Tri Pointe Homes Inc (Delaware) (TPH) 2021 Q3 法說會逐字稿

Hello, and welcome to the Tri Pointe Homes Third Quarter 2021 Earnings Conference Call. (Operator Instructions). As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to David Lee, General Counsel. Please go ahead.

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 2021. Documents detailing these results, including slide deck, are available at www.tripointehomes.com through the Investors link and under the Events and Presentations tab.

Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating performance, are forward-looking statements that involve risks and uncertainties. Discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the company's SEC filings. Except as required by law, the Company undertakes no duty to update these forward-looking statements.

Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through Tri Pointe's website and in its SEC filings. Hosting the call today are Doug Bauer, the company's Chief Executive Officer; Glenn Keeler, the company's Chief Financial Officer; Tom Mitchell, the company's Chief Operating Officer, and President; and Linda Mama, the company's Chief Marketing Officer. With that, I will now turn the call over to Doug.

Well, thanks, David, and good morning to everyone joining us on the call today. Tri Pointe Homes delivered another quarter of excellent operating results in the third quarter of 2021, generating net income of $133 million or earnings of $1.17 per share. New home deliveries of 1,632 represent a 25% increase compared to the prior year and exceeded our stated guidance for the quarter as our teams did an outstanding job dealing with the labor and supply chain issues that continue to challenge our industry.

Our focus on returns was evident in our third quarter performance with a return on average tangible equity hitting 20.8% on a trailing 12-month basis, representing 650 basis point improvement over the same period last year. Margin expansion has been a key component to our success in driving better returns this year, and we made even more progress on that front in the third quarter, with gross margins hitting 26.3%, a record for our company. Another factor that continues to improve our returns has been our shift to a more asset-light land strategy, using option agreements and land banking arrangements to control lots.

At the end of the third quarter, the percentage of lots controlled, but not owned stood at 42% of our total lock count compared to 37% at the end of the third quarter of 2020. Programmatic share repurchases continue to be an area of focus, and we repurchased an additional $65 million of stock in the third quarter and have surpassed $850 million of share repurchases dating back to 2015. We have executed this without sacrificing homebuilding revenue growth, which has increased at a compounded annual growth rate of 9% over the same period. As a result of this revenue growth, coupled with margin expansion and a significant reduction in shares outstanding, our book value per share has also grown by a compounded annual growth rate of 13% since 2015.

Concurrently, we have reduced our current net debt to net capital ratio to 24.3% and continue to accelerate our inventory turns. We are extremely pleased with the way these initiatives have led to tangible improvements to our return profile and believe they will continue to benefit our shareholders. New home demand in the third quarter was healthy across all our markets and product segments, with our monthly sales pace averaging 4.1 homes per community per month for the quarter. We continue to see favorable new home environment in our markets with low levels of home inventory, low interest rates, and a heightened interest in single-family homeownership brought about by the pandemic. In addition, Millennials are the most active homebuyers, and we expect this to continue over the next several years.

Millennials currently represent 54% of our backlog with our affiliated mortgage company, TRI Pointe Connect. That, coupled with current demand for entry-level and first move-up homes in locations that are close to job centers and transportation gives Tri Pointe a significant advantage across our markets. We believe this favorable demand dynamic will be in place for the foreseeable future, providing an excellent operating environment for our company and our industry. Complicating this positive fundamental outlook for homebuilding, however, are the ongoing supply chain challenges that continue to slow the pace of our operations. While the rate of this slowdown varies by market, we are experiencing supply chain issues across our homebuilding footprint and expect these issues to persist into 2022. Fortunately, we have successfully navigated this difficult operating environment, thanks in part to our focus on being the best of big and small as a home builder. By that, I mean we strive to take advantage of our size and scale to procure the inputs we need from our national suppliers while staying nimble enough to work with our local suppliers and contractors to get our backlog close in a timely manner. As a result of these efforts, we have not changed our full-year delivery guidance and still expect to deliver 6,000 to 6,300 homes for the year.

