Tri Pointe Homes Inc (Delaware) (TPH) 2016 Q1 法說會逐字稿

Greetings and welcome to the TRI Pointe Group first quarter 2016 earnings conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Chris Martin, Vice President of Finance and Investor Relations. Thank you, you may begin.

Good morning and welcome to TRI Pointe Group's earnings conference call.

Earlier today, the Company released its financial results for the first quarter of 2016. 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 risk 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 the most recent annual report on Form 10-K and in 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.

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

Thank you, Chris and good morning, everyone.

2016 is off to a great start for TRI Pointe Group, thanks to the solid execution of our team and the strong demand we experienced in the first quarter.

Some of the highlights from the quarter included 13% increase in home sales revenue compared to the first quarter of last year, driven by a 15% increase in new home deliveries and an average sales pace of 3.3 orders per community per month, which continues to be one of the best of the publicly traded homebuilders. In addition, we opened 27 new communities during the quarter, which puts us on schedule to open anticipated 70 new communities for 2016. Net income for the quarter grew 87% to $28.6 million or $0.18 per share on homebuilding gross margins of 23.3%.

These strong financial results for the quarter provided promising outlook for the balance of 2016. Furthermore with strong market conditions, we believe the foundation is in place for our six homebuilding brands to grow annual deliveries to between 5,100 and 5,400 homes by 2018.

Our first quarter financial results also reflect an important shift in our Company. While our California operations continue to be a key driver of revenue and profit, our operations in other states have made great strides. We expect this improvement to continue, which will grow our bottom line, while creating a more balanced and diversified company. Our goal is to raise the operational performance of all of our brands, while reaping the benefits associated with our favorable land position in California. I'm pleased to see both of these dynamics playing out.

Let me begin by making a few comments about the long-term health of the homebuilding industry. We continue to see strong demand drivers such as job growth and household formations in all of our markets. In addition, our markets continue to face an under-supply of new and existing housing coupled with constraints in land and labor. Combined, these demand and supply drivers lead us to forecast an elongated cycle with steady growth ahead. With that as a backdrop, here are some additional color on each of our markets.

Our California operations once again delivered strong results during the quarter, contributing 4.1 orders per community per month. Coastal California is very strong in both Northern and Southern California and is exhibiting healthy market characteristics with high job to permit ratios and low inventory levels. In Northern California, we have seen strong demand in our new communities in the core Bay area market and continue to see positive price trends. In Orange County, our high-end projects in the Irvine Ranch continue to absorb selling 3.7 homes per community per month for the quarter.

In San Diego, our orders were up 14% year-over-year, while absorbing five sales per community per month with an average selling price of $1.1 million. The Inland Empire market east of the 15 Freeway continues to perform well, as we are delivering new homes, taking advantage of FHA financing. Additionally, we saw improved market conditions west of the 15 Freeway during the quarter. Improvement in customer traffic and orders indicates we are gaining momentum in this market as well.

In the Pacific Northwest, Quadrant Homes in Seattle had one of the best sales basis in the Company for the quarter, with 4.7 orders per community per month. Quadrant also posted an outstanding improvement in homebuilding gross margins with first quarter margins expanding 520 basis points as compared to the same period last year. Our land team has done an excellent job in implementing our strategy to position Quadrant closer to employment centers and we are seeing the positive impact of this strategy in Quadrant's improved financial performance. We have an excellent land pipeline, which enables us to open new well located communities in both King and Snohomish counties. We believe we will continue to increase deliveries in these markets, which will lead to strong profitability.

Las Vegas is another market where we expect increased deliveries. Orders were up 29% year-over-year for the quarter and homebuilding gross margins continue to improve. We've introduced exciting new home designs in Las Vegas, incorporating popular aspects of our response of homes we showcased at this year's International Builders' Show. And the initial reaction from homebuyers has been excellent. Overall, we are seeing improved traffic from first-time buyers in the market and the move-up segment appears to be getting stronger as well. Given the improving economic conditions in Las Vegas, we are optimistic about this market for the next several years.

