Tri Pointe Homes Inc (Delaware)

NYSE:TPH

Earnings Call Analysis

Strong Quarterly Results and Optimistic Outlook

In the third quarter, the company capitalized on strong demand, delivering 1,223 homes and generating $825 million in revenue, with a gross margin of 22.3% and net income of $75 million. New home orders surged 122% year-over-year, and absorption rates significantly exceeded expectations. The company maintained a solid financial position, ending with $1.5 billion in liquidity and a robust share repurchase program. Looking forward to Q4, it expects to deliver 1,600-1,800 homes, aiming for a gross margin between 22-23% and an SG&A of 10-11%. The forecasted effective tax rate for the quarter is between 25.5% and 26%. The company's strategic initiatives aim to navigate through higher rate challenges and drive shareholder value.

Strengthening the Bottom Line and Rewarding Shareholders

Tri Pointe has demonstrated significant growth, manifesting in a soaring book value per share from $10.42 at the end of 2015 to $30.03 by September 2023, which translates to a 15% compounded annual growth rate. The company's strategy of reducing shares outstanding by 40% during this period has effectively increased shareholder value. Coupled with decreased leverage and boosted cash reserves, the company is strategically positioned to navigate interest rate challenges and seize growth opportunities in 2024.

Robust Financial Performance and Positive Outlook

The strong housing market has allowed Tri Pointe to outperform its own delivery estimates with 1,223 homes sold at an average price of $675,000, culminating in $825 million in revenue. Aided by a favorable product mix, the company saw a gross margin of 22.3% and netted $75 million in income for the third quarter. With a robust net order increase of 122% over the previous year and a substantial uptick in absorption rates, the company is on a clear upward trajectory. Looking to the future, Tri Pointe plans to maintain momentum, projecting deliveries of 1,600 to 1,800 homes in the fourth quarter with an anticipated gross margin between 22% and 23%, and a forecasted effective tax rate of approximately 25.5% to 26%.

A Commitment to Culture and Customer Experience

The company's commitment to fostering a favorable work environment has been recognized through accolades such as Best Workplaces in Construction, Best Workplaces for Millennials, and Best Workplaces for Women by Great Place to Work and Fortune Magazine. Tri Pointe attributes its success to the dedicated efforts of its team and its mission to provide life-changing customer experiences. This culture of excellence is a cornerstone of the company's continued success and contribution to shareholder value.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to the Tri Pointe Homes Third Quarter 2023 Earnings Conference Call. At this time, all participants are not 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, David General Confer of Tri Pointe Homes. Please go ahead.

[David Lee, executive]

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 2023. The Documents detailing these results, including a slide deck are available at www.tripointehomes.com through the Investors link and under the Events and Presentations tab. Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating performance, are forward-looking statements that involve risks and uncertainties. The discussion of risks and uncertainties and other factors that could cause actual results to differ materially are detailed in the company's SEC filings. Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be accessed through Tri Pointe's website and in its SEC filings. Hosting the call today are Doug Bauer, the company's Chief Executive Officer; Glenn Keeler, the company's Chief Financial Officer; Tom Mitchell, the company's Chief Operating Officer and President; and Linda Mamet, the company's Chief Marketing Officer. With that, I will now turn the call over to Doug.

[Douglas Bauer, executive]

