TRI Pointe Group Inc (TPH) Q1 2021 Earnings Call Transcript

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TRI Pointe Group Inc (TPH -1.34%)
Q1 2021 Earnings Call
Apr 22, 2021, 10:00 a.m. ET

Prepared Remarks:

Operator

Greetings. Welcome to TRI Pointe Homes First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I will now turn the conference over to your host, David Lee, General Counsel. Thank you. You may begin.

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David C. Lee -- Vice President, General Counsel And Secretary

Good morning, and welcome to TRI Pointe Homes Earnings Conference Call. Earlier this morning, the company released its financial results for the first quarter of 2021. 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 F. Bauer -- Chief Executive Officer

Well, thanks, David, and good morning to everyone joining us on the call today. This day is a celebratory one for TRI Pointe as we commemorate Earth Day, like we do every year through our proprietary LivingSmart program. LivingSmart is our companywide walk-to-walk commitment to our customers well-being and the well-being of our planet. We've been a leader in green building since 2001, and our commitment is always expanding, incorporating the latest innovative design, materials and technologies into living smart for our homes and communities. More TRI Pointe's ESG highlights are available on our website, and we will be publishing our 2020 ESG report in May as we strive to improve everyday life for all of our stakeholders. With that, 2021 is off to a great start for TRI Pointe Homes with the record-breaking sales momentum we experienced last year carrying into the new year. Net new orders for the first quarter increased 20% year-over-year, thanks to a 49% improvement in our absorption pace.

The order activity we experienced was broad-based, both from a geographic and product standpoint, which is a testament to the appeal of our homes at a number of different price points as well as to the strength of the housing market across the country. The combination of powerful millennial demographic forces, low existing inventory levels, favorable mortgage rates and years of underbuilding has led to a real supply demand imbalance that has taken the nation's need for new housing supply to new heights. The intensified demand for new homes brought about by the pandemic continues unabated as we see life beginning to normalize. Simply put, we're in the midst of one of the strongest housing markets in my career. We continue to take advantage of the robust demand with ongoing price increases and reduced incentives, allowing us to stay ahead of the cost inflation we're experiencing on a number of fronts. Gross margin from home deliveries for the first quarter came in at 23.9%, a 340 basis point expansion over last year.

We have also been successful in improving our operating leverage by keeping our costs in check while growing revenues, lowering our SG&A as a percent of revenue by 250 basis points year-over-year to 11.4% for the quarter. On another positive note for our industry at large, mortgage rate -- mortgage interest rates have stabilized in recent weeks after the upward trend in the latter half of the quarter. Rising rates have not impacted demand. And based on the sensitivity analysis we perform, we are confident in the quality of our backlog should mortgage rates continue to rise. As a premium lifestyle builder, TRI Pointe Homes attracts a very well-qualified buyer. TRI Pointe Connect, our affiliated mortgage company is a significant asset to our operations and captures over 80% of our deliveries. The average homebuyer financing with TRI Pointe Connect has a FICO score of 748, debt-to-income of 36% and loan-to-value ratio of 82%. While we continue to see new home demand far outstripping supply, today's environment is not without its operational challenges. Cycle times are being extended in all of our markets due to material shortages, labor availability and municipality delays. Suppliers are pushing for price increases of their own in an effort to offset raw material cost inflation as well as labor cost increases. New phase releases that communities are being weighed against existing backlog constraints. To be sure, these are good problems to have and are indicative of a strong housing market.

Fortunately, our leadership teams throughout our organization are made up of seasoned industry veterans who know how to navigate this landscape and keep TRI Pointe in a position to be successful. At TRI Pointe, our goal is to grow our operations in a profitable manner, achieving top 10 market share in each of our geographic segments and improving returns while maintaining a strong capital position. We made progress on all these fronts during the first quarter of 2021, including a return on average tangible equity of 15.8% for the trailing 12-month period. We posted an 18% increase in new home deliveries in the quarter and are poised to record a significant year-over-year increase in deliveries for the full year based on our existing backlog. As we guided on the last call, we opened 22 new communities during the first quarter and remain confident in our ability to open roughly 70 new communities for the full year.

In California, we continue to reap the rewards from our long-dated California assets, thanks to their low land bases and excellent market positioning as we experienced robust order activity at both our coastal and inland communities. For instance, four of our five top selling communities in the first quarter are in California and range from premium entry-level attached homes in San Diego, to detach homes in Southern California's Inland Empire as well as Northern California's East Bay. The investments we have made in our early stage markets of Austin, Dallas, the Carolinas and Sacramento are generating excellent results. In the first quarter, these markets contributed 157 deliveries on a combined basis, with an average sales price of $445,000 and gross margins of 21%. While these markets are contributing to the bottom line now, they still have a considerable runway for growth. Combined, these early stage divisions currently own or control approximately 8,300 lots and are anticipated to deliver over 2,000 homes annually by 2023.

