. Thanks very much, guys.

Glenn Keeler, CFO

Thanks, Stephen.

Operator, Operator

The next question comes from Truman Patterson with Wolfe Research. Please go ahead.

Truman Patterson, Analyst

Hey good morning guys. Thanks for taking my questions. My first one on spec versus build-to-order gross margin. Some of your peers have suggested that the spread between the two is kind of returning to historical levels with build-to-order being a bit higher than spec. I'm just hoping you could give some color on what you're seeing in the market today?

Tom Mitchell, COO

Yes, Truman, this is Tom. And I would tend to agree with our peer set that we are beginning to see normalization in that build-to-order versus spec gross margin. Historically, it's been around 200 basis points for us. We're not quite there yet, but we do expect it to continue to normalize.

Truman Patterson, Analyst

Okay, perfect. And then I haven't heard a lot of discussion on the new FHFA fee structures. Could you all just kind of give your general thoughts and how it might impact your business going forward?

Linda Mamet, CMO

We haven't really seen any significant impact from that. Currently, we are still offering financing incentives to customers, which can help ease transitions and changes like that.

Truman Patterson, Analyst

Okay, perfect. All right. Thank you.

Tom Mitchell, COO

One thing, Truman, relative to FHFA, it's only about 10% of our backlog portfolio right now.

Truman Patterson, Analyst

Got you. Okay. Perfect. All right. Thank you, all.

Operator, Operator

The next question comes from Alan Ratner with Zelman & Associates. Please go ahead.

Alan Ratner, Analyst

Hey guys. Good morning. Nice quarter and thanks for all the details so far. First on the gross margin, the guidance implies a bit of a sequential dip lower. And I'm just trying to figure out, is that more of a timing issue in terms of kind of the mix of deliveries and maybe more of those coming from homes that were sold late last year when pricing was still under pressure? Or is that more a function of maybe that spec versus build-to-order SKU or any other type of mix impact from perhaps more closings coming from newer markets that probably have stronger absorptions but maybe a little bit lower gross margin?

Douglas Bauer, CEO

Good question, Alan. And it is a little bit of mix. There's a couple of things going on there. The first quarter had some higher margins in it from some communities that were older that we were closing out, and so that's part of the mix. And you're right, Q2 is still reflective of some deliveries that were homes that were started in the May, June timeframe that had peak lumber in them. And so there is a little bit of mix related to that in Q2.

Alan Ratner, Analyst

So, Glenn, I know you're not providing guidance for the entire year, but as you look ahead, there are many variables to consider. You mentioned that your prices are likely to decline due to the mix. You also have some cost savings in play, and it seems you are beginning to reduce incentives. Do you anticipate that the second quarter will be the lowest point of the year for gross margins? Or are there still too many uncertainties at this stage to offer a directional guide?

Glenn Keeler, CFO

We want to get through the rest of the spring selling season and assess how it goes. We're continuing to evaluate price and pace while balancing those factors based on demand. We will provide updates next quarter regarding what we are observing with margins.

Alan Ratner, Analyst

If I could squeeze in one more maybe for Doug or Tom. Just on the cost side, you and others pulled back very sharply on starts in the back half of last year, and it's not terribly surprising to see that resulted in some cost savings. It seems like the industry is beginning to ramp up their start pace given the strong demand we've seen in the spring. Yet, I think I still heard there's a hope or an expectation that you could see further cost relief here for the remainder of the year. So, I'm just curious if you've kind of had conversations with your trades in the last few weeks as far as what they're seeing or expecting from a cost perspective and whether this ramping starts, whether they're equipped to handle it because I would imagine coming into this year, they probably had a pretty cautious outlook and maybe adjusted headcount or other things in anticipation of a lower start pace.

Douglas Bauer, CEO

Yes, Alan, this is Doug. That's a good question. As we mentioned, we have an overall goal of achieving a cost improvement of 10% to 20%. So far, we've managed to reach an average of about 8% to 10%, and we plan to keep working towards that target. We believe that the most significant improvements in costs will come from some of our product repositioning and value engineering efforts. Additionally, we are launching several new communities this year that have undergone this process and will continue to do so. We are also benefiting from strong involvement from our subcontractors in the bidding and purchasing stages. While we aim to reach that 20% goal, the actual outcome will depend on the year's progression and how builders begin their projects as the market picks up.