Thank you, David, and good morning to everyone on today's call. During the call, we will review operating results for the third quarter, provide a market update and discuss key operating highlights. In addition, we will update our fourth quarter outlook. Tri Pointe delivered another strong quarter, achieving 1,223 deliveries at an average sales price of $675,000, leading to home sales revenue of $825 million. We exceeded the high end of our delivery guidance for the quarter, which is a testament to the success we've achieved in efficiently converting our backlog and to our ability to sell and close move-in ready homes during the quarter. Throughout 2023, our strategy to increase construction starts, combined with improved cycle times has significantly bolstered our inventory of spec homes. Under the current market backdrop, having availability of quick moving homes has allowed us to ramp up our delivery potential and to capture share in today's undersupplied housing market and higher interest rate environment. This top line performance for the third quarter translated into a homebuilding gross margin of 22.3%, pretax income of $100 million and diluted earnings per share of $0.76. We are proud of these results and expect a strong finish to the year. We opened 30 new communities during the third quarter, bringing our active selling community count to 163, which is an all-time high for Tri Pointe. The 30 new communities opened during the quarter were well received by our customers, generating an average monthly absorption pace of 4.4 homes per community. Our strategic focus to geographically diversify our business from our historical concentration in California is progressing well. Currently, California represents 29% of our active selling community mix, while our Texas growth markets of Austin, Houston and Dallas-Fort Worth, accounts for 34% of our total active selling communities. We are excited about our current land position and continue to focus on growth with the goal of becoming a top 10 builder in each of our markets as measured by annual delivery volume. We are especially pleased with the success we've enjoyed this quarter and through the year during an evolving economic climate. Throughout the third quarter and into October, mortgage rates have remained at elevated levels due to continued increases from the Federal Reserve as well as from ongoing effects of quantitative tightening. Moreover, concerns have arisen regarding the nation's fiscal deficit and the increasing supply treasury issuance required to fund it. These elements, combined with today's historically wide spreads have resulted in cycle high mortgage rates on multiple occasions over recent months. Despite these hurdles that have put a strain in housing affordability, the demand for new homes has remained positive throughout the third quarter, extending the trend at First Service in January 2023. This demand is fueled by the strong job market and historically low housing supply. The housing supply shortage has played a crucial role in bolstering the new homebuilding industry's performance under today's higher rate environment because existing homebuyers who in previous years secured locked-in rates well below current levels, and now reluctant to sell. This lock-in effect significantly reduces resale home supply as trading up to current market rate levels creates affordability challenges for a vast number of homeowners. The resilience of the new home markets is further supported by steady demand from millennials and Gen Z. Millennials have reached the age for household formation and home buying and have significant incomes enabling them to qualify for our homes. In addition, Gen Z has entered the market and currently 30% of 25-year-olds own a home according to a recent Redfin analysis. Demonstrating the strong underlying demand that exists, we experienced positive order trends in the third quarter, with net orders up 122% compared to the prior year on an absorption pace of 3.3 homes per community per month. This has allowed us to grow our backlog by 10% quarter-over-quarter and 108% since the beginning of the year. We have over 3,000 units in backlog valued at $2.1 billion as we head into the fourth quarter. Based on the level of demand we experienced in the quarter, we were able to achieve modest price increases in approximately 2/3 of our communities. But our focus remains on maintaining our target absorption pace, while we carefully ensure the quality of our buyers and mitigate duration risk within our backlog. Further, we are using forward commitments and continuing to employ a range of pricing incentives, including closing cost credits, interest rate locks and buy downs, which are tools that are not typically available in the resale market and provide buyers with the opportunity to secure mortgage rates well below market level. With respect to our backlog that is expected to deliver in the fourth quarter and is financing with our affiliated mortgage company, Tri Pointe Kinetic, 86% are locked at an average fixed rate of 6.6%. In the third quarter, 85% of our buyers financed their new home with Tri Pointe Connect. This quarter, we announced several exciting initiatives that will be accretive to our long-term growth goals. First, we announced that we exercised the right to purchase the minority stake in Tri Pointe Connect, our mortgage joint venture with Loan Depot. This transaction is anticipated to be completed in the first quarter of 2024, at which time Tri Pointe Connect will become a wholly owned subsidiary of Tri Pointe Homes. This alignment of mortgage operations with our core homebuilding business offers more flexibility in terms of the customer experience and competitive pricing, along with adding a positive impact to the bottom line. In the interim, our Tri Pointe Connect operations will remain unchanged, and we will continue to operate under our existing joint venture model until the purchase is finalized. We also recently announced our organic expansion into Utah, focusing on the Greater Salt Lake City market. Operations have commenced under the leadership of Ken Krivanec who has led our Washington division for the past 12 years. Ken is the ideal leader to launch this new division, having been raised in Utah and with previous industry experience in the state, Ken has maintained strong ties to the market. Our well-established corporate infrastructure built on solid foundation and innovation, adaptability and a commitment to excellence has us very excited as we expand our footprint into Utah. Most recently, Tri Pointe has organically entered to Sacramento, Austin, Charlotte and Raleigh markets with strong success, and we are enthusiastic about adding Salt Lake City to our growing market mix. Looking ahead, we are actively exploring the Florida and Charleston markets with, as always, a disciplined and patient approach to our growth initiatives. Our dedication to product innovation remains a core pillar of our company strategy. As a premium lifestyle brand, we consistently evolve and differentiate our product offerings and customer experience. Our recently announced multiyear design collaboration with celebrity interior designer, Bobby Burke, is set to launch in select communities in our Southern California and Charlotte markets in the fourth quarter. We're excited about the integration of Bobby Burke's 10 collections into our design studios nationwide, allowing customers to personalize their homes with Bobby Berk designs and further enhance our award-winning product offerings. As we continue to innovate and adapt in the ever-evolving housing landscape, our unwavering commitment to delivering a unique customer experience remains a driving force. While we strive to meet the pricing and affordability challenges that are presented today, we have not lost sight of the importance of offering an inspiring premium product that is differentiated from the competition. Finally, I want to discuss our balance sheet and liquidity position. Our balance sheet remains very strong, and we ended the quarter with a record low debt-to-capital ratio of 32.1% and a net debt-to-capital ratio of 15.4%. Our total liquidity at quarter end was $1.5 billion, which provides us with the financial flexibility to execute our strategic plans and weather potential economic challenges. We remain committed to our share repurchase program and spent $55 million to repurchase 1.8 million shares for the quarter. This brings our year-to-date share repurchases to $124 million, which equates to 4.5 million shares or 3.6% of our outstanding shares as of the beginning of the year. We believe that our share repurchase program continues to be a prudent use of capital and that it will enhance shareholder value over the long term. This lever in addition to our strong earnings growth has enabled us to grow book value per share from $10.42 on December 31, 2015, to $30.03 as of September 30, 2023, representing a compounded annual growth rate of 15%. We have reduced shares outstanding over the same period by 40%, all while lowering our leverage ratios and increasing our cash and liquidity to all-time highs. Looking ahead to the rest of 2023 and into 2024, we remain focused on operational efficiency by continuing to improve our cycle times and maintaining the cost savings we realized throughout the year. Our strategic focus on maintaining a strong balance sheet and driving increased orders, cost reductions and improved returns should continue to enable us to address any challenges that higher rates may pose while capitalizing on opportunities for growth. With this outlook, I'm confident we have the right strategy and the right team in place to create significant value for our shareholders. With that, I'll turn the call over to Glenn.

