KB Home (KBH) 2017 Q3 法說會逐字稿

Good afternoon. My name is Daryn, and I'll be your conference operator today. I would like to welcome everyone to the KB Home 2017 Third Quarter Earnings Conference Call. (Operator Instructions) This conference call is being recorded and will be available for replay at the company's website, kbhome.come through October 5.

Now I would like to turn the call over to Jill Peters, Senior Vice President, Investor Relations. Jill, you may begin.

Thank you, Daryn. Good afternoon, everyone, and thank you for joining us today to review our third quarter results. With me are Jeff Mezger, Chairman, President and Chief Executive Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Corporate Treasurer.

Before we begin, let me note that during this call, items will be discussed that are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future results, and the company does not undertake any obligation to update them. Due to factors outside of the company's control, including those detailed in today's press release and in our filings with the Securities and Exchange Commission, actual results could be materially different from those stated or implied in the forward-looking statements. In addition, a reconciliation of the non-GAAP measures referenced during today's discussion to their most directly comparable GAAP measures can be found in today's press release and/or on the Investor Relations page of our website at kbhome.com.

And with that, I will turn the call over to Jeff Mezger.

Thank you, Jill, and good afternoon, everyone. I look forward to sharing with you the details of our strong results for the third quarter, along with how well we are positioned for continued success in the future. But first, I want to touch on a personal matter that occurred at my residence 2 weekends ago that has made the news and which no doubt has come to your attention. I regretted the incident immediately and I have apologized for it sincerely. The Board of Directors has already taken action, as the company has disclosed, and I and the KB Home team are fully focused on leading this company into the future.

Now let's talk about our results for the third quarter. With 25% growth in total revenues and a significant improvement in our operating margin, we reported earnings per share of $0.51. We made considerable progress on many fronts during the quarter and I will highlight a few key areas. We grew housing revenues to over $1.1 billion as we continue to benefit from our growing scale in California and a larger percentage of our deliveries coming from our highest ASP region. While our overall average selling price in the quarter was up 12% to roughly $411,000, we continue to offer product in locations that appeal to first-time buyers who accounted for 53% of our delivery.

One of the key components of the returns focused growth plan that we shared with you at our investor conference last fall was to increase our operating margin as we grow our scale. In the third quarter, we achieved a significant milestone, crossing over to a higher gross margin on a year-over-year basis, excluding inventory-related charges, 1 quarter earlier than we expected. The collective effect of taking price where we can; containing costs; opening higher-margin communities, while building through legacy assets; and growing our scale is a sustainably higher gross margin. This increase in gross margin, together with a record-low third quarter SG&A ratio of 9.6%, contributed to a 140-basis-point improvement, excluding inventory-related charges, in our operating margin. The combination of both significant revenue growth and operating margin improvement drove pretax income to $79 million, an increase of 48%.

As we have talked about over the past 6 months, our community strategy has been to maintain our sales price -- pace and capture more price and we are again successful in accomplishing this objective in the third quarter. We increased net order value by 15% to $1.1 billion on a 4% increase in net orders, benefiting from our strategy as well as the mix shift towards the West Coast. Our order pace per community increased 4% in the third quarter to 3.7% per month.

For broader perspective, if you look at this metric on a 2-year basis and compare our current absorption rate to the third quarter of 2015, we are up over 30%, resulting in a substantial improvement in asset efficiency. We believe the key driver of our industry-leading absorption rate is in delivering a compelling value to home buyers through a differentiated Built To Order approach, emphasizing affordable choice and personalization in some of the strongest housing markets in the country.

On a regional basis, our West Coast region produced a 26% increase in net order value on a 10% increase in net orders, an impressive result given how strong our net orders and net order value were in California in the third quarter last year. Market conditions remain favorable, both along the coast as well as the inland area. The Bay Area, in particular, continued to generate excellent results. With a growing community count and continued investment in the region, the West Coast is poised to become an even stronger growth vehicle for us going forward. Our Southwest region produced a 37% increase in net order value on a 26% net order comparison, led by continued outperformance in Las Vegas. Inspirada, one of our most valuable assets, consistently produces among the highest net order rates per community nationwide.

Net orders were down in the Central region, due in large part to the disruption to our operations at the end of August from Hurricane Harvey. We estimate that our results were impacted in the third quarter in a range of 60 to 80 net orders, absent which, net orders in the region would have been essentially flat. Central is our largest region in terms of units and we are looking forward to augmenting our Texas business with the restart of our Dallas operations, which has 4 new communities opening over the next few months and is expected to be a meaningful contributor to our results starting in the second half of 2018.

Wrapping up the regional updates, although net orders were down in the Southeast region, our absorption per community continued its favorable trend. In particular, Jacksonville and Orlando once again produced positive net order comparison and, with the new communities we are targeting to open, we expect the Southeast region to contribute to our revenue growth in 2018 as well.