Our Maracay Homes brand in Arizona also delivered positive year-over-year order growth and margin expansion for the quarter with new home orders expanding 25% on a 9% growth in average communities. Our Center Pointe master plan community in Tucson is an example of our new home offerings and comprehensive marketing strategy is yielding outstanding results. At our grand opening weekend in January, we had traffic of over a thousand people, which led us to write in 44 new home orders for the quarter. For Phoenix and Tucson combined, Maracay's absorption pace was 3.6 new home orders per community per month, 15% higher than the comparable quarter a year ago. Overall market conditions in Denver can be characterized as strong with high demand, low new home supply and extremely tight resale market. While, strong employment trends, income growth and household formations continue, this market also has experienced labor shortages and rapid price appreciation over a short period of time, which has moderated homebuyer demand. 2016 is a transition year for TRI Pointe Homes as we close out several of our high-performing communities and restock our land pipeline with new communities. We continue to like the long-term outlook for Denver and see an opportunity to increase our deliveries over time.

Trendmaker homes in Houston continues to deliver solid results in the face of difficult market conditions. For the quarter, Trendmaker's homebuilding gross margins were 19%, and its sales pace stayed flat on a year-over-year basis at 1.7 orders per community per month. Reinforcing our belief that our market positioning, asset light operating model and the brand's reputation gives us a distinct advantage over our competition. In addition, we are leveraging our Trendmaker brand by expanding our product portfolio in Houston to include smaller and more affordable homes utilizing some of the research and product designs from our other homebuilding brands. Lastly in April, Trendmaker opened its first Austin community in the award winning Bella Terra master plan development located in the southwest portion of the city. Expanding Trendmaker's geographic reach into a market, we are very excited about.

At Winchester Homes in the Mid-Atlantic region, the unexpected slowdown in 2014 and 2015, which was led by sequestration, has subsided and we are now seeing stronger market activity driven by improved job growth, a limited supply of inventory and low interest rates that have brought more buyers into the market. Our results in the first quarter reflect this improvement as Winchester Homes experienced a 7% increase in orders year-over-year [and 4%] increase in average communities, and which resulted in an order pace of 2.9 orders per community per month for the quarter. In light of the [profit] seen in this market and our ongoing repositioning to core locations near employment centers, we believe the Mid-Atlantic region has upside potential for us over next several years.

Now, I'd like to turn the call over to Mike to provide some financial highlights for the quarter.

Thanks, Doug and good morning. I would also like to welcome everyone to today's call.

As Chris mentioned earlier, we posted a slide deck on our website, which includes figures and charts detailing orders, deliveries and absorption rates by homebuilding brand or division for the first quarter ended March 31, 2016. We've also provided some certain key operating metrics by state in today's press release announcing our earnings for the quarter.

Slide 6 of the slide deck provides a snapshot of some selected operational highlights from our first quarter. We increased home sales revenue by 13% compared to the same period in 2015, primarily as a result of a 15% increase in home deliveries. Our homebuilding gross margin for the quarter was very strong at 23.3%, thanks to increased deliveries from our high-margin communities in California as well as year-over-year improvements at our Maracay, Quadrant and Winchester brands as Doug previously mentioned. 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 12.9% as a percentage of home sales revenue compared to 13.7% for the same period a year ago. Net income available to common stockholders was $28.6 million or $0.18 per diluted share compared to $15.3 million or $0.09 per diluted share, the same period last year.

During the quarter, we opened 27 new communities, 10 of which were added in January; six in February and 11 in March. We opened eight in Texas, seven in California, seven in Arizona, three in Washington and two in Nevada. These 27 new communities represented 177 net new home orders for the quarter at an average absorption rate of over four orders per month per community. In addition, we closed out of only six communities during the quarter, five fewer than previously anticipated resulting in a quarter ending active selling community count of 125 as shown by state on slide 7.

For the second quarter of 2016, we anticipate opening 10 new communities and closing out of 15 resulting in 120 active selling communities as of June 30 2016. For the full year 2016, we expect to open approximately 70 new communities and grow our active selling community count by approximately 20% year-over-year from December 31, 2015. During the first quarter, we had 1,149 net new home orders, down 45 orders or 4% compared to the same period in 2015. It's important to note that our new home orders for the first quarter of [2015] reflected an increase of 79% from 667 orders for the same period in [2014]. Our overall absorption rate remained very strong at just over 3.3 orders per community per month for the quarter and continues to be one of the best of any of the publicly traded homebuilders.

