Building Success: Doug Bauer and the Growth of Tri Pointe Homes

Podcast
To grow or not to grow is often the question for a homebuilder. For Doug Bauer, CEO and co-founder of Tri Pointe Homes, the answer has always been “grow.” In 2009, when Doug Bauer and his partners started Tri Pointe, growth was a huge risk. But they pulled it off, and now Tri Pointe Homes is one of the top public homebuilders in the nation with a footprint across the country. On this episode of the New Home Insights podcast, Doug Bauer shares some highlights of Tri Pointe’s growth over the years.

Featured guest

Doug Bauer, CEO, Tri Pointe Homes

Douglas (Doug) Bauer serves as the Chief Executive Officer of Tri Pointe Homes. Prior to forming Tri Pointe Homes, Doug was the President and Chief Operating Officer for William Lyon Homes where he also served as Chief Financial Officer and President of its Northern California Division.

He is actively involved in both legislative efforts and community enhancement programs through the California Building Industry Association and HomeAid Orange County, a charitable organization that builds shelters for the temporarily homeless.

After receiving his B.A. from the University of Oregon, Doug went on to finish his M.B.A. at the University of Southern California. When he’s not working on Tri Pointe, Doug likes to work on bettering his triathlon times for both exercise and pleasure.

 

Transcript

Dean Wehrli:

Hi, everyone. Welcome to the New Home Insights podcast. I’m Dean Wehrli. Most of the biggest home builders in America count their existence in decades, not years. Tri Pointe Homes was born about 15 years ago in 2009, just right when the sky was falling for the housing markets. So kind of a counterintuitive timing. When everybody else is picking up the pieces, they’re starting this brand new premium home builder. Doug Bauer co-founded Tri Pointe at that time and he joins us here to chat about the Tri Pointe story, how they continue to grow across the country, their approach to where and what they build and who they build for, and then also his take on the state of the housing market. Doug, how are you?

Doug Bauer:

Good, Dean. Thanks for having me on today.

Dean Wehrli:

Very glad you could make it. So let’s start just a little bit about that, a little brief about you first because you have a very storied career even before you started Tri Pointe Homes, and then we’ll talk about kind of the Tri Pointe home story to start us off.

Doug Bauer:

Well, I have been in the home building business, I keep rounding up, but somewhere between 33 and 35 years. So I’ll say it in the 30s. Started actually my career with Bill Lyon, William Lyon for 20 years. And Bill was an excellent mentor, really taught my partner, which is Tom Mitchell everything we really learned about the home building business. So we were there for 20 years and then we had this crazy idea. We stepped aside from Lyon and to start this new home builder, Tri Pointe Homes with a fresh approach to the home building business, focus on what we call is the premium lifestyle brand, really focusing in on the product, the purchasing of land, creating place-making. Really focus on families.

I know it’s kind of corny, but there’s nothing more rewarding than building homes for families. So we got our start in 2009 and like you said, Dean, it was a little counterintuitive actually. Our wives looked at us, said, “Are you going to start a home building company in the middle of the great financial crisis?” And oh, by the way, we pushed our entire nest egg into starting that company then too.

Dean Wehrli:

The way you said that, it really wasn’t. I meant that. That wasn’t the time where like, “Okay. Things are starting to pick up. We see a pathway here.” That was literally when things looked about as bleak as they ever did.

Doug Bauer:

Yeah. We never really looked back in the rear-view mirror at our 15 years of history. I guess as you get older, you’re supposed to get more sentimental, but, hey, I’m still very excited about growing the business, but it was… Tom and I have talked about it before. I figured if Tri Pointe didn’t work, I’d probably get a job with another home builder or bank. My wife only told me, she goes, “You’ll have three kids to put through college. Just remember that.”

Dean Wehrli:

So fingers crossed.

Doug Bauer:

Yeah.

Dean Wehrli:

So then you guys, almost fairly quickly after the founding in 2009, then the market did start to turn 2011, ’12 looked a lot better, still working through some of the REO stuff like that, but the market clearly was better. You pivoted to a growth strategy, again very quickly within the existence, the lifetime of Tri Pointe Homes. Tell us a little about that in 2013 and ’14.