We also made further strides in our efforts to acquire land in a more capital-efficient manner. We increased our lots controlled via option agreement to 38% at the end of the quarter, representing the highest option lot percentage in our company's history. We believe partnering with intermediaries to help facilitate the purchase and development of some of our lots as a prudent, risk-averse way to acquire land and will also lead to better returns on our capital in the long run. Overall, we are in a fortunate land position, considering the demand environment we're in. Page 14 of the earnings call slide deck shows the detail of our lot position. With nearly 37,000 lots owned or controlled, we do not need to be aggressive in the current land market. We continue to be disciplined in our underwriting approach knowing that we own or control 100% of our forecasted deliveries in 2021, 2022 and over 95% in 2023. In addition, most of these lots were controlled one to three years ago or even longer in the case of the long-term California assets. This year proved favorable to the company considering the rate at which both home prices and input costs have increased over the past 12 months. TRI Pointe Homes remains in an excellent position from a capital standpoint with over $1 billion and total liquidity, including cash and cash equivalents of $585 million. We put some of our cash to work during the first quarter in the form of share repurchases, buying back 3.7 million shares at a weighted average price of $17.88. The number of shares outstanding was 9% lower on a year-over-year basis, and we plan on reducing our outstanding shares even further as the year progresses.

With an increasing diverse and growing homebuilding operation, and a rapidly improving return profile and a strong balance sheet, TRI Pointe Homes is poised to take advantage of the strong housing fundamentals in the market today and create value for our shareholders over the long term. We think that the current housing cycle will have long-term momentum given the powerful demographic forces at play and the supply issues facing most of our markets. We believe TRI Pointe Homes has the right team, strategy and leadership in place to achieve our goals.

With that, I'd like to turn it over to Glenn for more detail on the first quarter and our outlook for the rest of the year. Glenn?

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

Thanks, Doug, and good morning, everyone. I'm going to highlight some of our results and key financial metrics for our first quarter and then finish my remarks with our expectations and outlook for the second quarter and full year of 2021. At times, I will be referring to certain information from our slide deck that is posted on our website. I wanted to start by discussing our new reporting segments, which we have reorganized in connection with the recent implementation of our one brand platform to TRI Pointe Homes. Slide four of the earnings call deck shows the map of the U.S. And the markets we currently operate in. Our Arizona, California, Nevada and Washington markets will now be reported in the West segment with Colorado and Texas in the central; and finally, the Carolinas and the D.C. metro markets in the East. Slide five of the earnings call deck provides some of our financial and operational highlights from our first quarter.

As Doug mentioned earlier, demand continued to be robust in the first quarter, with orders up 20% compared to the prior year and an absorption rate of 5.8 homes per community per month, representing a 49% increase compared to the prior year. Demand was strong across all geographies with the West reporting an absorption rate of six homes per community per month a 39% increase compared to the prior year. The central had an absorption rate of 6.1, which was a 118% increase compared to the prior year. And finally, the East had an absorption pace of 4.3, which was a 4% increase. Demand continues to be strong in April with 340 orders through this past Sunday, April 18. We continue to focus on our new community pipeline, opening 22 new communities in the first quarter. For the full year, we expect to open approximately 70 new communities and end the year between 120 and 130 active selling communities. For 2022, we continue to expect to open approximately 90 new communities and end the year between 150 and 160 active selling communities.

We reported a strong performance on all key metrics this quarter. We delivered 1,126 homes, which was an 18% increase year-over-year. Home sales revenue was $717 million, an increase of 20% and our average sales price was $636,000 a 2% increase compared to the first quarter of 2020. Our homebuilding gross margin percentage for the quarter exceeded the high end of our guidance range at 23.9%, a 340 basis point improvement year-over-year. SG&A expense as a percentage of home sales revenue of 11.4% improved 250 basis points compared to the prior year. Our focus on leveraging technology and operational excellence is evident in our reduced sales and marketing expense of 5.6% of home sales revenue in the first quarter compared to 7.2% for the prior year period. The evolution of our digital marketing and home shopping tools, less reliance on outside brokers and our employment driven sales approach enables our sales and marketing operations to be more efficient. For instance, we generated 8.5 orders per sales employee in the first quarter of 2021 versus 5.8 orders in the same quarter of 2020.

We reduced our broker attachment rate from 71% of deliveries in Q1 of 2020 down to 69% of deliveries this quarter, with an average broker commission representing 1.7% of our total home sales revenue. Looking at the balance sheet. At quarter end, we had approximately $3 billion of real estate inventory. Our total outstanding debt was $1.3 billion, resulting in a ratio of debt-to-capital of 37.5% and a ratio of net debt to net capital of 25.3%. We ended the quarter with $1.1 billion of liquidity, consisting of $585 million of cash on hand and $543 million available under our unsecured revolving credit facility. Now I'd like to summarize our outlook for the second quarter and full year. For the second quarter of 2021, the company anticipates delivering between 1,500 and 1,600 homes at an average sales price of $630,000 to $640,000. Homebuilding gross margin is expected to be in the range of 22% to 23% and our SG&A expense as a percentage of home sales revenue is expected to be in the range of 10% to 10.5% for the second quarter.