As a result of the meaningful net order value in the third quarter, we increased our ending backlog value to $2.1 billion, which has us solidly positioned to achieve our revenue target this year and keeps us on track for continued momentum entering next year.

Before I address the estimated impact to our Central and Southeast regions from Hurricanes Harvey and Irma, let me first say that we are extremely grateful that our teams in the affected divisions are safe and we appreciate the discipline with which they executed our preparedness plan to secure our communities before the hurricanes hit.

In Texas, although the hurricane set a record for rainfall with nearly 52 inches of rain, we fared well. We did not experience flooding in any of our homes, the result of building in the newer areas of Houston, which have more advanced drainage system requirements, and we also experienced very little wind and rain damage. We did miss approximately 50 deliveries in Texas due to Hurricane Harvey, but within a week of the hurricane, we resumed deliveries and starts and our sales offices reopened, with traffic and net order activity starting to recover by early September. Hurricane Irma hit Florida the first week of our fourth quarter and our divisions remained closed for about a week. As with Harvey, we did not experience flooding in our homes and had minimal damage. We have resumed deliveries and starts, and are open for sales in all communities within the region.

Both Texas and Florida are now in recovery mode, however, it is difficult to project when the markets affected by the hurricanes will return to normal. Our recent trends have been positive with net order results improving sequentially each week since Labor Day. Having said this, the shortfall in net orders that we experienced in September will more than likely result in a slightly negative net order comparable for our fourth quarter. Our best estimate at this time is that overall net orders will decline in a mid-single-digit range. In absolute numbers, this shortfall equates to between 75 and 125 net orders, but at this level, we would still expect to generate a positive net order value comparison.

We do view this as a short-term disruption and expect demand to increase as a result of buyers looking to purchase a home in areas that were less affected by the hurricanes or the demand created by the job growth tied to the rebuilding efforts. Despite the near-term net order impact, we expect to be well positioned entering 2018 with a robust backlog that supports our revenue expectation.

Overall housing market conditions remain stable and positive, with strong employment, wage growth and healthy demand from first-time buyers driving overall demand for new homes. Resell inventory remains constrained, averaging 4.2 months across the country, and far below that level, in most of the markets that we build in, fueling a deficit of existing home supply. With this market dynamic ongoing, we remain focused on maintaining our healthy pace and increasing overall price where appropriate across the broad range of opportunities in our build-to-order model, including base price, lot premiums, structural options and Studio option.

We are confident in our ability to deliver on our objectives for 2017. With double-digit growth in revenues, meaningful gains in profitability, higher returns and a lower leverage ratio. For the last 12 months, we have increased our cash from operations, reduced our debt and expanded our stockholders' equity by almost $160 million and, with our returns-focused growth plan, we expect these trends to continue. We also believe, given our backlog, that we can sustain the year-over-year improvement in gross margin for the remainder of 2017 and going into 2018.

Another positive for our future is our mortgage joint venture, KBHS, which is making solid progress with a capture rate that is improving, allowing for more predictability in deliveries and a higher income stream. We are committed to growing our community count and are rotating in to a more productive asset base as we continue to build through legacy communities while opening new communities at higher margin. We recognize the need to open more communities by the second half of 2018 in order to sustain the double-digit revenue growth we have produced over the past 5 years, and we have the teams and plans in place and the capital available to achieve this goal.

A year ago at our investor conference in October, we expected to increase our revenues year-over-year by about 11%. Today, our expectations reflect 20% growth to about $4.3 billion. And as we look forward to the start of a new fiscal year, with our anticipated year-end backlog, we have set the midpoint of our revenue range for 2018 at $4.7 billion, just shy of our 3-year 2019 target of $5 billion.

We're excited about the consistency and strength of our business and, in addition to a larger revenue base, we anticipate that 2018 will mark another year of operating margin expansion, continued monetization of the deferred tax asset, as we drive higher pretax income, and further gains in asset efficiency.

With that, I'll now turn the call over to Jeff for the financial review. Jeff?

Thank you, Jeff, and good afternoon, everyone.

As Jeff mentioned, we are pleased with the third quarter performance and the progress we continue to make on our 3-year returns-focused growth plan. I will now highlight some of the measurable improvements we generated across our key financial metrics in the third quarter and provide details on our current outlook for the fourth quarter as well as some high-level commentary relating to 2018 housing revenues and community count.

In the third quarter, housing revenues grew 25% from a year ago to over $1.1 billion, reflecting increases of 11% in homes delivered and 12% in the average selling price of those homes. The significant growth in our housing revenues was largely driven by 19% higher beginning backlog value in the current quarter as compared to the same quarter of 2016 in combination with solid operational execution. Housing revenues were up in 3 of our 4 homebuilding regions, with year-over-year increases ranging from 9% in the Central region to 47% in the West Coast region. Housing revenues in the Southeast region declined due to the wind-down of our Metro Washington, D.C. operation, which we announced in the second quarter of last year.