We had 1,534 homes in backlog at the end of the quarter, down 24 homes or 2% compared to last year's first quarter with an average sales price of $581,000. The corresponding dollar value of our backlog decreased 5% year-over-year to $892 million. During the quarter, we converted 67% of our fourth quarter ending backlog delivering 771 homes resulting in a 13% year-over-year increase in home sales revenue to $423 million. Our average sales price for homes delivered was $549,000, a 2% decrease from $560,000 for the comparable period a year ago.

As I previously mentioned, our homebuilding gross margin was 23.3% for the quarter which was up 340 basis points year-over-year from 19.9% and up a 110 basis points sequentially from 22.2% in the fourth quarter of 2015. Our gross margin continues to be very strong for our Pardee brand especially in California due to the legacy land basis and outstanding operational performance. In addition, we saw a year-over-year margin growth at Maracay, Quadrant and Winchester, as Doug mentioned.

SG&A expense as a percentage of home sales revenue was 12.9%, which was an 80 basis point improvement compared to 13.7% in the same period in 2015. The favorable leverage impact of higher home sales revenue in the quarter, more than offset increases related to supporting our operations and future growth. During the quarter, we spent $149 million on land acquisition and $79 million on land development. The focus of our current land strategy is to target land for communities, which will deliver homes in 2018 and beyond as we currently own or control all of the land needed to meet our planned deliveries for 2016 and 2017.

As we previously messaged, we started development of our Pardee's Golden Valley master plan community now called [Aliento] in Santa Clarita, California. Initially we intended to sell lots in this community to guest merchant builders in 2016. However, our strategy has changed and we have decided to build out the entire community using our homebuilding operations at both Pardee Homes and TriPointe Homes. This will allow us to capture all the upside and homebuilding profits, grow our community count and increase our annual deliveries. This change in strategy will not decrease our land and lots sale revenue -- will decrease our land and lots sale revenue for 2016, but will have no impact on our anticipated land and lots sale gross profit for the year. The community grand opening is currently scheduled for the first quarter of 2017.

Now, I'd like to make a few comments about the balance sheet. At year-end, we had approximately $2.7 billion of real estate inventory representing 27,929 lots owned or controlled, of which 63% are located in entitlement constrained markets of California. Our lots owned or controlled represent 6.7 years supply of land 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, and well on our way of reaching our goal of approximately five-year supply. A detailed breakdown of our lots owned is reflected in our Form 10-Q, which we'll file later today. And in addition, there is a summary of lots owned or controlled by state on page 23 of the slide deck.

At quarter end, we had approximately $374 million outstanding under our $550 million unsecured revolving credit facility. Our total outstanding debt was $1.2 billion resulting in a ratio of net debt to capital of 39.4%. We ended the quarter with $144 million of cash on hand and additional liquidity of $170 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 second quarter and full year 2016. During the second quarter, we expect to deliver approximately 60% of our homes in backlog as of March 31, 2016. We anticipate opening 10 new communities and closing out of 15 resulting in 120 active selling communities as of June 30, 2016. We expect our homebuilding gross margin to be in a range of 21% to 22%. For the full year 2016, we are reaffirming our previously issued guidance of opening 70 new communities, resulting in a 20% year-over-year community growth delivering between 4,200 and 4,400 homes at an average sales price of $550,000. And SG&A expense ratio in the range of 10.3% to 10.5% of home sales revenue and generating land and lot sales gross profit of between $45 million and $50 million. Then lastly, based on our first quarter success, we are now anticipating our full year homebuilding gross margin to be in a range of 20.5% to 21.5%, increase from our previously guided range of 20% to 21%.

Now, I'll turn the call back over to Doug for some closing remarks.

Thanks, Mike.

In conclusion, I'm extremely pleased with our accomplishments this quarter. We doubled our earnings per share, averaged more than 3.3 orders per community per month and grew our active community count by 20% on a sequential basis. TRI Pointe Group and its six homebuilding brands are led by some of the strongest operating teams in the industry. The management teams are all seasoned veterans with over 15-years to 20 years of experience working together to provide outstanding results. Their experience is the competitive advantage that allows us to source superior land positions and attract the best trade partners and team members that will provide the foundation for growth as we scale our operations. As always, these results are only possible because of the efforts of our team members. Your willingness to work hard, think differently and share best practices has made TRI Pointe Group a more complete and diverse organization, benefiting homebuyers and stockholders alike.

That concludes our prepared remarks and now we will take your questions.

