Greetings, and welcome to TRI Pointe Group first-quarter 2020 earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Martin, investor relations for TRI Pointe Group. Thank you, Mr. Martin. You may begin..

Good afternoon, and welcome to TRI Pointe Group's earnings conference call. Earlier today, the company released its financial results for the first quarter of 2020. Documents detailing these results, including a slide deck under the Presentations tab, are available on the company's Investor Relations website at www.tripointegroup.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of 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 such risks and uncertainties and other important factors that could cause actual financial and operating results to differ materially from those described in the forward-looking statements are detailed in the company's filings made with the SEC, including in its most recent annual report on Form 10-K and its quarterly reports on Form 10-Q.

Except as required by law, the company undertakes no duty to update these forward-looking statements that are made during the course of this call. Additionally, the non-GAAP financial measures will be discussed on this conference call.

Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be assessed through TRI Pointe's website and in its filings with the SEC.

Hosting the call today is 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..

Thanks, Chris, and welcome, everyone, to today's call. Needless to say, this call is happening at an unprecedented time. And, first and foremost, I want to thank our first responders and our healthcare professionals across the country, who are on the front lines, many risking their own safety and health.

Their selflessness and the thousands who are sick from COVID-19 are at the top of our minds as we navigate this challenging time.

Since the start of the pandemic, our management team has been focused on moving quickly to address the almost daily developments regarding COVID-19, including taking actions with respect to the safety and wellbeing of our employees, trade partners and customers, and operationally, as we work as an essential business in most of our markets, to deliver homes to our customers and provide them shelter.

In late February, we sent a companywide email with the CDC's guidelines for businesses and employers and asked all our division presidents and our human resource team to work with employees to ensure that all protocols are being followed.

Shortly thereafter, we adopted a work-from-home policy for our office-based roles on our teams and expanded our paid sick leave benefits to cover COVID-related sicknesses and employees who are unable to work due to school or child care provider-ish closures. Strict social distancing and sanitation policies have been instituted at all job sites.

We have also distributed educational materials to our trade partners and have posted flyers on our job sites with materials provided in English and Spanish. We have assigned members of our customer care and construction teams to regularly monitor job sites for social distancing and work protocols.

Our new home galleries have been opened by private appointment-only since mid-March. It is critically important to be proactive to do our part to flatten the curve. We have also accelerated our digital sales program.

Aside from COVID-19, in anticipation of a new era in online sales, we have already invested heavily in the technology applications that allow consumers to go further in the online sales process than ever before, and we have adapted and accelerated our usage of these digital platforms in the current environment.

Buyers can self-schedule appointments online, take virtual tours, leverage interactive tools, access detailed company -- community information, including our online design studio, interact with our sales team, and much more from the safety and comfort of their own homes.

Our technology also allows buyers to close on their homes in ways that limit the need for in-person interaction. And even more transformative to our business, buyers can now reserve a quick move-in home on our website.

By driving a higher percentage of our business through the website, we can better identify and target potential buyers who are in the market for a new home. For our sales teams, we have established regular virtual training, which has been key in preparing them for the new era of selling.

We anticipate this trend of online home shopping using virtual tools and facilitating with self-service options will continue to grow, and we are constantly innovating to stay ahead of the trends.

What we are seeing in response is a higher number of appointments originated online than this time last year, and more importantly, higher quality of prospects.

While I realize that our first-quarter results represent a time period largely unaffected by the impact of the virus, they bear mentioning only to underscore the strength of our industry, and specifically, our company as we head into this period of uncertainty.

Unit deliveries, orders and backlog grew 18%, 26% and 33%, respectively, on a year-over-year basis. Home sales gross margins for the quarter came in at the high end of our guidance range at 20.5%, while SG&A as a percentage of revenue improved 180 basis points year-over-year to 13.9%.

We sold homes at an average sales pace of 3.9 per community per month, representing a 32% improvement over the first quarter of 2019. As I referenced earlier, we are open for business with new work protocols, and we are finding success selling, building and closing homes for motivated new homeowners.

TRI Pointe Group's home buyers are typically well qualified. As of April 1, our backlog buyers financing with TRI Pointe Connect, our affiliate mortgage company, representing 75% of our total backlog, have an average loan-to-value ratio of 75% and average debt-to-income of 40%, and 83% of our buyers have a FICO score over 700.