[Glenn Keeler, executive]

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 fourth quarter. At times, I will be referring to certain information from our slide deck, which is posted on our website. Slide 6 of the earnings call deck provides some of the financial and operational highlights from our third quarter. We delivered 1,223 homes at an average selling price of $675,000, resulting in home sales revenue of approximately $825 million. Deliveries came in above the midpoint of our guidance range by 16% as we were able to take advantage of the strong demand environment and deliver move-in-ready spec homes during the quarter. Gross margin percentage for the quarter was 22.3%, which was above our guidance range due to a favorable mix of the additional deliveries we were able to pull into the quarter. Adjusted gross margin was 25.6% for the quarter and represented a 70 basis point improvement sequentially from the second quarter, resulting from the pricing power we experienced during the spring selling season. SG&A expense as a percentage of home sales revenue was on the lower end of our guidance range at 12.3%. And finally, net income for the third quarter was $75 million or $0.76 per diluted share. We generated 1,513 net new home orders in the third quarter, which was a 122% increase compared to the prior year. Our absorption pace was 3.3 homes per community per month, an 84% increase compared to the prior year and higher than we would normally expect seasonally for our third quarter. In terms of market color, demand was broad-based based across both our product and market segments. Absorptions were 3.7% for our entry-level offerings in the quarter and 3.1% for both first and second move-up segment. Moving to the markets. Absorptions were 3.5 in the West, 2.8 in the central and 3.7 in the East. In the West, our Inland Empire, Orange County, San Diego, Arizona and Nevada markets showed particular strength during the quarter. In the Central region, Houston and Dallas displayed strong demand as did our D.C. Metro and Charlotte divisions in the East. So far in October, absorption pace has been 2.3%. Interest rates have increased, but normal seasonality is also a factor. For context, prepandemic absorptions in the fourth quarter averaged 2.5 for Tri Pointe, and the current demand environment feels similar to that normal seasonal level and much stronger than the fourth quarter last year when absorptions were 1.1%. As Doug mentioned, we had robust community count growth in the quarter, opening 30 new communities and ended the quarter with 163 active selling communities, which was a 23% increase compared to the prior year. We expect to open an additional 8 communities in the fourth quarter and anticipate ending the year between 150 and 160 active selling communities, depending on the timing of community closeouts. We are in a solid land position with over 32,000 lots under control, which provides the foundation for volume growth for the next several years. Looking at the balance sheet and capital spend. We ended the quarter with approximately $1.5 billion of liquidity, consisting of $849 million of cash on hand and $700 million available under our unsecured revolving credit facility. Our debt-to-capital ratio was 32.1%, and net debt to net capital ratio was 15.4%. We continue to be active in our share repurchase program, repurchasing 1.8 million shares during the quarter for a total aggregate dollar spend of $55 million. We have spent $124 million on share repurchases year-to-date and have $126 million of remaining availability on our current repurchase authorization. For the third quarter, we invested approximately $284 million of land and land development. And going forward, we expect to spend approximately $1.2 billion annually on land and land development to support our growth targets. Now I'd like to summarize our outlook for the fourth quarter. For the fourth quarter, we anticipate delivering between 1,600 and 1,800 homes at an average sales price between $670,000 and $680,000. We expect homebuilding gross margin percentage to be in the range of 22% and 23%, and we anticipate SG&A expense as a percentage of home sales revenue to be in the range of 10% to 11%. Lastly, we estimate our effective tax rate for the fourth quarter to be in the range of 25.5% and 26%. With that, I will now turn the call back over to Doug for some closing remarks.