(Operator Instructions)

Ivy Zelman, Zelman & Associates.

Hey guys, good morning and congrats on the strong quarter. Very impressive results.

I have two questions. Can you please talk about your strategy and maybe some numbers around entry level, Doug, you spoke about the strength of entry-level and recognizing you guys already have a decent percent, can you quantify today within the 1Q results what percent of orders are entry level and maybe within FHA loan limits? And then just strategically, how you see that over the next few years expanding and if that were the main strategy or focus will be.

And then my second question and think I'm trying to get it all in, if I can ask a thousand, but the second question relates to your G&A improvement as a percent of revenues. As Mike, you indicated that you did see a support for continued growth in your operation. When we think about modeling, you are going forward costs, as a percent of revenue, do the G&As stay at these lower levels and it's sustainable?

I'll take kind of your questions in different orders. As far as our game plan on the entry level, Tom will talk more about the percentages, but we're going to continue to be a well-diversified company, taking advantage of the products and offerings that we have across the country. And we see an opportunity, I'm sure not different than anyone else. But in Houston for example taking our Trendmaker brand and coming up with a new product offering on 50-foot to 60-foot wide lots and bringing that price point down in the Houston market, there's been rapid price appreciation through 2014. We have a very strong brand. It's very well recognized by brokers alike. So we'll continue to expand that offering and we actually look to have a couple of communities come into the market early part of next year.

As far as the rest of the Company, Pardee really commands the entry level price point in the Inland Empire. They do enjoy a lot of product that we offer within FHA ranges, but as you and I know, those price points -- the price points allowed under FHA, we could really see a significant improvement in order activity and just velocity in the Inland Empire because many of those homebuyers are actually commuting to Los Angeles and that county out there is so large, it's a little unfair the way the FHA price points play out, but we'll work through that and we continue to have a lot of success because of our low land bases out there.

Tom, you want to talk about the percentages and where we're growing.

Sure. We do see the first-time buyer segment and the Millennials as key drivers going forward in the future. So we do want to take advantage of that. This year, we expect about 36% of our deliveries to be coming from that first-time buyer segment and in the coming years, we're looking to target around 40% of our deliveries moving forward.

Great. Thank you, guys. And then, G&A, maybe Mike you could address that please.

Yes. See you want to specifically talk about G&A when you just talked about SG&A to start with, our range is 10.3% to 10.5%, so let's call that 10.4%. We're averaging around 5.2% this year in 2016 for the S side and 5.2% for the G&A, A side. But as we move forward into 2017 and 2018, that G&A component will definitely get fairly significant operating leverage going forward as we see our home sales revenue increase in the out years.

So would you guide any particular range that we should model? I mean you have very strong performance this year on margin for the quarter, could you be a little bit more specific on the SG&A?

Ask your question again, you kind of cut out a little bit, Ivy.

I'll just talk to you offline. I'll let someone come up with the next question. Thanks guys and good luck.

Jack Micenko, Susquehanna.

Of course [margin] came in a bit better, obviously I think guidance range up a bit, was that all Quadrant or what else is behind the improved margin outlook from where we were come out of the fourth quarter?

Jack, obviously we delivered a higher backlog conversion as well, 67% versus our 60% that we guided to. So we saw increased deliveries in California. Originally we thought California would deliver around 37% of our overall deliveries. They delivered just about 41%. So that's where we saw the improvement in our margin. The Pardee operation averages in the high 30s on a gross margin basis and when we pull some of those forward, it impacted our margin.

Okay. Thanks, Mike. Then the West numbers on your home sales yesterday were surprisingly down, it doesn't sound, Doug, through your commentary that you're seeing any of that. Can you just kind of confirm, I mean, I know that number is subject to some revision and some wild swings, but you're not seeing anything, it sounds like that would suggest what we saw in the March numbers yesterday?

No, I always caution everybody in reading in between the headline noise on those new home orders, they always get revised. But as we spoke earlier, up and down, California, we continued to see strong activity. As I mentioned earlier, San Diego, it's pretty impressive sales base at five orders per community per month at $1.1 million. And so, we continue to see a lot of strength here in California.

And Jack, just to add to that. I mean, when you look at April we showed it in our slide deck. I mean April we're averaging around 3.9 orders versus the quarter averaged at 3.3, we had our best sales week last week, we had 134 orders last week, which is the largest order count we've had since we combined the two companies. So we continue to see strong growth. Our issue is our absorption pace, it's a very difficult concept for us for the first six months of the year.