This gives us greater confidence in the quality of our backlog in the current environment. We have also implemented backlog management practices to assess the risk and focus on timely issue resolution, thereby facilitating a disciplined approach to our new construction starts of sold homes.

So far, in the month of April, we have recorded 134 net new orders. We started April with 2,455 homes in backlog, added 224 gross orders, closed 168 homes, and have had 90 cancellations month-to-date, representing less than 4% of the current backlog.

Several notable community openings have occurred in late March, achieving order success by scheduled private appointments conducted virtually or in person. Waterston, master-planned community in Gilbert, Arizona, the three product types have accomplished 17 orders since opening on March 28.

Lario, a townhome community in Bellevue, Washington, achieved 10 net orders since opening in early April. And Atwell a master-planned community in Banning, California, just opened the first two neighborhoods this past weekend, garnering seven orders thus far.

We believe our order success is indicative of our premium brand strategy, which emphasizes product design, innovation and our focus on the customer utilizing the latest in technology. We believe TRI Pointe Group is in a solid position to navigate the new reality brought on by this ongoing pandemic.

We have an experienced management team, both in our home office executives and our divisional presidents that has been through downturns in the past and can draw upon those experiences to take the right course of action.

One of the most important strategic decisions we've made and continue to make a priority is to maintain a well-capitalized balance sheet in the event of economic slowdowns. We ended the first quarter with a debt-to-capital ratio of 45.8% and a net debt-to-capital ratio of 35.4%.

Our total available liquidity stood at $677 million at the end of the period with $624 million in cash and cash equivalents and $53 million remaining on our revolver.

While we have ample liquidity to fund our operations for the foreseeable future, we took the prudent step of accessing a significant portion of the funds available under our revolver to err on the side of caution due to the impact of COVID-19 on the lending and capital markets.

Cash is a priority during times of uncertainty like this, and we would rather have it on hand until we have more clarity on the market, we have and intend to continue to defer land acquisitions and minimize capital expenditures to put a net around the company's liquidity.

We remain confident that TRI Pointe Group has the right people, strategy, and financial strength in place to weather the current storm. We were ahead of the curve in investing in the kind of technology that is key to adapting to trends in the market that are likely to accelerate once the pandemic is behind us.

We believe that there will be opportunities for well-capitalized innovative builders to prioritize technology to take market share on the other side of this. With that, I'd like to turn it over to Glenn for more details on the quarter and the current state of our operations..

Thanks, Doug, and good afternoon, everyone. I'm going to briefly highlight some of our results and key financial metrics for the first quarter and then discuss our cash position and overall liquidity. Slide 6 of the earnings call slide deck provides key financial and operational highlights from our first quarter.

Net new home orders for the quarter were up 26% year-over-year due to a 32% increase in monthly absorption rate, offset by a 5% decrease in average selling community.

The increase in our monthly absorption rate of 3.9 homes per community per month reflected strong market conditions in each of our market during the quarter prior to the impact of COVID-19. Slide 20 of the earnings call slide deck provides monthly order and absorption rate information.

To give you context on how demand trended during the quarter, January net new home orders were 541, which was a 71% increase year-over-year and represented the highest January order volume in the company's history.

February orders were 687, which was a 53% increase year-over-year and represented the highest order volume of any month in the company's history. Due to the impact of COVID-19 and the resulting shelter-in-place orders, March orders were 433, which was a 22% decrease year-over-year.

Cancellation rate for the first quarter was 13%, compared to 15% in the prior year. Turning to deliveries. We exceeded the high end of our stated guidance, delivering 958 homes in the first quarter. This resulted in home sales revenue of $595 million, which was a 21% increase year-over-year.

Our homebuilding gross margin percentage of 20.5% was a 610-basis-point improvement year-over-year due to the strength of our backlog coming into the year. SG&A expenses as a percentage of home sales revenue came in at 13.9%, which was 180-basis-point improvement year-over-year as a result of the leverage gained from the increase in revenue.

Finally, net income came in at $32 million or $0.24 per diluted share, compared to roughly breakeven in the prior year. Moving on to our active selling communities. During the first quarter, the company opened 19 new communities and closed out 13 communities to end the quarter with 143 active selling communities.

At quarter-end, we owned or controlled approximately 32,000 lots, 29% of which were controlled under land option contract or purchase contract, compared to 15% in the same year-ago period. There's a summary of lots owned or controlled by state on Page 19 in the slide deck. Turning to the balance sheet.

