Tri Pointe Homes Inc (Delaware) (TPH) 2016 Q2 法說會逐字稿

Greetings and welcome to the TRI Pointe Group's Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

I would now like to turn the conference over to your host Chris Martin, VP, Finance and Investor Relations. Please go ahead.

Good morning, and welcome to TRI Pointe Group's earnings conference call. Earlier today, the Company released its financial results for the second 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 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 the most recent annual report on Form 10-K and its quarterly report 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 assessed through the TRI Pointe website and 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. TRI Pointe Group posted strong results for the second quarter of 2016. Delivering significant year-over-year improvements to both revenues and profitability that culminated in a 35% increase in earnings per share. We sold homes at one of the best absorption rates in the industry at 3.5 homes per community per month, at profit margins and average selling prices that were well above our peer group's average. We also generated healthy profits from the strategic land sale of our lots in Pacific Highlands Ranch community in San Diego, further demonstrating the value of our land positions in California. Our results this quarter are a testament to our customer-centric and product driven focus as a home builder, as well as to the quality of our land holdings. They also serve as further evidence that we are continuing to unlock the value that was embedded in the homebuilding assets we acquired from Weyerhaeuser just over two years ago. This value will continue to be realized through our homebuilding activity with increased communities and deliveries along with periodic land sales as we bring several strategic land assets to market in both coastal and inland California.

Meanwhile, our operations outside of California are making great strides as well by combining a deep understanding of local markets with a passion for design and innovation that has been the hallmark of our Company since its inception. In short, I'm very pleased with our results this quarter, particularly in light of the fact that homebuilding activity continues to be constrained by land and labor availability, as well as fee increases and delays imposed by local municipalities. Despite these impediments, TRI Pointe Group delivered operating results that surpassed our internal projections as well as the guidance that we provided during our first quarter earnings call, reinforcing our reputation as a Company that surpasses the goals that we set for ourselves.

With that, here is some color on the markets in which we build. Our homebuilding operations in California turned in another excellent performance in the second quarter. Orders per community averaged above five per month as demand across the state remained robust. Our operations in San Diego continue to produce margins well above the Company average due to our low land bases and increasing home prices. At the end of the second quarter, we had over 4,000 lots remaining in this highly desirable land constrained market, which means that San Diego should be a big contributor to our bottom line for years to come. Our operations in the Inland Empire also generated new orders and accelerated pace during the quarter. As we saw strong demand in both sides of the I-15 corridor, getting more favorable pricing environment as the quarter progressed. These trends bode well for our Company as we are scheduled for grand opening next month at West Ridge, a 400 plus lot community in Lake Elsinore. In addition, we are currently planning a 700-unit active adult community in Beaumont, with land development starting in the first quarter of 2017. This further demonstrates our commitment to optimizing the value and accelerating the monetization of our California landholdings. We also saw solid trends in Northern California with a sales base above four per month, and a year-over-year improvement in homebuilding gross margin. Our two new communities in the Bay Area in Fremont and Hayward opened to great demand and sales activity during the quarter.

In the Pacific Northwest, our Quadrant brand continued to show the benefits of its repositioning by delivering another quarter of strong sales and gross margin improvement. Not only have margins improved on a percentage basis, but on an absolute dollar basis. Quadrant's second quarter average selling price of $521,000 represented a 27% increase from a year ago period. We expect our selling prices in this market to continue to increase as we roll out more communities in the highly desirable Puget Sound area, which bodes a very attractive employment and demographic profile. Our Pardee Homes operation in Las Vegas also experienced strong sales and improved profitability in the second quarter. Our team in Las Vegas has done a great job, targeting both the move up and entry-level segments with unique differentiated product offerings. As a result, new orders in that market rose 38% year-over-year and homebuilding gross margins expanded 180 basis points compared to the same period last year. In our other western markets, Maracay Homes in Arizona had another strong operating quarter, maintaining a 3.4 order pace per community per month. In addition, we had a 32% increase in deliveries compared to the same period last year. The team continues to be successful managing our trade partners to build and deliver homes in a timely manner. We are optimistic about continuing to grow our business in both the Phoenix and Tucson markets and are doing a great job filling our land pipeline. In Colorado, we continue to rebuild our product offering, but with accelerated absorptions last year and new communities coming online later this year, our orders are down. Similar to Maracay though, the second quarter was a strong period for deliveries with a 14% increase from the same period last year. Overall, the Denver market continues to see strong demand and we look to capitalize on that as we bring new products to the market. We are encouraged by several new quality land acquisitions that will fuel our growth over the next couple of years.