Nishu Sood, Deutsche Bank.

Yes, actually Mike just wanted to follow up on that absorption discussion. The monthly data is very helpful and you folks had been pretty clear that in the first part of 2015, the first quarter in particular, there was, as you aligned the WRECO operations on an absorption basis there was a surge of -- there is a surge of sale. So the April improvement is pretty large on absorption base year-over-year but -- are we seeing an improvement in trends in April, I mean is it, or is this just that, the first quarter was where most of the alignment was happening in terms of absorptions and the -- so that becomes less of a factor on a year-over-year basis as we move into the second quarter.

And I think -- Nishu, it's Mike, and also I think in April what happened is we did open 27 new communities sporadically throughout the first quarter and now we have the benefit of those being open for, call it, a month and a half on average and so we're seeing better traction there as well as we mentioned we had, I think, 177 orders out of those communities averaging well over four. You mentioned it and it's really the first half of the year we averaged 3.5 orders per community last year on a Company average. We're off in California, when you look at the percentage, it's 25%, but that's going from an average of 5.1 orders with very high ASPs to 4.1. I mean we're averaging 4.1 now, I don't know how many of the other builders are doing that right now. So I think we feel good about our absorption, it's just a difficult concept for us.

But Nishu, this is Tom. From a perspective of being on the ground in our stores and sales operations, we really feel good. We're entering into a strong spring selling season. And we've got great buyer motivation and strong traffic and I think it's translating into new orders that you're seeing in April. So we're anticipating a really good season going forward.

Got it, and it's very helpful.

On Houston, excellent results there considering the context and the price points that you folks operate out, which is I think amongst the highest of the public builders, margins at 19% if I'm remembering correctly, that's I think roughly flattish on a year-over-year basis. So just wanted to dig into that, that run so counter to the trends that we've been hearing on the ground. We have heard -- it does sound like Houston has stabilized even at some of the mid-price points on a sequential basis. So just want to understand, what drove that in the first quarter, is that likely to persist or is there a day of reckoning to come later on this year and the recent trends if there's been any stabilization, if you could just give us some context that would be great.

Yes, Nishu, it's Doug. We continue to think that the operating model that we have, it's very asset light. So we're continuously re-negotiating terms and conditions, future land and lot take-downs -- actually lot take-downs, not land at gross margins of 18% to 20% -- 18% to 22% actually depending on the risk factors of the project. It's still very competitive market, incentives still range around 11% to 13% and that's probably a couple -- maybe 200 basis points to 300 basis points higher than it was a year ago. So there is going to be continuous pressure on margins through the rest of this year, but we still believe that we have one of the most outstanding brands, that's recognized by the realtors which promotes almost all the activity, and being in some of the biggest master plan communities, we're going to be well positioned as Houston comes out of this downward cycle it's been in for about 14 months.

So A, I would say there would be continued pressure in incentives. So I am not going to fall in love with the 19% margin, but I think I pointed out at our end of the year earnings call, the Trendmaker team has never lost money in its 25 years of working together. I think their margins got to as low as the mid-2016s, if I recall. So I don't -- I sleep pretty well knowing that team is in place in Houston is operating under the model that we have.

Nishu, it's Mike, just to answer your question. The direct comp set we were at [19.7%] in the first quarter of 2015 versus the [19%] that Doug mentioned in 2016.

The one thing I was going to add, Doug did cover it in his remarks, is we're excited about the opportunity to take advantage of diversifying our product offering there and moving into a more affordable price point. So we think that's going to yield positive results in the future.

And the smaller product that you're mentioning, is that on -- is that new lots, is that new phases or if you're putting it on your existing lots which would've been originally intended for probably higher price point homes, does that have an impact on margins or should that be neutral to profits?

Yes, it's neutral to margins. Yes, we would be putting that product on new lots. The one piece of land that we do own, the south and southeast portion of Houston is very strong, we have a community down in -- called Clear Lake in South Houston, and we will be putting this new product down on our 50-foot wide lots down there. So it's all new lots that we're talking about.

Patrick Kealey, FBR.

So first, wanted to focus on, you talked about the California land parcel you're going to be developing as opposed to selling. Maybe if you could give us a little bit more insight as to what went behind that decision, was it just market dynamics and demand, was it something you saw in the land market, I think any additional color would be helpful there.

