TRI Pointe Homes' (TPH) CEO Doug Bauer on Q1 2014 Results - Earnings Call Transcript

May. 6.14 | About: TRI Pointe (TPH)

TRI Pointe Homes, Inc. (NYSE:TPH)

Q1 2014 Results Earnings Conference Call

May 06, 2014 10:00 AM ET

Executives

Glen Keeler - VP and Corporate Controller

Doug Bauer - Chief Executive Officer

Mike Grubbs - Chief Financial Officer

Tom Mitchell - COO and President

Analysts

Rob Hansen - Deutsche Bank

Ivy Zelman - Zelman & Associates

Pat Kealey - FBR Company

Brendan Lynch - Sidoti

Mark Weintraub - Buckingham Research

Alex Barron - Housing Research Center

Operator

Greetings and welcome to the TRI Pointe Homes First Quarter 2014 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mr. Glen Keeler, Vice President and Corporate Controller of TRI Pointe Homes. Thank you, you may begin.

Glen Keeler

Good morning. Welcome to TRI Pointe Homes first quarter 2014 earnings conference call. Earlier today, the company released its financial results for the quarter. Documents detailing these results are available on the Company's Investor Relations website at www.tripointehomes.com.

Before the call begin, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in these forward-looking statements.

I refer you to the company's filings made with SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update these forward-looking statements that are made during the course of this call.

Additionally, non-GAAP financial measures will be discussed on this conference call. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through the filings with the SEC at www.sec.gov.

Hosting the call today is Doug Bauer, TRI Pointe Homes’ Chief Executive Officer; Mike Grubbs, the company's Chief Financial Officer; and Tom Mitchell, the company’s Chief Operating Officer and President.

With that, I will now turn the call over to Doug.

Doug Bauer

Thank you, Glen, and welcome to our first quarter 2014 earnings conference call. Today I will provide a brief summary of our recent results, as well as share some additional insight into the housing market. And bringing up to-date on our progress related to the transaction with Weyerhaeuser Real Estate Company for WRECO. Mike Grubbs will follow up with some additional detail on the first quarter and provide some perspective on the remainder of 2014. We will then be joined by Tom Mitchell to take some questions.

We are pleased to start 2014 with a strong quarter on all financial metrics, increases in orders, deliveries, backlogs and average selling price. All of which drove higher revenues and resulting in increasing earnings per share when compared to the same period in 2013.

We were able to achieve these results while working to complete the integration and transition of the WRECO operation. As part of our $2.7 billion merger we announced in November 2013. This wouldn’t have been possible without the hard work and dedication of our deep and talented TRI Pointe team. The housing market continues to act very normal some markets are choppy, some markets are good other markets are great with the choppiness and demand we experienced at the end of 2013 that means from the mortgage rate volatility political uncertainty and the rapid price appreciation largely abated our traffic and sales pace improved in the first quarter on a sequential basis from the fourth quarter of 2013.

We remain confident that the housing market has strong life to stand on due to the continued disparity between supply and demand. although this recovery has been inconsistent at times the fundamentals of job growth household formations and a low housing supply should continue to lead to healthy demand.

For the remainder of 2014, we expect home sales prices to rise normally in most of our markets with absorption rates ranging from 2 to 5 sales per month per active selling community. The two new communities in California that we opened during the quarter were met with active buyer demand as evidenced by our strong absorption rate of 4.6 orders per month per average selling community compared to 3.5 orders per month over the previous quarter.

We converted over 60% of our ending backlog by delivering 92 homes which resulted in home sales revenue of $72.8 million for the first quarter which was over a 200% increase from $23.9 million in home sales revenue a year ago.

The significant growth in revenue year-over-year was attributable to the rise in the number of homes delivered combined with an increase in our average sales price in California. Our company’s average sales price for deliveries in the first quarter was $791,000 compared to approximately $500,000 in the same period last year, which mainly reflected a change in product mix to a more move up product at our new communities. In addition, our quarter ending average sales price backlog increased 50% to $809,000 compared to a year ago.