Doug Bauer:

Well, we obviously started organic in ’09, as you said, through ’13. But in 2010, I had a relationship with Starwood Capital, and this is a very capital intensive business. We put in our capital to start the businesses as a fee builder for the Irvine Company. But fast forward, we got $150 million from Starwood. Barry Sternlicht is a good friend, and that really got us going from a capital standpoint. It gave us the balance sheet to grow the business.

And then in 2013, Barry called me up and he said, “I think we should go public.” I’m like, “Go public.” We’re like this little peanut of a home builder. He goes, “Yeah, go talk to Citibank.” I said, “Okay, I’ll go talk to Citibank.” And lo and behold, we were, I guess the first home builder in over 10 years to go public in January. It was January 31st, 2013. So we went public, and so I got this currency and I’m just a little home builder. I think our market cap was, what, about a half a billion or something? I don’t know what it was.

So I called up my friend, Dan Fulton, who was the CEO of Weyerhaeuser. I’ll never forget it. I went up to Seattle, had dinner with him and Dan… If you know Dan, he’s very cagey, but he’s a really, really nice guy, but he keeps his cards close to his vest. I went up there with the bold ask of buying Quadrant Homes, which is one of the five home building brands at Weyerhaeuser. He looked at me and he said, “Doug, we’re not going to do that.” I said, “Well, if you ever decide to sell Quadrant, give me a call.”

Well, in 2013, it was the summer of ’13, he called me back and said, “Hey, I think you should look at buying the entire company of Weyerhaeuser real estate company.

Dean Wehrli:

So he changed his tune pretty quickly.

Doug Bauer:

Yeah. Well, he was the CEO and Weyerhaeuser was a REIT. The old adage, when things are good in home building, you spend a lot of capital. So as a REIT, they’re trying to distribute their cash flow, and so they decided to liquidate. Well, he called it a strategic objective. I looked at strategic alternatives. So long story short, I kidded with Dan. I said, “Dan, that’s got to be a couple billion dollar deal. I can’t get that much money from Starwood.” And he goes, “Well, I don’t think you’re going to need it from Starwood. There’s an interesting angle to doing this deal. It’s called a Reverse Morris Trust, an RMT, and basically the minnow, which is Tri Pointe, buys the whale in a reverse merger.

What we did is we bought the companies for 2.7 billion. We issued $2 billion of Tri Pointe stock. I floated a $900 million bond offering and gave 700 million of it to Weyerhaeuser. So the whole deal cost us 2.7 billion, and we closed that in July 2014, which really put us on the map.

Dean Wehrli:

Oh yeah, it did. I remember that because people forget Weyerhaeuser, the paper company, they owned a lot of forest. They were one of the biggest… But they had Quadrant. They had Pardee who I knew very well.

Doug Bauer:

Pardee.

Dean Wehrli:

They had Maracay in Phoenix. They had some stuff back east. I remember East Texas.

Doug Bauer:

Winchester back east. Trendmaker was a big brand in Houston.

Dean Wehrli:

So, they were a major, major builder through their various brands. And for you guys, it was almost like… I can’t remember the guy’s name, but remember the guy who he had the parking lot in downtown Boston, and that enabled him to buy the Los Angeles Dodgers from Fox? God, I’m totally drawing a blank on his name. But you immediately became one of the biggest builders in the country.

Doug Bauer:

Well, it definitely made us relevant, and it was an amazing transaction as you look back on it. Again, we don’t look back on it much, but they did have… We had Tri Pointe as our brand and we had five others. You mentioned a Pardee, Maracay in California and Nevada. We had a Trendmaker in Houston, Winchester in the East Coast and Quadrant up in Seattle. So when we put all the companies together, we kept it as six brands initially.

Dean Wehrli:

So that was the strategy you’re building as Tri Pointe, but you’re also building as these various brands in various parts of the country. Then fast forward, I think it was 2021, you decided to do kind of a rebrand and have everything be Tri Pointe. What was behind that?

Doug Bauer:

Well, COVID.