Hello, Patrick, good morning. This is Tom. Yes, as we went through this process, we really took a good solid look at the competitive nature of the land market and saw an opportunity to diversify ourselves with multiple brands up in our Golden Valley community in Santa Clarita. By doing that we think we're going to be able to increase delivery growth, community count and capture homebuilding profits. As we looked at those potential land sales in specific, it was really being driven by cash flow, I think we've previously mentioned that. And so as we looked at our cash flow, we saw an opportunity to really capitalize on the advantages of having multiple builders in that one community and building amount ourselves and retaining builder profits versus giving them away for a cash flow purpose.

Okay, great. And then if we could focus on Maracay for a second, you talked about your better margins, you had average sales price growth and absorption growth, you kind of looks like got everything here year-over-year. So, has there been any change in your thought process as you move into second quarter kind of given the absorption pace, do you feel you can push prices there a bit more to get better margin, are you kind of comfortable with pricing and getting the absorptions or maybe just kind of digging into your outlook for 2016 there I think would be helpful.

Patrick, our outlook for Maracay is significant growth 2015 to 2016 and we continue to look over the next three years to five years, growing that brand. Phoenix is a super competitive marketplace and it's all about execution. We've got one of the strongest teams in led by Andy Warren there at Maracay and has done an outstanding job of implementing both product and land development to get these type of results. We have seen in certain pockets, some price appreciation, but Phoenix is not going to go crazy with price appreciation. It's going to range in the low single digits, but that's going to be fighting off a lot of labor cost issues too.

So overall, as you look at margins, you'll see gradual improvement over time, but it's a gradual process in Phoenix and that's been at least my history, over 28 years, it's just a very gradual process. Only time I saw a rapid margin appreciation is when I saw a double-digit pricing and that leads to an unhealthy market, frankly. So Phoenix is still battling some labor issues. I'd say, Phoenix and Denver are the two markets that we continue to feel that pressure the most and we'll continue to work in offsetting those cost issues with price.

Mark Weintraub, Buckingham Research.

So obviously you laid out an increase of 50 basis points on your gross margin expectations for the year. Is there anything that might be offsetting that or should we now be seeing this year as having a bit higher earnings than what previously you would have been believing or indicating?

Mark, it's Mike. That's the only metric that we actually increased. So I guess effectively we're highlighting the fact that earnings could potentially be higher, but it's a fairly wide range on our deliveries, which will probably hopefully tighten after we get through the spring selling season, maybe on the next call.

Yes, I'd add Mark, I mean it's game time. In the next four months, it's crucial to a homebuilder. So we gave -- we're feeling good. We had a great quarter. We feel very good about the market, but it's too early to message anything other than that. We'll call you back in four months and tell you how strong the spring selling season was or wasn't.

Okay, great. And you mentioned some of the more affordable homes you're building in Houston. Are you looking at doing that elsewhere as well or is that specific to that market?

Specifically, we are taking advantage of the opportunity in Houston to do that and diversify our product. But I'd say across all of our brands, we're looking to capitalize on that entry level buyer segment and bring our average selling price down. As Doug mentioned, we're seeing particular traction in the Inland Empire in our Pardee brands, but both Southern and Northern California and our TriPointe brands, we've got a significant amount of entry-level product and we continue to see opportunities in Las Vegas in the entry level market as well.

And I guess at the other end of the spectrum, I think in Seattle, Washington area, you're sort of moving the other way, any update on how things are progressing in moving those price points higher?

Yes, Seattle's actually go in the opposite way. You'll see the ASP grow over the next three years, pretty significantly as the product mix has changed and the market has -- the market in Seattle is red hot right now. So our team led by Ken Krivanec in Seattle and their land team has done an excellent job of positioning more future communities for the next couple of years in the key market places that I mentioned earlier in King and Snohomish. So you will see because of those strong markets and the product offering that we continue to introduce, price is going up and margins continue to be very strong for Quadrant.

And then lastly, obviously you talked about April, the absorption rates looking really good etcetera. Now orders in the first quarter for reasons you noted weren't as robust, perhaps if I had modeled incorrectly. Does that begin as you -- as the community count increases and you're continuing to get good absorption rates. Any sense as -- any guidance you can give us in terms of what type of order growth you would be targeting for the balance of the year, recognizing how the market plays out yet to be determined?

