Tri Pointe Homes Inc (Delaware) (TPH) 2015 Q4 法說會逐字稿

Greetings and welcome to the TRI Pointe Group fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Chris Martin, Vice President of Finance and Investor Relations. Thank you. You may begin.

Thank you. Good morning. Welcome to TRI Pointe Group's fourth quarter and full-year 2015 earnings conference call. Earlier today the Company released its financial results for the fourth quarter and the full year. Documents detailing these results, including a slide deck under the Presentations tab, are available on the Company's Investor Relations website, at www.tripointegroup.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call which are not historical facts are forward-looking statements that involve risks and uncertainties. A discussion of such risks and uncertainties and other important factors that could cause actual operating results to differ materially from those in the forward-looking statements are detailed in the Company's filings made with the SEC, including in its most recent annual report on Form 10-K and its quarterly reports on Form 10-Q. The Company undertakes no duty to update these forward-looking statements that are made during the course of this call.

Additionally, non-GAAP financial measures will be discussed on this conference call. Reconciliations of those non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through the Company's website in its filings and with the SEC.

Hosting the call today is Doug Bauer, the Company's Chief Executive Officer, Mike Grubbs, the Company's Chief Financial Officer, and Tom Mitchell, the Company's Chief Operating Officer and President. With that, I will now turn the call over to Doug.

Think you, Chris, and good morning to everyone who has joined us for a review of our fourth quarter and full-year 2015 results, as well as an update on our homebuilding business.

If 2014 was a year of great change for TRI Pointe Group, then 2015 was a year that was characterized by great execution. This time last year, we issued full-year earnings per share guidance in the range of $1.15 to $1.30. As the year went on, we refined our guidance to include expectations for homebuilding gross margins, SG&A expense ratio, landfill revenue, and quarterly backlog conversion targets.

Despite the numerous headwinds the industry endured over the year, including widespread labor shortages, weather-induced delays, and continued weakness in the Houston market, TRI Pointe Group was able to meet or exceed it stated guidance on a consistent basis, culminating with full-year results that included new home delivery growth of 31%, homebuilding gross margins of 21.1%, and earnings per share of $1.27, a 119% increase compared to 2014. This could not have been possible without our very talented and experienced leadership teams at our six homebuilding brands.

We knew that execution risk was one of the main concerns the investment community had when the WRECO acquisition closed in July, 2014. Our Company's performance in 2015 demonstrated that TRI Pointe Group has the vision and experience to execute through changing market conditions and that it can deliver on its business objective.

We have provided some preliminary guidance for 2016 in today's press release, which Mike will discuss in more detail later on the call. In general, I'm very excited about the opportunities that lie ahead for TRI Pointe Group, despite the recent turmoil in the financial markets. We are positioned to open over 70 new communities in 2016, which will improve our market presence as the year unfolds. It will also propel us towards our goal of 5,100 to 5,400 annual deliveries by the end of 2018.

On our longer term land assets at Pardee Homes, we continue to make progress accelerating the marketability and development of these products and expect them to be significant contributor to the Company's profits and cash flow for the foreseeable future. As an example, we are currently in progress on the development of our Golden Valley project in Santa Clarita, California. This enables us to sell parcels to guest builders, as well as begin construction on models for our homebuilding operation.

In addition, our strong balance sheet and low leverage will allow us to take advantage of strategic land opportunities and properly position our business for the long term. While our industry is challenged by land, entitlements, labor, regulatory concerns, we feel that housing is poised for an elongated cycle that is supported by the demand drivers of job growth and household formation. With that as a backdrop, here is some color regarding market conditions in the areas in which we build.

California continues to be the main driver of total revenue and profit growth for our Company, accounting for 45% of our fourth quarter deliveries at gross margins well about the company average. We saw continued strength in the Bay Area and our coastal communities in Southern California, including San Diego. Additionally, our Inland Empire projects east of the I-15 corridor performed very well through the FHA financing availability in our low land basis.

Overall for 2015, our California operations had a very strong year, delivering 1,623 homes with an average selling price of $707,000, a strong annual absorption rate of 4.3 orders per community per month, and generating $52.8 million of landfill gross profits in 2015. We continue to feel really good about California and our market positioning throughout the state.

Our Las Vegas operation was a standout performer in terms of year-over-year sales improvement during the quarter, posting a 96% increase in orders. We also had significant growth in deliveries year-over-year which resulted in 374 deliveries, a 34% increase. Overall, we feel very good about our community locations and price points within Las Vegas and plan on increasing our market share in 2016 through 2018.