Lastly, the company anticipates its effective tax rate for the second quarter to be approximately 25%. For the full year, we are raising our anticipated delivery guidance to between 6,000 and 6,300 homes and increasing our expected average sales price to $620,000 to $630,000. We are also increasing our homebuilding gross margin range to between 22% and 23% for the full year, while lowering our SG&A expense as a percentage of home sales revenue, which we expect to be in the range of 9.8% to 10.3%. Finally, the company is forecasting its effective tax rate for the full year to be approximately 25%.

I will now turn the call back over to Doug for some closing remarks.

Douglas F. Bauer -- Chief Executive Officer

Thanks, Glenn. To sum up, the housing market and TRI Pointe Homes are hitting on all cylinders. Our absorption pace of 5.8 in the first quarter was the best in our company's history. And the same is true of our home sales gross margins of 23.9%. And when price and pace can both be achieved at such a high level, it is clear we are experiencing an exceptionally strong market. And while we expect demand to remain elevated for the near term, we also expect there to be a leveling off to a more normal demand environment at some point. This would enable the industry to be in a better balance with the supply chain as it moves more in line with demand. Until then, we will continue to take advantage of the strong housing fundamentals and grow our operations while adhering to our underwriting discipline, a strong balance sheet and continuing to improve our returns. Finally, I would like to thank our team members for their contributions in producing a record breaking quarter. The results we posted in the first quarter are a testament to your hard work and entrepreneurial spirit, and I'm extremely proud of what we have built together.

That concludes our prepared remarks, and now we'd like to open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] Thank you we will now be investing our question and answer session. Our first question is from Alan Ratner with Zelman & Associates. Please proceed.

Alan S. Ratner -- Zelman & Associates LLC -- Analyst

Congrats on the great results and glad to hear you're all doing well. Doug, I'd love to start off with kind of the comment you just closed with and talking a little bit about an eventual normalization of demand and kind of some of the supply side challenges that the industry is facing today. And I was poking around on your website, and I couldn't help but notice there were quite a few communities that you guys have labeled as temporarily sold out, and I'm guessing that somewhat ties into your commentary there. We've been hearing a lot of builders intentionally slowing the sales pace just to allow the production machine to catch up a little bit. So I'm curious if you could talk a little bit about if you guys are doing that and to what extent? And have those limitations we've been seeing of late, has that helped at all to allow the supply side to catch up? Or are those problems still intensifying?

Douglas F. Bauer -- Chief Executive Officer

Yes, Alan, it's a good question. Out of our community universe and Linda, I think you may even have the number a little more exact, but it's -- if I recall, it's about 20 to 30 communities are in that mode. And we haven't really seen that improve the supply chain. You know I think the supply chain is going to be a challenge for the rest of the year as all homebuilders and other industries are affected by a lot of global things and from chip manufacturing to Suez Canal to Snowmageddon to everything else that's gone on since the pandemic. And there's just been such a rapid increase in demand that didn't correspond with the increase in the supply chain. And it's going to take a little bit to catch up. But I don't think it's going to all happen in a short-term manner. I think it's going to be a challenge for the rest of the year as we continue to see strong demand across all our marketplaces.

Alan S. Ratner -- Zelman & Associates LLC -- Analyst

That makes sense. And I appreciate the candidness there. Maybe this is related, maybe it's not, but the gross margin guidance does imply a little bit of sequential pressure from the very strong results you just put up in the first quarter. So I'm curious, can you talk a little bit about the moving pieces there? Is that mix? Is that cycle times extending that's putting some pressure on that? Any color you can give there would be great.

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

Hey Alan, this is Glenn. It is a bit of mix. We had some higher end communities close out in the first quarter, so that contributed to that higher margins. But it also is reflective of some of the price -- or sorry, cost increases that happened in the back half of last year that are delivering as a bigger part of the mix in Q2 and Q3. But overall, as you saw from our guidance, we raised the margin guidance at the high end to 100 basis points for the full year. So it shows that we have been able to raise prices above costs compared to where we were on our last call.

Alan S. Ratner -- Zelman & Associates LLC -- Analyst

Yes, absolutely. Didn't mean to imply that it wasn't impressive. Just curious what the drivers were there. So I appreciate that, Glenn. Thanks a lot guys good luck.

Douglas F. Bauer -- Chief Executive Officer

Thanks, Alan

Operator

Our next question is from Jay McCanless with Wedbush Securities.

Jay McCanless -- Wedbush Securities Inc., Research Division -- Analyst

Hey good morning [indecipherable] First question I had, any impact from the February weather in Texas in terms of delivery, timing, et cetera?