At quarter-end, we had approximately $3.2 billion of real estate inventory. Our total outstanding debt was $1.8 billion, resulting in a ratio of debt-to-capital of 45.8% and a ratio of net debt-to-net capital of 35.4%.

We ended the quarter with $677 million of liquidity consisting of $624 million of cash on hand and $53 million available under our unsecured revolving credit facility. As Doug mentioned, we drew $500 million on our credit facility during the quarter.

We felt the overall cost of borrowing was minimal for the peace of mind of having the liquidity on the balance sheet.

We spent the past few weeks modeling out various downside scenarios and feel confident that we have ample liquidity to operate successfully during this pandemic, including paying off our $300 million senior notes due in the middle of 2021, if needed. Our business has a lot of variable spending that we control.

And as such, we have made the decision to stop building spec inventory homes and we have delayed spending for buying and developing land. This allows the company to generate positive cash flow by delivering homes from our current inventory. To summarize, we commenced 2020 with a healthy backlog and experienced strong demand in the first quarter.

However, due to the impact of COVID-19 and the resulting uncertainty around the economy and consumer demand in the near term, we have decided to withdraw our previous 2020 full-year guidance. I will now turn the call back over to Doug for some closing remarks..

Well, thanks, Glenn. I'm very proud of how our organization has responded to the challenges brought on by the pandemic. We pivoted quickly to address the pandemic and adjusted our business practices in a way that prioritized the health and safety of our employees, trade partners and customers.

We also found innovative ways to conduct our business and keep the workflow moving forward while staying ahead of trends and keeping our focus on innovation, design, and exceptional customer service.

While it's still unclear what the full impact the virus will be on the economy, I remain optimistic about the long-term outlook for our industry post-COVID-19, given the demographic changes occurring in our country, the undersupplied nature of our housing stock and changing home buying patterns with the view that working from home will provide comfort to families.

I am also optimistic about TRI Pointe Group's ability to work through the near-term challenges and ultimately thrive over the long term, thanks to our well-capitalized balance sheet, our experienced management team and our premium brand strategy.

Finally, I want to offer my heartfelt thanks to all of our team members for the way they have responded to this diversity. I realize that everyone's lives have been upended by this crisis, and I appreciate the commitment you've made to stay focused on the task at hand and work as a team during these very uncertain times.

That concludes our prepared remarks, and we'll be happy to take your questions. Thank you..

Thank you. [Operator Instructions] Our first question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question..

Doug, I think the mortgage data you gave was very helpful. I know there's a lot of concerns about what's going on in the mortgage market today. And certainly, based on some of the stats you gave, it seems like perhaps you're not overly exposed to where the greatest tightening is occurring.

But I'm just curious if you could talk a little bit about what you're seeing maybe on the edges of your buyers, whether it's at the jumbo market or on the FHA side? And if there's been any fallout or how closely have you kind of scrubbed the backlog to really analyze the type of loans that your buyers are qualifying for or had qualified for and whether that loan program is still viable?.

Hey, Alan. This is Tom. Great questions. And as you can imagine, we are spending the bulk of our team's time analyzing our backlog. There's nothing more important than our backlog right now and bringing that to fruition. So we do have great data on that. And our team is doing a fantastic job.

I mean it's an hour-by-hour assessment, but every day and every week, we continue to assess the risk in our backlog and work on strategies to make sure that we're going to be able to have a strong pull-through of those buyers. A couple of things just on mortgage, because I know it has been a big concern. Overall, we operate a little bit differently.

I think most people know that we really have a very strong joint venture partner, and we operate through a brokerage model. So there's much less risk to us in the mortgage finance business. Obviously, you highlighted it, jumbo products have been challenging. Currently, though, only 6% of our backlog falls into that category. So we do feel good about it.

We're currently working with some primary banks to buy those products for our customers. But again, as Doug said, we've got really strong, well-qualified buyers. And on the FHA, VA side of things, FHA represents about 7% of our backlog, VA about 13%. So we really are well-positioned to continue to provide financing for our buyers..

That's great, Tom. I appreciate that extra detail. Yeah. Second question, just maybe thinking about your footprint a little bit.

You guys, when you look at the markets you operate in, you have a handful of markets that it sounds like, unfortunately, you probably haven't been able to continue constructing homes, thinking about Washington and maybe parts of the Bay Area.