On a side note, we introduced our Responsive Homes in Las Vegas to great fanfare during the International Builders Show last month. The Responsive Homes are our concept homes focused on designs that are targeted for today's millennial buyers. These homes incorporate flexible designs, multi-use spaces, and smart home technology that will appeal to younger buyers today and in the future. The Responsive Home project is an excellent example of how TRI Pointe Group is committed to being a leader of progressive home design, customer experience, and innovation in our industry.

In Seattle, our Quadrant brand delivered strong sales performance in the fourth quarter, posting a 73% increase in orders compared to the same period in 2014 on flat community count. The market reposition we implemented in late 2014 has really started to bear fruit. These new communities in the core market of King County has helped drive an increase in our sales base and we anticipate a 15% increase in our average sales price and improvement in our gross margin in 2016. We think these positive year-over-year trends will continue for Quadrant in 2016 and beyond, thanks to the repositioning and continued strong market fundamentals.

Arizona has been another solid market for us, as we had an excellent year in 2015 and anticipate that continuing into 2016. Sales increased 15% year-over-year in the fourth quarter, thanks to an increase in our absorption pace.

Labor availability remains an issue and will likely cause an increase in labor cost in the market for the foreseeable future. That said, we believe that we will be able to offset these cost pressures with sales price appreciation, driven by strong demand. So far in 2016, we have experienced a 37% increase in year-over-year orders and a very strong absorption pace of 4.2 orders per community per month.

In Colorado, our TRI Pointe Homes brand had significant growth in both year-over-year orders and deliveries, which increased 124% and 421%, respectively. In the second half of 2015, we experienced a slowdown in orders, which we attribute to our shift to higher price, lower absorbing communities versus the same period last year.

Similar to Arizona, we have experienced labor cost increases in the market and anticipate this to persist in 2016. We like the long-term outlook for the Colorado economy and are pleased with the future mix of our communities and our ability to continue to grow our market share.

The Houston market continues to be challenged, as concerns over the health of the energy sector persist, which had a direct impact on our slower sales activity in the quarter. Fortunately, we employ a flexible business model in this market that enables us to control lots via option contracts rather than owning land outright. The option strategy allows us to renegotiate the price and pace of future lot takedown, which means the terms of each new section becomes more favorable as the market declines.

I know it is easy to make raw generalizations about potential downside risk, given the number of active communities we have open in the market. However, Houston accounted for only 8% of our inventory dollars at the end of 2015, with only 3% being in land inventory.

Given the asset light nature of our business and Trendmaker's history of making money in good times and bad, we feel comfortable with our operations in Houston and will continue to pursue new community openings in the most desirable master planned communities. To date in 2016, we have seen an increase in absorption to 1.6 orders per community per month, up from 1.1 orders per community sequentially from the fourth quarter of 2015.

And finally, our Winchester brand experienced a 19% year-over-year increase in orders during the quarter and a 22% increase for the full year, which was primarily driven by an increase in our active community count. We're in the midst of repositioning the brand to focus more on core locations that are closer to the major employment centers and transportation corridors.

Given the lengthy entitlement process and development requirements, the results from this strategy will be realized over time. Ultimately similar to our Quadrant repositioning, this change in focus is expected to provide higher margins, selling prices and absorption pace. With that, I'll turn it over to Mike for more details on the numbers.

Thanks, Doug. Good morning. I would also like to welcome everyone to today's call. I'll be highlighting some of our results and key financial metrics for the fourth quarter and the full year 2015, and then finish my remarks with an update on our expectations and outlook for the first quarter and full year 2016.

I'd like to also refer you to our slide deck on our website, which includes charts detailing orders, deliveries and absorption rates by homebuilding company or division for both the fourth quarter and full year ended December 31, 2015. We've also provided key operating metrics by state in today's press release announcing our earnings for the quarter and for the full year.

Our fourth quarter included strong revenue growth, highlighted by the 36% increase in our home sales revenue over the same period in the prior year, primarily as a result of a 30% increase in our home deliveries and, to a lesser extent, a 5% increase in our average sales price. Our homebuilding gross margin came in ahead of our guidance, at 22.2%, thanks to increased deliveries in California. We were also successful in recognizing additional operating leverage improvements during the quarter, as reflected in our selling, general, and administrative expense ratio, which improved to 8.4% as a percentage of home sales revenue, compared to 8.9% in the same period a year ago.