Douglas F. Bauer -- Chief Executive Officer

Yes, Jay, this is Doug. It did affect about 20 to 30 deliveries in the first quarter. And it's probably why I was looking at the consensus deliveries for the quarter, probably why we were just a few units below it. But we've picked it up from there and expect more deliveries as part of our overall guidance for the year out of Texas.

Jay McCanless -- Wedbush Securities Inc., Research Division -- Analyst

And then in terms of the community count guidance for this year, I know you all took that down a little bit, is it -- is there any geographic bent to where that came from? Or are you just having to deal with some municipal issues pretty much country wide?

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

No. The community count lower guidance for the full year is just reflective of selling out a little bit quicker than we originally planned based on the high absorption pace we saw in the first quarter. We're still opening the same amount of communities that we guided to previously. So from an opening perspective, we're right on where we thought we were going to be. We're just going to close out a few more communities before year-end quicker than we thought. It's all that is.

Douglas F. Bauer -- Chief Executive Officer

Jay, that obviously implies a healthy backlog going into the second half of the year, right?

Jay McCanless -- Wedbush Securities Inc., Research Division -- Analyst

Yes, absolutely, absolutely. And then the other question I had, just on cycle times. Could you talk about where they are now versus last year or versus what -- last year, of course, was COVID, but you know where do you think -- where they are now and where they should be?

Tom Mitchell -- President And Chief Operating Officer

Jay, good question. This is Tom. And obviously, we still are dealing with COVID impacts this year, although it is different. But in general, on average, I would say, our cycle times have increased 10% to 20% year-over-year. We are battling a significant supply and labor constraint, and we're doing our best to overcome that. So translated into working days, that's about a 10 to 20-day increase on average for our average construction cycle time. So we're dealing with it. The biggest thing is we're making sure we're setting appropriate expectations with our customers and delivering their homes in a time frame that is meeting their expectations. So, so far so good. We don't anticipate that it will have any impact on our ability to deliver year-end units that we're planning on.

Jay McCanless -- Wedbush Securities Inc., Research Division -- Analyst

Sounds great thanks for taking my question.

Operator

Our next question is from Stephen Kim with Evercore ISI. Please proceed

Stephen Kim -- Evercore ISI Institutional Equities, Research Division -- Analyst

Great job, obviously, in the quarter. Doug, you made mention about how you ran an analysis on your backlog to determine how secure it was in the event of a rate rise. I was curious how broad that analysis was. If you could shed a little more light on it. In particular, I was wondering if it you know was analyzing your buyers' credit quality and stress testing it for higher rates. And then you know you kind of concluded it wouldn't have a negative impact of rates rose. At what point of mortgage rate would it have had an impact, in your view?

Douglas F. Bauer -- Chief Executive Officer

I'll let Tom and Linda to chime in on that.

Tom Mitchell -- President And Chief Operating Officer

Yes. Stephen, great question. We did do a stress test on our backlog, as you mentioned, and it was on all fronts, as you indicated, including buyer quality. And as you know, being a premium lifestyle brand, we have a significant quality of buyer, and that's demonstrated with an average FICO score of about 748, and our average loan-to-value is 82% with a debt-to-income ratio of around 36%, I think Doug said in the prepared remarks as well. And what we did was go into our backlog and focus primarily on a stressing of increasing interest rates by half point and then a full point and looking at debt-to-income and seeing where the tipping point was. And in both those scenarios, very little of our qualified buyers drop-off that ability to purchase. So the answer would be somewhere over one point in interest rate increase would begin to have any effect on our buyer pool.

Stephen Kim -- Evercore ISI Institutional Equities, Research Division -- Analyst

And just to translate that go ahead into a number, I assume it's 4%, like north of 4%, obviously.

Tom Mitchell -- President And Chief Operating Officer

That's correct, north of 4%, yes. And that Stephen, was about 75% of our -- 75% to 80% of our backlog.

Stephen Kim -- Evercore ISI Institutional Equities, Research Division -- Analyst

Okay. Great. Well, that's really interesting. I appreciate that. And then I guess, another question is about the gross margin guide. I know you mentioned that there were some unusually high gross margin communities that kind of closed in 1Q. But you beat your 1Q guide pretty handily. So I'm just curious, is it right to think that you're using pretty much the same methodology for guiding your margins in 2Q as you did for 1Q?

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

It's a similar methodology, yes, in that we're guiding based on where prices and costs are today. And some of that was, like I said, a mix shift. There were some communities that pulled into Q1 that are higher margins that we thought were going to go into Q2. So that mix definitely plays a part into it. But yes, we're based on that on what's in backlog right now, what we know the margins to be. Obviously, there's still houses to sell throughout the year. So if we can continue to raise price above the cost increases, there could be margin upside to the full year guide, but obviously, there's still a lot of time left in the year to get there.

Stephen Kim -- Evercore ISI Institutional Equities, Research Division -- Analyst

Yes. Sure. Great. I appreciate that. My -- I think you guys know which side my bets going on, but that's great. Good job, and good luck with the rest of the year.