And then you've got a market like Vegas, which definitely seems to be overly exposed to some of the hotspots from a job loss perspective.

So when you think about your overall footprint today and maybe less about what's going on today, but more about how those markets react going forward, do you see increased risks of cancellations in a market where perhaps the delivery schedules are being pushed out? Or are you seeing any big price actions being taken either by yourself or other builders in a market like Vegas, anticipating drop-offs in decline? Just curious if you can kind of give a little bit of around the horn on what you're thinking across your footprint..

Yes, Alan, this is Tom again. I'll take that one also. Different markets are reacting very differently depending on at what stage of the pandemic they're in, and obviously, relative to job loss related to that. But so far, can rates have been fairly consistent across all of our different buyer segments.

But by geography, I think you identified some of those areas that have higher concerns. Vegas has certainly been on the front end of that. And similarly, some of our buyers in the Inland Empire fall into a higher risk of cancellation. Certainly, high in that zone would be contingent buyers just with their inability to move their resale home.

So we're closely monitoring that and watching it. I think we had implemented about a year ago a new contingency management program, and so we have less exposure than we would have had in the past. So we're thankful for that.

But one thing that we clearly see geographically is that there are still buyers out there, and we are happy to service them in any way that we can.

But it's very consistent that where we have the ability to offer well-designed, well-located products at attainable prices, we are having some success there, whether it's on the attached or detached product types that we're offering..

Alan, I would also add, right now, only 4% of our current backlog has a home to sell. So we're in really good shape on that side. And you asked about price reactions, and frankly, we haven't seen any major price reaction so far since the shelter-in-place rules went in place.

There have been increased use of some incentives, whether it's a broker co-op, whether it's -- we've got a financing buy down program right now. So there are some little things, I call them, but nobody's -- we haven't seen any wholesale price reaction at all in any of the markets yet..

Doug, did you say 4% of your backlog has a home to sell? That sounds shockingly low..

Yes. It's been a strategy. And I'll complement Linda Mamet, who's sitting here as our CMO. It's a strategy and a discipline that Linda put in place probably a year and a half, two years ago, because we thought it was going the other way. So it is very low.

And that's why it's all about backlog management in these times, just like we went through the S&L crisis and the mortgage crisis. So we've had a little experience of this, so maybe we're getting better at it..

Our next question comes from the line of Truman Patterson with Wells Fargo. Please proceed with your question..

First question, in the areas where construction is deemed essential, I'm hoping you all can discuss the construction cycle times, what you're seeing being extended by and some of the hurdles that I imagine you're facing, whether from municipal constraints or labor availability with all the social distancing guidelines..

Yes. Good question, Truman. Obviously, with new guidelines and distancing protocols, it's really not business as usual. The good news is that there is still a strong labor force out there that's available and desires the work. We really haven't had any broad-based schedule delays relative to that.

But we do have some slight increases to our cycle times and schedules just for pure coordination of trades, trying to work without overlap. So that's a factor. You also mentioned municipalities and other jurisdictions. There have been some permitting delays, as people are trying to adapt to working remotely.

So pulling permits has definitely slowed the process to getting a home started out there as well. But overall, we're generally pleased with our team's ability to be creative and get work happening and constructing and delivering quality homes to our buyers..

Yes. I'd add to that, Truman, though, I give a shout out to one of our superintendents up in Northern California. He brought in a model complex during these times in record time. So at the same time, the trades are also very hungry. Everybody is hungry for work. Everybody needs a paycheck. So it's not a material change in cycle time..

Okay. That's really good to hear. Just a clarification on your April orders, I believe you said 143.

Is that net of the 90 cancellations? Or is that gross?.

That was net..

Could you just dissect that April performance a little bit? Really, I think investors are interested to hear kind of by consumer segment or geography, where construction isn't deemed essential, I imagine, has dropped off more. But just wanted to get your thoughts on that..

Yes. Sure. Truman, this is Linda. So first of all, just to clarify for those April numbers, that's a gross number and then the cancellations..

But he said -- you said 143. It was actually 134 net orders..

Got you. Okay. Okay..

And 224 gross..

And then could you guys just break out kind of how April demand has trended by consumer segment and/or geography?.

Yes. Geographically, we're currently seeing the highest net sales in our Southern California region, followed by Washington and perhaps somewhat surprisingly then in Las Vegas that is currently coming in third in net sales for us April month-to-date..