No, Mark, this is Mike. I mean again as a company we plan on an average of around 3 and so as we achieve an average greater than that for the full year, we would have more order growth than we previously anticipated based on our -- when you apply that to our community count growth. But we still can see higher absorptions in the first half of the year, and then absorptions typically fall off in the third and fourth quarter of the year. So we look to average around 3 given our product mix.

Again, Mark, to add to that, I would say that last year in the third and fourth quarters, we saw those absorptions trail off in the industry more so than normal and if we anticipate a more normalized seasonal selling cycle, we would be experiencing better results in the (multiple speakers).

Building that part of year-end. And then, you mentioned about the Quadrant ASPs. I mean if you just take a look at the backlog, the ASPs and backlog is a pretty significant shift at the end of both the first quarter of 2015 and 2016.

Jay McCanless, Sterne Agee.

First question I had, you were talking about the FHA loan limits in the Inland Empire. Are there other areas of the country where you're having to work on price or work on your offering to stay under those FHA limits?

Jay, I mean, ideally you'd see that pressure in Phoenix, also from the reduction they had there. The phenomenon in the Inland Empire, as Riverside, San Bernardino County is huge. What is it Tom? 29,000 square miles. And if you really examine the FHA loan limits in that region, you've got the west region, which is competing to Los Angeles which has an FHA loan limit, I think, of $625,000 and they're committing back into the Inland Empire in the west side and it's $355,000.

So, the federal government has it kind of backwards and either they need to look at it on zip code, they've got to consider these large counties and the pricing effect swing in product in the Inland Empire which is very large. And again, I'd say, Phoenix, I think we've experienced it there. I really can't tell you anywhere else that we've experienced it because a lot of our product would be more on the upper end price points.

The second question I had just thinking about the progression of the gross margin through the rest of the year based on what you have sold this quarter, it looks like gross margin should trend down maybe sub-20% for 3Q, 4Q, is that how we need to think about giving to the full-year guidance?

I think, Jay we talked about it on our first quarter call, we do see our margins contracting somewhat in the back half of the year because of the new communities that we're opening in the first half of the year. Until we see kind of the full spring selling and what are price, it's been accepted by the consumer, we're not guiding any more than that 50 basis point increase in our margin. But you will see our margins trend off in the back half of the year.

Will Randow, Citigroup.

Good morning and congrats on the progress.

In terms of it's been hit on a few times, but in terms of Pardee and the TriPointe Homes brand, can you revisit some of the drivers of absorptions coming in later in the first quarter year-on-year in light of the Easter holiday shifts, any pricing actions you may have taken year-to-date and really the key drivers for the TriPointe Homes brand in terms of the price point?

Yes, Will it's Mike. Again, when I mentioned last year Pardee averaged 6.1 orders in the first quarter, there was some new communities opened out in the Inland Empire which we're taking advantage of lower price points. So we had very strong absorption I think over 7 a month in the Inland Empire last year. This year, we average around 4.8, which is still a very solid absorption in Pardee California given our price points in San Diego. In TriPointe California what happened there if you remember in the fourth quarter of last year, we were selling much better in coastal California and so we closed out of a lot of our coastal California projects and west of the 15 was fairly weak, the back half of 2015, so absorptions were low. And so it's really that mix of opened communities right now that happened in the first quarter, it's more towards the Inland Empire and so we've seen our absorption fall off from what was 4.5 last year primarily coastal to 3.6 this year, which is primarily Inland. But we're still seeing a strong 4.1 absorption rate in our California markets.

So no pricing actions year-to-date or were there something that constrained orders potentially?

Could you repeat that, Will?

In terms of pricing actions in California, have you raised pricing up or there were some sort of elasticity?

We certainly are seeing an elasticity in our high-demand markets and we have been able to continue to raise pricing. I think even in the Inland Empire as Mike was alluding to some of those really fast-absorbing projects in the first quarter of 2015 experienced significant price gains throughout the year, so we are coming into this year with much higher price points than we were at the first quarter of 2015. So overall, we feel really good about our position and our ability to continue to gain price going forward in our high-demand markets.

And just as a follow-up to that for April [3.85] orders you show, if I remember correctly the strongest part of month for you guys is right at the end of the month. I guess is that a fair statement? And potentially as we close up this month in the Saturday, is there a potential upside to that 3.9 absorption number?