Looking forward, we are extremely pleased with our new community pipeline. We plan to open 110 new communities over the next five quarters and in 2022 with between 150 and 160 active selling communities. Beyond that, we have an additional 80 new communities planned to open in 2023, which we estimate will grow ending community count in 2023 to between 170 and 180 communities. Based on the cadence of community openings and assuming a continued strong market, we expect year-over-year order growth to occur starting in Q2 of next year. With strong operational momentum, an excellent balance sheet, and a sizable backlog, Tri Pointe is in a great position to finish out 2021 on a high note and carry that momentum into 2022. With that, I'd like to turn it over to Glenn, who will provide more details about our results for this quarter and give some guidance for the rest of this year and 2022. Glenn?

Thanks, Doug, and good morning. I'm going to highlight some of our results and key financial metrics for the third quarter and then finish my remarks with our expectations and outlook for the full year of 2021. At times, I will be referring to certain information from our slide deck that is posted on our website. Slide 6 of the earnings call deck provides some of the financial and operational highlights from our third quarter.

As Doug mentioned earlier, demand continued to be strong in the third quarter with an absorption rate of 4.1 homes per community per month, which is an elevated level of demand for a third-quarter compared to historical comparisons. Demand was strong across all geographies, with the West reporting an absorption rate of 4.5 homes per community per month, the central region had an absorption rate of 3.5, and the East had an absorption rate of 3.3. We reported outstanding performance on all key metrics this quarter and either met or exceeded all of our stated guidance. We delivered 1,632 homes, which was a 25% increase year-over-year. Home sales revenue was $1 billion, also an increase of 25%, and our average sales price was $630,000. Our homebuilding gross margin percentage for the quarter exceeded the high end of our guidance range at 26.3%, a 420 basis point improvement year-over-year. This was a record gross margin for our company and demonstrates the pricing power we experienced in the first half of this year. Finally, SG&A expense as a percentage of home sales revenue came in at 9.6%, which was a 20 basis point improvement compared to the prior year.

We continue to focus on our new community pipeline and opened 16 new communities in the third quarter. We expect to open 20 new communities in the fourth quarter, which will get us to our stated goal of 70 new communities for the full year. Based on current demand trends, we anticipate closing more communities than expected, and we, as a result, will be lowering our year-end community count guidance to between 110 to 115 active selling communities. For 2022, we expect to open approximately 90 new communities and end the year between 150 to 160 active selling communities. For 2023, we expect to open approximately 80 new communities and end the year between 170 and 180 active selling communities.

Looking at the balance sheet. At quarter-end, we had approximately $3.1 billion of real estate inventory. Our total outstanding debt was $1.3 billion, resulting in a ratio of debt-to-capital of 36.3% and a ratio of net debt to net capital of 24.3%. We ended the quarter with $1.2 billion of liquidity, consisting of $587 million of cash on hand and $590 million available under our unsecured revolving credit facility.

Now I'd like to summarize our outlook for the full year. We anticipate delivering between 6,000 thousand 6,300 homes for the full year, and we are raising the range of our expected average sales price to $635,000 to $640,000. We are also increasing our homebuilding gross margin range to 24.5% to 25% for the full year. Our SG&A expense as a percentage of home sales revenue is expected to be in the range of 9.8% to 10.2%. And finally, the company is forecasting its effective tax rate for the full year to be approximately 25%. I will now turn the call back over to Doug for some closing remarks.

Well, thanks, Glenn. In conclusion, I'm extremely pleased with our performance this quarter as we exceeded our guidance for a number of key metrics despite a difficult operating environment. We also made improvements to our return profile and laid the groundwork for what we anticipate will be a year of significant growth in 2022. While we expect the supply chain issues in our industry to persist for the foreseeable future, we also expect the positive demand dynamics that have emerged during this housing cycle to remain in place for the foreseeable future.

Tri Pointe is in an excellent position to capitalize on these positive industry fundamentals, thanks to a significant increase in community count scheduled for next year, coupled with our premium brand focus and our shift to more affordable price points. We're in a great place, both financially and operationally as we head into the end of the year, and we are excited to capitalize on the opportunities that lie ahead for our company.

Finally, I'd like to thank all our team members for their outstanding performance this quarter. This is undoubtedly one of the most difficult operating environments from a logistics standpoint that I have witnessed in more than 30 years in the homebuilding industry. The fact that we are able to overcome industry-wide challenges and meet our delivery goals for the quarter, says a lot about the character of this company and the talented and dedicated people who work here. I truly appreciate your efforts. That concludes our prepared remarks. And now we'd like to open it up for questions. Thank you.