For the first quarter 2014 TRI Pointe generated net income of $4.3 million which resulted in earnings per diluted share of $0.14 or earnings per diluted share of $0.15 excluding expenses associated with the WRECO transaction. We are also active in the land acquisition market where we continue to successfully execute on our strategy to control a supply of developed lots in high demand markets, while remaining discipline and selective in our homebuilding activities. TRI Pointe ended the quarter with 3,472 lots, of which 2,509 were owned and 963 were option.

I would like to provide an update on the WRECO transaction. One of the main strength to this merger is that it gives TRI Pointe a well diversified brand of companies across many of our target markets with strong local operating teams to execute. The combination with WRECO will be highly transformative for the company’s scale, while providing increased liquidity in earnings on a combined basis. We continue to make meaningful progress on our plans for the integration and transition of the WRECO operations and clean to the TRI Pointe platform.

As we spend more time working with the five WRECO companies, we have learned to appreciate the strength and depth of the management teams at Winchester, Trendmaker, Maracay, Quadrant and Pardee. We remain on track to close this transaction early in the third quarter of 2014. Looking forward to the remainder of the year we are excited not only about the growth at TRI Pointe, but the combination of these six companies.

Long-term outlook is strong in all of our existing markets and afford us an excellent land position that presents opportunities for future profitability and cash flow. I want to thank the WRECO and TRI Pointe teams for the tremendous support and effort they have put into the integration and transition of what will become one of the largest homebuilders based on estimated combined equity market value. But it isn't about being the biggest, but being one of the best and leader in our markets.

I will now pass the call to Mike to provide additional detail on our first quarter 2014 financial results.

Mike Grubbs

Thanks, Doug. Good morning. I would also like to welcome everyone to today’s call. I will be highlighting some of our results and key financial metrics from the first quarter and provide our expectations and outlook for the second quarter and full year 2014 and we will open it up for some questions.

As Doug previously mentioned, overall it was another solid quarter for TRI Pointe. Our home sales revenue was $72.8 million on 92 home deliveries with an average selling price of $791,000.

Our homebuilding gross margin remains strong at 22.5%, while our SG&A expense as a percentage of home sales revenue improved to 11.5% for the quarter resulting in net income of $4.3 million or $0.14 per diluted share.

During the first quarter, the company incurred $548,000 in transaction-related expenses which included legal and accounting due diligence, integration and other transition costs related to the WRECO transaction. Excluding these expenses, earnings per diluted share was $0.15. The company also expects to continue to incur additional transition expenses related to the WRECO integration during the next two quarters.

As far as selling communities that we previously guided, we opened two new communities during the first quarter; one in Southern California and one in Northern California. We also closed two communities one each in Southern California and Northern California. So, we ended the quarter with how we started with 10 active selling locations.

For the first quarter, we averaged 10 selling communities versus 7.3 selling communities during the same period last year and 8.3 selling communities in the fourth quarter of 2013.

We continue to see strong absorption rates with 4.6 orders per month per average selling community during the first quarter, which was an increase sequentially from an absorption rate of 3.5 orders per month from the previous quarter.

Our cancellation rate for the first quarter was 8%, an improvement compared to 16% from last quarter and 9% from the comparable period a year ago.

Our new home order activity resulted in quarter ending backlog of 195 homes, up 36% compared to the same period in the prior year with an average sales price of 809,000, up 50% as compared to 2013. Meanwhile, our dollar value of backlog increased 105% year-over-year to $157.7 million.

The increase in average sales price homes in backlog was largely due to a change in product mix to a more move up product at our new communities compared to the prior year and price increases during the same period of time. Our average sales price will continue to vary on a quarterly basis due to the mix of units, product types and timing of our new communities in 2014 but should begin to decline, during the second half of this year as we continue to open additional communities throughout the balance of 2014.