Yes, I think that's probably not true what you originally said, and we don't see any difference in absorption at the end of month versus at the beginning of the month. Our absorption is dictated because we have 40% of our actions in California and we're a [phase] builder in California. It's based on [phase] releases, so that could come at any time during the month. So I think, we feel pretty good about continuing the 3.9 absorption pace for the balance of April. Our toughest comp set is the month of May. I think last year we had 457 orders in the month of May. So we feel good about where absorption pace is, where our new communities have opened and we'd like to keep performing at that pace.

(Operator Instructions)

Dan Jacome, Sidoti.

Just two quick questions. For the Winchester, can you give us an update on the competitive dynamics there, just in terms of pricing. And I know you had mentioned promotional activity last year in the suburban pockets, wondering if there was any change there, things have intensified or possibly moderated?

Yes, as I indicated, our absorption pace in order activity is up year-over-year. Last year, at this time at the end of the quarter, we were at about 2.7 and it's about 2.9 orders per community per month. I'd say generally speaking, even incentives a year ago we're averaging about 11.6% first quarter. They're about 8.9%, so that's where you're going to see net improvement in pricing and ultimately over time margin.

Generally speaking, we have a strong presence in Maryland and we've seen a lot of activity up in Montgomery County, and then in the Southern end of Frederick County at our Landsdale community and then in Montgomery county in our Cabin Branch master plan community. So overall, there seems to be a stronger market presence, stronger consumer confidence that trickles across the river and also into Northern Virginia.

And then turning to Houston, I appreciate all the color, but just wondering if like -- the major infrastructure changes that are happening there right now, I think, two segments of the Grand Parkway or State Highway 99 just opened up, wondering if that's leading to any incremental traffic for you guys and how much exposure your communities have to that?

We have -- the Grand Parkway opening up we're not a land developer there. So we're -- over 80% of our revenues come from lot options. So the Grand Parkway has definitely allowed some new communities, I believe the newest one that'll be coming on board and I think they've done some pre-marketing is called Elyson by Newland, which is right off Grand Parkway. So that has and will continue to have a positive effect on the people getting around town and being able to live in those areas.

And then just one last one if I may, you said for the land sales, are you still -- is that going to be centered in the second and third quarters still?

Yes, that's right, Dan.

Alex Barron, Housing Research Center.

I guess I was kind of trying to still reconcile the performance of the TriPointe brand orders for this quarter. Was it just kind of a drop in -- temporary drop in community count that accounted for the lower amount or?

That some of it obviously in Colorado, our community count was off 8%. I think -- I believe is 8% in Colorado. Sorry, 29% in Colorado and our orders were off 25% as well in Colorado. So, but then in California that mix is -- it's a little above, right. We opened some new communities during the quarter, which didn't come out to later in the quarter, but the mix of product that were available for sale compared to the prior year's first quarter was less coastal product more inland product.

And when you are saying that you were seeing an improvement or a strong sales pace in the Inland Empire, was that just only for the Pardee brand or also for the TriPointe Homes brand?

Alex, we're seeing improvement across the board in both brands. Historically, we've messaged that east of the 15 corridor has been strongly absorbing through our Pardee brand, west of the 15 corridor had been struggling. But in the first quarter of this year, we are seeing momentum and the buyers returning to that marketplace, which is really encouraging for us and TriPointe is capitalizing on that.

And then just to go back on the margin trend, so this quarter, I guess you're expecting this to be the peak margin quarter for the year, given your guidance and you said it's just all based on what the mix of land, the vintage of the land?

It's primarily because we accelerated deliveries from our Pardee brand and other deliveries in California end of the quarter. Remember we're a phase builder and so it's very difficult to time the closings if you're delivering additional half phase of a project, we were able to pull units forward into the quarter. And pulling those units into the quarter at a higher ASP and at a much higher margin is had impact on our margin for the quarter, correspondingly those that come out of the second quarter, which the margins are going to fall off slightly in the second quarter to where we guided.

Mr. Bauer, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you everyone for attending the first quarter 2016 earnings conference call. As we mentioned, we're very pleased with the first quarter, it's off to a great start and we look forward to talking to everybody at the end of the second quarter after the spring selling season comes in for a landing, so. Have a great quarter and thank you for attending today's call.

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