Turning now to our Texas operations. Trendmaker Homes delivered another profitable quarter for the Company and increased new orders by 7% versus the same period last year. The price of oil seems to have stabilized in the last few months, which is an encouraging sign for the long-term outlook for Houston market. However, we remain cautious about market conditions in the short-term. Fortunately, the asset light strategy we employ in this market allows us to have more flexibility with respect to our community offerings and limits our downside risks. Trendmaker's expansion into Austin has gone as expected, and we look to grow our Austin division with more community openings in the near future.

Winchester Homes in the Mid-Atlantic sustained a positive momentum it established earlier this year, with another quarter of margin improvement and increased order pace on a year-over-year basis. We have seen an improvement in the housing fundamentals in the region and look to capitalize on this rebound with products in core locations, beginning with openings in Bethesda and Northern Virginia in the third quarter as well as a highly desirable community located at our Glenmont Metro project in Silver Spring, Maryland. We're very happy with how the quarter ended up and the outlook for the year.

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

Thanks, Doug. We appreciate everybody hanging in there with us this morning with little technical difficulties. Obviously, we're a little bit more effective delivering results than we are hosting this conference call. So appreciate your patience.

Chris also mentioned earlier, we have also 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 second quarter ended June 30, 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 second quarter. We increased home sales revenue by 30% as compared to the same period in 2015, as a result of a 25% increase in home deliveries and a 5% increase in our average selling price. Our homebuilding gross margin for the second quarter was very strong at 22.3%, primarily due to our higher margin, higher average selling price communities in California, as well as year-over-year improvements at our Maracay, Quadrant, Pardee and Winchester brands. Pardee Homes closed two significant land sales to guest builders during the quarter, representing 102 lots at our Pacific Highlands Ranch community in San Diego. These transactions generated approximately $62 million of cash, as well as land and lot sale revenue, and $53 million of profit at a gross margin of 85%.

Pacific Highlands Ranch continue to provide substantial homebuilding and land and lot sale profit in the future as we still own approximately 1,000 lots in these community. We're also successful in recognizing additional operating leverage improvements during the quarter, as reflected in our selling, general and administrative ratio, which improved to 11.3% as a percentage of home sales revenue, compared to 12.6% for the same period a year ago. Net income available to common stockholders was $73.9 million, or $0.46 per diluted share, compared to $54.9 million, or $0.34 per diluted share in the same period of last year.

During the quarter, we opened 10 new communities, three in California, three in Texas, two in Colorado, one in Maryland and one in Nevada. In addition, we closed out of 18 communities during the quarter, three more than anticipated, resulting in a quarter ending active selling community count of 117, as shown by state on slide 7. For the quarter of 2016, for the third quarter, we anticipate opening 16 new communities and closing out of 12, resulting in 121 active selling communities.

For the full year 2016, we're reaffirming our guidance of growing our active selling community count by approximately 20% year-over-year from December 31, 2015. During the second quarter, we had 1,258 net new home orders, up 2% compared to the same period in 2015. However, it is important to note that our net new home orders for the second quarter of 2015 were up 62% from the same period in 2014, creating a difficult comparison for the quarter. Our overall absorption rate remained very strong at just over 3.5 orders per community per month for the quarter and continues to be one of the best of any of the publicly traded homebuilders, while having the second highest average selling price in our peer group for those that have previously reported their results.

For the first six months of the year, orders were relatively flat on a same average community -- comparative community count compared to the prior year, while deliveries were up 20% during the same period, due to a higher backlog conversion rate. As a result, backlog at the end of the quarter was down 200 homes or 10% compared to last year's second quarter to 1,798 homes with an average sales price of $571,000. The corresponding dollar value of our backlog decreased 14% year-over-year to approximately $1 billion. During the quarter, we converted 65% of our first quarter ending backlog, delivering 994 homes, resulting in a 30% year-over-year increase in home sales revenue to $557 million. Our average sales price for homes delivered was $560,000, a 5% increase from $535,000 for the comparable period a year ago. As I previously mentioned, our homebuilding gross margin was 22.3% for the quarter, which was up 230 basis points year-over-year from 20%, although down 100 basis points sequentially from 23.3% in the first quarter this year. Our gross margin continues to be very strong for our Pardee brand, especially in California, due to the legacy land bases and their outstanding operational performance.