We ended the quarter with the backlog value of $2.1 billion, up 14% from the year-earlier period. Based on this strong backlog value, we believe we are well positioned for continued top line growth in the fourth quarter and into 2018.

We project fourth quarter housing revenues of approximately $1.3 billion to $1.4 billion and continue to expect full year housing revenues of approximately $4.3 billion, the midpoint of our previous guidance.

In the third quarter, the overall average selling price of homes delivered increased to approximately $411,000, driven by increases in our West Coast, Central and Southwest region, and a higher proportion of deliveries in the current year quarter from the West Coast region.

Reflecting the strength of our West Coast region's third quarter net order value and expected regional fourth quarter backlog conversion rate, we are projecting an average selling price for the 2017 fourth quarter in the range of $425,000 to $430,000, a year-over-year increase of about 10%. This is the result of a changing mix of communities within our region, an expected proportional mix shift towards our West Coast region and the successful implementation of targeted community and plan-specific price increases.

Homebuilding operating income in the current quarter increased 49% from the year-earlier quarter to $76.7 million, including inventory-related charges of $8.1 million compared to $3.1 million in the prior year period. Excluding inventory-related charges from both periods, our third quarter homebuilding operating income margin improved 140 basis points to 7.4%. We expect to generate another strong sequential and year-over-year improvement in operating margin for the fourth quarter. At the midpoints of our gross margin and SG&A expense ratio guidance ranges, we expect our fourth quarter operating income margin to be approximately 8.9%. Our housing gross profit margin was 16.9% for the third quarter, excluding 70 basis points of inventory-related charges. This is an improvement as compared to both our prior guidance and the year-earlier period. Excluding inventory-related charges and the amortization of previously capitalized interest, our adjusted housing gross profit margin was 21.7%, up 50 basis points compared to the same period of 2016.

Since the beginning of this year, we have successfully generated sequential increases in our gross profit margin to improve leverage on fixed costs from higher quarterly housing revenues; deliveries from recently opened, higher-margin communities; a favorable regional mix of deliveries; community-specific gross margin improvement action plan; and continued targeted balancing of absorption pace and pricing in our community. Due to these factors, we expect to generate a meaningful increase in our gross margin for the fourth quarter.

Assuming no inventory-related charges, we expect our fourth quarter housing gross profit margin to be in the range of 18% to 18.3%, representing at the midpoint an increase of 35 basis points as compared to our previous guidance and a year-over-year improvement of 115 basis points.

Our selling, general and administrative expense ratio of 9.6% for the quarter improved 120 basis points from the year-earlier quarter and set a new third quarter record low for us. This significant improvement reflects our ongoing cost control initiatives and a favorable leverage impact from higher housing revenues. We currently anticipate that our fourth quarter SG&A expense ratio will be in the range of 9.2% to 9.4%.

Income tax expense for the quarter of $29 million, which is a predominantly noncash charge against earnings due to our deferred tax asset, represented an effective tax rate of 36.6% and incurred a favorable impact of $2.6 million from federal energy tax credit. We expect our effective tax rate for the fourth quarter of 2017 to be approximately 39%.

Turning now to community count. Our third quarter average of 234 was essentially even with the same quarter of 2016. Higher average community counts when compared to the year-earlier quarter in our West Coast, Southwest and Central regions are entirely offset by a decrease in our Southeast region.

During the third quarter, we invested $417 million in land, land development and fees, with $213 million of that amount representing new land acquisition.

We anticipate that our fourth quarter overall average community count will be approximately flat as compared to the corresponding prior year period.

As Jeff discussed earlier, we remain focused on growing our community count and driving top line revenue expansion as key components of our core business strategy and returns-focused growth plan. While we currently project our 2018 average community count to be flat to slightly down for the full year, we expect we will have more open selling communities by the end of 2019 -- '18, excuse me, as compared to year-end 2017. Combined with our anticipated year-end backlog, we believe the number and mix of our open selling communities in 2018 will generate full year housing revenues in the range of $4.5 billion to $4.9 billion.

Moving on to the balance sheet. We have made meaningful progress over the past year on our goal of improving asset efficiency. As previously announced, during the quarter, we were able to successfully increase the commitment level under our unsecured revolving credit facility to $500 million along with an extension of its maturity to July 2021.

We ended the third quarter with total liquidity of nearly $1 billion, including $494 million of cash and $467 million available under our upsized revolver.

In the fourth quarter since August 31, 2016, we have increased our cash balance by $159 million, reduced debt by $153 million and generated $158 million of incremental stockholders equity, resulting in a 580-basis-point improvement in our net debt-to-capital ratio to 52.2%. At year end, we believe our net leverage ratio will improve to around 50%, the high end of our stated 40% to 50% midterm goal.

In early August, S&P raised our corporate credit rating to B+ while maintaining a positive outlook.