(Operator Instructions) Our first question today is coming from Stephen Kim from Evercore ISI.

Congratulations. A strong quarter. A lot of good performance. I think that's -- the closings were particularly impressive. But I guess I would like to ask with respect to the closings and the supply chain commentary you gave, it sounded like the challenge is obviously continuing into 2022, most likely, that's consistent with what I think a lot of people are thinking. And yet you clearly navigated those well. Your closings guidance for the year is maintained. And so my question is, do you, at this point, feel that you have caught up on the production side sufficiently so that sales restrictions at your communities could be scaled back? You could sort of loosen some of those restrictions, sales restrictions on those communities that have them.

Hi Stephen, it's Doug. To begin with, we lifted any sales restrictions on all our community's, Linda. I think maybe there's one or two. So we don't have any sales restrictions. The biggest restriction the industry has is the supply chain. And we're no different than the rest of the builders. We've got a strong team that we're able to substitute and bob and weave through the supply chain to get homes done. But we're no more special than anybody else, but we've just had a very strong team, our Head of National Purchasing and Supply Chain Management, Kevin Wilson, has worked tirelessly with our 15 divisions. So -- and we expect the same type of environment going into 2022 but we don't have any sales restrictions in our communities right now. Stephen. just to add a couple of things on to that. Obviously, we've been in this environment for over a year now. I mean, so we started making changes to our construction schedules early on. We've adjusted communication with our trade partners. It's all about early lead times. So I think we have reached a balance point between our starts and our sales releases. And so it's not business as usual, but this new normal is going to persist, as Doug said, and we're prepared for that.

Yeah. No, that's encouraging though certainly to see those strong closings because I don't think that's something that we're seeing from every other builder. I'm sure people are going to ask about the gross margin. I guess the one aspect of that gross margin that I wanted to get a little clarity on is the breakdown of material. Basically, my sense is that one of the ways in which you guys are navigating around the supply chain issues is by substituting products where you need to sort of taking from other homes in order to -- parts or things you need in order to close homes and maybe expediting and all that incurring some cost. And I'm curious, Glenn, if you could give us a sense or whether there was any material or significant costs associated with this scrambling, if you will, that the supply chain has created?

Yes, there's definitely a cost to that. I think what's reflected in the gross margins for the quarter is obviously the strong pricing environment we had in the beginning half of this year and the back half of last year. And I think you're seeing in the guidance that margins are sequentially forecasted to be down in the fourth quarter because a lot of those costs are coming through, especially peak lumber from the beginning of this year. So yes, there's a cost associated with all of that moving around for sure.

Okay. But you're not comfortable quantifying it at this point, I guess?

I mean, costs overall have risen, from the beginning of the year, about 15% overall. That's including lumber. So that's a pretty sharp rise in cost. We've been able to offset it mostly with price, but costs are definitely up, and they're continuing -- they're going to continue to go up.

This is Doug, Stephen. One of the things I would caution everybody on is this lumber drop because not only are you subsiding products, you mentioned the costs and included that, but there isn't a week that doesn't go by that between labor and other costs, input costs that are being managed or going up. So lumber, yes, has gone down from its peak but there isn't this windfall going forward into '22 because this supply chain does not let up in all the other input costs. So be very wise about that phenomenon going into 2022.

Got it. That's helpful. And then lastly for me is capital allocation. You talked about share repurchases being up a little bit. I'm curious, though, with -- given what we're anticipating, you're likely going to be able to do next year. I'm curious about how you think about the cash balance, Glenn. I mean, usually, it goes up a bit in the fourth quarter. You're already running at a fairly hefty rate or a level of cash. Should we be thinking that this level of cash we're seeing here in 3Q is about the level of cash, call it, high $500 or something like that, is about what we should expect for the foreseeable future? Barring a little bit, as you know, movement quarter-to-quarter just due to seasonality or something like that. There's no reason to expect that level of cash to build significantly from here, is there?

No. No, I wouldn't say it would build significantly and I think it's roughly a good estimate. Like you said, there could be some ups and downs quarter-to-quarter, but on average, it's a comfortable level for us.