Dean Wehrli:

Really? Really for the brand? Really?

Doug Bauer:

Well, no. I mean COVID hit us what early 2020. And so Tom and I, Tom Mitchell, my partner here… Let’s back up. You have six home building brands and to operate them from a sales and marketing standpoint, which you can appreciate is a little clunky. It’s a little inefficient is the best way to put it. And so Linda Mamet who’s our brilliant CMO, EVP/CMO here, we all sat down in end of 2020. We started talking about and said, “Hey, how can we get more efficient in the SG&A category?”

Well, let’s just make one brand and we eliminate marketing materials, websites, having six different websites. All this stuff gets more efficient. And frankly, Dean, brand, I’m a little agnostic on brand. Brand is earned over time. Actually, if you look at the six brands, I think Pardee has the best brand recognition because it had been around the longest, right?

Dean Wehrli:

Yeah. Had a very good reputation too.

Doug Bauer:

Yeah. So we actually debated internally. I actually called a CEO friend of mine and another public home builder, and I asked his opinion and he goes, “Well, I’d call it Trendmaker.” I go, “Trendmaker.” He goes, “Oh yeah, that’s the best brand in Texas.” I said, “But what would be the best brand in the US?” So we really came down to say, “Hey, we were this new home builder. We started in 2009. We came with a fresh approach to product, to how we build and how we recruit people and the culture of our company and a focus on the customer. So let’s call it Tri Pointe.”

And frankly in my mind, brand like Tri Pointe, it’s only earned over time. It is kind of cool for… I mean, we don’t have any egos here, but it is kind of cool to go to Texas and the Carolinas and say, “Hey, I bought a Tri Pointe house.” That’s cool, right?

Dean Wehrli:

Yeah.

Doug Bauer:

But it’s earned over time. So we wrapped, we consolidated them all into one in ’21.

Dean Wehrli:

But you guys had earned that though, because I remember we all have an idea. Market analysts know what builders have their best reputation, and I think almost every major builder now, it used to be the product was kind of on a scale of zero between a hundred, you had stuff in the 20s and 30s and the 70s and 80s. Most folks build really good homes across the country. Any major build is building really good home. But even above that, you guys did have kind of an above average reputation for your product in 2021 when you rebranded those folks. So I would argue that at that time, Tri Pointe probably would’ve been the best brand to have chosen from that perspective.

Doug Bauer:

Obviously, I would agree with you.

Dean Wehrli:

Okay. So you’re growing. You grew exponentially almost through the Weyerhaeuser purchase. Now though more recently you guys have been growing pretty dramatically in some of the big stronger markets in the southeast. What’s the motivation for that? I think I know, but go ahead, walk us through how you’re growing now more organically by expanding.

Doug Bauer:

Yeah, I’ll back up a little bit. We were kind of obviously founded in California, so we have a very strong presence in California. I mean, we do roughly 6,000 closings a year. California, I know, different rankings. We’re obviously on a combined basis probably top three or four builder in California and deliveries, I think we’ll do about 3,000 or so or 2,500. And that’s going to go on for the rest of my future with the company.

But what I and Tom said, “Hey, we got to grow the business outside of California and push east, Phoenix, east. So we pushed into Texas and we organically went into Austin. We bought a small builder in DFW. It was so small, we ended up basically bringing in all our people. We had Houston already with Trendmaker, which is obviously Tri Pointe. So we started really pushing, Dean, growth in Phoenix east. Maracay obviously was gone. We were at Tri Pointe in Phoenix. But then we organically started in Raleigh and Charlotte led by Gray Shell in Charlotte and Bob Davenport in Raleigh.

And those markets have just growing like a weed. Great, great markets to be in. And then lastly, we kept studying the northwest. We looked at Oregon, we looked at Boise, and we looked at Utah. And we decided on Utah primarily, you’re only as good as the people that you have or you hire your leadership and our leader up in the state of Washington, Ken Krivanec is actually from Utah. He knows everybody. I mean, we were over there months ago. He is the most well-connected person in Salt Lake. So he’s going to lead that charge. We’re still in Washington.