Now you probably should have listened to that, Truman, and those are in areas that are deemed nonessential, right?.

Yes..

In the Quadrant brand in Seattle, we've had some phenomenal orders..

What it tells you is the consumer is adapting to these new shelter in place, new virtual world. And even in state of Washington, although deliveries will be pushed out a little bit, as we're deemed nonessential in construction, people are still in the technology business, especially up there, very interested in buying a home and securing a home.

And that's true, even down here in Southern California and Vegas, as we talked about..

Yes. Okay.

Could you maybe just rank order kind of entry level move up, luxury, the health of each of those markets in April?.

We've not yet seen any significant difference in net order activity by segment. We're roughly 26% at entry level, 54% move up, 17% luxury, 3% active adult, and that's been consistent through April..

Our next question comes from the line of Stephen Kim with Evercore ISI. Please proceed with your question..

Yes. Thanks a lot guys. And, again, glad to hear you guys are doing well. Really interesting commentary there about April in some of the markets you're in, Quadrant, not being one of your largest divisions, seems good. Good results there on the sales in the most recent month.

I was curious if you could talk a little bit about those three figures you gave for April, the net orders, the gross orders, and the cancellations. Particularly on the gross and the cancellation, can you talk a little bit about what kind of momentum you saw through April? Because things are changing so fast on the ground week-by-week.

We've kind of gotten some indication that things in the most recent week or so have been measurably stronger than what they were in the earlier part of the month.

Did you see that as well? And can you just talk about what you're seeing on the cancellations in that regard as well?.

Well, I'll start off, Stephen, and Linda can chime in. But yes, we've seen some slight increase in traffic demand over the last four weeks, but there's no conclusion to draw from that. It's way too early, personally. But, yes, in the last four weeks, it has seen some better activity, both traffic and sales..

We saw our cancellations peak the week of March 30, and they have been declining since then. But, again, it's early to tell..

That cancellation, is that a ratio that you're referring to that percentage of backlog? Or is that absolute numbers of cancellation?.

Just an absolute number. It's just an absolute number..

Okay. And then secondarily, you mentioned your online activity. That seems to be an area where larger companies such as yourselves would seem to have an advantage over a lot of your smaller peers. And I'm curious as to whether you can talk about the margin profile that you expect from online orders versus traditionally acquired orders.

Do you think there's an opportunity either in the current environment or maybe going forward, if this were to sort of persist, whether you see the opportunity for maybe a higher-margin profile from orders that are processed and acquired on an online basis? And then also with respect to margins and customer receptivity, I'm curious about your move-in product versus your built-to-order product.

You have some more quick move-in products now than you usually do.

Are you finding that customers are actually showing, if any, preference for that kind of a product in this environment where they want to get in there relatively quickly? Or, rather, are you seeing that people are preferring to sort of design some features, maybe which they didn't know they wanted until this COVID situation arose, like maybe like some more flex space and things like that? So are you seeing more of a preference or quick move-in or more customization?.

Well, some of us can help. There's about four or five questions in that statement. I think I'll start at the beginning.

In the virtual world, as we mentioned, going to a website where you can reserve now, buy now, yes, I think in the post-COVID world, which our view is pretty far out there until there's a vaccination, the way we look at things getting back to somewhat normality. But, yes, where you'll see margin improvement is probably a reduction in the broker co-op.

So your SG&A, which is where that falls in for us, right, yes, will be less because our SG&A will be a lower number, because we'll have less broker co-op in the future. But that's quite a ways out there. But the consumer, as they continue to shop online, I think that's a definite improvement overall in the future.

Linda, you've got some of the other questions Stephen asked?.

Sure. Yes. In regard to the design studio appointments, we're not seeing significant difference in order amounts between virtual appointments or in-person appointments. So we're happy with that.

And in terms of preference for move-in-ready homes versus do-it-start homes, qualitatively, we are seeing more inquiries from customers who are currently renting, wanting to get into a move-in-ready home sooner. But other trends seem to be pretty stable between people who want to personalize a home from the ground up versus a move-in-ready home..

That's exactly where I was getting at. Thanks, Doug..

No problem. Thanks, Stephen..

Our next question comes from the line of Jack Micenko from SIG. Please proceed with your question..

Doug, I know you've always taken a long view to running the company and certainly don't want to make short-term decisions or longer-term positions on short-term data. But thinking about the existing franchise versus some of the de novo markets. And the question is, we hear you on pulling back on land purchase, on spends, cash in, not cash out.