In addition, we saw year-over-year margin growth at our Maracay, Quadrant and Winchester brands. SG&A expense as a percentage of home sales revenue was 11.3%, which was a 130 basis point improvement compared to 12.6% in the same period in 2015 and a 160 basis point improvement compared to 12.9% sequentially from last quarter. The favorable leverage impact of our higher home sales revenue in the quarter more than offset cost increases related to supporting our operations and future growth. During the second quarter, we spent $131 million on land acquisition and $107 million on land development. Year-to-date we've spent approximately $466 million on land acquisition and 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 the land needed to meet our planned deliveries for 2016 and 2017.

Now, I'd like to make a few comments related to our balance sheet. At quarter end, we had approximately $2.8 billion of real estate inventory, representing 27,680 lots owned or controlled, of which 62% are located in the entitlement constrained markets of California. Our lots owned or controlled represent an implied 6.4 years of supply on a trailing 12-month delivery basis, significantly down from over an implied 9-year supply, when we closed the WRECO transaction in July 2014, and well on our way to reaching our target of approximately a five-year supply. A detailed breakdown of our lots owned is reflected in our Form 10-Q, which will be filed later today and in addition, there is a summary of lots owned or controlled by state on page 21 of the slide deck. During the quarter, we partially exercised the accordion feature under our existing unsecured revolving credit facility to increase our total commitments from $550 million to $625 million. We also issued $300 million of senior notes at an interest rate of 4.875%. At the end of the quarter, our total outstanding debt was $1.3 billion, resulting in ratio of debt to capital of 42.2%, and net debt to capital of 39.9%. We ended the quarter with $117 million of cash on hand and additional liquidity of $520 million available under our unsecured revolving credit facility. During the quarter, we executed on our $100 million share repurchase program, purchasing 1.3 million shares at an average price per share of $11.73 for a total of 14.7 million. Subsequent to June 30, 2016, the Company purchased an additional 250,000 shares at an average price per share of $11.71 for a total of 3 million.

Now, before I turn the call back over to Doug for some closing remarks, I'd like to summarize our outlook for the third quarter and full year 2016. During the third quarter, we expect to deliver approximately 55% of our 1,798 homes in backlog as of June 30, 2016. We anticipate opening 16 new communities and closing out 12, resulting in 121 active selling communities as of September 30, 2016. We expect our homebuilding gross margin to be approximately 20%, as we deliver more homes from recently opened communities that are performing closer to our underwriting standards. For the full year 2016, we are reaffirming our guidance for a 20% increase in our year ending community count, deliveries between 4,200 and 4,400 homes at an average sales price of approximately 550,000, and SG&A expense ratio in the range of 10.3% to 10.5% of home sales revenue and full-year homebuilding gross margin to be in the range of 20.5% to 21.5%. In addition, we don't anticipate any further material land sale gross profit for the balance of the year.

With that -- those comments, I'll turn the call back over to Doug for some closing remarks.

Thanks, Mike. In conclusion, I'm very pleased with the progress we have made this quarter. Our results continue to demonstrate our ability to unlock value from the assets we acquired from Weyerhaeuser over two years ago. We knew that with the right operational focus and an emphasis on generating returns on capital, the combined entity would be greater than the sum of its parts. Given the strong profits we generated this quarter from both homebuilding operations and land sales, we believe that the potential we envision at the close of the acquisition is being realized.

Finally, I would like to thank all of the hard-working team members of this organization for a job well done. Collectively, we are building a best-in-class homebuilding organization, and I'm extremely proud of the fact that TRI Pointe Group, TRI Pointe Homes Southern California Division, Quadrant Homes and Pardee Homes, San Diego Division were honored as best places to work in their respective local communities. That concludes our prepared remarks and we will now take your questions. Thank you.

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Ivy Zelman from Zelman & Associates.

Good morning. Congratulations, guys, on the strong quarter. Overall, I guess there is such a great comprehensive deck and you did pretty good, Mike, don't worry, we all heard everything. In terms of the guidance though, I think, where do you expect the sequential pressure in the back half to really come from, it seems like fundamentally things are really operating on all cylinders, even the improvement that you've seen in Houston, so where is that coming from? And then I have a follow-up.

Yes. Ivy, it's Mike, and thanks for hanging with us today. On the margins, I mean, as we talked about it from the beginning of the year, we guided the fact that our margins were going to be relatively strong in the first half of the year and have some pressures on the back half of the year, primarily because we're closing more units out of the newer communities that we opened in 2016, which really don't have the maturity of the pricing yet. And so, we see our margin closer to the 20% range in the third and fourth quarter, plus, we have some mix issues related to some of our higher priced products. Product in California delivered much more percentage of our deliveries in the first half of the year than on the back half of the year.