And then the other markets that we were studying and looking to expand was the coastal Carolinas, which is really connected with our Charlotte operation a little bit. It’s a few hours a little southeast. And Florida. We’re not in Florida. Mitchell kept telling me, I’m not too old to keep doing another organic play because I kept looking at acquisitions. Because it’s obviously more immediate. The good thing about organic is we have a playbook. You hire the right leader, you hire the right team concurrently with buying land, and you don’t incur a lot of what I call dumb tax because you’re not paying a premium, you’re paying book value for land, and you’re slowly growing versus if I went and bought, Dean, home builders, and you already had 10 communities, but then I found out that I overpaid you by 200%.

So we like the organic approach. So yes, we just expanded. We have Joel Underwood heading up Orlando. I was just there last week. A few weeks before that I was in the coastal Carolinas, which will be Charleston to Savannah led by Ali Heavener. And then we’ve got Ken running Utah. So that kind of completes our playbook right now. Are we going to go anywhere else? Never say never, but we’ve got that lined up right now.

Dean Wehrli:

North Dakota. Is that on the horizon?

Doug Bauer:

No.

Dean Wehrli:

Okay. Doesn’t callback to it but maybe-

Doug Bauer:

Tom told me I should look at Nashville. I think he wants to go to Nashville so he can go listen to good country music.

Dean Wehrli:

That’s why everybody wants to go to Nashville right now. Nashville is actually smoking hot right now.

Doug Bauer:

Is it?

Dean Wehrli:

It’s a very, very cool place and a very, very hot market too. Tennessee is very strong. Were any of those markets kind of waffled the most or the toughest calls in that process?

Doug Bauer:

No. I mean, it takes us a while. We’re very deliberate in how we want to find the right leader who fits our culture. Culture at Tri Pointe is really, really important to Tom and I and throughout the company. I mean, we’ve been obviously… Not obvious, but we’ve received a lot of designations. It’s a great place to work and other Fortune magazine stuff. But when you have a strong culture, that really helps feed this premium brand strategy that we have of producing great homes for families.

So we are very deliberate when we’re looking for Orlando or looking for Utah or looking for Coastal Carolinas to make sure we had the right leader in the seat to lead us and grow us in those markets. So there’s not a big hesitation to it. It’s more of a process. Maybe we’re just looking for the right team, because if you have the right team and you don’t have a lot of turnover, you’re going to have a lot of success.

Dean Wehrli:

Would you not go into a market, even if the metrics, which is my next question, what are the metrics that you’re looking at job growth? Would you hesitate to go on a market though if you could not find the right leader or the right team for that market?

Doug Bauer:

Yeah. I mean, we’ve hesitated because we didn’t have the right team. But I would argue, and we use obviously all of the Burns market data advertisement for John Burns.

Dean Wehrli:

Yes, thank you.

Doug Bauer:

And team, everybody. But I mean, we look at all the data that you guys provide us and look at and say, “Well, we love Orlando. We like the coast of Carolinas. They’ve got strong job growth. They’ve got a strong employment base. They have great businesses. They have great education systems. They have a favorable tax basis, stuff like that.” And if you look at kind of the smile states, and I’m not getting political, but to be honest with you, the red states have become a very strong housing market across the country, and there’s a reason for that. They’re very pro growth, pro business.

Dean Wehrli:

You might’ve just answered, but let me check, my next question, which is, are there constraints to where you grow? What is that red flag in a given market that you’re thinking about that would make you hesitate the most? Is it that the political landscape of that market?

Doug Bauer:

I call the barriers to entry on the land side. Yeah, for sure.

Dean Wehrli:

So if their entitlement takes forever, if they have kind of anti-growth sentiment, you’re going to be hesitant to go into that market.?

Doug Bauer:

Well, and you would say California is probably the poster child for all that.

Dean Wehrli:

For sure.

Doug Bauer:

But we’ve cut our teeth here for 30-plus years, so we know how to get our way through those barriers to entry. But if you have other markets that are not as robust as that, the smile states as I keep referring to and don’t have significant barriers to entry, we would definitely not pursue that right now.