Next question today is coming from Truman Patterson from Wolfe Research.

Just wanted to follow up on one of Steve's questions. Based on your closings, it seems like you're performing pretty well on the construction side of the business. So just a couple part question here. Are there any specific actions you all have taken to help navigate the supply chain constraints? I think you mentioned ordering products a little bit earlier. I'm thinking if you all are staging the construction differently or anything like that? And then second, Doug, you also touched on this in the opening remarks, but we've always thought scale in the local market is extremely important. But on a national level, I'm thinking about this, you're larger than your private peers, but you're smaller than the public peers. Is there any way that this might be a benefit in the current environment?

Possibly. I'll take the latter half of that. I would say possibly. Hey, listen, Truman, it is a battle out there. Our teams are battling every day. I don't think we have any secret sauce. As Tom mentioned earlier, and he can talk more about it. We've been working in this environment for a year. It's just gotten worse. And so we are very proactive instead of reactive is probably the best way to look at it. So -- but listen, if I'm -- if Tri Pointe is looking for 50 windows in DFW and one of the bigger builders is looking for 1,000. I bet 50 is probably a little easier than 1,000, right? So I mean, that doesn't mean we're any better. But -- so we're somewhere in between that large and definitely obviously bigger than the small local builders. So, Tom, you want to add anything to it?

Sure, Truman. Like I said, we've been in this environment for a year. It's been a priority for us and our operations teams to overcome these challenges. I can't stress enough about lead times, proactive communication with trade partners. Again, we adjusted our schedule templates early. We've really pushed early construction starts. And then we have been fairly successful and creative in sourcing alternative materials. So all those things have added up to some strong results, but we still are off relative to normal cycle time. So we don't want to give anybody the opinion that that is any different. On average, we're year-over-year about 30 days up on cycle times. So it still is having an impact, but so far, we've been able to manage through it.

Okay. And then secondly, on your shift towards more option land. I think it's up like 12 percentage points versus a year ago to now 42% of your portfolio. Is there any target you could give us as to where you want to go over the next two, three years? And any way that you can help us out on what sort of cash that frees up benefiting your free cash flow?

Yeah, Truman, it's a key component of our five strategic strategy points that we've articulated over the last 18 months to really hone in on that consistent ROE going forward over the next several years. So we would target 50%, fifty-fifty, on the option land. We continue to harvest our long-term dated California assets, which generates significant cash flow and earnings to allow us to continue with a programmatic share repurchase program, which is the other light to the stool. And I don't know if it was you or somebody noticed the divisions outside of California are growing like a wheat. They're generating huge income, and that is going to continue to change dramatically over the next couple of years. The other thing that really affects ROE and ROIC is getting your inventory turns up higher. And in some of these markets, most of the markets actually, outside of California, it's less capital intensive and so you can really focus in on getting those turns up. We inherited a lot of long land with Weyerhaeuser. It's been a blessing. It generates huge cash on earnings but we're using all these tools to hopefully benefit the shareholders long-term and drive consistent returns. And hopefully, we can take that Rodney Dangerfield label office, and the shareholders will really appreciate the type of returns that we're generating.

Yeah, no. No, absolutely. And your performance over the past year especially has been nice. So thanks for the time and good luck on the upcoming quarter.

Our next question today is from Tyler Batory from Janney.

So I wanted to follow up on a comment you made in the prepared remarks. I think you said that you expect year-over-year order growth to start in the second quarter of next year. Can you just expand on that a little bit more? I mean, I'm assuming that that inflection is driven by the community cap moving higher, but I'm just trying to get a sense of how you're thinking about sales pace early on next year in relation to order growth.

Yes. If you're thinking about it the right way. It's a reflection of the cadence of when the community is open and looking at how we've kind of planned versus the comps. And obviously, Q1 is a tough comp because absorptions were really high this year in '21. And so that creates a little bit of a tough comp in '22. We're planning, like we've discussed before, kind of a three and a half to four absorption pace across our divisions, and it's a little bit higher in the beginning half of the year and lower in the back half of the year, assuming normal homebuilding seasonality trends throughout a year. And so that's how we're planning the year next year.