Okay. That's pretty helpful. And I think Las Vegas seemed very strong, and just thinking about incrementally over the last few months and the three-month period, we've had some new products that have been made available for consumers through Wells Fargo and higher LTV mortgages available, 1% down by Quicken, 3% down by Wells Fargo, just wondering if anything that you can pinpoint to sort of the acceleration that might be of help to sort of give us more fundamental conviction that, that things are accelerating or would you say things are just kind of status quo in spring, maybe Doug, if you want to comment how would you rate the first half on a scale of 1 to 10 versus the normal spring selling season, is it above normal, do you feel like this is normal and have you increased your conviction on the outlook?

Yes. Ivy, I would say the first six months of the year were right in line with previous year and maybe a tad bit up -- our absorption pace per community was a tad bit better. So that's the thing that we really focus in on and especially at our ASP, we're really proud of continuing to move that product, continue to see some pricing increases. Now, as you get into this third and fourth quarters, the early part of the third quarter, we've seen the seasonal changes. So, I mean, this business is as I've always said, you sell 60% to 65% of what you need to deliver in the first six months and then your orders will tail off in the second half and you start delivering it. And as Mike mentioned, as we told the street from the beginning, we know our business very well and our mix. We've got a lot of new projects delivered in the second half of the year, closer to our underwriting standards, so to be honest with you, the market is performing just as we expected. Frankly, we feel very optimistic about the long-term nature of housing for the next three to five years, and we push out on the five-year horizon. When we look at the demand drivers of household formations and jobs and the constant supply constraints, we talked about the fees, the regulatory constraints, I mean, every municipality is always struggling with our operators to get building permits. So, when you combine demand and supply constraints, it's just going to be a very steady, very good housing market. The other thing that I keep hearing as I go -- I've gone to a couple of conferences hosted by a few different people, the apartments seem to be kind of losing a little bit of steam. I think rents have been pushed so hard I constantly hear from the apartment operators, hey guys, single family is going to start feeling the benefits of that over the next several years. So, we're very optimistic still for the next three to five years, it's just going to be a very steady growing business when you combat both the demand and supply drivers.

That's really helpful. And the incremental move out to buy from the apartments, we're definitely seeing that. Just sneaking in one real last quick one on your guidance on community count. You expect community count growth for the full year 20%, that's one of the hardest things to forecast, and operationally you guys have really met or exceeded on that front. So, can you give us conviction that that is achievable and any color on 2017, I know you don't want to give quantitative, but just qualitatively, do you expect to see sort of a continued momentum of that growth?

Yes. Ivy, this is Mike, again. We feel pretty good about where our ending community count is going to be. I mean, the only thing that we can't really control as much is is how many we closed out, I mean, if there's a tremendous success in the third and fourth quarter on orders more so than we had year-over-year, and maybe we don't see as much seasonality, we might close a few more communities, but we feel pretty good about the communities that are in line to open for sure.

We've indicated, Ivy, that we're going to grow deliveries through 2000 -- by the end of 2018 of upwards of 5,400. So that's going to continue to require more communities that will come to the market over the next -- going into 2017 as well.

Also, Ivy, I think the quality of the new communities that we're bringing to market, we're really encouraged by -- we've had some excellent land acquisition opportunities, and I think you'll see the offerings coming to market in 2017 being outstanding performers.

Congratulations guys. Good luck.

Tim Daly, Deutsche Bank.

Thanks. This is actually Nishu from Deutsche Bank. So, yes, I wanted to start out with the Winchester operations, really strong performance there, particularly, it looks like from Maryland, but Virginia as well. So that's on the volume side, but on the ASP side, it looks like that is also contributing to some of the downward pressure on ASPs in addition to that migration into the Inland Empire that you folks have been talking about. So I just wondering if you could walk us through, Mike, I think you also mentioned that the Winchester margins, gross margins are up on a year-over-year basis, you introduced us new product. So, I was wondering if you could just walk us through the dynamics as you expand your volumes and your community count there, what's shifting, what's driving the success, how much further ASP pressure might that provide, so what's going on on the ground there?