[Douglas Bauer, executive]

Thanks, Glenn. In closing, our industry is positioned for long-term success, with the continued supply imbalances and strong consumer demand. At Tri Pointe, we are focused on steady growth to both the top and bottom line. This focus will continue to benefit our shareholders with a very simple formula of increasing book value per share year-over-year. I would also like to thank all of our team members for their excellent work and commitment to building our passionate culture. Tri Pointe has earned distinguished recognition from Great Place to Work and Fortune Magazine on 2023 best workplaces in construction, best workplaces for millennials and best workplaces for women. We are extremely proud of these designations and of our people who put into action Tri Pointe's values, mission and beliefs that we are in the life-changing business by delivering an outstanding customer experience. Now I'd like to turn the call back over to the operator for any questions.

[Operator]

[Operator Instructions] And our first question comes from Joe Ahlersmeyer with Deutsche Bank. Please go ahead.

[Joseph Ahlersmeyer, analyst]

Hey, good morning, everybody. How are you? I appreciate you highlighting the tripling of the book value there. Do that a few more times and you'll really be in business. The question I had first off was on community count in the third and fourth quarter here. I think you had said before $155 to $165 million by year-end, it looks like you were ahead of that even in the third quarter, but now then you're saying it might be a little bit lower sequentially. I know there's timing in there, but maybe you could just go through some of what those timing puts and takes were around the communities.

[Glenn Keeler, executive]

Yes. It's just the stronger absorption that we experienced this year, Joe. This is Glenn. There's about 15 to 20 communities that are close to close out in the fourth quarter. We're opening 8 new communities in the fourth quarter. So that's -- it's just timing that when those communities close will depend on the MD number. But overall, we opened the total number of communities we thought we were going to open this year with the additional 8 in the fourth quarter. So it's just the timing that closed out.

[Joseph Ahlersmeyer, analyst]

Got it. And then you referenced the absorptions on the ones that you opened, which were higher than the average. But then as you're kind of talking about the October absorption and what you used to do prior to the pandemic, I would think those were lower absorption communities on average to begin with. So maybe just talk about the mix of your communities in the fourth quarter and how that would play into comparability versus that 2.5 history.

[Glenn Keeler, executive]

Well, I think what we tried to highlight there is usually you do get a nice pop when you initially open the community, right? There's some pent-up demand there. And we were just trying to highlight that those 30 communities were well received within the quarter, but it's still a mix of an overall 163 communities, and we just tried to highlight that, that seasonality that we've seen so far in October feels similar to pre-pandemic level, the seasonality.

[Operator]

Our next question comes from Stephen Kim with Evercore ISI.

[Stephen Kim, analyst]

Congrats on the good results. You talked about being prepared to do maybe a little more with incentives, given the market environment in order to maintain sort of targeted sales pace. And I gather you talked about -- you talked about forward purchase commitments, which I think is something you haven't really done much since maybe early in the year. So as you talk -- as you introduce these rate buydowns through forward purchase commitments, can you give us a sense for how you're doing that? How -- what kind of significant -- what the magnitude is of the buydowns and what the uptake seems to be so far in October?

[Linda Mamet, executive]

Stephen, this is Linda. Yes, thank you. So we use forward commitments on a very limited basis at select communities and even on select home sites. And to give you an idea of the magnitude, only 7% of the loans that we funded in the third quarter used a forward commitment. So most of our homebuyers are using a permanent rate buydown and our typical incentive level is -- in the third quarter was 3.8% of homebuilding revenue and customers were typically using approximately 2% of that for closing costs and/or financing.

[Stephen Kim, analyst]

Okay. Now has any of that changed in -- as you moved into October and into the fourth quarter?

[Linda Mamet, executive]

Not significantly. Month-to-date in October, our incentives at 3.9% of revenue. So we expect it to be similar, but we will adjust if we see further changes in mortgage interest rates.

[Glenn Keeler, executive]

And just to clarify that revenues, she means order revenue, not delivery revenue.