Douglas F. Bauer -- Chief Executive Officer

Thanks, Stephen.

Operator

Our next question is from Mike Dahl with RBC Capital Markets. Please proceed

Michael Glaser Dahl -- RBC Capital Markets, Research Division -- Analyst

Thanks for taking my question. I wanted to ask more detailed question around pricing. I think based on the work that we've been doing, it seems like for a lot of the past six months or so, you had good pricing power, but potentially slightly lagging the peer group in terms of breadth of magnitude. And more recently, you kind of fully caught up and maybe even exceeded, which certainly seems to be reflected in the margin guide. But you know I'm wondering if, a, you know you think that's a fair characterization. And b, how much of that is really kind of the market strength continuing to broaden out and give the higher end stronger pricing power versus more kind of the company-specific actions that you're taking, whether it's the lot allocations or just a more aggressive approach to pricing, given how strong your sales base has been?

Douglas F. Bauer -- Chief Executive Officer

Thanks Mike, good question. Obviously, the pricing environment is very fluid out there right now. And we continue to see strength and elasticity in our ability to continue to raise prices really in all markets and at all price points. So we see it being pretty broad-based. Obviously, affordability is a general concern out there. Although, as I just said with Stephen, our stress testing of our backlog appears that we've got room to move there, and we're going to try to take advantage of that where we can. Linda, do you have anything else to add on pricing?

Linda H. Mamet -- Chief Marketing Officer

No. Again, as you said, I mean, it has been very broad-based. And as they become less supply of home sites remaining in a community, we certainly have more opportunity to continue to push prices.

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

And the one thing I'll add, Mike, this is Glenn. I wouldn't say we lagged the rest of the group from a pricing power perspective. If you look at pure percentages because we have a higher ASP, that may be the case, but when you look at total dollars, that I think we're definitely getting our fair share of price increases, as you mentioned, that's reflected in the margin guidance. So I think we've been able to raise prices throughout the entire run-up in the homebuilding market just as everybody else has.

Michael Glaser Dahl -- RBC Capital Markets, Research Division -- Analyst

Okay. That's helpful and good point there, Glenn. Thanks My second question, just on the April commentary and sales pace in general. I understand it's only halfway through or two and a half weeks through the month, but it seems like that number would suggest maybe pace of closer to five a month versus the six plus you ran in Feb and March. And clearly I don't think you've ever articulated that six is the right number for you guys. But you know just curious to get your take on, given the actions that you've taken around communities, given the pricing, given the demand you're seeing, when you're thinking through the balance of the year and the guidance, what are you guys assuming? Understand it's always community by community, but high level, what are you guys assuming in terms of sales pace right now?

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

I think it's similar to what we talked about before. I mean, obviously, we had a really strong Q1. And your math is correct. It was around five for the first couple of weeks of April. But part of that is just, again, us limiting some of the releases to allow construction to catch up to the sales pace. So we're not seeing any real drop-off in demand, if that's part of the question, demand is still really strong out there. But what we do think is that it will get back to a little bit more of a seasonal norm and slow down in the back half of the year from an order pace perspective is our assumption in the plan. We could be surprised to the upside on that, but that is how we built the plan.

Tom Mitchell -- President And Chief Operating Officer

I think Mike the other thing...

Douglas F. Bauer -- Chief Executive Officer

Go ahead, Tom.

Tom Mitchell -- President And Chief Operating Officer

Okay. I think the other thing to think about there, Mike, is as we are limiting releases, you're going to see continued choppiness and potential spikes in absorption rates as we hit new releases. There is strong pent-up demand, so we have a strong absorption pace on those releases. And then we're bringing a lot of new communities to market as well, and there's significant pent-up demand at those new communities. So as we bring those releases on, I think we'll have accelerated absorptions as well. Doug, did you have something to add?

Douglas F. Bauer -- Chief Executive Officer

Yes. I was just going to add to Glenn's comment, Mike, with -- hopefully, our society getting back to normal and seeing some of the travel statistics from the airlines, we do see a seasonal pattern, at least we forecasted that in our plan for the last three quarters. Typically, we see some seasonal slowdown in the summer months and a little bit of a pickup before the fall. So we think with the country getting back to normal a little bit and families traveling and hopefully, the school year starts off on a normal beat. So again, that's our thinking, but we could be surprised to the upside.

Michael Glaser Dahl -- RBC Capital Markets, Research Division -- Analyst

Great, OK great, thats very helpful

Operator

Our next question is from Tyler Batory with Janney Capital Markets.

Tyler Anton Batory -- Janney Montgomery Scott LLC, Research Division -- Analyst

Hey, good morning thanks for taking my questions, Just a few for me. And I wanted to start on the land side of things. Just curious, what you guys are seeing out there in terms of land prices. Generally interested if there are instances perhaps where prices might look a little bit extended in terms of what some of your peers or competitors might be willing to pay?