Dean Wehrli:

Yeah, I figured. What’s the most interesting lesson you’ve learned in this growth process, especially the organic stuff. If something just stuck out and say, “Huh, next time we’ll be thinking more about that.”

Doug Bauer:

Yeah. It’s a great question and it is real simple. It’s finding the right leader. And if you find the right leader, and I call that a division president, we’re very flat here. Well, now we have 17 divisions. We don’t have regional presidents. Half report to Doug, half report to Tom. So we also have our other job of playing CEO and president and all the public company stuff, but we both were division presidents. So we’re very involved in a macro way with the divisions. But the biggest lesson that Tom and I always are critical of ourselves is if we have the wrong leader in that position.

I’ll pick on Austin. I picked somebody internally. Great, great person. Great guy because I love to promote from within, but he didn’t have what I call the it factor to attract, retain, and build a division. He was really just more really good at construction. So it’s always, Dean, the thing that I’m most critical of myself is picking or having the wrong person in the wrong seat in the bus as I always refer it to. We’ve been batting a pretty good average. I think we bat in the 90% range, but we’re not perfect.

Dean Wehrli:

That’s not bad. That’s not bad at all. I guess the issue with that is you often aren’t going to know if that’s the right person until they’ve gone through for some time.

Doug Bauer:

It takes a minimum of six to 12 months to know that you picked the right person. But we hope we check every box along the way. But yeah, like I said, none of us are perfect.

Dean Wehrli:

No. How much big are you going to be next year than this year, do you think in whatever metric? Sales community count.

Doug Bauer:

Well, we’re public, so we told the street, and I tell you we’ll see community count grow 10%, but by the end of 2025. We’re not looking to be the biggest builder in each of our markets in each of our divisions. How we look at scale is we like to be relevant and be in the top 10 from deliveries. And reason for that, it’s not… What happens when you get a relevant basis of deliveries, it helps with buying land because you’re relevant. It helps with attracting subcontractors because you’re relevant, you have repeat business. It helps attracting people because you’re relevant in the market.

So I use that term relevant in a broad way. It obviously helps with your financial performance too. But again, we’re not going into any of the markets saying, “I want to be Lennar or Horton.” I mean, they can have the number one or two spot all day long.

Dean Wehrli:

That’s actually a good segue for an next kind of, I guess module. Let’s talk about your approach. Some builders are more pace oriented and let’s be honest, the bigger you are, the more vol you are oriented. You have to be. Do you think of yourself as pace-oriented? That is the velocity of your sales, you think of yourself as price-oriented. Are you always trying to balance those two considerations?

Doug Bauer:

Great question. And it is really a balance. I mean, actually, I think I mentioned this at the Burns conference. I mean there’s toll, that’s the highest ASP of the public builders. We’re number two in the high sixes, low sevens. I think we’re 7-12 in the first quarter, our ASP. But we even at our ASP, and even with the product execution, we actually focus on pace. I mean, I’ve told those street this, we’re focused on about a three-and-a-half as a company absorption pace. That’s pretty good for an entry-level, premium first and second move-up builder.

Our cycle times. Very proud of our cycle times too. They average 115 days, so that’s just under six months. So we’re very not only in tune with product development and pace and watching margin, but we’re also very cognizant of cycle time and return. So there’s so many levers as you know, better than anybody that you have to pull. But pace and price is really equally balanced and it’s done community by community.

Dean Wehrli:

And just for our listeners throughout lots of the country, remember when Doug said that their ASP is high sixes, remember they have a big presence in California. So that number is not as dramatic as it might seem in parts of the country. How about in terms of your buyer segments, your focus? You’ve mentioned families a couple of times. Who are the buyer segments you are most cognizant of that you know you need to please to make it work?

Doug Bauer:

Well, again, we’ve taken a look at that. When we bought the Weyerhaeuser companies, we had a big asset down in San Diego called Pacific Highlands Ranch, and all that product was a million to 3 million. It printed money for years. And so intentionally, we have… Even in California, look at the Inland Empire with all the land that we still own with Weyerhaeuser, that’s all entry level. I mean, that’s four to $600,000 entry level product that because we have such a great land basis. But our focus is pretty balanced, Dean, between, I call entry level premium first and second move up.