Okay. Okay, great. And then just to follow up on the gross margin discussion. Certainly, very strong performance in the quarter. You mentioned the pricing strength and the pricing environment contributing to that. Was there any mix shift that was a positive benefit in the quarter as well, perhaps maybe selling some additional long-dated California assets than expected that drove that margin upside versus the guidance?

No. I wouldn't say anything in particular on the mix side that drove it up. And actually, compared to a year ago, our long-term California asset deliveries were lower in the third quarter of '21 versus 2020, which just really reflects the strength across -- in margin across the whole portfolio and not just the long-term California assets. You are seeing a little bit of a mix in the fourth quarter and kind of increased lumber pricing, like I stated, that's flowing through the P&L in the fourth quarter, but nothing in particular in the third quarter, just really strong results across the board.

Okay. Okay, great. And then meanwhile -- last one, if I could, just on the demand side of things. On the opening remarks, you talked about demand remaining quite strong. Can you expand a little bit more on what you're seeing in the demand and traffic perhaps into October here? Are you seeing evidence of a more normalized demand environment out that perhaps some more seasonality impacting the business?

Hi, Tyler, this is Linda. Yes, we're differently continuing to see that healthy demand environment. So far in October, we're just over that four-per-month pace that we're looking to achieve. So continued strength across markets, definitely expecting a much more normal seasonality across markets and customer segments.

Next question today comes from Alex Rygiel from B. Riley.

Nice quarter, gentlemen. A couple of quick questions here. Can you help us to better sort of understand some of the -- how we should think about modeling gross margins over the next kind of handful of quarters coming off of a very, very strong quarter here? As well, help us to think about how to model average selling prices in 2022, given the quantity of new communities that are being opened up?

Yes. So I think the going to ASP first. For the full year ASP, it will be similar to this year, next year on ASP, even though we're opening more first time and first-time move up and entry-level communities next year as part of the mix, just with the price increases that we've seen this year. We had previously thought ASPs were going to go down, but they look like they're going to be more flat this year despite that heavier mix towards entry-level and first-time move up. And then from a margin perspective, I think you're going to see the peak of the lumber rise impact the fourth quarter and the first quarter the most. And everything, the little bit of relief, like Doug mentioned, we're seeing on lumber, which largely has been offset by other cost increases. That kind of started happening for houses we started in the third quarter, and you'll start those deliveries in the second quarter of next year.

Very helpful. And then as it relates to the characteristics of your buyers, have you noticed any rebound in the international buyer category?

This is Linda, and no we have not. We continue to see a really strong percentages for our buyers, over 80% of our buyers are U.S. citizens.

Our next question today is coming from Mike Dahl from RBC Capital Markets.

I appreciate the balance and candor so far. I wanted to ask another related question about, kind of, demand and margin or pricing. If I look at the monthly absorption, it seems like it dipped a little in late summer, then bounce back in August. Some of this is seasonality, but I want to ask what you've experienced in terms of pricing power as you've gone through the past few months?

Yes. This is Doug. Pricing power has moderated in most of the markets, still fairly strong in markets in Texas and Arizona. But since lumber decreased in the second half of the year, all the builders have, and our competitors have tempered the pricing environment, frankly, which I think is good. So we're seeing some modest price increases to let the backlog know that they're in good shape. But the market overall is really good. I mean, I think, come on, I mean, third quarter '19, our absorption was 2.9, and we thought that was a great quarter, and it was, what, four in the third quarter this year. Year-to-date, we're about 1% above our total orders compared to the last year and under with a lot less community. So the demise of housing, which a lot of pundits have tried to make a headline on it. I'm not sure it's there. And I'm not criticizing anybody. Nobody's come out of a pandemic. Nobody knows what the outcome of the pandemic is. And obviously, the pandemic is going on longer, and it has definitely continued to help the consumer's mind get around the need for housing. And that's been a big driver of our demand. And the second thing is Millennials. 54% of our backlog are Millennials, 80% of our buyers are captured by our mortgage company, by the way. So the Millennials are a big, big demographic. I'm big in demographics, and that's going to drive housing for the foreseeable future.