[Stephen Kim, analyst]

That's really helpful. That was going to be my-

[Glenn Keeler, executive]

Yes. But yes, fairly consistent so far in October from what we experienced in the third quarter, Stephen.

[Stephen Kim, analyst]

That's really encouraging. So yes, I appreciate that color. Moving on to SG&A. Your guide was a little higher on SG&A than we expected, even though the closings were kind of looking like in line. But I'm curious as to whether or not you've seen an increase in your agent commissions and also with the court case playing out in Texas, curious as to how you guys are positioned relative to moving with the market if you were to see agent commissions broadly across the market come down, particularly on buyer agency.

[Glenn Keeler, executive]

Stephen, I'll take a chance of that and Linda could chime in as well. But overall, we've seen a slight uptick in outside broker commissions, just the percentage of usage. Overall, though, compared to our peer set, we're pretty low -- we're on the lower end of usage of outside brokers. I think we've done a pretty good job of that historically. And then related to the Texas trial I don't know, Linda, do you have any color there?

[Linda Mamet, executive]

We'll be watching the outcome of that. But as Glenn said, I mean, our broker sales on third quarter orders were 71%. So we're typically in that high 60%, low 70% range for broker attachment to sales. Stephen Kim

[Linda Mamet, executive]

Actually, no. We aim to really keep that under control, and our average commissions as a percentage of the home price in the third quarter were 2.3%.

[Glenn Keeler, executive]

A lot of times in certain markets, Stephen, we'll just do a flat fee or a fixed amount versus an actual percentage, just depends on the market, the community, the demand for the community, things like that.

[Operator]

Our next question comes from Truman Patterson with Wolfe Research.

[Truman Patterson, analyst]

First question, earlier in the year, all builders were expecting some pretty nice cost tailwinds this year. I'm just hoping you could give an update on kind of the cost trends here in the back half of 2023 labor materials. And given the recent rate move, perhaps the sequential softening you're seeing, do you think there's a chance to perhaps push back on any labor material costs going into 2024? Or is just kind of the underlying inflationary pressure is likely to keep everything kind of elevated as we sit today?

[Thomas Mitchell, executive]

Truman, this is Tom. I'll take a little bit of that one. We're feeling really good that the market is normalizing relative to supply chain and trade availability and labor supply. It's still tight and constrained but it is beginning to normalize. On the cost front, we are largely able to maintain the cost reductions we achieved in the first couple of quarters. So we feel really good about that. And that's our goal going forward into 2024 is to really focus on maintaining that cost structure, continuing to focus on cycle times and just capitalizing on a more normalized market.

[Douglas Bauer, executive]

Truman, I would add. This is Doug. Going forward, I think it will continue to be very normal. I don't think interest rates are going to drive cycle times or costs one way or the other. Obviously, that will be driven more by starts and velocity. So we've seen, as Tom said, a very steady market, and it's also showing up in our customer satisfaction scores that are going up very nicely, and that's very important to our business.

[Truman Patterson, analyst]

Okay. Got you. And then hoping you all could give an update on kind of the Carolinas Dallas expansion, if you will, as well as the recent Utah entrance. And given your all's balance sheet, a tougher just banking lending environment for smaller privates. Could you just discuss the appetite you have for M&A in the current environment? I think you mentioned you're looking at Florida and Charleston. Would that be greenfield or potential M&A opportunity?

[Douglas Bauer, executive]

Yes. Truman, this is Doug. Right now, we're looking at both. I would tell you that the M&A environment is a little limited. And so we've been pursuing more of the organic strategy, as we've mentioned in Utah. We're actively recruiting for Florida and Charleston. And that could tag along with an M&A opportunity within the local market. So we're looking at both, but we're going to pursue organic, which is something we can control and be very disciplined about our growth. So that's kind of the current update.

[Operator]

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

[Alan Ratner, analyst]

First question, I guess, on capital allocation. You guys have done a really good job of taking advantage of what I'm sure you feel is an unjustified discount here on your stock price with the buybacks. You do have a maturity coming up next year and obviously, with rates climbing up here. I was just curious if you can give us an update on your thinking on the balance sheet? Is the plan to pay down that maturity next year. Anything else that you're contemplating with that?

[Glenn Keeler, executive]

Alan, this is Glenn. Good question. Right now, we're putting ourselves in a position to pay those bonds off next year. With the current bond market and the rates, it's not too attractive to refinance. And so we plan on delevering and paying those bonds down. But as you can see, we have ample liquidity to do that while still investing in land and being active in our share repurchase program.