And even when you look at absorptions for the first quarter, entry level I think was at 4.0 exactly, but even first move up and second was maybe in the mid to high threes. Our active adult was actually, which is small portion was closer to four. But overall, we like a balanced approach between entry level premium first and second move up. We’ll do a little luxury here and there if we have to, but we’ve really gotten entirely out of the luxury segment. I’ll leave that to toll.

Dean Wehrli:

Okay. Is there anything you do right now to get folks assigned on the dotted line? Is it a concession? Is it a type of concession? What’s working the best right now? What tactic, I guess?

Doug Bauer:

It’s a multiple number of levers you pull. I mean, one of the things that is the most important lever is our focus on land in core locations close to employment, great schools. I call it Maine and Maine. I think Doug Yearley calls it the same thing. But we don’t buy in tertiary markets. So the consumer starts their buying process online. Every consumer does. And we have a very robust online presence. But when you are focusing on core locations and then you focus on product that fits that core location, that site and design the right product whether it’s attached or detached and give the consumer some choice, even though we still sell 65% of our orders are spec homes, but the consumer usually has some choice along that path.

So that’s really what we do to focus the consumer in. Now, we have incentives. As I reported in the first quarter, off the top of my head, I think our incentives with 3.8. About half of it goes to closing costs and half goes to financing. Our buyer profile, I mean, they make some pretty good money. I mean, their average income is 195,000 and they’re a little agnostic to where the rate environment is. I mentioned this the other day at your conference. They’re really focusing on product location and the experience that they can have buying a home from Tri Pointe.

Dean Wehrli:

So it’s seven percentage right now for a typical mortgage rate through the year across the country. From your perspective, that’s not quite the negative that a lot of folks maybe perceive that to be.

Doug Bauer:

It isn’t.

Dean Wehrli:

Can you tease that out a little bit?

Doug Bauer:

Well, again, our buyer profile is very well-equipped to deal with the current mortgage environment. We’ve been in this environment for some time now, and I think one of the biggest drivers for the new home builders, and I think you guys noted in some of your research somewhere, but the new home builders share of total home sales, you know this better than I do, Dean, I think it’s gone from 15 to 30 plus percent.

Dean Wehrli:

Even a little less below 13 to 30 plus of available homes. It’s dramatically increased.

Doug Bauer:

And when I’m out, I was on the East Coast last week, I was in Texas two weeks ago, and I’m always walking product and talking to our sales teams and the consumer, I mentioned this also two-thirds of our average mortgage is 500,000. Two-thirds of our buyers are millennials and Gen Zs. Gen Zs are about 10 to 15% of that Two-thirds. But they are very well-equipped to buy homes today and that’s really our focus.

Dean Wehrli:

It does amaze me how much because I try to walk product as much as I can when we’re doing our market feasibility studies. And you hear a lot from agents that you know what, they’re using that incentive money for closing more often than buy downs. Now, that mortgage rates have slid back a little bit here these last week plus.

Doug Bauer:

Well, and the buyers are not as in tune with where the 10-year treasury is trading every day like you and I are. Frankly the buyers and especially the cultural buyer. The Indian buyer profile is a very significant portion of our buyers in Houston, DC, Washington. I mean, they’re usually very in the tech business or engineers of sort. They prefer to have their incentives in the form of a price adjustment than even financing because they do very well. They’re not worried about a six and a half, 7% mortgage rate.

Dean Wehrli:

Okay. That answers your question. I’m glad you said that because that helps me figure out why that has been. It seems counterintuitive that a lot of new home buyers aren’t going more for the buy down when they have that option.

Doug Bauer:

But getting back to what I was trying to point out is if I tell you, you could be the CEO of Tri Pointe and your major competitor, which historically has been the resale market is not trading about a million homes a year or trading less than a million homes than they’d normally trade, would you be happy or sad?

Dean Wehrli:

I’d be ecstatic.