Got it. Yeah. I appreciate that. And I mean, certainly still holding around four a month at this point is healthy and good for pace. So I wanted to shift gears and come back to the land position also because I think it's kind of interesting looking at the breakdown as we go state by state. A lot of the growth in both total and controlled loss has come from Texas. And I know these are good growth markets for you, but a really notable increase in land controls and total lots the past few quarters in Texas, a lot of your other markets may be a little flatter to even down. So could you elaborate a little bit more on kind of the strategy or where you're seeing success? And maybe if you could tie that into, as we think about that community count trajectory for the next two years, how much should we think of this as being a little bit more skewed towards Texas versus some of the other regions?

Well, it's definitely going to be skewed towards the Central and Eastern regions. I mean we talked about this 18 to 24 months ago, guys, Linda. I think we -- I mean, California, we've got an incredible land book. Nobody can compete with us on our old retail land basis, which I've continued to talk about the cash on earnings. And California is a very regulatory environment. Nobody's getting a hall pass here when it comes to entitlement. So we have pushed dramatically in Arizona, West. And then -- of our divisions, our goal is to be in the top ten market share. And in Texas, Arizona, Colorado, and now the Carolina's East Coast, I mean, we aren't there, okay? So we will be there by the end of '23 and '24. I mean that's been our goal. It's a lot less capital to grow in those markets. It's much more efficient. We've done a lot of ventures. We've got a lot of land banking. So again, it's part of those strategic alternatives at points that I've made to continue to enhance our returns. So you'll see tremendous growth. When you look -- sit here today and look at 23, the Central and East regions are growing like a wheat.

Mike, it's Tom. Just a couple of add-ons to strategy relative to Texas specifically. We have in-house capability to do some self-development, and we're shifting in that direction quite a bit. And that's enabled us to take some larger positions in really well-located projects. So I think some of the scale of the projects that we're going to be bringing to the market in the future is going to be really helpful in capturing additional market share that Doug talked about.

And I would finish with the land position the company has, Tom. I mean, in our 30-plus years of being in the business, I don't think we've ever as strong of a land position. Where we own and control our growth through '23. So all the land efforts we are -- I mean, we're being -- we're always very disciplined, as you know, and really focus on '24 and '25. So it's got a good setup, as we mentioned, and with the demand demographics and supply constraints that we keep battling, I think Tri Pointe is in a really, really strong position.

And without a doubt, that's a differentiator for us. I think one of our strong suits is really the strength of our acquisition teams. And as Doug said, we've got the best pipeline that we've ever had.

Our next question today is coming from Carl Reichardt from BTIG.

Glenn or anybody, of the 1,349 orders you took in the quarter, what percentage of those do you think were like state lab or frame-up? In other words, what percentage were specs versus pre-sales on dirt?

Yes, I can answer that. Kyle, this is Linda. We have -- of our Q3 construction starts, actually 44% of them was spec starts, but they sell very quickly. So we've had a very, very low number of completed unsold homes, 0.2 per community at this time.

Okay. Great. Thanks, Linda. And then on the lot options that you've got, can you distinguish between the percentage that would be, say, with either third-party lot developers or the land seller where you're going to self-develop versus land banking transactions where you effectively have a financial partner?

We'd have to dig into that, Carl. Not off the top of my head.

Okay, thank you. And then just one more, and I want to go back to the guidance beat this quarter, Glenn, particularly on the margin. So I think you were 230 basis points above the midpoint of the range this quarter. Can you just help me understand, of that 230, what was -- what exceeded your expectations? Like specifically what improved relative to what you told us you thought you'd do?

Well, I think really, it's just how we were looking at things and the timing of certain deliveries coming in relative to the price appreciation. I think, to be honest, we went a little bit conservative because costs were rising quickly, but also price. And so it ended up just coming in higher than what we expected once we got through everything. So it was really just weighing the price increase versus the cost increases and it exceeded our expectations.

Okay, thanks. And then you're not anticipating that same dynamic to occur in Q4 then?

Not right now, but well, I'm pleasantly surprised with you.

Our next question today is coming from Ivy Zelman from Zelman & Associates.

So can you tell me on the land that you purchased during the quarter, absolute land that you purchased? How much have you seen lot prices increase? And what's your assumptions on absorptions that you're underwriting for those lots. So absolute number of lots, year-over-year live inflation, and underwriting assumptions, please.