Douglas F. Bauer -- Chief Executive Officer

Yes. This is Doug. Good question. As we pointed out, we're in a very, very strong position. We were very aggressive in the land market one to three years ago. So we've got a great book going through 2023, 100% for 2022 covered and 95% for 2023. So we're in the land market. We're in it every day. We continue to underwrite the current market conditions. Are there examples of land deals getting bid up beyond the tips of your skis? There's a few, but generally speaking, all the builders that we work with and we joint venture with a number of them now too are still being very disciplined in their underwriting and land values are a function of your land residual. And if home prices go up, land prices are going to go up. So -- but your input costs is also going up. So you got to factor all that into the equation, and that's how we look at the land business. Tom, do you want to add anything to that?

Tom Mitchell -- President And Chief Operating Officer

No, well said. We are really positive on our existing land pipeline in all our markets, and we continue to look for the right pieces to add. And as Doug said in the prepared remarks, we're in great position, and we're really looking for land to finish off that last 5% in 2023, but it's for 2024 and beyond that our focus is on.

Tyler Anton Batory -- Janney Montgomery Scott LLC, Research Division -- Analyst

Okay. Great. That's very helpful. And then just as a follow-up. I wonder if you can elaborate a little bit more on what you're seeing in some of your early stage divisions. Just curious how those are progressing versus your expectations. I think you cited 21% margin for those overall. So interested how that's playing out versus what you had originally expected. And then I think you talked about the 2,000 annual sales by 2023. Just wondering if you could talk a little bit more in terms of progression and time line over the next year or two moving toward that target in some of these earlier stage locations.

Douglas F. Bauer -- Chief Executive Officer

Well, obviously, we're very bullish on our early stage divisions, and hence, the reason why we share that information. 21% margins are very strong for early stage divisions. But more importantly, that we own and control over 8,300 lots that will generate 2,000 homes annually by 2023. So that's within that 3-year -- two years from now. So very, very pleased with the Carolinas, Dallas, Austin and Sacramento. Teams have done an excellent job of sourcing land. And again, that land was sourced one to three years ago. And so with the rapid increase in prices and input costs, we're in a very good position to deliver those 2,000 homes annually in 2023, and hopefully, we'll be able to deliver a very consistent margin profile with that.

Tyler Anton Batory -- Janney Montgomery Scott LLC, Research Division -- Analyst

Great, thats all for me [undecipherable] thank you very much for the detail.

Operator

Our next question is from Truman Patterson with Wolfe Research. Please proceed

Truman Andrew Patterson -- Wolfe Research, LLC -- Analyst

Hey, good morning guys thanks for taking my questions. First, just wanted to touch back on your 2021 gross margin guide, even though you pretty materially in 1Q, you know 2Q through 4Q, it seems like you still lifted you know your guidance for the remainder of the year as well. So you know could you just discuss that a little bit more in depth? Are you expecting there's more you know higher-margin California mix in there? Or are you just really seeing a general lift across the country where pricing is outstripping costs? And then finally, you know what sort of cost inflation are you all really expecting in the back part of the year?

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

Truman, it's Glenn. I'll take the first part. It was really the latter part of your comment. It is reflective really of just us being able to raise prices above costs, which gave us the ability to raise that gross margin guidance based on what we see in backlog currently. And then as far as cost inflation, I'll let Tom take that one.

Tom Mitchell -- President And Chief Operating Officer

Truman, good question. We're not dissimilar to everything else that you're hearing out there relative to cost, and there's significant pressure in that arena right now. So far, we're expecting cost to increase on our direct side of the business, 5% to 15%. That's in the magnitude of what we've been experiencing lately.

Truman Andrew Patterson -- Wolfe Research, LLC -- Analyst

Okay, Tom. And in that 5% to 15%, I imagine that's labor and materials blended. But on the lumber side, is that really one of the largest swing factors is in that number? And where I'm going with this is, look, over the past month, I mean lumber futures has spiked like 50% plus. I mean it's a very rapidly moving target on a day-to-day basis. But big picture on the lumber side, how do you think that plays out over, we'll call it, the next nine months? I mean you know is this level of lumber pricing here to stay? Are we going to see any relief? Is it going to continue accelerating upwards? Just wanting to get kind of your big picture thoughts on that.

Douglas F. Bauer -- Chief Executive Officer

Truman, this is Doug. We we're not in the business of forecasting some of these crazy swings. Obviously, lumber is a major component of those cost increases. As I mentioned earlier to Alan, we're anticipating a continued supply chain headache for the rest of this year as we continue -- all builders are trying to provide housing for the consumer right now. So I don't know where lumber is going to go. I mean, a year ago, it was, what, $370 to $400. Your guess is as good as ours. But as Tom mentioned, our cost inflation ranges in 15 divisions, 5% to 15%. The pricing has also increased 5% to 20%. So that's a big component of what's going on. And hence, the reason why we provided an increase in our gross margin guidance for the year. The first quarter was a little bit of mix. And as it stretches out for the year, we're looking at increasing our margins 100 bps as we provide in our guidance. So we still think prices will be able to cover those cost increases.