Doug Bauer:

Yeah. So I hate to say I’m a fan for a higher raise, but there’s another macro thing that I think despite what the Fed wants to do is we’ve got, unfortunately a fiscal crisis here in the US. I’m not going to pontificate on my economics theories, but there’s a lot of debt that we need to keep financing. And guess what, the investor that wants to buy that debt is going to want a return. So you’re not going to see treasuries go down. At least my lifetime left running this company back down to 2, 3%.

Dean Wehrli:

But also, remember, they also have to finance that deficit and higher interest rates make that more expensive for the government.

Doug Bauer:

That’s the flip side. So there’s going to be, I think… I think the tenure and the financing rates are going to be stuck where they are for the time being.

Dean Wehrli:

So kind of stable mortgage rates, you think?

Doug Bauer:

Hey, if you look at the 30-year average of mortgage rates, and I could be wrong on this, but I think it’s like six and a half percent.

Dean Wehrli:

It depends on how long you go back. If you go back far enough, it’s almost eight.

Doug Bauer:

Is it? Okay. You know better than me. But where we are in mortgage rates right now is very, very similar to what history has been here in the US.

Dean Wehrli:

Doug, is there any product type you won’t do? For instance, is there a density that is just too dense for Tri Pointe?

Doug Bauer:

I’ll simplify it. A quick answer podium.

Dean Wehrli:

Okay.

Doug Bauer:

From a real high density standpoint, Tom and I have messed around with it, but when I look at, I’m also the financial brain here and I just get hung up with the amount of capital that I need to invest in a podium and have it sit there for such a long time before it turns. And so that’s probably the one product I could probably safely say we will not do.

Dean Wehrli:

Okay. It’s expensive and not every sub knows how to do it or do it well.

Doug Bauer:

Well, that’s the other problem.

Dean Wehrli:

How about in terms of your approach to internally enter your business? Are you very much, “Hey, we’ve got the right person in that market. We’re going to let them go. We’re very entrepreneurial.” Is Tri Pointe a little more top down and let’s kind of follow a script? Are you somewhere in between that?

Doug Bauer:

We’re not top down at all. As I mentioned, Tom and I play regional presidents, and so we’ve got a lot of things going on. I look at this. I want to hire the best division president. We have very little turnover in that area. I’m going to pay you very well, and I’m going to empower you with a capital allocation to go invest. I learned this from General Lyon. I was the CFO at Lyon, and I told him, “I want to go run Northern California.” He looked at me, he said, “Son, you don’t know the difference between a two by four and a flying saucer, but that’s the best idea you’ve had.”

He said, “I’m going to send you to Northern California. You’re going to run that division. I’m going to give enough rope. And then if you hang yourself, you hang yourself, you’re out.”

Dean Wehrli:

No pressure.

Doug Bauer:

No pressure. And so a little of that… We’re very entrepreneurial. I just hung up with our division president in Raleigh and we’ve got a big land deal we’ve been discussing. We’re here. We call the best of big and small. We’ve got the home office that provides the capital, the human resources, the IT, the legal support, some of the marketing, a lot of the marketing. But you as a division president are running a three to four, 500 million business. We set you up with a business plan. We set you up with capital. You got to perform. And if you don’t perform, then we got to talk. I mean, it’s really that simple.

Dean Wehrli:

You have 17 pretty sizable local builders effectively.

Doug Bauer:

Totally. Because when I said the best of big and small, the best of big provides the capital. But I can tell you, I was in Dallas a couple of weeks ago, and that is a very local market. And the biggest raw material that we are always focused on is, what, Dean? Land. But I tell you what, our Dallas Fort Worth team has incredible relationships. So that’s the best of local. Then I need to come in and say, “Hey, this is a good deal. How do we give you the capital to build this thing out?”

I mean, I could say this because I’m running Tri Pointe. I think the best job as a division president of this industry, and we’ve recruited a few, several of them from other builders is working for Tri Pointe because of the entrepreneurial spirit. There’s not some robotic corporate initiative coming down every day. Now, do we have certain things that we want to simplify and streamline? Yeah. I mean, we’re a public company. We’re always looking for SG&A efficiencies, but running this business is a very local business.