During the quarter, we converted 62% of our 2013 fourth quarter backlog by delivering 92 homes with an average sales price of 791,000. Our average sales price increased 10% sequentially from 717,000 last quarter and 59% year-over-year from approximately 500,000 in the first quarter of 2013.

The 65 homes delivered in our communities in Southern California had an average sales price of 848,000. The 17 homes delivered in Northern California communities had an average sales price of 819,000 and then 10 homes closed in Colorado had an average sales price of 380,000.

Our homebuilding gross margin remained relatively consistent with our fourth quarter at 22.5% but increased 400 basis points year-over-year from 18.5%. Excluding interest and cost of home sales, our adjusted gross margin was 23.1% for the quarter, an increase of 360 basis points from 19.5% for the same period in 2013.

This improvement compared to the prior is a direct result of deliveries from our newer communities where we achieved an accelerated absorption pace along with increased pricing.

On the expense side, our SG&A expense increased on an absolute basis 8.4 million from 4.6 million in the first quarter of 2013 but SG&A expense as a percentage of home sales revenue was 11.5%, an improvement of 800 basis points from 19.5% in the previous year’s quarter.

To break it down, sales and marketing expense increased 1.2 million primarily attributable to the increase in our community count and new home deliveries. And our general and administrative expenses increased 2.6 million primarily attributable to compensation related expenses resulting largely from the increase in our office headcount and other cost to incur -- incurred to support our growth.

From a balance sheet perspective at quarter end, we had 32 million of cash and about 484 million of real estate inventory. During the quarter, we increased one of our revolving credit facilities from 30 million to 50 million, resulting in 284 million of total loan commitments of which 225 million are related to our two revolving credit facilities.

As of March 31, 2014, we had debt outstanding of 177 million at an average interest of approximately 3% and our ratio of net debt to capital was 30.7%. Our current liquidity position consists of approximately 30 million cash and given the assets currently in our revolving credit facilities and based on our borrowing based formulas, we have approximately 60 million of undrawn availability as of today.

For the balance of 2014, excluding the WRECO transaction. We expect to open 22 new selling communities at TRI Pointe of which 16 are in California and 6 in Colorado. During the second quarter we expect to open 7 new selling communities and close 2 communities resulting in 15 active selling communities at the end of the quarter. The balance of the remaining projected new selling communities were opened evenly throughout the year.

For the full year 2014, excluding the WRECO transaction the company is maintaining its guidance for deliveries of 660 homes and home sales revenue of $475 million. During the second quarter of 2014, we expect to deliver approximately 50% of our 195 units in backlog as of March, 31, 2014.

In addition we’re off to a solid start in 2014 as we look at ahead to the balance of the year we’re very excited and focused on the transformational changes of our company.

This completes our prepared remarks, but let me remind everyone that while we can discuss our results we’re still fairly restricted on discussing information related to WRECO. After we close this transaction which we expect to occur earlier in third quarter we will be able to provide additional information related to the WRECO subsidiaries and future filings and on subsequent earnings release calls. We look forward to reporting our progress throughout the rest of the year.

At this point Daniel we would like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions). Our first question comes from Nishu Sood with Deutsche Bank. Please proceed with your question. Your line is live.

Rob Hansen - Deutsche Bank

Thanks. This is Rob Hansen on for Nishu. So in the past you mentioned restricting sales updated there of higher gross margins. And so I just wanted to see if you continue to do this and what is your outlook on pace versus prices, especially in California and in Colorado?

Tom Mitchell

Hey, Rob this is Tom. Thanks for been on this morning. We still continue to try to price our projects to the appropriate targets absorptions for our business plans and are very cognizant of that, and the California projects really in our excellent well located core communities are performing very well. So we tend to have phase releases that have very high demand and we have had good price increases on our new projects.