Well, on the absorption side, Ivy, we continued to underwrite all our -- it depends on the price point of the product. It's a multifaceted equation. But it ranges from 3.5 to very -- more of an entry-level product, maybe up to 4.5, five. So that's kind of the underwriting assumptions. What was the other?

I don't have the number of lots in front of me, Ivy, but as far as price appreciation in the land, what do you think, Doug?

15% to 20%. And I think I pointed this out to you before, Ivy, the land that we're closing on now was land that was really tied up in late '19 and early 2020. And then there was that pandemic moment where everything got extended, and so we've got, and I mentioned this several times, this land position that gives us huge flexibility going forward in a market that could create some uncertainty. Obviously, interest rates are always the Boogieman out there, but we have tremendous amount of flexibility, and we have a lot of strong basis in there because of the strong inflationary environment, if you're looking for just-in-time land right now, yes, you're going to pay dearly for that. So that's part of the reason why Tom and I have said a number of times over our career, we're in an excellent position. And then when you look at that land, and I'm always looking at the upside and the downside. That's just the way we want to be proactive. That land has the flexibility to be repositioned to even more affordable products, different products. Obviously, that's a lot easier outside of the state of California when it comes to doing that, and that's where most of our growth is. So that's another reason why I feel very secure going forward based on the ups and downs that the housing business can give us.

No, that's really helpful, Doug. So if I understand you correctly, you're not purchasing real-time right now, incremental lots at today's prices because you're concerned about the inflation. So you're not incrementally signing new contracts that are going to close in the future at these inflated prices or you are?

We're definitely in the land business, and we are underwriting the current revenues and current costs. But we're looking for land positions that probably have a little more of a self-developed component. So it's probably got a stronger margin profile, and it doesn't deliver homes until 24 and beyond.

We're staying disciplined in our underwriting, Ivy. We don't include inflation in our underwriting. We're using historical absorption paces, not -- we're not using kind of increased absorption paces to make underwriting work. We're staying very disciplined in our underwriting.

Perfect. Just switching gears for a moment, recognizing that you did a great job this quarter of achieving your closings in a very challenging market. With respect to the sales caps, the restrictions that you lifted, are you seeing a pickup in the need for incentives in the market to move and get the velocity and sale pace that you're achieving? And if so, maybe Linda can tell us what percent of your orders had incentives associated with them.

Yes. Thank you, Ivy. We're still seeing very low levels of incentives. I would say just continuing customary lender incentives. There's been some incremental increase in incentives in our D.C. metro market, but certainly nothing untoward and still at lower levels than prior years. So in Q3, our incentives per delivery were 1.7% of revenue.

And that's down from the prior year in September was 4.3%. So incentives are really low.

Right. Got it. And last one, I'll sneak another one in for you, Doug. If you'd like to just opine on your perspective. I mean the market with community count is poised to grow pretty significantly in '22 by many of your peers and yourself included. Do you -- are you concerned about getting those communities ramped up? It feels like a lot of communities right now are not -- builders are not hitting the targets that they had anticipated due to the constraints in the market and municipalities. And if you give us some confidence level of your ability to get to the community count goal that you've articulated? And at the same time, everybody is doing the same thing. So it's the hardest thing for you to forecast, and we appreciate you even attempting it. But what's your conviction level? That's a pretty big increase percentage-wise, maybe not in absolute, but kind of hearing your perspective of you and the industry and the challenges that you face when it comes to not the construction of homes, but the actual development of land and getting municipalities to approve and get those communities rolled out. A lot to unpack but thank you, guys, for taking my questions.

Yeah, no. No, that's a great question. And hey, listen, it's a daily grind with the supply chain, and you mentioned municipalities. That's obviously also a big delay, not only getting communities started and open but also even getting homes finaled and signed off, so you're spot on. But confidence factor, Tom and I, we -- our management system here is he and I play the regional presence. So we could tell you right now our growth going into '22 is at a 90% confidence level. You got a little bit of a 10% cushion in there because of municipalities and supply chain, but very, very, very, very confident. And the reason it gets back to what Tom was talking about. We've started -- I mean, we've been dealing with the supply chain and municipality issues for a year. So that means you just need to be more forward-thinking. So we want to have most of our year started much earlier in the year next year than what would be normal. We want community started much earlier. And we started that planning process. So if you don't start that planning process, six to 12 months ago, you're never going to open the communities we talked about in '22. So it's really about being proactive in your planning process. And the other point you're making is, yes, there's going to be a ramp-up of communities for all the builders. And yeah, I mean, we're all out there doing the same thing. But on a relative basis, there's been such a huge drop-off in communities across the marketplaces. I mean, Charlotte, Linda, I think about 30%. And so if you go up 20% to 30%, you're really getting back to where you were maybe in the early part of 2020 as an industry. So yes, there's going to be a lot of commotion on new communities started, but it all comes back to proactive planning, don't you think, Tom?