Does that differ between the existing and the de novo? Or do you want to keep moving forward on the de novo, because the more you do this sooner, you get to a breakeven and a contribution to profit?.

Yes. I think, Jack, you're asking about our greenfield markets versus our existing markets..

Yes. Exactly. Yes..

Well, we just had an earthquake in the U.S. So we've put a big net around our liquidity, obviously, and doing all the necessary steps that we've learned from being in this business for quite a while. We do sit back and look at our markets that we're in, both early stage and in existing.

And we believe long-term, those are all markets that we want to be in. And, frankly, as we continue to increase our cash position and put a net around liquidity, we see an opportunity like ourselves to increase market share out in the future. But the future is quite a ways out. That's not in six months or three months.

So, I mean, but we do have a thought process of being in the markets that we're in and continue to grow on them.

Right, Tom?.

Yes. Jack, on the short-term side of things, as you can imagine, there's a real lack of clarity out there. It's really hard to get price discovery and us getting down to land residual valuations.

The one thing we are committed to is ensuring that on every piece of land that we buy, we're buying it with the right metrics to get the right returns for our company. And so that's why you see the strategies that we've currently put in place until we can get better clarity on where it's going.

But absolute commitment to the markets that we're in and growing market share there, as Doug said..

And then on the buyback, it would appear that you bought early in the quarter on the averages. And you didn't say it outright, but I'm just looking for clarification.

Big discount to book value today, but circling the wagons on liquidity, are you cc'ing the buyback going forward? Or at 65%, 70% of book, is it still interesting enough, based on what you think the liquidity needs are for the next year, year and a half to keep buying back?.

Jack, it's Glenn. Good question. We did buy earlier in the quarter. We stopped probably the first week of March once things started to change rapidly. And I think as of right now, like Tom just mentioned, there's a lack of clarity in the market. And we're going to be looking to preserve cash at this time.

And so as of right now, we don't plan on being back in the buyback market until we get more clarity on where things are going..

Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question..

I wanted to go back to the mortgage environment for a minute. It sounds like you guys have about 75% capture rate through your venture. Do you have any insight or can you share any insight into the remaining 25% that's going outside of TRI Pointe Connect.

How much do you have in terms of that same type of credit profile or the same metrics around those buyers and what rule and types they may use in LTVs, DTIs, FICOs, etc.?.

Yes. I'd say the credit metrics for our buyers, whether they're through TRI Pointe Connect or going to that outside provider are very similar. It's not a situation where we're just trying to cherry-pick the top buyers and put them into Connect.

It's really primarily driven by a buyer's preference to having a long-term relationship with someone that they've worked with..

I would add, Mike, I mean, one of the advantages now that we have by not pivoting entirely into the entry level is we have a very strong mix of buyers with a very strong credit and down payment and debt-to-income scores. And that's always been our mission since we started the company 11 years ago.

And we'll continue to be a well-diversified company, focusing in on that homebuyer that wants choice, wants personalization. And they typically have a stronger credit profile than that entry-level buyer..

And Doug, just, I guess, to go back one more time to Alan's question and your answer about the 4%, just to try to clarify again. Is that 4% specifically with the contingency in place? Or is it 4% of your total buyer pool? Because it does seem awfully low when you're predominantly a move-up..

Yes, Mike. This is Tom. Let me clarify that. That is a 4% of our backlog that has a home to sell. We also have an additional 4% that they've sold their home, but it is waiting to close. So total, if you said, what level of contingency has the needs for funds coming out of a prior resident, it's probably more likely around that 8% number.

But once it gets into that home-to-close range, it's a much lower risk profile. That's why we're citing the 4% on the home to sell..

Yes. We've sliced and diced our backlog to the nth degree. And so when you have a home to sell, you're in a very, very high-risk category under our underwriting and a home-to-close, which is that other 4%. So, hopefully, I didn't mislead you. I think more risk -- and home-to-close is a lower risk..

Right. Yes. I guess, even at 8%, that seems low if only a quarter of your business is the first-time buyer. But maybe we can dig into that a little bit..

I think, Mike, that speaks to the high demand of our product, our core market locations and people really taking those steps to sell their home because of the desirability of our home to get in a better position to be able to purchase ours even before they come see it..