Dean Wehrli:

So in the market, just briefly, how has the spring selling season in 2024 been for you so far? Just FYI, we’re recording this in mid-May. How’s it gone so far?

Doug Bauer:

Yeah. I mean, we just reported Q1 and through April. I think our sales pace we recorded was what about 3.9 absorption pace. That’s sales per community per month. We’re very consistent now with April, and we’ll be reporting here in the next quarter, but the consumers still is very engaged.

Dean Wehrli:

You guys are still getting the price you want and in your incentives don’t seem pretty flat.

Doug Bauer:

Yeah. We gave our guidance. We trended our guidance for the year with a slightly higher margin improvement. So that would definitely imply that you’ve got a tighter bandwidth on incentives and costs and stuff like that.

Dean Wehrli:

We talked about this at the summit that you have referenced a couple of times, but what’s happening in your world with costs, with hard costs? Not land costs, but your hard costs, your verticals?

Doug Bauer:

Very flat to maybe up 2%. I know the summit had the little clickers to make that poll. I think the poll was, what, two to 3% or something?

Dean Wehrli:

Yeah. It was pretty stable.

Doug Bauer:

I can tell you it’s been very flat.

Dean Wehrli:

That’s good to hear.

Doug Bauer:

Flat to 2%.

Dean Wehrli:

Flat to 2%. That’s a world better than it was a couple years ago and even more recent than that. So that’s good trend. Two more. Let’s just do this. I’m going to ask you sort of a negative and positive. Let’s start the negative so we end on the positive, but what worries you more than anything else about let’s say in the next year or so?

Doug Bauer:

What worries me over the next 12 to 18 months, 12 months is this coming election and the potential risk of that being a big distraction for the consumer, which we’ve actually factored into our business plan. And then geopolitical risk. I’m a very interested party of what’s going on in the Middle East and Europe and so forth, and none of us control that. But could that cause some significant derailment? Not uncommon, but like a pandemic or some other risk that happens.

I’m just cognizant of it, but on the plus side, I will say my outlook for housing, and we’ve talked about it with where rates are, and then there’s all these other impediments that are in front of housing, the regulatory environment of land and the scarcity of land. I mean, labor isn’t getting any younger, but I think that the homebuilders, the public homebuilders have a very good runway for the next three to five years.

For Tri Pointe in particular, and I mentioned this at the summit, our runway at our price point and our focus on product execution and this premium brand strategy all the way through the customer experience really puts us in a lane a lot of times to ourselves, which I think bodes well for our growth as well. And lastly, for the financial community that may be listening to this podcast, our focus, and I think I mentioned this at the summit, growing book value per share, 10 to 15% a year.

We’ve, since 2015, compounded annually. It’s gone up 15% per year. And I know there’s been a lot of talk about multiples changing for builders and this and that. We’re a small cap home builder. We do about 4 billion in revenues and over 6,000 deliveries. But if I told you, you could own a stock and its book value grows 10 to 15% a year, I hope you don’t want to buy it.

Dean Wehrli:

I love that 4 billion is just… We’re not that much. Very modest. Just 4 billion. That’s all. Well, Doug, I really appreciate you coming on and joining us with the podcast.

Doug Bauer:

Well, thank you. It was great. Always love talking to you and absolutely love the Burns organization. You guys are so vital to us in everything we do, so really appreciate everything.

Dean Wehrli:

Two commercials in one podcast. Completely unsolicited. Thank you so much. I appreciate it.

Doug Bauer:

They didn’t even pay me.

Dean Wehrli:

No, we did not. We did not. Thank you too for listening, listeners. This is Dean Wehrli for the New Home Insights podcast. We’ll hopefully see you again in a couple of weeks.

 

Want to Subscribe to the New Home Insights Podcast?

The New Home Insights Podcast is available on all major podcast platforms. Click any of the platforms below to subscribe.

Contact us to maximize your opportunities in the housing market.

If you have any questions about our services or would like to speak to one of our experts about how we can help your business, please contact Client Relations at clientservices@jbrec.com.