Alan Ratner, Analyst

Understood. All right. Appreciate it. Thanks a lot.

Douglas Bauer, CEO

Thanks, Alan.

Operator, Operator

The next question comes from Carl Reichardt with BTIG. Please go ahead.

Carl Reichardt, Analyst

Good morning, everyone. It's great to connect with you. I believe you mentioned that 60% to 65% of your starts this quarter were speculative. I'm curious if this strategy reflects recent market conditions that may be temporary, or do you anticipate that over time, two-thirds of your business will be speculative and one-third will be build-to-order? How is this strategic thinking evolving as you expand beyond California and adjust your product mix?

Tom Mitchell, COO

Hi, Carl, this is Tom. Yes, I think you're hitting on something that is more of a directional influence where we do anticipate in the future, continuing to drive to that spec start model, specifically as we diversify geographically into Texas and the Carolinas. And then, of course, you know, given our phase building in California, that's largely spec-start driven as well.

Douglas Bauer, CEO

Carl, this is Doug. I agree with Tom. It's crucial that we focus on returns. As you implement more line and phase building in markets outside of California, which you know well, you can certainly enhance your cycle times and returns. Moving forward, as Tom mentioned, this will likely account for around 65% of our business. Depending on the stage of those homes, we can still optimize our option revenue and achieve option margin, even with our entry-level premium product.

Carl Reichardt, Analyst

Okay, thank you, Doug. Do you all have an inventory turn or asset turn goal relative to where you are right now?

Tom Mitchell, COO

Yes, definitely, Carl. And that's something we've been focused on, and it's been historically a little bit impacted by some of the longer-term land that we inherited through the merger, which has been great for us and obviously provided strong margins. But as we work through a lot of that, our focus now is to turn inventory over once a year. And we got close to that over the last couple of years, but that's continued to be a focus of ours.

Carl Reichardt, Analyst

Okay. And if I could squeeze one more in. I think you have not quite 14,000 lots under option contract. What percentage of those do you intend to self-develop?

Tom Mitchell, COO

Yes, Carl, currently, self-development is the majority of our business. I'd say 70% of that is probably self-developed.

Carl Reichardt, Analyst

Great. Appreciate it, guys. Thanks so much.

Operator, Operator

The next question comes from Mike Dahl with RBC Capital Markets. Please go ahead.

Mike Dahl, Analyst

Good morning. Thanks for taking my questions. Just had a question on the closing cadence and the guide. I mean, you'd be pretty handily in the quarter. Your spec starts are up. Your pace comments are pretty strong, the full-year guide on closing is unchanged on units. So, can you just help us understand some of the puts and takes? And is that conservatism or is there something we should be thinking about as you kind of work through what was maybe a little elevated level of specs? Do you see lower backlog conversion in the back half of the year? Just help us understand that a little more.

Douglas Bauer, CEO

Yes, good question, Mike. I think what happened in the first quarter relative to our guide was we did enter the first quarter with an elevated level of specs and move-in ready homes. And so with the strong demand, we were able to sell and close those homes in the quarter. And then for Q2, with that guide between 900 and 1,000, some of that's just impacted by the fact that it was slower in the third and fourth quarter and so we were coming into the quarter with a lower backlog for the second quarter. And we have a little bit less of the move-in ready homes than we did entering in the first quarter, although we still have a healthy spec mix going into the second quarter. That's the cadence. And then the back half of the year, we're going into a kind of a normal seasonality cadence where you've seen in the past where the majority of our deliveries will be in the fourth quarter due to the strong spring selling season.

Tom Mitchell, COO

Sorry, Mike, I was just going to add, as you see demand beginning to normalize, and we've got a much clearer picture, our starts are going to normalize as well. So, on a comparative basis, back in Q4, we were only starting about 400 homes, and we've more than doubled that in Q1 to starting over 1,000. So I think you'll begin to see that normalize now.

Mike Dahl, Analyst

And that's more of a part of the point, time being, that will be more of a 2024 impact to closings?