It's also the quality of the buyer profile. I mean, we're in a different -- I'm just guessing who's the other -- I mean, the other big move-up guy is, what, Toll. I mean, Toll is a luxury, though. I'm assuming their buyer profile is very strong too. But everybody else is, obviously, pivoted at entry level.

They probably have a higher risk profile, but that's not for me to judge. I'm just telling you, we've always managed our business that way, and very proud of it..

Sure. I mean, that's impressive. One more question on my end. You guys, obviously, have a few larger and long-dated development projects.

So when you talk about delay, some of the development, can you give us any more detail around projects, either specific projects or just any more color around how you're thinking about phasing some of these longer developments and any metrics around and of cash preservation that that's going to provide for you guys?.

Sure. As we started through this, the first thing was to try to dimension our balance sheet, to make sure we're doing all the prudent things to preserve liquidity. We analyzed each and every one of those assets.

And depending on the scenario that we've chosen to assume as a baseline assumption, we've made different degrees of development decisions to how to move forward. So you can take an asset like Skyline Ranch, which is up in Los Angeles County in Santa Clarita. That market continues to perform very well.

We continue to see a little bit of flight from density to a more suburban environment, but still close to employment centers. And so we are choosing to continue our presence there and be moving through the next phase of development.

And if you remember, way back, I think, November of 2016, we talked about these long-dated assets and how we had redesigned them to be implemented on a phased basis, that strategy is proving itself out very valuable right now. So that's kind of what's happening at Skyline.

On the opposite end of the spectrum, down in San Diego County, where we're just entering into land development on a 840-unit master-planned community called Meadowood, we made the decision to wait to see if we get more clarity on where the market was because of the amount of upfront land spend that was going to be required to even move through that grading operation.

So that's two different examples. And as I said, it depends on the market, depends on the dynamics of the buyers and our ability to do things appropriately on a phased basis, where, ultimately, we feel good about harvesting the cash that we're putting into these longer-term developments..

Our next question comes from the line of Jay McCanless with Wedbush. Please proceed with your question..

The first question I had, could you maybe talk about how many communities are shut down right now because of nonessential orders and maybe when those orders are scheduled to roll off the communities?.

Yes. We'll have to get back on that. I don't have that number right off the top of my head. It's obviously a few -- there's a few up in Washington, and then there's -- I mean, we're partially open in the Bay Area, in Solano County and Central Valley. So we have to get back to you on it. It's not a material amount..

But on the order side, Jay, it's important to note, while sales offices might be closed even in those areas that they're nonessential. In others, we are absolutely open under different protocols. Across the country, we're open by appointment-only.

And even in those areas in the Bay or Seattle, our team is still working remotely to cultivate sales activity. And on the order front, you heard us talk about Seattle and Quadrant specifically having some very strong new project openings in the middle of them being shut down. So there's still a buyer preference.

They're still engaging with us and going through this new process that we have. Even though our sales offices are closed, we're able to achieve new orders..

Yes. Jay, just to give you some numbers, I mean our Quadrant division has 10 active communities and our Bay Area only has seven, but I think half of those are open, because they're out in the Central Valley. So let's call it two or three that are affected. So out of 143, let's call it, 12 or 13 communities that are nonessential.

But as Tom mentioned, a lot of those projects, both in the Bay Area and Washington, the cities and counties where you're about, what is it, Tom, 30 to 60 days from completion. They're being sympathetic to the fact that a family needs to move in and they're letting us finish it. Or they're letting us make sure the homes are safe before that.

So there's a lot of workarounds that are going on. So it doesn't have as much finality as it seems, that's for sure..

And then if I could maybe ask Mike's question about land a different way. For the communities that -- and maybe if you guys have a number on this.

I mean how many communities have you decided to go ahead and greenlight, because you were very close on them, roads, sidewalks in, etc.? And I know you guys don't want to give guidance, but if you have a number or a ballpark of how many communities are going to go ahead with a new open this year, that might help us on the modeling side..

Hey, Jay. It's Doug. First of all, Mike's retired. I think that was -- okay. I thought he was talking about Grubbs. Listen, wish we could help you with your model, but we're modeling, stress testing everything here. And there's not a lot of models that I can really help you with on that. It's all over the map.

But I mean, it is safe to say, think about it logically, if we were under construction on a new project, a new community opening, we desire to get our models open so that we can try to assess demand and pricing. And that would give us insight into our ability to sell, deliver and generate cash flow out of that.