Subsequent to quarter end, we repaid the remaining $165 million of our 9.1% senior notes on a maturity date in mid-September. Combined with the $100 million reduction in the first quarter, the total $265 million elimination of our most expensive debt will result in an annualized reduction in interest incurred of approximately $24 million.

In summary, we delivered another quarter of strong financial performance, particularly the 25% year-over-year increase in total revenues; the 140-basis-point improvement in homebuilding operating income margin, excluding inventory-related charges; and growth in diluted earnings per share to $0.51. We made measurable progress across our key financial metrics in the quarter as we continue to execute on our road map to our returns-focused growth.

Due to the successful community-level management of pacing price during the quarter and continued efforts to contain construction cost increases, we generated a 15% year-over-year increase in our net order values supporting future revenue growth and have increased our midpoint fourth quarter housing gross profit margin expectation by 35 basis points.

For the full year, based on our solid third quarter performance and assuming midpoints of our forecasted guidance for the fourth quarter, we expect to generate a 20% year-over-year increase in housing revenues; a full percentage point of incremental operating margin, excluding the impact of any inventory-related charges; and over 300 basis points of improvement in return on equity.

Finally, we would like to announce an investor conference call on November 7 to provide an update on our progress towards achievement of our 3-year returns-focused growth plan objective as well as additional guidance for 2018. Further details relating to call logistics will be communicated next month.

We will now take your questions. Daryn, can you please open the line?

(Operator Instructions) Our first question comes from Alan Ratner of Zelman and Associates.

You guys have had, it seems, like a lot of success balancing the price and volume mix, and I was curious if you can maybe give a little bit more color on exactly what type of pricing power do you have. If you look across your market, we see a huge increase in ASP. You mentioned a lot of that is mix or some of that is mix. I was curious if you could just kind of talk a little bit about what the apples-to-apples price increases you are seeing in some of your communities and how that compares to what you're witnessing on the cost side.

Alan, as you know, we run pay through communities pretty quickly, opening, closing, turning them over year to year. So it's very difficult to do an apples-to-apples on price because they're not identical products in an identical location. What we shared on the call that we had a mix shift to California, which is also where -- within the quarter we saw the strongest pricing power, the combination of being able to take price, at the same time your mix rotates the higher ASP. If you look at our ASPs in the other regions, they really didn't moved up much more than an incremental increase. And I would say that we are successful in raising price above any direct cost increases that we had, and that's in part why our margins were able to pick up a little bit. There's still cost pressure, but we were able to cover it with price.

So second question, on the community count, it sounds like you guys are definitely focused on getting that moving in the right direction there, and it's been flat for a while. Just curious if you can give a little bit more color on why you're comfortable guiding for that to inflect positively in the second half of '18. Because if I look at your land spend, it's been holding pretty steady. Your lot count has been steady, maybe declining a little bit. So where do you see that growth coming from? And do you need to see the lot count move higher from hereon to that point in order to hit to those targets?

In part, Alan, the increase in community count is tied to our current tracking schedules while we have control, when we would get them open, when we book for sales, and we think we're at a trajectory to achieve the increase in the second half that Jeff referred to. But when you look at our land spend and the numbers can move quite a bit between land acquisition and development and fees. We've shared before in California, as an example, you pay a lot of fees when you start grading. So it looks like it's heavy dollars invested into land acquisition and development when it's really the fees you're paying per unit upfront. So from quarter-to-quarter, the number's been fairly static. It's moved a little bit between development and acquisition. And we've been slightly ticking it up over to the last couple years as the quarters go by, keeping in balance our returns-focused growth. But we have plans in place to achieve our community count growth next year.

Our next question comes from Stephen East of Wells Fargo.

Jeff, maybe I can just follow on that a little bit. With the hurricanes, everybody's talking about how you probably have some labor shortages out there, et cetera. Do you see any of that, one, on your land development as you look into next year? And two, you all have been pretty optimistic on your gross margin and you've been beating it. But as you look into '18, what are you all expecting? What are you seeing or hearing right now on the ground with labor cost and supplies moving forward in lumber and any other raw materials that might have some shortages there?

Stephen, relative to the hurricanes, you're asking a good question. And it's very hard to project in that we know there's going to be pressure on labor and materials in Florida and Houston. We don't know to what degree, in that there isn't a lot of funding yet to start repairs. What we've been doing as a company is procuring the materials for our deliveries we've already procured into the second quarter, and it's a benefit of being in a Built To Order model and knowing your starts and you have visibility in your production. So we're going to our subs and locking them down. We're going to our suppliers and locking them down now so we can stay ahead of it. And if there are no more hurricanes, I think it won't be as significant an impact as you see in the media. When we reflect back, when Florida was hammered with hurricane back in '05, there was a succession of hurricanes where homes were already exposed and damaged and here came the next one and damaged things even further. And right now, we're not seeing anywhere near the level of damage that we saw back in '05 in Central Florida. So we're cautious about it. We're concerned. We're taking the steps we can to manage through it, and we keep an eye on it. But all that -- all those assumptions are baked into the guidance that we gave for next year. Jeff, do you want to add anything?