Our income from continuing operations before income tax was $131 million for the quarter, or 14.9% of total revenue. Income taxes for the quarter were $46 million, representing an effective tax rate of 35%. This resulted in net income for the quarter of $85.1 million, or $0.52 per diluted share, compared to $41.4 million, or $0.26 per diluted share a year ago.

We averaged 113 active selling communities during the quarter, up 7% from the same period a year ago. During the quarter, we opened four new communities, one of which was in California, one in Maryland, one in Nevada, and one in Texas. In addition, we also closed out of 18 communities during the quarter, ending with 104 active selling communities.

For the first quarter of 2016, we anticipate opening 25 new communities and closing out of 11, resulting in 118 active selling communities as of March 31, 2016. For the full year 2016, we expect to open over 70 new communities and growing our active selling community count by approximately 20% year-over-year.

During the fourth quarter, our net new home orders increased by 5% from the same period last year, to 753. We begin the fourth quarter with very strong order growth in October, up 28% year-over-year, and then experienced softening in our new home orders in November, as compared to 2014, which continued into December. This softening was primarily due to a 12% sequential decrease in our active selling communities at the end of the year as compared to September 30, 2015, as well as an increase in our company-wide cancellation rates of 21% for the quarter. Our absorption rate was 2.2 orders per community per month for the quarter, which is a slight decrease from 2.3 orders per community per month in the fourth quarter of 2014.

We had 1,156 homes in backlog at the end of the quarter, up 12% compared to last year's fourth quarter, with an average sales price of $603,000. The dollar value of our backlog increased 7% year-over-year to $697 million. During the quarter, we converted 78% of our third quarter ending backlog, delivering 1,453 homes. Our average sales price for homes delivered was $583,000, a 5% increase from $555,000 for the comparable period a year ago, primarily as a result of increased deliveries in California.

As I mentioned, our homebuilding gross margin was 22.2% for the quarter, which was up 230 basis point year-over-year from 19.9% and up 120 basis points sequentially from 21% in the third quarter of 2015. Excluding interest, impairments and lot option abandonments, our adjusted home building gross margin was 24.2%, compared to 22% for the fourth quarter of 2014.

We continue to make progress in our SG&A leverage for the fourth quarter, as well. Our SG&A expense as a percentage of home sales revenue was 8.4% as a result of our focus on operational efficiencies, along with higher home sales revenue. This represented a 50 basis point improvement compared to 8.9% in the same period in the previous year. The favorable leverage impact of higher revenues in the quarter more than offset increased expenses that we incurred, primarily to support our higher fourth quarter deliveries.

During the quarter, we spent $265 million on land acquisition and land development, raising our total spend to approximately $825 million for the year. The focus on our current land strategy is to target land for communities which will deliver homes in 2018 and beyond, as we currently own or control substantially all the land needed to meet our planned deliveries for 2016 and 2017.

Just a few comments on our full-year results before I talk about the balance sheet. Our full-year results also included strong revenue growth, highlighted by a 39% increase in our home sales orders over the previous year, primarily as a result of a 31% increase in home deliveries and a 6% increase in our average sales price. In addition, we had over $100 million of land and lot sales, generating $66 million in gross profit.

Our homebuilding gross margin came in ahead of our guidance at 21.1%, as well as our full-year SG&A expense ratio of 10.2%. Our income from continuing operations before income tax was $319 million for the full year, or 13.3% of total revenue. Income taxes were $112 million, representing an effective tax rate of 35.1%, and resulted in net income of $205 million, or $1.27 per diluted share, compared to $84 million, or $0.58 per diluted share a year ago.

Now I'd like to make a few comments on our balance sheet. At year end, we had approximately $2.5 billion of real estate inventory, representing 27,602 lots owned or controlled, of which 63% are located in the entitlement constrained market of California. Our lots owned or controlled represents a 6.8-year supply on a trailing 12-month delivery basis, significantly down from over nine years of supply when we closed the WRECO transaction in July of 2014.

A detailed breakdown of our lots owned are reflected in our Form 10-K, which should be filed later today. In addition, there is a summary of lots owned or controlled by state in the slide deck on our website.

At the end of the quarter, we made a $50 million paydown on our $550 million unsecured revolving credit facility; and as of year end, we had $299 million in outstanding borrowings under the facility. Our total outstanding debt was $1.2 billion, resulting in a ratio of net debt to capital of 36.5%. We ended the quarter with $215 million of cash on hand and additional liquidity of $242 million available under our revolving credit facility.