Douglas Bauer, CEO

That's correct. Mike, this is Doug. I think part of your question was also on the guide on the closings for the year. We bumped the lower end of the range because of the demand, but it's going to be pretty tight to go much above the upper end of the range because of the timing of new community openings, which we have quite a few between second, third, and fourth quarter. And so that will feed right into 2024, as you mentioned.

Mike Dahl, Analyst

Got it. Okay. Makes sense. And then on the lands comments, I think a lot of your peers have still kind of signaled that there's a little bit of a standstill in the land market and everyone's also kind of still been evaluating their own land book. It sounds like you're already potentially getting more active. And so I'm curious just what you're seeing, whether it's geographically or otherwise, what's allowed you to have some success getting back in the market today? Is it just hey, you're able to underwrite today's higher pace on more deals pencil? Or have you seen sellers come off ask price and a little more narrowing of bid/ask? Maybe just a little more color on what you're seeing there.

Douglas Bauer, CEO

Yes, that's a good question. And it's really market specific. Now that we're feeling pricing has stabilized in certain of our markets and most of our markets actually have stabilized, we feel more confident, I mean, underwriting land deals. Land residuals are all a function of house revenue, as you know. And we have an excellent land pipeline for growth in 2024 and 2025. So, we're really looking for land deals that would be new communities, maybe late 2025, but for sure 2026. So, we're being very selective. We've got our normal underwriting standards, but we'll continue to be very disciplined as we use a mix of margins and return metrics to look at new land deals.

Mike Dahl, Analyst

Thanks Doug.

Operator, Operator

The next question comes from Tyler Batory with Oppenheimer. Please go ahead.

Tyler Batory, Analyst

Thank you. Good morning. Just wanted to put a finer point on the price incentive commentary. Can you talk a little bit more, give some numbers around your incentive activity on orders in Q1, how that compared with Q4? And then talk about how much more you can reduce incentives for the rest of the spread here.

Linda Mamet, CMO

Thanks, Tyler. Yes, as we mentioned, we have been able to reduce incentives during the first quarter. And we'll just have to see how that goes and what happens with interest rates from here because we want to remain nimble and ensure that we're providing attainable monthly payments for our homebuyers.

Tyler Batory, Analyst

Okay, great. And then in terms of the buyer segment commentary, I mean, you mentioned demand pretty broad-based strength there across entry-level move-up. I wanted to focus on that move-up piece a little bit more. I mean, you look so far year-to-date into April, with rates a little bit more stable. You're starting to see a little bit more improvement or more interest or more traffic in some of those communities.

Linda Mamet, CMO

Yes, certainly. First move-up was very strong as we talked about. So, yes, we're seeing very good interest from both entry-level and move-up. And our new community openings are reflective of that. We're seeing strong demand in openings for move-up communities as well as entry-level.

Tyler Batory, Analyst

Okay. And then last one for me, just from a market perspective, I mean, California, still a big part of the mix, a lot of noise, headlines out there. Just talk a little bit more about what you're seeing on the ground, sales pace, traffic, et cetera, over the last month and a half or so out there?

Tom Mitchell, COO

Tyler, good question. I think California is very misunderstood. And our results have been strong in California across all product segments and geographic regions. So, we're really encouraged by the depth of demand in California. I think we've proven up that there are buyers in plenty when we're offering 5% to 6% interest rates, and the incentives have worked well, our product repositioning has hit on. And then just remember, we have a focus on design and innovation and core market locations that I think has been very well received. So, we expect California to continue to be strong going forward this year.

Tyler Batory, Analyst

Okay, great. That’s all for me. Thank you.

Operator, Operator

The next question comes from Jay McCanless with Wedbush. Please go ahead.

Jay McCanless, Analyst

Hey good morning everyone. So, Tri Pointe and several of your peers have talked about increasing starts into the spring. But I haven't heard anybody talk yet about labor availability, especially on the front end. Is that labor to drive those starts? Is that coming from the private builders, do you think you're taking meaningful share, you and the other publics are taking meaningful share from the privates right now to drive those starts?