Doug Bauer

Yes. Rob this is Doug. What I would add that it’s really a granular exercise on a project by projects approach that’s done every week as our sales team meet. As Tom mentioned here in California we are a phase builder we do split some of our phase sizes to maximize revenue at the same time, we are always balancing pace. So there is a constant recipe of success that we are looking at every week and it’s very project specific.

Rob Hansen - Deutsche Bank

In general your absorptions are running at a pretty high level, would you say that they are, this is kind of what you have targeted then or this is just way above plan in terms of what you originally expected?

Tom Mitchell

We generally plan anywhere from our planning process anywhere from three to five sales per month per project from a planning tool, obviously 4.6% is the higher end, but I think it's also reflective of the locations, when you look at the projects that we've opened and the markets that we're in, I would grade those markets as A and they have opened up with a lot of strength.

So, it's a little bit of a reflection from the beginning the land acquisition strategy to developing product and executing on that product and delivering it to the consumer. And right now the TRI Pointe team is hitting it on all cylinders and especially in the Coastal part of California, Southern and Northern California and Denver is doing very well too.

Mike Grubbs

Rob, I would add to that, just again we do try to target specifically to our underwriting relative to absorption. So we are certainly able certainly able to do that. And again right now, most of our projects as Doug said in the well located assets, demand has been great.

Rob Hansen - Deutsche Bank

All right. Thank you very much guys.

Operator

Our next question comes from Ivy Zelman with Zelman & Associates. Please proceed.

Ivy Zelman - Zelman & Associates

Hey, guys. Good morning. Great results. Just a few things, your SG&A as a percent of sales has been very strong and surprising to the upside and recognizing the success you've had in the ramp-up with maintaining a low cost. Can you just elaborate on if we should assume that's sustainable in the face of the acquisition and obviously integration costs, do you think you can kind of stay in that low end of the range?

Mike Grubbs

Ivy, this is Mike. Yes, we're really not guiding to the combined company right now, but as TRI Pointe standalone obviously we're comfortable working within the lower end of that range. We are going to incur some additional transition costs that's going to bump that number probably up and when you look at the combined companies, they're running a little bit higher SG&A. So that's one of our targeted goals over the next two to three years drive that numbers down.

Doug Bauer

The part of the issue; Ivy, this is Doug. You're dealing within higher ASP in our mix of homes right now so that obviously drive the percentage down and when you combine the company’s ASP it will come down quite a bit. So there will definitely be some changes in that SG&A, but we look at that as something we continue to prove on over the next one to three years.

Ivy Zelman - Zelman & Associates

It's been very strong, good job. I think when you talk about with your now TRI Pointe relatively small scale and maybe you can dig in a little bit and help us appreciate, you've had very strong performance and absorption and assumingly that pricing power maybe talking a little bit more about the actual consumer, who are they, are they first time buyers buying a move up home, we’ve heard some 38% is there buyers were actually renters, previous renters have been for the first time and I was intrigued by that.

So I was just wondering if you can maybe tell us is there so much negative sentiment in the market towards having today and (inaudible) are going to leave it home forever and there is speed in loan debt. You obviously had success with strong demand so maybe help group some of the more settlement point out there and talk a little bit more about who the customer is and what you're seeing in the REITs?

Tom Mitchell

Ivy, this is Tom, that's a great question. Absolutely without a doubt it varies on a project-by-project basis and it's very specific to the market. But you can see with our higher average sales price that strong majority of our buyers are move up oriented buyers and second and third time buyers. So that certainly is a factor there.

We do have some products come to the marketplace that are geared more towards the entry level buyer and we are seeing a lot of activity and excitement about those coming. But right now I would say our mix is very typical for what you would expect to see in a move up oriented buyer type of product market that we are operating again.

Ivy Zelman - Zelman & Associates

And Tom just to elaborate though, if you get to the -- go granular on that customer, they are moving because they have new job, they are moving because their house is too small, they are moving because they just want a bigger home. Can you have any granularity on what is driving them to come in and obviously selling their home assuming they are moving locally and so the resale market is pretty tight? So it's really a lot of disconnects, I think people would be interested in that perspective.