Before I turn the call back over to Doug for some closing remarks, I'd like to summarize our outlook for the first quarter and full year 2016. During the first quarter, we expect to deliver approximately 60% of our homes in backlog from the end of the fourth quarter. We anticipate opening 25 new communities and closing out of 11, resulting in 118 active selling communities as of March 31, 2016.

For the full year 2016, we expect to open over 70 new communities, growing our active selling community count by approximately 20%. We anticipate delivering between 4,200 and 4,400 homes at an average sales price of approximately $550,000.

We expect our homebuilding gross margins to be in a range of 21% to 22% in the first quarter of 2016, based on the strength of our California deliveries. We project our gross margin to then moderate in the second half of the year, as closings from our newer communities with margins closer to 20% replace older, higher gross margin communities. For the full year 2016, we are anticipating our gross margin to be in a range of 20% to 21%.

We project our SG&A expense ratio will be in the range of 10.3% to 10.5% of home sales revenues. And in addition, the Company anticipates gross profit of between $45 million and $50 million from land and lot sales, most of which are expected to close in the second and third quarter. Lastly, the Company expects to spend between $800 million and $1 billion on land acquisition and land development for 2016.

I'll now turn the call back over to Doug for some brief closing remarks.

Think you, Mike. In conclusion, I'm very pleased with our Company's performance in 2015. We posted strong improvements to nearly every relevant metric for our business, including deliveries, orders, operating margins, and pretax profits; and our full-year return on equity was 13.4%. We also ended the year with 12% more homes in backlog than the previous year, setting the table for additional home delivery growth in 2016.

While this growth will likely not be as robust as what we experienced in 2015, as we mentioned at our November investors conference, the longer term outlook for our Company has not changed, as we remain focused on increasing shareholder value through our homebuilding, land sales, mortgage insurance operations, while achieving our goal of annual deliveries of 5,100 to 5,400 homes by 2018.

TRI Pointe ended 2015 on a strong note and I'm very excited about what lies ahead. As always, I want to thank the hard working men and women of this Company who are behind the great execution that led to such an outstanding year. TRI Pointe Group takes pride in hiring and retaining the best and brightest in our industry has to offer and I'm very appreciative of all your efforts.

With that, it concludes our prepared remarks and I'll open it up to some questions. Thank you.

Thank you. The floor is now open for questions.

(Operator Instructions)

Alan Ratner, Zelman & Associates.

Hello, guys. Good morning. (Technical Difficulties) in your communities, and I think that --

Alan, you cut out after you said good morning. Maybe you could start your question again.

Sorry. Can you hear me now okay?

Yes, we can hear you fine now, but we didn't hear anything after good morning.

Okay. Thanks. First off, I was just congratulating you guys on the strong execution in the year. I know it was a tough environment, so a pretty noteworthy result.

My questions that relate to the community count, because you guys are seeing a lot of turnover in terms of close outs and obviously new openings throughout 2016, so first, I was wondering, as we think about the closeouts here in the fourth quarter and sounds like you expect to see continued closeouts at least in the first part of this quarter, is that having any impact on the absorption pace just as you maybe run a little bit lighter on lots remaining in these communities and anything we should consider when we think about the more recent order performance? And then, as you see the community count transitioning and opening up these new ones, how should we think about the price point, the portfolio there? Does it look meaningfully different in terms of products from what you've been delivering over the last year or two?

And finally, what vintage is that land? Is this legacy WRECO-type assets or are these lots that you put under contract post the merger? Thanks a lot.

Alan, thanks. This is Doug. I'll start. I think there's about three questions there. As far as orders in the fourth quarter, as you recall from our investor conference, we had a strong October, was seasonally softened up a little bit in November in December. But what really also happened, and this is something that you've got to dive into the details, is at the end of the third quarter, the fourth quarter our total community counts, especially in California, our ending community count, I think, was down about 19%.

What happens is we had rapid absorption in 2015, we pulled those units in, did a great job of doing that, but then you're down to the last phase -- and in California, we're a phase builder -- so you typically, your mix of homes are at the last sell out. So it does slow your pace down, and then you start ramping it back up.

I will tell you the first eight weeks of this year are on par with last year. It's very good, hitting on all cylinders across the country for us. What we saw in the fourth quarter was a little seasonal slowdown, but also the fact that the total amount of communities decreased so much and you were at the mix of that, those communities that slowed down -- I'm sorry, the mix of those communities had less units to sell and it changes a little bit.