No.

Okay. All right, that's really helpful there. And then you all have been talking about you're moving toward fewer options at your entry-level, and you seem to be having some success with that. I guess, a couple of questions there, Jeff. Are we -- one, how far have you rolled that out? And how much further do you want to roll it out? And is that playing any meaningful part in your gross margin beat that you've been seeing?

It's mentioned in process, Steve, and you've picked up on it, I think, after our comments on the last quarter call. It was a classic example where you always add things and you never take things away. And our system was gummed up with a bunch of SKUs on items that the customer wasn't taking but we're still bidding out and offering and keeping in the system. And company-wide, we eliminated about half the SKUs that were offered around the system. And in this process, we -- you take a whack like that and you lower the SKUs that are available. As things settled down, our revenue per sale didn't change, though we know we did the right thing. We got rid of some bloat in the system without affecting our sales. And we'll go back in and do another around and see if we can refine it more. All I can share is, anecdotally, if you're bidding half the options you were before and the subcontractors and suppliers are only having to price half of what they were before, there's some efficiencies in the system. But I don't know that we've really -- we can say yet that it drove any of the gross margin improvement.

Our next question comes from Michael Rehaut of JP Morgan.

Just had a couple of questions here. I appreciate as well the commentary on the hurricanes and a lot of I guess, difficulty, kind of ascertaining at this point what some of the impacts might be, but Jeff, you mentioned an interesting thing, if I heard it right that you're trying to lock down with certain trades at a minimum to guarantee labor. I just want to make sure I heard that right, and I guess, the question around that is, is this something where -- it's our understanding that there is a portion of labor that does move around a little bit. I'm just trying to get a sense over the next quarter and even into the next year if the degree to which you're able to kind of get your subcontractors, so to speak, locked in to a degree and how -- the degree to which that's possible, I suppose.

Michael, split the cost between labor and material. More specifically, it's lumber, sheet rock, shingles, all those things that we know will be in short supply as the rebuilding goes on. That's all controlled now. Labor, we're working with our contractors, especially in the cities where we have a lot of scale. We call ourselves a builder of choice because they like the continuity it starts in the business, and we're working with them and raising our commitment to them on how many starts we'll give them and getting visibility deeper into next year on the labor side. But we're not naïve. If FEMA starts writing checks, are we're paying a framer $5 and FEMA funds something and they're offered $10, you're going to be in a chase for that contractor. So we're doing what we can to get more visibility, commit more starts to people on a bigger scale and certainly locking down the material, and then we'll just deal with it as it comes.

Okay, great. No, I appreciate that. I guess, also SG&A -- I guess this is more for, perhaps, Jeff K., Kaminski. I believe you have the SG&A for next quarter flat to up a little bit year-over-year, flat to up 20 bps, which is a good contrast to the first 3 quarters. And I think you came in about 50 bps or more better than your guidance for 3Q. So is there just kind of a continued level of conservatism here, Jeff, that you're trying to bake into that number? Or is there something else going on that kind of gives you the better visibility that -- either post-hurricane or whatnot, I'm not sure that -- we shouldn't look at that number as well as being perhaps a little conservative?

I could not comment on that, Mike. First of all, I'd like to say I appreciate the recognition of how well we're doing in SG&A. We're very proud of it. We've had now 4 consecutive quarters of new record-low SG&A, and that dream started with the fourth quarter last year, so we're getting through some pretty tough comp. And fourth quarter 2016, frankly, will be hard to beat. We'd like to beat it. And as you pointed out, the lower end of our range has this spot at the same level. Our fourth quarter forecast right now assumes about a 6% incremental increase in SG&A as a percent of incremental housing revenues plus $1 million or $2 million to cover other potential fixed-cost increases. We don't think it's overly conservative. We think it's about where the business should be operating. There's potential upside. If our revenues are higher, then our midpoint, of course, and things like that, but you never know quarter-over-quarter. I mean, there's always one-offs, there is always one-off negatives and one-off positives due to various reserve and equivalent adjustments, et cetera. And it's pretty sensitive. I mean, $1 million or $2 million moves our ratio 10 or 20 basis points. So we think we have it pegged about right. We've been on a really nice streak. We're starting to anniversary some really tough comps. And last year in the fourth quarter, everything went the right way for us. So if we reached that level, we'd be really happy.

Our next question comes from Nishu Sood of Deutsche Bank.

So thinking about the closings and the revenues in 4Q, I think taking the revenue and the ASP, it works out to about a mid-3,100 range in terms of closings roughly for 4Q. Are you anticipating in that number some sort of delays from the hurricane events? And I was just wondering if you could kind of specify that for us?