Tom Mitchell

Yes, I don’t think there is too much surprise to the answer there. Most of the movement in the move up market tends to happen because of some form of life change either a growing family, additions to the family or as their family matures that the buyer to get into different schools. There has been some job relo, but most of it is people just having their life change and wanting a different home to accommodate that.

Doug Bauer

I would also add, Ivy, this is Doug. If you look at the Core Bay area and along even the coastal part of Southern California the job growth is very strong, a lot of those jobs are very high paying jobs, the median income and [Sam Mikhail] for example is I think close to $92,000, $94,000. We are selling town homes in the $800,000 to $900,000 price range and that becomes the first time homebuyer. And that’s obviously a little bit of a different definition of a first time homebuyer than across the country.

But we are in a very unique marketplace when you look at the Core Bay area and the coastal part; very limited supply, very strong job growth, nice demographics, strong median income levels and these people are coming out of ramping for example I met a customer in Sam Mikhail, a young couple. This is $800,000 town home. This is their first home. They’ve been a renter for a number of years across the street in Bay Meadows.

They looked at me and said Mr. Bauer our payment here even for this $800,000 town home will be less than my rent payment. So there is still there rent to own equation for some of these people. The fact that they’ve got very good jobs too obviously helps the housing equation.

Ivy Zelman - Zelman & Associates

That’s great color guys. And obviously the Californian markets are really good; but this is making some more commentary on Colorado or any comments there that would be showing the same trend?

Doug Bauer

Yes, I mean we’ve had very good success in Colorado. I know some of our peers have spoken otherwise which is surprising. We’ve had excellent pace, some mild pricing elasticity. The traffic is very interested in making a purchase decision as we’ve gone through the first four months of this year in Castle Rock all the way up to Denver. We’ve recently opened a new community in the core part of Denver. And more urban product 20 foot like product and then we opened a lot of interest and success. So we’re looking at further new communities up in the Northwest in Northern Colorado. And frankly we’re seeing a lot of success from our competition up there too. So I am very excited about Colorado.

Ivy Zelman - Zelman & Associates

Okay. Congratulations guys, great job.

Doug Bauer

Thanks.

Operator

Thank you. (Operator Instructions). Our next question comes from Steve Stelmach of FBR Company. Please proceed with your questions.

Pat Kealey - FBR Company

Hey, guys. It’s actually Pat Kealey on for Steve. Would you guys be able to comment on just what you are seeing in the California land market, what does competition and pricing look like, have you seen any indication of normalization there?

Tom Mitchell

Yes. Pat, this is Tom. We certainly have felt that land market stabilized over the last four or five months. That being said, we continue to see excellent opportunities in the marketplace. We really have had a good time sourcing that the deals that we want and overall, we see it stable but still highly competitive; most of all our competitors are still aggressively pursuing land deals.

Pat Kealey - FBR Company

Great, thanks again.

Operator

And our next question comes from Brendan Lynch with Sidoti. Please proceed with your questions.

Brendan Lynch - Sidoti

Good morning guys, thanks for taking my question.

Doug Bauer

Hey, Brendan.

Brendan Lynch - Sidoti

Could you give us a little color on the product mix of the 22 communities that are set to open on the ASP trend that we could expect given that the backlog ASP is north of 8,000?

Mike Grubbs

Yes Brendan, this is Mike. As I mentioned, we are going to see our probably average sales price start to trend up towards the latter part of the year as open our new communities. Most of our new communities are coming out of more [east] and with the lower price point as Tom mentioned will be providing some house into the first time buyer in some of those markets.

If you look at our guidance, our guidance is around an average sales price of 720,000 for the full year. We should see that reduce also moving out into 2015. So it’s trend down over the next couple of years, our ASP.