Truman Andrew Patterson -- Wolfe Research, LLC -- Analyst

Hey Doug, just for clarity, that divisional cost inflation range of 5% to 15%, that isn't what you're seeing currently or previously, right? That's what you all are expecting kind of flows through based on today's contracts over the next two to three quarters. Is that correct?

Douglas F. Bauer -- Chief Executive Officer

Well, that's what we experienced in the first quarter.

Truman Andrew Patterson -- Wolfe Research, LLC -- Analyst

Okay. Okay. Got you. Tom, I don't know if you have that metric of what you're kind of baking into guidance for you know maybe even 4Q, 3Q, 4Q? Or is it kind of in the same range of that 5% to 15%?

Tom Mitchell -- President And Chief Operating Officer

Yes, it's within that same range.

Truman Andrew Patterson -- Wolfe Research, LLC -- Analyst

Okay, Alright. Thank you guys, good luck on upcoming quarter.

Douglas F. Bauer -- Chief Executive Officer

Thanks Truman.

Operator

Our next question is from Deepa Raghavan with Wells Fargo.

Deepa Bhargavi Narasimhapuram Raghavan -- Wells Fargo Securities, LLC, Research Division -- Analyst

My, Good morning, My first question is on pricing. I know you provided good color, especially to the last question. But pricing within the orders, you mentioned, given all the inflation out there, you're increasing prices for inflation and then some more, which means you're capturing some amount of profits. You mentioned pricing increases 5% to 20%, cost increases 5% to 15%, so there's a spread there. Just curious, is that spread actually been increasing off late, given that demand is so strong, your absorption is pacing strongly, which means you do have the pricing power, but also, you should be able to -- that additional spread is going to give you the power to offset some of the volatility in the second half you alluded to. Just curious, is that spread -- are you -- is that increasing? Are you seeing that in your order levels? And do you anticipate that will go higher near term?

Douglas F. Bauer -- Chief Executive Officer

This is Doug. What we quoted as far as pricing band of 5% to 20% at cost, 5% to 15% is in the -- what we experienced in the first quarter. We don't forecast in our business planning revenue increases. We do have current cost inputs in our plan. So if revenues were to sustain themselves in this manner, there could be, as Glenn mentioned earlier, some margin expansion in the latter half of the year.

Deepa Bhargavi Narasimhapuram Raghavan -- Wells Fargo Securities, LLC, Research Division -- Analyst

Okay. Is there like -- I was asking if there's a delta between even how you did your closing versus your orders as well. Like is the pricing delta between your order pricing and closing pricing, strong enough to capture additional support as well?

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

Yes. Well, I think based on raising the guidance, the gross margin guidance for the year shows that the spread was positive, obviously, in the first quarter. Is the spread increasing, if I understand your question right? I'm not sure it's increasing. I think it's been there, thankfully, right? We've been able to raise prices above costs throughout the last nine months. I wouldn't expect the spread to increase because costs are rising pretty rapidly. We're thankful that we can raise prices to cover costs right now. That's a good position to be in. And it also really varies wildly on a community-by-community basis. Some communities, the spread is increasing because there's a limited supply of houses and then other communities that's less so. So it's a tough question to ask or to answer on a macro basis.

Deepa Bhargavi Narasimhapuram Raghavan -- Wells Fargo Securities, LLC, Research Division -- Analyst

All right. No worries. No, that's helpful. That was my question. My follow-up is I'm looking at your Q1 performance across regions. I see there is some ASP decreases in like Central and East. Just curious what's driving that year-on-year decreases, especially some markets and central ones seem like they're a good strong market at this point in time. Any color there?

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

All that is pure mix. The mix of homes, where we'll have lower ASPs this year. Our percentage of attached homes and our mix is higher this year than it was last year. Again, thinking ahead to affordability, we're just trying to, in each market we're in, target the right price points for the buyer pool. And so it's not reflective of pricing, it's just pure mix of types of homes we're selling.

Deepa Bhargavi Narasimhapuram Raghavan -- Wells Fargo Securities, LLC, Research Division -- Analyst

Thats pretty helpful thanks so much i will pass it on.

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

Thanks Deepa.

Operator

Our next question is from Carl Reichardt with BTIG.

Carl Edwin Reichardt -- BTIG, LLC, Research Division -- Analyst

Good morning guys, I wanted to ask about the SG&A, and I'm sorry if I missed it. So it was quite better than your guidance, the dollars were actually down, but the delivery volume was sort of at the low end of the guide. So I'm kind of curious the leverage -- why the leverage was so strong or even why the dollars were down. Is that in part of a function of the cost sets from last year rolling through?