Nishu, any delays are already baked into that number, so we've taken that into consideration. And to me, one of the things that I can finally reinforce as a real benefit of our business model, if you think about it, where your deliveries are sold and then started, we have the homes under construction and already sold that we need for our fourth quarter. And if we lost sales for a month or 2 weeks, 3 weeks, whatever the speedbump is here in sales, it doesn't affect our short-term delivery cycle because they're already sold. So in Houston, we lost some deliveries in the third quarter, but what -- it's okay. We have to replant a tree that blew over, we need to get a reaffirmed appraisal that the home is complete, and you close it. So you lose a week or 2. It's not you lose 3 weeks of sales and, therefore, you just defer your deliveries because your sales shut down. So actually, what we're working on is the visibility we now have. The sales shortfall from the hurricane will actually play out end of Q1 and into Q2, and we have 5 months to manage through that now and figure how fast the build times or how do we cover the sales shortfall. But in Houston and in Florida, the contractors went right back to work as soon as they could because they also were shut down for a few weeks and lost their income during the hurricanes. So we're actually out of the gates saw very high productivity in both states where subs wanted to get right back to work. We'll see how it plays out over the quarter, but it's baked into our guidance.

Got it, got it. So yes, if I'm hearing that -- if I'm understanding that correctly, it sounds like the impact on delivery delays won't be that extensive by the time we get to the end of 4Q. Yes, that definitely does sound encouraging. The other question I wanted to ask was the average selling prices have risen pretty nicely this year on mix from $360,000s to kind of high $420,000s. It sounds like it's going to end up this year. How should we based upon the mix of communities that you have opening? How should we expect that to trend through -- into and through '18?

Nishu, I think we'll pull back on that and give you a bit more detail in November during the call. Right now, we're providing high-level guidance on the revenues to correspond with what we think is happening with community count. And some of the more details, I think, guidance points, we'll hold off for now.

Our next question comes from Stephen Kim of Evercore ISI.

This is actually Chris Shook on for Steve. I was just wondering whether we could hone in on the California market. So obviously, you just highlighted the Bay Area, but as demand continues to grow in more inland areas, are you seeing the same ability to achieve similar pricing power in those markets?

On a relative basis, yes. But when you're -- you get 5% of price on a $500,000 house it's different than a 5% of price on $1 million house in the Bay Area, Chris. Right now, there's a very strong market in the Bay Area. There's a shortage of product on the market. Prices are still moving up. And as they move up, it moves buyers a little more inland because there's a strong demand to be a homeowner, and they'll go where they can afford to buy a home. So we saw price in both Northern and Southern Cal in the inland areas in the fourth quarter.

Okay. And I guess, sort of in the more affordable inland areas, are you kind of seeing an affordability threshold emerge? Or do you still think price has further to go?

Well, not at this time. If you look at our -- we're able to take price while holding our absorption pace, and that's why we keep talking about this balance. If we saw that our sales paces were slowing, we would do something to hold to our sales pace because we need to turn the inventory. But right now, with the shortage of inventory and all the positive things I mentioned, first-time buyers coming out, wage growth, employment growth, all these good things are going on, and there's more demand out there right now than there is supply. So we're being a little opportunistic. And if the demand were to slow up a bit, we'll pivot and move in a different direction. But right now, we're holding the course on our current strategy.

And then in relation to the delayed homes in Houston, are you able to tell us whether those homes had margins in line above or beneath the company average?

Yes. We have strong margins in Houston.

Next question comes from Jamie McCanless of Wedbush Securities.

Just wanted to ask really quickly and make sure I've got the math right. Did you guys say you all lost in the quarter per week in Houston on 30 communities?

Are you talking about the third quarter hit?

Yes. Yes, yes.

Yes. It was more than Houston. It also impacted Austin and San Antonio to a lesser degree. It was [60] -- 60 days. The order is between the 3.

Yes, got it. Between the 3, okay. And then the second question I had, just so we get a sense of context for Florida, how many homes did you guys deliver there last year? And how many have you already closed on this year? Just trying to get a sense of how much potential is still down there if it's tough to get the contract in and get the subs in.

Right. Yes. What we'd like to look at -- I mean, as far as exposure to the company and exposure to the financials, Florida represents about 9% of the company's total housing revenues, and that's how we view it. So it's not 0, obviously. It's not overly significant. I think one important thing to remember about our Florida business is we have a disproportionate share of reactivated communities in Florida. So the revenues that we do generate in Florida are generally below company average margins because of the -- just the mix of business between core communities and reactivated communities. So again, not to deemphasize it or understate it, but it's 9%, and of the 9%, it's one of our less profitable sales and revenues in the company.

Our next question comes from Bob Wetenhall of RBC Capital Markets.

This is actually Edson Flores on for Bob. The first one, after major storms like Harvey and Irma, the demand for housing is much more immediate, much more urgent. So I was wondering, how does this factor into your building strategy? Are there any thoughts on increasing the construction of spec homes?