Alan, this is Tom. In respect to the second part of your question about turnover and what's the new mix of openings look like, I think it looks very comparable to what we've had in the past. Overall, we've got a strong community count opening for the first quarter, and those go pretty much across the board with Maracay, Pardee, Quadrant, Trendmaker and TRI Pointe all contributing new projects opening in the first quarter. Eight of those are in California. We have six of those coming from Maracay. So those are our stronger producers and we anticipate similar results to what we've had.

Alan, this is Mike. Just to pile on here, just to put numerically some numbers around it, as you saw in the press release, our absorptions were 2.2. We now absorbing over 3.3 already in the first seven weeks of this year, which is pretty consistent with last year's pace. Remember, we were one of the best absorption homebuilding companies out there in the first half of the year. We averaged around 3.5 sales per community.

So we've seen that pace pick up. And we've seen the new communities we have already open in January and February open to pretty good success and high absorption rate, and more specifically in Arizona, as Doug mentioned in his prepared comments. As we were disappointed in our absorption pace in November and December, we've seen it turn around and we feel good about where we're at right now.

That's great to hear. And then the final part to that was just the vintage lots on the new community openings, are these primarily legacy WRECO assets or are these more recent land buys from 2014?

Yes, Alan, they really are more current buys and not related to more legacy Pardee assets. So pretty current mix of new product in all our markets.

And that's why, when we talk about our margin, our overall margin guidance between a range of 20% to 21%, we will see stronger margins than that in the first half of the year because of the California deliveries of our older communities that are in backlog. But then we're projecting that our margin does moderate a little bit, because the new communities that Tom's referring to that have been acquired more recently, until they actually open and we see the success of the pricing, we expect those margins to be closer to 20%.

Understood. Thanks and good luck.

Thanks, Alan.

Nishu Sood, Deutsche Bank.

Hello, guys. This is Tim Daley on for Nishu. First question, I just wanted to touch on Houston a bit. Houston orders, obviously, from 17% to 10% year-over-year, closings similar, about 14% to 10%, and as you mentioned, only about 8% of assets, due to your higher option lot strategy.

But what I'm seeing on the slide deck is essentially you haven't really changed the mix shift for your 2018 closings expectation, still to be around 14% for Trendmaker, similar to what we've seen recently. Is this due to, essentially, the option strategy allowing you to turn the ship a bit faster than other builders in the region, and what do you expect for 2016 and 2017 closings out of Trendmaker?

This is Doug, Tim. That's correct. Our option strategy allows us to renegotiate price and pace of future lot takedowns, and that gives us a very flexible business model as we move through each new section. So we will continue, as I mentioned, to pursue new community openings, because it's a very asset light model. The returns on capital are very significant, despite the market headwinds, but we are going to continue to reposition ourselves in the best master planned communities because we have this option strategy that effectively we only own -- our land owned is, what, 3% of our real estate inventory. So it's very, very small. So it gives us the flexibility to continue to be in the market. That team at Trendmaker has always made money, and our forecast is they will continue to do so.

Tim, this is Tom. The other thing that adds to that question really is the fact that we are organically growing into Austin, and that is helping us maintain our volume targets there.

Good point.

All right. And just a follow-up on that, essentially this 1.1 to 1.6 absorption pace that you mentioned, is this a normal seasonal change for absorptions in January in Houston?

The fourth quarter was slower than normal, because of the persistent news on the energy sector, at 1.1. We've seen better activity. And normal is typically around 1.7 to 2 sales orders per community per month.

So we're just about there. But it's going to be -- there's a lot of storm clouds, obviously, in Houston, but we like our business strategy, we really feel very confident about our team there and our operation to generate earnings going through these storm clouds.

All right. Thank you for that. My second question is regarding your SG&A guidance. Essentially, SG&A guided to about up 20 basis points year-over-year. Is this coming from the 20% community count growth expected in 2016? And additionally, once these communities are seasoned, is it correct to assume that the SG&A will resume a downward trend to get back to the typical 10% range or so?

Yes, there's actually two things going on there, Tim. One, which you mentioned, was related to the increase in the new communities, over 70 new communities this year. But also, our expansion into Austin. We're delivering very few homes into Austin this year, and also the startup of our LA division related to our activation of our Golden Valley project, there's expenses associated there without the corresponding revenue. So it's twofold. And we do expect our SG&A leverage to come down once these communities are open, as well.