[Alan Ratner, analyst]

Got you. That makes sense. Second question on the margin guide. Some of your peers have guided for some sequential pressure in margin in the fourth quarter with the expectation or assumption that incentives might creep higher. And I know you had similar commentary in the press release, but your guidance is pretty flat sequentially. And it sounds like there hasn't really been any notable shifts in your incentives thus far in the quarter. So can you just explicitly highlight what is your expectation for incentives for the quarter embedded within your guidance right now?

[Glenn Keeler, executive]

Yes. Like we discussed it so far in October, we've seen consistent with the third quarter from an incentive perspective. Now if rates stay elevated, like we said in our comments, we'll look at that, and we'll look to incentivize certain communities that aren't meeting our sales expectations. But overall, we're going into the fourth quarter with a strong margin in backlog that supports that guidance. And we don't -- right now, our sales are really to generate deliveries next year in 2024 largely. And so that should impact our Q4 margin.

[Thomas Mitchell, executive]

Yes, Alan, the other thing, this is Tom, just to add a little more color there. Of course, we're focused on target absorption for our business plan, and we are right on that seasonality that we normally build into our business plan. We've got 86% of our fourth quarter backlog locked those that are going through our Tri Pointe Connect. And so we feel good about the fourth quarter coming up.

[Operator]

Our next question comes from Tyler Batory with Oppenheimer & Co.

[Tyler Batory, analyst]

My first question on the impact of higher mortgage rates. What do you think about a possible lag effect from higher rates? I mean, in the past, when you saw rates spike was traffic or sales pace impacted right away? Or does it take a few weeks to filter through? I'm just trying to get a sense maybe for the industry or maybe for you as well, perhaps the full impact of this run to 8% here might not have been felt yet.

[Douglas Bauer, executive]

Yes. That's a really good question. The homebuilders -- we sell -- we just happen to sell the most expensive durable goods that consumers are going to buy, right? And you hit the nail on the head. And what's interesting to me is the reaction by the Street and the construct because as we saw at the beginning of the year, there was a very rapid increase in interest rates, right? The Fed increased rates 7x in 2022. That was such a psychological effect on the consumer that it really caused a bigger pause.You saw what happened in the first part, you saw what happened in 2023. The consumer adjusts. Interest rates don't drive a homebuilding market, and that's the thesis that the market is missing. The consumer in the homebuilding market is driven by jobs and household formations. And the consumer ultimately adjusts. So this increase in rates lately and the volatility that we've seen, obviously, it wasn't -- hasn't been as volatile as significant of an increase that we saw in '22. Hence, the reason we're still seeing very good demand. It's seasonal. But I mean, we opened several new communities in the last couple of weeks with prequalification list from 10 to 80 people. So the market for the homebuilders is very solid. And yes, there is some temporary puts and takes and maybe a little longer conversion cycle. But your question is spot on. You'll see the consumer adjust, and we'll move into the spring selling season. And the beauty of the homebuilders is we have the levers to pull to continue to move product.

[Thomas Mitchell, executive]

This is Tom. I'm going to add just a little color to that as well to try to put it into perspective. I think everybody does the math based on median household income. I think it's important to note that our typical buyers are much more significantly qualified and have higher income levels than median household incomes, and it gives them more purchasing power.And if you think about it, if you go back to Q2, interest rates from the end of Q2 to the end of Q3 are up about 100 bps. But on our average loan amount, that's about $300 per month, and the incomes of our qualified buyers really can absorb that. That's why we don't see as big of an effect on that demand profile.

[Tyler Batory, analyst]

My follow-up question on ASP, closing ASP. You talked about price increases in 2/3 of your communities during the quarter. It looked like ASP was a touch lower than the guide. So I'm assuming there's a little bit of mix there that's impacting that. So kind of talk about pricing trends and then also interested how you're thinking about ASP next year in 2024 as well?

[Glenn Keeler, executive]

Yes. Tyler, this is Glenn. So we did talk about some modest price increases at 2/3 of the communities in the quarter. But that ASP, you're right, was a little lower than our guidance, and that was purely mix. The additional deliveries we pulled into the quarter were -- they came from largely from our Texas and Charlotte markets. And so that was just a mix factor. And ASP going into 2024, as I discussed on previous calls, will be lower than 2023.But again, that is just more mix related because you'll have a heavier weighting towards Texas and Charlotte than the current mix. A lot of new communities opened this year and next year in those markets that is just driving that ASP. So I think I'd mentioned on the last call, something around $625,000 to $630,000 ASP range for next year, and that still feels like a good target.

[Operator]

Our next question comes from Carl Reichardt with BTIG.