Not at this time. We're -- as I shared in the comments, we're back open for sale. In fact, we have several grand openings on the horizon here in Houston. And we'll continue to sell homes in our Built To Order approach and let them personalize them, and we'll start them in the Q. So to us the, I'd say, return to normal, it's more the infrastructures, the utility companies, people settle back down and visiting our communities again. We'll continue to operate within our -- the guidelines of our business model.

Got it. And then just a question on cycle time. Can you comment on the impact that the recent hurricanes had on cycle times in the market that got hit? I know that in the past you talked about somewhere between 5.5 and 6 months as being a normal cycle time depending on the city. Just curious if you anticipate increase in cycle times from contract to close?

And you just qualified it at the end. Our cycle time of 5.5 to 6 months is from contract to close. In Texas, if you use Houston as an example, it's one of our fastest build times cities in the country. And we probably build our homes there in 3.5 months, 1/3 through the start process. And I would say, right now, it's too early to call whether cycle times have been impacted because as soon as the roads cleared and people can get back to the communities, all of our contractors went right back to work.

Our next question comes from Mike Dahl with Barclays.

Jeff, I wanted to go back to a question that Steve East asked about community count and how to think about it as it relates to potential for development delays. And maybe could you share with us how many openings are scheduled in the storm-impacted regions for 2018 and whether or not there's been a shift in that number since prior to the storm.

Right, Mike. Like we said earlier, I don't -- we're not going to get into too much detail in 2018 at this point. We're still very focused on closing out what's been so far a very strong year for us, and we'll continue to stay focused on the fourth quarter. But with that said, probably the largest impact we see short term, as far as community openings go is in the Houston market, where we have 6 planned openings for the fourth quarter. Subsequent for the storm hitting, we've reviewed with our local operations, we've reviewed the status of all those communities, and we believe 5 of the 6 are very secure as far as opening in the quarter, and we believe we can actually get all 6 still opened in the fourth quarter. Now those, of course, were all going through various phases of timing and development. One, we just announced a few days ago that it opened. So we feel pretty good on the short term and as far as being ready for spring selling season. Florida as far as community openings there go, our community count has been ticking down in the Southeast as we've been addressing a number of improvements in our operations, frankly, and we have more openings scheduled for next year, but we don't think they'll be impacted tremendously as we move through the year. But it's still pretty early, and there's a lot to comment and a lot to play out in relation to the recovery of the storms, but we don't think there's anything significant. And we've contemplated all of that in the guidance -- the high-level guidance that we've provided, really, in the community count earlier during the call.

Okay, understood. I know you just said that you didn't want to get into too many details on '18. But just thinking about SG&A kind of directionally, you did mention you're starting to run up against more difficult comps, and truly, the revenue growth has been really helpful in terms of helping delever the SG&A. As you pivot towards some point in -- through balance of 2018 towards growth in community count, how should we think just high level about ability to further lever SG&A as we get into that environment?

Right. I think I'll respond to that a little higher up and talk more about operating margin. We've made really large strides in operating margin since our investor conference last year in the fall, and we're pretty pleased with how we've progressed along what I'd say the line towards the achievement of our 3-year goals. And for 2019, just to restate it, we'd like to be between 8% and 9% operating margins and believe '17 puts us clearly on that path. And we'll comment more on '18 at the call, but we'll continue to focus on operating margin. This year, it was more skewed, I think, towards SG&A improvement. And we'll see a little bit of a margin improvement, and we'll see for the future years. But we're still committed to the goals. The company is still focused on hitting those 3-year targets. And we'll use both leverage, both on the gross margin side and the SG&A side, in order to achieve it.

Our next question comes from Susan Maklari of Crédit Suisse.

I guess, first off, you guys have talked about affordability and your ability to raise prices even in areas like California. Are you seeing, though, any shift in terms of the sort of options or the things that people are selecting in your Design Studios in an effort to sort of maybe offset some of that pricing power that you're putting through?

Susan, we really haven't seen that. I have shared over the last few years the buyer's been more of a value buyer, where they're putting it into a different room configuration, better -- a bigger kitchen with island options and things like that. It's more functional features versus the sizzle features, like 6-level granite instead of 1 or jacuzzi tubs or things like that. And it tells me the buyer that we're seeing today intends to live in the home, stay in the home. It's an investment, but it's a longer-term horizon for them, and I'd say that's been pretty constant over the last 3 years. So if anything, if there's an affordability, it's the other side of our business model. We will typically offer more floor plans than our competitor in a community. So if the buyer can't afford a 2,400 square foot home, they can't qualify -- with the features they want, if they can't qualify for that but they like the area, want a new home, they'll trade down to the 2,200-foot home and still buy a home. And that's the type of homebuyer that we're seeing today. "Give me the biggest home I can afford that has these features in it."

Okay, perfect. And then just in terms of the reactivated communities, can you give us sort of an update on where you stand with those and maybe how that compares to where you expect it to be?