Brendan Lynch - Sidoti

Okay, very good. Thank you. And then, another question, I see that you're acquiring some land in California in the first quarter. Is this something that you will continue to do even after the WRECO acquisition, or is this just a land deal that was coming to fruition in the first quarter that you had been working on for the past several months?

Doug Bauer

Yes, this is Doug, Brendan. We will continue to look at land opportunities, we've got a 100% coverage for 2015 and through 2016, I think we're, if I recall Mike about 75%, 80%. So, we're looking for opportunities that will fill that pipeline for the second half of 2016.

So, we'll continue to be in the market here at TRI Pointe and frankly after we close the WRECO transaction as well.

Brendan Lynch - Sidoti

Okay, great. Thank you.

Operator

Our next question comes from Mark Weintraub with Buckingham Research. Please proceed.

Mark Weintraub - Buckingham Research

Thank you. Actually, one quick clarification. When you say 75% to 80%, was that in 2016 or through 2016?

Mike Grubbs

Through 2016, coverage on the closings, Mark.

Mark Weintraub - Buckingham Research

Okay. So, basically, that’s closer to 50% in 2016?

Mike Grubbs

No, roughly 80% of the closings that we have projected for 2016, we own our control.

Mark Weintraub - Buckingham Research

Perfect, okay. Thank you.

Mike Grubbs

Sorry about that.

Mark Weintraub - Buckingham Research

And can you just remind us how many communities you are at this point anticipating to be closing out in the second half of this year?

Doug Bauer

In the second half of the year, we'll be closing out roughly four communities -- on the second half, two communities, we’re going to close two in the second quarter and then two more in the second half of the year.

Mark Weintraub - Buckingham Research

Okay, great. And lastly, as you look at your strong absorption rate, were there a few real stand out communities or was it fairly strong across the Board, and if there were some stand out, just a little bit of color perhaps?

Tom Mitchell

Yes. Mark, this is Tom. We certainly have had some standouts and some strong absorptions. Doug mentioned the one new product we opened in Northern California up in the Bay area that performed very well right out of the gate. And then also the other strong performer came from the new project in Southern California, which was Woodson at Playa Vista. And those two really had a lot of pent-up demand and open to some great results.

Mark Weintraub - Buckingham Research

Great. Thanks very much.

Operator

Okay. We have time one more question. Our final question will be from Alex Barron of Housing Research Center. Please proceed with your question.

Alex Barron - Housing Research Center

Hey guys. Good morning, great job. I wanted to see if you could talk a little bit on Northern California. So, it seems to me like the closing were a little lower in terms of backlog conversion than previous quarters. I was wondering if that was just a question of timing. And then as far as the ASP, I'm getting something for orders well north of $1 million. Is that correct?

Mike Grubbs

Yes. Alex, this is Mike. And to answer your first question, yes, it is related to timing. We closed a lot of our product out in the fourth quarter of last quarter. Northern California is just bringing on some new communities, which is still kind of new communities in Bay Meadows, we have pretty much been sold out of our other Bay Meadows project in the first quarter. And then we're just recently opening a couple of new communities in Redwood. And so our ASP is going to start driving down fairly significantly in Northern California as we close out the higher end products in the Bay area.

Alex Barron - Housing Research Center

And I guess as far as margins, is Northern California still very different than Southern?

Mike Grubbs

No those are performing about equally now when you look at the margins, they are both performing very well.

Tom Mitchell

From our two existing projects in Northern California, we do have some really strong performers there but we as we blend in the new projects opening out in [Redwood], you’ll see it combined and be very comparable to what’s happening in Southern California.

Alex Barron - Housing Research Center

Got it, okay thanks a lot.

Operator

Thank you. At this time, I’d like to turn the floor back over to management for closing comments.

Doug Bauer

Thank you everyone and we appreciate you joining us for our first quarter call. And we look forward to talking with all of you coming in the second quarter. Thank you and have a great day.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.

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