Tom Mitchell, COO

Good question, Jay. This is Tom. Certainly, labor has been impacted pre-pandemic levels for sure. And it continues to be a stress point for all builders. But I think the publics, in particular, are gaining more and more market share and driving more and more of that labor to their jobs. So, it's improved from pandemic times, but it was a challenge pre-pandemic, and we expect that to continue. But again, we are looking to position ourselves as a builder of choice for the trades and I think we're being very successful in that.

Douglas Bauer, CEO

Jay, this is Doug. On a broader scale, you raised a significant point that may not be fully recognized yet. The banking issues affecting smaller regional banks will impact smaller builders, and I expect that in the latter half of this year and into 2024, larger public builders with ample capital will continue to increase their market share during this credit crunch, especially for builders closing fewer than 500 homes annually.

Jay McCanless, Analyst

You actually addressed my second question, Doug. I was going to ask if you have noticed the opportunity to start undertaking some new lot projects or perhaps more flexible terms regarding land deals. Could you provide a more detailed response, particularly in relation to opportunistic project purchases?

Douglas Bauer, CEO

Yes, I think it's early. Even if you're a small or regional builder, you're having success selling homes, right? So you're generating cash flow, but I think the opportunity will be felt more in the second half of this year where even some of the smaller regional land developers in the central region and in the east region will probably find some issues in obtaining capital. And so our land teams are in the market, being very disciplined, but looking for and hopefully being opportunistic, I'm sure all our brothers are doing the same thing.

Tom Mitchell, COO

Yes, Jay, this is Tom. As you know, lumber has been a key driver to our cost reductions, but we are seeing reductions on other areas of our costs as well. Doug alluded to it in our prepared remarks that through value engineering on both existing and new products, we have been able to simplify and see some significant reductions there. Our national team is working really well on those larger-scale relationships, and we're seeing some reductions from some of our big suppliers, and it's being displayed in our product offerings currently. So, we feel pretty good about our costs, and we're looking forward to continuing our efforts there, and hopefully, we'll see some continuation of those savings.

Jay McCanless, Analyst

Okay, sounds great. Thanks, guys.

Douglas Bauer, CEO

Thanks, Jay.

Operator, Operator

The next question comes from Alex Barron with the Housing Research Center. Please go ahead.

Alex Barron, Analyst

Thanks, guys, and good job on the numbers. I was in Southern California a few weeks ago, and I heard about a program the state launched, I think it was called FHA or FA or something like that, where they give buyers like 20% of the home payment. I was wondering to what extent you guys were able to participate and take advantage of that program?

Linda Mamet, CMO

Thanks, Alex. We did take advantage of that program, but the funds did run out very quickly. So, clearly, there is housing demand there when people can get additional assistance for their down payment.

Alex Barron, Analyst

Was it like significant or did it run out to where it really didn’t amount?

Linda Mamet, CMO

Yes. In total magnitude of our orders in the first quarter, it was insignificant because there was a very short window for us to be able to take advantage of that before the funds were depleted.

Alex Barron, Analyst

Okay. All right. And then I guess, towards the end of last year, there was talk among builders about reducing starts and understandably so, but there was also an expectation that for those builders who would start more specs, they would be able to capture some cost savings from subs looking for work. I'm just curious to what extent that's been achievable or not?

Douglas Bauer, CEO

Alex, it's Doug. I mean, as we saw the housing engine slowed down through the end of last year going into the first quarter of this year, as we mentioned, we've achieved roughly 8% to 10% in cost savings from a combination of existing programs, existing communities, and new community starts.

Alex Barron, Analyst

Okay. But it sounds like that's the extent of it because if things are reaccelerating then I suppose.

Douglas Bauer, CEO

Yes, I mean, as we mentioned in our prepared remarks, our goal, as we said at the beginning of the year, and it's still today to get up to towards 20%. And in certain markets, we may achieve that. But you're right. I mean, as the market improves, cost and pricing, as we see, will firm up. But we're seeing the most success in cost improvement when we reposition product and bring out new products for the trades to bid on. And there's plenty of trades that are looking for work and bidding on and being very aggressive in their bids. So, that's where we're seeing the most success in cost improvement compared to what we had underwritten a year ago.