Right. If you look at the revenue side, it's held very constant. I think in the quarter, we're about 12% in total revenues came from reactivated communities. We're still continuing on the game plan we've been as far as activations. And I think very importantly, we've activated so many communities now to this point that now we're in a phase of working through the initially activated section and getting to Phase 2, Phase 3, Phase 4 as we worked with the rest of the community. So we're still remaining very aggressive on it, still a big target for us, it's still a large part of our asset efficiency program and being able to recycle those dollars into a productive asset. And it's been a large part, frankly, of the very nice cash flow that we've been generating as a business and allowing us a lot of flexibility to do -- to basically both grow the business through additional investment as well as to delever the business. So the net leverage ratio coming down as much as it has this quarter has been aided by that. And it's just basically right according to the plan that we set out, and we're seeing the results that we expected coming off that initiative.

Our next question comes from Jack Micenko with SIG.

This is actually Soham on for Jack. So my first question was on SG&A leverage. And it looks like your G&A line, you were at roughly 3.5% growth as a percentage of sequential revenue growth when that's historically been in the 5% to 6% range. So just wondering what's driving that this quarter, and if in your view, the mix shift to West now with the higher ASPs is having an even more pronounced impact on leverage than you were previously expecting.

Right. Yes, there's been -- there were several factors impacting it this quarter. The mix shift towards the West Coast is one of those factors. We do have a lower variable cost percentage in the West Coast, mainly due to the higher ASPs and things like lower percentage of commissions and things like that. So that's definitely helped. The continued cost containment that we've been really putting in place across the company, in addition to our expanding revenues, has been probably the #1 driver on that. And we've also seen -- for this particular quarter, relative to guidance, we were slightly above the midpoint of our revenue guidance, so the additional leverage helped out. In addition -- in the third quarter, like all quarters, there were a few unusual items both positive and negative. And we had a small net positive impact this quarter. Sometimes it goes the other way, so that was also a contributing factor.

Okay, got it. And then on the pacing price dynamic, looks like majority of the order this quarter came from absorptions. And you've previously talked about targeting sort of that 4x per month sort of range, but you're sort of tracking slightly below that for the year now. And with pricing power, it appears to be -- which appears to be pretty strong, does that still remain a target for you guys? Or are you looking to lower the threshold in order to generate a higher return?

It's a balance. And it's not that the 3.7x is an underperformer, there's also a seasonal cycle. If we're going to average 4x for the year, you'll typically average 4.3x, 4.5x in the second quarter, then it dips under the 4x in the third quarter, and it dips a little lower in the fourth quarter. So we were actually very close to our targets. And as long as we can hit those targets, we'll go for price. If we drop below those targets, we'll do other things. And it's not just your margin it's your inventory turns, so it's that delicate balance between the 2.

Our next question comes from Carl Reichardt of BTIG.

Jeff, I've gotten some mixed commentary from your peers on this, but I'm curious, what you think about your potential for labor drain away from approximate markets to Houston, in particular, so you have kind of fairly good-sized operations Austin, San Antonio, starting up Dallas. Is your expectation that once the FEMA and insurance numbers come through that you might see some drain and that those markets could show some slowdown in cycle times? Or are you not stating that?

They possibly could. Our speculation on -- again, I was -- referenced them before, the hurricanes back -- that ran through Central Florida, Fort Myers up to Orlando in '05, a lot of the contractors actually came from the Midwest. And there is a component of our trade base that's nomadic, and they'll go where the highest dollar is. And then there's a component that stays in the city, values the relationships and commits to the work and enjoys the partnerships. So it's a mixed bag, and we're very watchful of it right now. So we'll see how it plays out.

Okay, fair enough. And then, again, I know you don't want to talk too much about '18, but either Jeff, whatever your community count at '18 ends up being, are you expecting any kind of significant shift in the customer mix, ex geography, so a slightly more aggressive move toward entry level? I think 53% was your delivery count for first-time buyers this quarter, or is that likely to stay roughly what it has been?

Yes. Carl, it's kind of interesting. Jeff and I were talking about it before the call. There's very few of our communities that don't attract first-time buyers. It's very broad across all of our cities, and we like that. We like to be where the meat of the market is, and it's certainly a consumer segment where demand is growing right now. So it's a great place to be. If you look at the community count this year, and Jeff stated it in his comments, we're down in the Southeast, offset the growth in the other 3 regions that are all performing well and growing, and we've got additional communities targeted. And in the Southeast, the drain on community count was the shutdown in D.C. And we pulled back in some of the cities until we could fix our execution. The execution's now fixed, and you'll see our community count start to grow in the Southeast region going forward because we're reinvesting there while we're investing in our other ongoing businesses as well. So we think, coming out of the year, you'll see community count growth, and I think you'll see a similar buyer profile to what we have today.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may now disconnect your lines.