All right. And any cadence you can give us behind that?

Pardon me?

Any quarterly cadence on the SG&A, higher in the first half, back half?

From an G&A perspective, it's pretty pro rata across the quarters. When you break out the split, it's roughly 5.2, 5.3 for each of those categories for S and G&A. The G&A is going to be -- pretty much divide that by 4, and then the S is going to track with, a little bit with closings. But it's much higher in the first half of the year and much lower in the back half of the year. First quarter would be the highest, clearly, because there's fewer closings.

Perfect. Thank you.

Mark Weintraub, Buckingham Research.

Thank you. I'm just trying to understand a little bit more about the vintages of the land, how you expect that to play out over the next couple of years, because you have a lot of owned lots in California, a lot of which, I believe, are fairly early vintage and presumably would be sustaining very high gross margin as you play those through. And so I understand your comment that you're going to have a number of new communities that are going to be opening up, but I guess I would have thought that you still would have been having more of the higher gross margin, particularly Pardee, properties flowing through for the next little while. Is this a temporary lull, or how would you talk through how we might expect those lands to come through?

Mark, the other thing that's happening is obviously Houston. We are planning some downward pressure on our margins in Houston year-over-year from 2015 to 2016, so that's impacting our overall margin, as well. When you look at California, we feel pretty good about our margins in California, and the legacy projects that we are opening from the Pardee assets still will contribute very strong margins.

We've had some pressure on the west side of the Inland Empire on some of the TRI Pointe assets. But other than that, I think it's probably an impact of newer communities coming out with the expectations of our margins being a little bit lower, because until we actually go to market and price those products, and the combination of Houston's margins being off a couple hundred basis points.

But ultimately, Mark -- Mike, we've discussed, once we are able to bring those longer dated Pardee assets into the marketplace, I think you're going to see some great results. And we're encouraged and very optimistic about what we've been doing there and how we've been redesigning and planning our development of those projects that are going to lead to even greater economic benefit. And so I think we're just getting there on the front end as were starting to activate, as Doug talked about, our one Golden Valley asset, and that will becoming to market early next year. And so we're encouraged with the progress we're making on those longer term assets.

And I would also add, Mark, I think you were at the investor day and had a chance to tour, for example, Pacific Highlands Ranch -- and Tom, you can chime in here -- but you can't just flood the market with all those projects, in California, the Pardee, because of the amount of development and entitlement. It's a normal process, I should say, not entitlement, normal processing and development time frames for all those assets. So they are going to continue to just drive very nice margins for the next several years, as we talked about last November. But we do have a broader operation here with other markets that we're in that do have an impact.

Okay. That's helpful. And on the share repurchase, you had announced $100 million repurchase authorization recently, updated thoughts on anything that you might have done and/or contemplation on what you might do?

Yes, first of all, Mark, we're a homebuilding company and we're really not in the business to buy stock. Our passion is primarily to buy quality land close to employment centers and transportation corridors, and title and develop that land, design innovative new product, build quality homes for people to raise their families. And so as Doug mentioned, our primary focus is to grow our homebuilding business to 5,100 to 5,400 annual deliveries within our existing platform by the end of 2018. So we don't have any intentions of using our liquidity to purchase stock that would deter us from that goal.

With that being said, we also have no intentions to sit back and watch our stock continue to trade at below its book value, especially when management believes that its book value is already significantly understated, due to the nature of the reverse Morris trust transaction related to WRECO, where their assets came over at their historical basis. We plan on being opportunistic. We have not acquired any stock, because we couldn't until we actually released our earnings and opened our blackout period, but we plan on being opportunistic in acquiring our stock if those conditions exist, and primarily using available liquidity.

Okay. Thank you. And one last one, any color on where the increase in cancellations was taking place? And connected to that, it sounded like November and December were a bit little weaker and then it's feeling better again in January and the first part of February. Has the guidance you've given, was that largely set after what you saw in November, December? Has it really incorporated some of this better feel you're seeing in January and February?

The delivery guidance is in line with what we mentioned at the November investor meeting as far as where we -- this isn't a linear path that we're growing to 5,100 to 5,400 deliveries, and we're opening over 70 communities this year and they don't all unfold during the year. So we're right on plan, as far as what we intend to see as our growth over the next three years, which is upwards of 30% in deliveries. We're right where we want to be.