Absolutely. The team is 100% focused on that. The future lifeblood of the company is based on increasing our community count. And I think by the end of next year, and then we've even messaged about the communities going into 23, we put ourselves in a whole different league. So we're excited to move forward and increase our volume and get those stores open on a timely basis.

Our next question today is coming from Alex Barron from Housing Research Center.

Great job on the quarter. I wanted to ask about, I guess, one component that I think a few people focus on, which is the share buyback. I think you guys have been more consistently and aggressively buying back your stock and driving down the share count. I guess as you guys just expanded the share buyback authorization, should we expect that to be a fairly consistent thing going forward every quarter? Or is it expected to be more opportunistic? And my second question is along the lines of giving back capital, have you guys considered starting a dividend?

Hey, Alex, it's Glenn. I'll take that one. And yep, good to mention the share buyback, like Doug mentioned, it's a key component of our strategic goals. And the level of buyback that you're seeing each quarter that we've been consistently doing, that is a good run rate to use going forward. We do think that is a good place to put capital right now, especially where our stock has been trading, it makes a lot of sense for us, and it's driving part of the equation to drive returns. So yeah, we -- you can expect that same level going forward. And then what was the second question? We've looked at that. We've done the math. I don't think right now, that makes sense. I think we'd rather focus on the share buyback at this time, but it's something we may look to in the future once we kind of achieve some of our growth goals. Right now, we're focused from a capital standpoint and growing in our early-stage divisions, growing in our Central and East divisions, like Doug said, and focusing on the share buyback.

Our next question today is coming from Deepa Raghavan from Wells Fargo Securities.

Great quarter. A couple of questions from me. As I think through your 2022 gross margin set up, it feels like it should grow year-on-year. The market of being -- your lumber probably benefits for a good quarter of the next year. And then there is a little bit of an operating leverage that comes with a huge community count lift even with those initial ramp costs and the offset by additional commodity inflation out there, but that seems like it can only be a partial asset. And you mentioned pricing is flat. Are there any big moving parts with this train of thought? Or do you have any comments that the gross margins actually are biased to go next year?

So we haven't given gross margin guidance for 2022, but the one thing I'll say is costs are still rising. So that's something we have to watch. There's -- we're opening 90 new communities next year. So there's definitely a mix change. We're ending the year between 110 to 115 active communities. So it's a big mix shift around there in communities. And so that plays a factor but we'll give guidance next quarter on where margins are going for 2022.

Okay. Can you talk through your stock's base (inaudible), so that probably lines up with your backlog intake? But any dynamics there that are impacted by the supply chain, incremental supply chain issues? And also any a bit of thought on your cycle times have increased or decreased because of the supply chain?

If I heard you right, or you're asking -- you're kind of breaking up a little bit. Does it sound like what, in particular, in the supply chain is causing the cycle times to increase? Is that what you're asking, sorry?

That's one part of it, but anything -- and also has that -- is that impacting your start pace...

Yes. As I said, I think we're reaching a balance point between our sales releases and start pace. We've lifted restrictions. Certainly, as Doug mentioned, municipalities and processing to get permits for starts has been probably the biggest impediment. Once we get started, we've got the normal supply chain issues that are leading to, on average, about a 30-day cycle time delay. Year-over-year.

Okay. Got it. That's it for me. I'll follow up later. Thanks so much.

We reach the end of our question-and-answer session. I'd like to turn the floor back over to Doug for any further closing comments.

Well, thanks, everyone, for attending today's call. I hope everyone has a wonderful holiday season. I can't believe it's -- we're looking at the holiday season already. It's been a fast-moving year. And we look forward to our 2021 results, reporting those next year. So thank you, and have a great weekend.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.