So if it had been in process, we think the right thing to do is to move it forward to a state of completion and get it into the market. It's those ones that hadn't started yet that we thought was more prudent to hold off on. So in the near term, you will see some of those communities that had started now in the first quarter moving forward..

Like the models that we just opened at Atwell, we had seven net sales last week and, what was that, three new models, four, three?.

Yes?.

Was it two? Two..

Two..

We just had at the beginning of the month, out at Phoenix, we opened up at Waterston three product types there and had some success. So it's a strategy of generating revenues and increasing your cash flow. That's the strategy right now..

Our next question comes from the line of Carl Reichardt with BTIG. Please proceed with your question..

I wanted to ask about SG&A, Doug, and fixed expense.

Are you beginning to look at that? And given the uncertainty, just give me your sense as to what your anticipation is as far as folks go?.

Well, we're evaluating changes to our organization based on current and future demand environment. And nobody has the perfect crystal ball, but we are evaluating changes as we look at the demand curve going out in the future, that's for sure..

But nothing announced internally plan-wise? It's staying business as usual for the time being, no furloughs?.

No, sir. That's all I can tell you..

And then on your backlog at the end of the quarter, when we're trying to gauge sort of how that converts, normally assuming, 50% done with backlog. Roughly, this time, you're 40% or something like that.

As you look at your backlog now, can you possibly divide it up as to sort of dry in or later versus slab or just trenching? I'm just trying to get a sense effectively of how complete it is at this point.

And if that completion of construction is any different than what we typically see in the first quarter for you?.

Yes. Carl, it's a good question. I don't have the specific stats in front of me to probably be able to give you a real good answer. I would say that for the most part, it is fairly normalized as to the stage of construction that you would expect, but I can look into that and get back to you..

Thanks, Tom. And if you don't mind me sneaking one more, I just also wanted to ask about supply chain. You talked -- gave a great answer to treatment on cycle times. Is supply chain in terms of whether it's finished goods or raw, appliances, anything like that? Has that delivery of that product delayed you in any meaningful way? And thanks very much..

No, we haven't seen any delays. And we have seen lumber prices fall, though. So that's a good thing..

Yes. We're similar to everybody. On the front end, there was a big concern about goods produced in China. That was very short lived. We adjusted to that. We are now beginning to see some impacts of U.S. manufacturers that are dealing and adjusting to demand, and they own -- COVID impacts that they have. So we would anticipate in Q3 a few bumps in the road.

But we're trying to get out ahead of that. We're working with our trade partners and manufacturers to generate early lead times. To manage through the issue. So we don't see it being a big issue, which is a positive..

Our next question comes from the line of Alex Rygiel with B. Riley FBR. Please proceed with your question..

Thank you. A quick question.

Can you talk a little bit about some of the costs that you've taken out of your structure, both fixed and variable?.

Say the question again..

Can you say that again, Alex?.

Can you be a little bit more specific on some of the costs that you've taken out of your fixed cost structure?.

Well, we haven't taken anything out yet on the fixed cost side. I think -- are you talking about from our prepared remarks, where we said we looked at our fixed and variable expenses, and we've chosen to really look at the variable side of the spending equation and not start spec homes, delay land acquisition and land development dollars.

That's what we meant. We have not yet made a change to our fixed component..

And then as it relates to inventory out in your markets, not necessarily your inventory but others, how do you see that playing out right now? And how do you anticipate that impacting pricing over the next quarter or two?.

You're talking about inventory for other builders?.

Correct.

Whether or not it's existing home inventory or other builder inventory, how do you see that out in the market right now?.

Right now, I think I mentioned that a number of builders have increased their broker co-op, have increased some of the closing costs, offered mortgage buy down programs to move some of their inventory. And that's primarily what we've seen so far in the marketplace..

Are you talking about supply in general in the market?.

Yes..

Yes. I think, overall, we feel that supply is still relatively low. But as more -- it depends on how demand trends go into the future to see if more completed homes will be out in the market.

But I think if you're comparing this specifically to the financial crisis, obviously, we feel like we're in good position going into this crisis from a supply side for the industry..

And, again, with most of our projects being in core markets, A locations, a lot of things, particularly in California, infill of nature, we probably have less competitive set than others out there. So there's a lower amount of inventory to begin with by nature of what we do..

Thank, Alex. Well, thanks, everybody. We look forward to providing more updates in July. Be safe. Be healthy. Thank you..