[Carl Reichardt, analyst]

Thanks. I missed the absorptions for entry level during the quarter, Glenn. But I also wanted to -- I think you raised prices in 2/3 modest price increases, 2/3 of your stores. Can you break that out between move-up and entry level in terms of the price increases you put in place?

[Glenn Keeler, executive]

So yes, that entry-level absorption, Carl was 3.7% and it was 3.1% for both first move-up and second move-up. And we don't have the breakout in front of us between price increases between those cohorts, but I think it was probably more on the move-up side, you would see a higher percentage of those price increases, but it was just really market dependent more than anything. So like in Charlotte, for instance, where we're more entry-level first move up. That was a market where you saw price increases across the board really, just because of the level of demand. So I would say it was fairly broad based.

[Carl Reichardt, analyst]

And then in August, we talked a lot about the premium entry level as a differentiating point for you product-wise. And I'm interested, again, you do spec, but you're trying to build that product up so that customers can still choose options upgrades. So within the move-up cohort and the premium metro level cohort, have you begun to notice trade-down effects? So people taking fewer options on upgrades in their homes and/or a shift to smaller homes in either cohort as you go to offset the affordability challenges that we see out there?

[Thomas Mitchell, executive]

Carl, it's Tom. Good questions, obviously, because we do such a great job on our option and studio business, and it's a big component of our offerings. In Q3, we did not really see any decline relative to option spend. On closings, we averaged $76,000 per home, which was about 11.2% of revenue. Year-to-date, we're at about 11.6% of revenue with that dollar amount being about $81,000 per house.So we're still seeing a significant amount of spend in our design studios because people in today's market still do want to personalize their homes. And it's a driving factor. You saw we introduced the Bobby Berk collection. That's going to be very popular and a big driver. And it will also help us streamline and be more efficient through our studios. So we're excited about that. We have put into the marketplace some smaller footages because we're very aware of attainable price points. And so that is something that we are seeing that people are accepting smaller footages for affordability reasons.

[Operator]

Our next question comes from Jay McCanless with Wedbush Securities.

[James McCanless, analyst]

Doug, you made the comment earlier that you see the M&A environment as limited. Could you maybe unpack that a little bit? Is it limited by the valuations you're seeing or just not the right fit? Any color there would be helpful.

[Douglas Bauer, executive]

I would say, limited by the number of offerings, Jay. We're looking at packages. There are a few right now, but it's not so much in valuation. It's more in opportunities, the number.

[James McCanless, analyst]

Okay. And then thus far in October, you said you raised price in 2/3 of communities during 3Q. Do you feel like you have that same type of pricing power now? Or you had to slow it down a little bit just given the 70 bp move we've seen in mortgage rates over the last few days or few weeks.

[Douglas Bauer, executive]

Well, that pricing increasing was about 7,000 per house. It's about 1%. So it was very modest. And I would imagine we'll continue to keep it very modest and be very mindful of making sure our product is attainable. Price and payment is the name of the game, especially more in the entry level. But we've had a lot of success in our new community openings that we talked about earlier, and we'll continue to see some price movement in those as well.

[Operator]

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

[Michael Dahl, analyst]

Just to go back to the kind of current environment, as you noted, some consumers may adjust. The builders have the tools to adjust as well to meet the market. We have heard some of your peers already leaning back into incentives when they're talking about the trends from September into October. Your commentary sounds a little bit different.So I'm curious, given your other comments around what happened last year, do you have a view that, hey, it's been a quick move over a short period of time. Let's give it a little time to see where things settle out before we jump the gun on pulling the incentive or price lever or as pace just not fall into levels that are kind of triggering for you at this point? Just maybe talk through that a little bit more because it does seem different than what some of your peers have described.

[Douglas Bauer, executive]

Well, as we mentioned, we continue to manage to our pace that we desire in our business plan. I think year-to-date, Glenn, we're at about 3.3, 3.4 absorption. So our seasonal pace that we're seeing right now is it maybe a tick softer than what we saw back in 2019? Yes. But we'll continue to use the tools to move into building our backlog for the Q1 and Q2.The other thing I'd point out is comparing peers is a little bit difficult in the sense that we have, what, 163 active communities and our focus on land acquisition is to be in the premium markets, A locations with A product. And frankly, that trumps the B locations. And within every one of our markets, we're seeing higher incentives from builders and locations that are different. So there's a lot more to that question and how you answer it and how you execute it. And one of the strengths that Tri Pointe has is our land strategy that we start years ago when we buy land. And it's proven out. I mean, in Houston, which is one of the most competitive markets in the U.S., our community locations have been selling very, very well because it's location -- it's the old adage, Mike. It's location, location, location. So we can drive a better absorption, drive a better premium and we're not at the whims of playing as much in the incentive game possibly because our buyer profile, as Tom pointed out, is very strong as well. So there's more detail behind that. You can't just lump us all in one industry.