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

Yes. Carl, this is Glenn. Good question. That's part of it, for sure. We haven't had to hire back as many as we would have thought considering the volume increases because we are just more efficient, like we talked about in some of our prepared remarks. In addition, because of the strong demand we saw in the first quarter, we've spent a little bit less on advertising we just -- than we originally thought we would have to because when you have such strong demand, you just don't need to spend as much on advertising. So that between sales per employee and advertising spend, that's where we saw some of the meaningful savings.

Carl Edwin Reichardt -- BTIG, LLC, Research Division -- Analyst

And then the bigger picture one for Doug. Doug, you mentioned the sort of broader goal of wanting to be in the top 10 of all the geographic markets TRI Pointe's in. And I was interested in if there's something special about that number, I mean why not top 15 or why not top five? What's the sort of the driver behind that long-term goal for you? What are the economics behind it for you?

Douglas F. Bauer -- Chief Executive Officer

Well, we're never looking to be the biggest, we want to be the best and we want to be the best at what we do. In order to be the best and in order to generate the type of revenues and profits when you back into the various markets we're in, you need to be in our minds in the top 10. But in the end, our focus is on generating higher profits and higher returns and be more efficient in our overall turning of our inventory. And we believe as we see great expansion east of California, and those markets are very efficient. And so we'll be hitting on, as I mentioned, we've got over 8,300 lots in our early stage divisions, and they'll be hitting all cylinders by 2023. So those are just macro goals that we have to keep our position in the market. And again, it's not about being the biggest, it's about being the best.

Tom Mitchell -- President And Chief Operating Officer

Carl, this is Tom. We've had several conversations about this, and I think you have an opinion on it. But certainly, scale does provide leverage. And so there is an economic benefit to having certain scales in certain markets, and we believe that, and we've seen it prove out. So in all our early stage divisions, we're looking to get to an optimization level that is within that top 10 that provides the volume to produce leverage.

Carl Edwin Reichardt -- BTIG, LLC, Research Division -- Analyst

Thank you, Thanks fellas

Tom Mitchell -- President And Chief Operating Officer

Thanks Carl.

Douglas F. Bauer -- Chief Executive Officer

Thanks Carl.

Operator

And our final question is from Alex Barron with the Housing Research Center.

Alex Barron -- Housing Research Center, LLC -- Analyst

Yes, Thanks gentlemen. Good job in the quarter. I think you had previously indicated you expected the pricing trend to be heading down, but obviously, I think pricing power is going the other way. So can you kind of, I guess, walk me through your expectations on that going forward?

Douglas F. Bauer -- Chief Executive Officer

Alex, this is Doug, and I'll let Tom and Glenn chime in, but I don't think we indicated pricing power is going down. We just don't forecast significant price increases. The market is very strong right now. Demand is very strong, and we experienced some pretty significant pricing power in the first quarter. So right now, the housing business is as good as I've seen it in my 30-plus years, and I think it will continue to be very strong this year.

Tom Mitchell -- President And Chief Operating Officer

Alex, this is Tom. I'll chime in. I think what you were asking is relative to us guiding to a lower ASP coming up over the next couple of years. And that is that is correct as we are bringing on new products through our early stage divisions, those ASPs are lower. So overall, that's going to be lowering our ASP as a company. We still believe that to be true. But obviously, with the pricing power we've experienced over the last four quarters, we've actually had an increase to our ASP overall, even though we are projecting an ASP reduction due to the mix of new units coming into our portfolio.

Alex Barron -- Housing Research Center, LLC -- Analyst

Okay. Yes, that's what I meant. And in terms of that mix, is it because of the geographic exposure that you think that's why that trend would be going down? Or is it more because you're introducing like smaller floor plans, more entry-level housing that type of thing?

Douglas F. Bauer -- Chief Executive Officer

Yes. That's really due to the expansion east of California. Although even in California, we're expanding more affordable price points, especially in the inland Empire and down in San Diego. But generally speaking, it is the expansion east of California and a very slight reduction in the overall square footage for the company.

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

Alex, to give you a specific example, in the Carolinas, we only have three communities open right now, and those price points are in the 350 to 450 range. And in a couple of years, we're going to have over 10 to 15 communities open there. So it's part of just that geographic mix of these early stage divisions.

Alex Barron -- Housing Research Center, LLC -- Analyst

Okay. And then I think I also heard you say you're indicating more emphasis on share buybacks. I was just curious if that's something you expect to be like a percentage of profits or just opportunistic or more programmatic? How are you thinking about that?

Glenn J. Keeler -- Chief Financial Officer, Chief Accounting Officer And Treasurer

We're looking to be a little bit more programmatic. And you can see we've been more consistent over the last couple of quarters, and we're forecasting in the near term, that's continuing to be the case.

Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Doug Bauer for closing comments.

Douglas F. Bauer -- Chief Executive Officer

Well, thanks, everyone, for attending our Q1 call, and we look forward to meeting all of you next quarter. I hope you all have a great weekend. Thank you.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

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