Alex Barron, Analyst

Got it. If I could ask one other one. Let's say, hypothetically, the Fed does one more hike and they're done. And then something leads them to start lowering interest rates, whether it'd be they feel inflation is done or whether it's a crisis or whatever. I guess the question is if rates were to go back down significantly, do you feel like the industry has capacity to handle or ramp up in starts? Or do you feel like we're just going to go back to supply chain bottlenecks and all that stuff?

Douglas Bauer, CEO

I believe the industry, particularly the public ones, will be cautious as we increase our starts, as Tom noted. I expect more of a typical market condition. Personally, I don't anticipate significant changes in rates unless we face another banking crisis or similar issue. I feel the Fed will have persistent inflation and may implement one more modest rate increase before stabilizing. Ultimately, it’s hard to predict. This is the most awaited recession I have ever experienced.

Alex Barron, Analyst

Correct. Okay. Yes, just wanted to get a sense of if you felt there was an opportunity to ramp up starts and deliveries more than single digits.

Tom Mitchell, COO

Yes, I think based on demand, if demand is there, the industry has the capacity to increase starts and capitalize on volumes that we've proved over the last couple of years, and I do believe that supply chain is being normalized and the labor environment is normalizing. So, we feel good about the opportunities in the future for growth.

Douglas Bauer, CEO

Thanks, Alex.

Operator, Operator

And we have a follow-up from Truman Patterson with Wolfe Research. Please go ahead.

Truman Patterson, Analyst

Hey just a quick follow-up. In Denver, Colorado, your orders were down about 70%. I'm just hoping you can give an update of what you're seeing on the ground there as well as your kind of strategy in the market. It looks like community count dropped a little bit to about six communities. Is that a target area of this community count growth going forward?

Tom Mitchell, COO

Yes, absolutely, Truman. And good questions, and you're right on with your assessment. A large portion of that order decline was due to lower community counts and then just selling out and being at the tail end of some communities as well. We've got new product offerings that are coming into the market this quarter that we're very excited about, and we have seen a pickup in demand overall across the market and specifically at our new product offerings as well. So expect that to improve.

Truman Patterson, Analyst

Okay, got you. So, it sounds like the market on the ground, it might be a little bit more internal constraints than overall market conditions.

Tom Mitchell, COO

Yes, I think the market lagged some of the rebound early on in Q1, but it gained footing as the quarter moved through. And then that coupled with our lack of offerings, I think is why you're seeing the decline in orders for us. But yes, we'll both be seeing an improved overall market condition as well as our offerings that will lead to better orders for us.

Douglas Bauer, CEO

Thanks, Truman.

Operator, Operator

And we have a follow-up from Stephen Kim with Evercore ISI. Please go ahead.

Stephen Kim, Analyst

Yes, thanks a lot, guys. I know we talked about starts. And I think you said there are about 1,000, maybe a little less is what I'm calculating. But that was a number that kind of averaged around, I don't know, 1,700 or so post-pandemic, I believe. And I was curious as to whether or not you felt like you could pretty effectively get back there, how quickly that sort of thing?

Tom Mitchell, COO

Yes, Stephen, this is Tom. As we've talked about, starts are a function of demand, and we certainly have the capacity to improve starts, and we're going to balance that with our absorption paces. So, I think as you see Q2, we will improve upon, but average a little over 500 starts a month. So, we'll be getting closer to your 1,700 normalized number in Q2 going forward.

Stephen Kim, Analyst

Perfect. Regarding the production homes per community, they have decreased by about 18, slightly under 18 per community. Previously, that figure was in the range of 18 to 22 before the pandemic. With the increase in speculative building, I am interested in what level of production homes per community we should consider as normal moving forward.

Douglas Bauer, CEO

Stephen, we'll have to look at that. I think what you've seen historically shouldn't be any different going forward, but a lot of that is timing of when we're getting starts out. And so it's not a perfect number to look at, at a point in time because it really depends on the timing of when that goes. But like Tom said, our whole goal is just balance starts with demand, and that's how we look at it on a community-by-community basis.

Stephen Kim, Analyst

Okay, that’s fine. Perfect. Thanks much.

Douglas Bauer, CEO

Thank you.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Doug Bauer for any closing remarks.

Douglas Bauer, CEO

Thank you, Andrew, and thank you for joining us on today's call. We look forward to updating you all on the spring selling season next quarter, and have a great weekend. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.