[Michael Dahl, analyst]

Yes. That's fair. Makes sense. Helpful. My second question is on the mortgage venture. And I know you'll have more to say once it closes or when it's closer to close. But is there any order of magnitude you could give us in terms of maybe had you owned this outright in '23. Here's what the incremental contribution would be from a profitability standpoint. That's one. And then two, from a more of an operational standpoint. I mean presumably with the joint venture partner, you have availed yourself with all the same tools that the other builders who have wholly-owned ventures have in the current environment. But is there anything operationally where you think there could be a meaningful difference for you as a wholly owned for JV?

[Glenn Keeler, executive]

Mike, this is Glenn. To the first part of your question, we'll update you on more of the economics as we get further into '24 and actually are up and running. But there should be a positive benefit to the company as we'll have 100% of the economics versus right now being in a joint venture, obviously. But from an operational standpoint, I think it's really all about the consumer. We'll be able to control that process from end to end. And I think that will be the big advantage from us from a customer experience perspective.

[Operator]

Our next question comes from Alex Barron with Housing Research Center.

[Alex Barrón, analyst]

Good job on the quarter. I was hoping you could elaborate on the -- what -- on the consumer, what your average statistics look like, meaning what's their average income? What's their average down payment, what's their average FICO score, that type of thing. And also wondering if you guys have an average interest rate after incentives that people are getting, how does that compare to market?

[Thomas Mitchell, executive]

Alex, this is Tom. I'll take the first part, and then Linda can talk about the second question there. But as I said, we've got an exceptional buyer profile, and that largely breaks down with our average buyer having an average income of about $185,000, an average FICO score of 749. Our average debt to income is right around 40%. Average loan to value is about 81.5%. 79% of our buyers are using conventional financing. So we've got a really strong buyer pool, and it's very consistent as well.

[Linda Mamet, executive]

Just to provide you some more information about the average interest rate for our buyers. As we mentioned, with 86% of our fourth quarter backlog box, those buyers that have already closed or are expected to close, has an average interest rate of 6.6%. And then obviously, rates increased more at the end of the quarter and into October. So the loans that we locked in the third quarter have an average interest rate of 6.7%.

[Alex Barrón, analyst]

Very helpful. Doug, you were going to say something?

[Douglas Bauer, executive]

No, I was going to say the exact same thing Linda said.

[Alex Barrón, analyst]

Great. Well, I appreciate you guys sharing that because I think it helps to highlight that it's not your median income household buying your homes, which is something that I think people oftentimes don't quite get. But anyway, the other question that I had was what is your average build time? And how much has that come down, say, versus a year ago? Because I'm kind of looking at your order trends, which are obviously very different than the deliveries you're having. So I'm assuming all those homes, obviously, are coming at some point. I'm just trying to figure out what kind of a lag is there between typically an order and the delivery these days.

[Douglas Bauer, executive]

Good question, Alex. As we've stated, on average, we've been able to reduce our cycle times to about 6 to 8 weeks in reduction. And so it's very back to a normalized schedule template. Our average is 112-day schedule. So it's about a 5.5-month construction cycle. And it varies based on product and market anywhere from 100 to 145 days and it's 5 to 7 months in duration.And so we're back to those templates and we're going to continue to evaluate and see if there's further reductions there coming as we continue to look to more efficient product and reuse that efficient product that we've designed over the last couple of years. So we're optimistic on the cycle time front.

[Alex Barrón, analyst]

Awesome. And if I could ask one more, going back to the discussion of the average consumer that buys your homes. Have you guys done some hypothetical testing, just how much more rate paying these guys could take? In other words, could they pay 8% theoretically should they pay higher than that?

[Linda Mamet, executive]

Yes. Thanks, Alex. We stress test our buyers at the time that they are prequalifying. And right now, we're stress-testing typically at 8.5% and don't see issues for our buyers at that level.

[Operator]

There are no further questions. At this time, I would like to turn the floor back over to Doug Bauer for closing comments. Please go ahead.

[Douglas Bauer, executive]

Well, thanks, everyone, for joining us today, and we want to wish all of you a safe and wonderful holiday season. I can't believe the holidays are right around the corner and look forward to reporting some strong results next February as we get back together. And thank you.

[Operator]

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation, and have a great day.