We've seen very good, normal market results this year, despite all the financial turmoil. I'm very pleased with the amount of traffic, with our sales base, as we mentioned. We had some recent openings in Tucson and Phoenix to some wonderful sales results, at our Centerpoint community in Tucson, Rancho Vistoso, and in Morrison Ranch, in particular. So everything is -- the consumer is fully engaged still, despite the headline noise that we're hearing on the macro level.

With that being said, Mark, we did come into the year with probably less backlog because of our order pace in November, December that fell off and our cancellation rate bumping up. You mentioned cancellation rate. California and Texas had a fairly high cancellation rate during the quarter.

As we work through our backlog and the quality of some of our buyers, that typically happens in the fourth quarter. But we've seen a correction right away in January, our newer communities being opened and our absorption pace jumping right back up. But that certainly did impact it. We were probably off, let's call it, 150 orders from what our expectations might have been coming into the year.

Thanks for all the help. Thank you.

Patrick Healey, FBR Capital Markets.

Good morning. Thanks for taking my question. First, when we think of fourth quarter, I know in the past you've given color on the breakout with first-time home buyers, so just curious if you could give us 4Q orders, what percentage of that was first-time, and if you have it, maybe in January, what that looks like and maybe how that compares to the same period last year?

Pat, this is Tom. Our order pattern relative to the first-time home buyer has been very consistent. Probably about 30%, 35% of our orders are in that buyer demographic, and consistent in fourth quarter and Q1, as well.

Okay. And safe to assume that would look similar, when we're thinking about 2016 guidance on closings?

Yes.

Okay. Great. And when we think about land spend for the year, how should we think about -- looking at it versus 2018 expectations, how should we think about new lot purchases between the brands? Should we think about looking relatively consistent to what you have today in your lot inventory, or are there opportunities you're seeing in the market today that maybe shifts that one way or the other?

I would say it's probably pretty consistent to what you're seeing today. Clearly, we buy -- most of the land that we buy in California is higher price point, and that's in the TRI Pointe brand. We really don't acquire much land at all in the Pardee brand, with the exception of Nevada. Most of the dollars there are spent on land development.

So when we're looking at our $800 million to $1 billion, it's roughly $400 million to $600 million in land acquisitions. And a lot of that is associated with land that's already controlled, we're taking down the lots moving forward. There's probably $200 million or $300 million of that number that are unidentified projects at this point in time, for deliveries in 2018 and beyond. And then it's about $400 million of land acquisition dollars, and that's primarily in Pardee, and maybe $20 million to $30 million in some of the other (Inaudible).

Okay. Great. Thank you again.

Thanks, Pat.

Will Randow, Citigroup.

Hello. Good morning. This is actually Scott Schrier in for Will. Thank you for taking my questions and congrats on the progress. My first question is, I just wanted to ask you about, when I look at the backlog price at TRI Pointe, it looks like it's actually decreased significantly from last year, while conversely at Pardee, I saw the opposite happen, where it looks like you have some higher price point homes in backlog. I just wanted to see if you could talk about some of the trends going on at the two brands there.

Yes, Scott, this is Tom. You're accurate in your assessment of where the trends are going relative to our backlog price. As it relates to our TRI Pointe brand, we are having a higher mix coming from our more Easterly markets in both Southern and Northern California, which is driving that ASP down a little bit. And contrary to that, as you look at the Pardee brand, particularly in California, we've got an increasing shift in our Inland Empire markets to newer product, which is at a higher price point.

Our San Diego communities are delivering comparable price points relative to new product offerings that we have, but we have sold out of one of our higher selling projects there, in Alta Del Mar. And so that will ultimately trend our average selling price down. In Nevada on our Pardee assets, we are introducing higher price points that have been really well received in the marketplace and very successful.

Thanks for that. And then I want to follow up. I believe you said that you would expect Quadrant prices to be up about 15% in 2016, and I just wanted to see how much of that might be price versus how much might be mix; and if it's stronger than you had originally anticipated, are you catering to maybe design more higher end homes there to match that demand?

Yes, Scott, this is Doug. A lot of that increase is due to design and repositioning of the product in core King County. But I'd also say that there is market appreciation that's going on, as well. So it's a combination of both.

Great. Thanks. Appreciate you taking my questions.

Yes. No problem.

(Operator Instructions)

Steven Kim, Barclays.

Hello, guys. This is actually Trey Morrish on for Steve. First thing I wanted to ask you about is at the midpoint, you're really guiding for your gross margins to be down roughly 60 basis points. I was wondering if you could break that up into a lower mix, as indicated by your lower ASP guide, land costs and labor costs, and any potential offsetting factors to those?

Well, for us, it's primarily our new product that's coming out, and that's why our margins look like they're coming in a little bit from the previous year. We still have very strong margin delivery in the first and second quarter of this year. You look at Texas, Texas we do anticipate our margins to come in.

Other than that, I think we feel like we have a very strong margin, and our new communities coming to market are going to average around that 20%. One other thing that Tom mentioned is in San Diego, San Diego is a very high margin, specifically at one asset, and a very high ASP. Those ASPs, because of the new products that we're releasing there, those ASPs come down significantly, and so it skews the overall weight of our company average margin.

Got you. That's helpful. And then earlier in your prepared remarks, you talked a little bit about some labor constraints. I was wondering if you have it, and you mentioned that you see it existing for a while. Could you give a sense, do you think that's another quarter or two, or do you think that labor constraints are really going to be a longer term headwind for the industry, out looking another couple of years?

Well, we've always anticipated the labor shortages that we had last year. It didn't affect our conversions in the year, but we've also anticipated the labor costs issues as you go forward.

How long it lasts, as we mentioned in November at our investor meeting, as you continue to see starts, and you have seen starts increase in a Phoenix and in Colorado, starts go up in a big stair step. And if you were to draw a graph, the labor community increases more on a flatter line, and it eventually just catches up to starts. So you're going to have this lag effect that eventually the vendors will continue to retool, and I've talked to a number of our key vendors, even in California, and our guys in Arizona, and they are bringing in more of the labor force, both skilled and unskilled, but there's a lag effect.

How long that is, I'm not an economist, I don't have my pulse on it. We're anticipating it being that way for 2016, but then once starts maybe flatten out, then all of a sudden, you're caught up. It's not a perfect recipe, but that's the way we see it right now.

Trey, there is some optimism out there that the impacted workers from the oil and gas sectors will begin to shift back into the residential construction sector. So there is some optimism. But I think as Doug said, we are planning for it to persist certainly throughout 2016.

Thanks, guys. Appreciate it.

Alex Barron, Housing Research Center.

Thank you. Can you hear me okay?

Yes.

Hello, Alex.

Good morning, Doug. Hello, guys. I wanted to ask on Houston, you've alluded to slightly lower margins and you've also said you're expanding into other cities, so I was hoping to get a better idea of what you're seeing as far as the competitive landscape at this point. Is that just taking shape in the way of more incentives or are you having to compete on price? And then also, what kind of community count expansion are you thinking about for -- I missed what other city, I don't know if you said Austin or San Antonio -- but what are your plans there over the next couple of years?

I'll take the latter half of that question. Right now, we're focused on expanding into Austin. San Antonio would also be on the radar screen, but we don't have anything active that we're pursuing there.

As far as Houston, our just-in-time lot inventory model there, which is different than really all the other brands, allows us to continuously negotiate lot takedowns and price through each section. So our focus will be, continue to be in the key master planned communities throughout Houston. And as other builders that are longer in the tooth, so to speak, in land, we will continue to negotiate new takedowns at different prices to meet our underwriting criterias of 18% to 22%.

So that's the beauty of the model we have there in Houston. And we will continue that going into the year, because eventually -- the interesting thing about Houston that a lot of people don't understand or maybe don't talk about is they had over 100,000 jobs generated for a couple of years, I think it was 2013 and 2014. And actually, if you break that job growth down, it was probably only 30%, upwards of 30%, I would say 30,000, 20,000, 30,000 that were energy-related. The other job growth that has gone on -- and this is what's happening, we're feeling it right now -- is you have the healthcare, the ports, the petrochemicals, that has also been a very, very big job driver, especially in the South and the Northeast. I'm not saying that's going to solve all the woes of Houston, because it's dominated by the headline noise right now. But even in our recent community openings, we've seen some pretty good success with that kind of buyer profile.

That's good to hear. And then, Mike, any guidance, I don't know if I missed it, on tax rate for this year?

Tax rate. 36%.

Okay. Great. Thanks and good luck, guys.

At this time, I would like to turn the floor back over to management for any additional or closing comments.

Thank you, everybody, for joining us for a fantastic year that we had in 2015. Again, I want to thank all the team members at the TRI Pointe Group, and we look forward to a very good 2016 and talking to you all at the end of the first quarter. Thank you very much.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.