In Winchester, we've got a couple of big PUDs or planned unit developments up in Montgomery County, Cabin Branch, and then just in the Southern Frederick County area, Landsdale, and as you go up that quarter, the 270 quarter, it definitely has seen momentum pickup, mild tightening of incentives, but nothing to go crazy over and that's where we're forecasting, as we look at that market, a continued improvement in pricing. On top of that, we're very excited about the second half of this year, as we open up a new community in Bethesda, it's a higher end town home community, out in Northern Virginia, a higher end community. We open it up a more of an entry level product that we opened up in Glenmont, called Glenmont Metro in Silver Springs. So as we mentioned at the end of the year and beginning of this year, we're continuing to reposition our land assets closer into the core, which we believe will show continued pricing and more importantly margin improvement. The one thing that -- I don't know about price -- price will be very closer above the Company average, because there's a lot of town home product that gets involved there. So we've got some single-family detach that's going to be a $1 million type of product, but the town home product will bring that in line or slightly above our Company average, just basically flat in that area. So, we see more margin improvement and a stronger market as we go into 2017.

Got it. Thanks. That's helpful. And how much, Mike, the gross margin improvement that you mentioned across those three divisions, the non-California divisions, roughly just order of magnitude, how much was that in Winchester as well?

Well. Winchester was relatively slight, Winchester and Maracay were slight improvements, most of the improvements came out of Quadrant for the quarter.

Great. Thanks. And I also wanted to ask about land spend, Mike, I think you mentioned year-to-date, total you're at above $400 million now, very strong pace of land development spend, especially against, like, if you look at your land inventory about $1.8 billion, a pretty good increment against what you have on the balance sheet at the moment. So, you're closing this guidance that you've given, longer-term implies mid to high-single digits or so, and obviously you're on track for that, but the land spend just seems to imply something a stronger trajectory than that, maybe that's just a lot of -- on the development spend side, how do I reconcile those two?

Yes. I mean, I think what you're seeing is on the development side as we talked about, we were originally going to sell some lots in Golden Valley, we were probably going to sell some lots in Castle Rock, and we decided to build those under the TRI Pointe brand as we move forward into 2017 and 2018, and so, we're having to spend more dollars on the land development side related to that. But primarily what the land spend and the land development has to do is driving us to that 5,100 to 5,400 deliveries out in 2018, and we probably feel like we're on the longer end of that range now at this point. So, we guided at the beginning of the year, I think our land development spend was between $800 million and $1 billion, and we're kind of right on pace with that currently through the first six months, you know how that works, it's somewhat lumpy at times, land doesn't just roll in on an even quarterly basis.

Right. Okay. Great. Thanks for the color, guys.

Mark Weintraub, Buckingham Research.

Thank you. Thanks for all the details as always if I look at the lots that you own and I think about that, the five-year land supply and that 5,100 to 5,400 and you talk about, hopefully being towards the higher end of that by 2018. That sort of -- those numbers sort of work already. And so I guess the question is, whether you're really at this point going to slow back on land sales or there are going to continue to be land sales and you're going to be continuing to buy fairly aggressively on new lots and so you're going to shifting the mix? And is there a kind of a geographic goal if it's the latter or basically do you largely have your land positions that you're going to be looking to utilize in the next couple of years?

Mark, this is Doug. You're right on in a lot of cases. I mean, as we've said previously and we continue to demonstrate it and unlock some of the value in the land holdings because of the nature of this [RMT] transaction, but it's clear to us as we go out into 2018, we'll be focused primarily on homebuilding activity, because we see more profitability from doing that than using more land sales. We've got the TRI Pointe brand and the Pardee brand now going to team up in Golden Valley up in LA, down in San Diego, Castle Rock, we're looking at opening an active adult community in the Inland Empire at Sundance that I mentioned in my remarks. So by 2018, it's a well running homebuilding engine is we like to look at the forecast.

Okay, great. And then just a question on the fourth quarter, historically that was a pretty big quarter, particularly on the Weyerhaeuser properties and typically the gross margins moved higher in the fourth quarter. It sounds like, you're sort of guiding more to flattish with the third quarter in the fourth the quarter. I guess there could be a little bit of upside, but is that a function of just the communities going off and communities going on or what's the thought process behind that guidance?

Yes Mark, it's all being driven. It's being driven by two things. Some mix shift happening, which we closed. We had very good success selling homes in the back half of 2015 in California. We delivered a lot of those in the first half of this year. Higher priced, higher margin homes, with low land basis. More specifically, even down in San Diego we delivered much more units out of our PHR site than we will in the back half of the year. So there's some mix issues there, along with, we have so many new communities that we're opening this year. That's just -- again as I talked about, they don't really have the maturity of the pricing model yet, and so that has some pricing pressure and margin pressure on the back half the year.

Okay. And I guess, I realize you're not giving 2017 guidance at this point, but often the fourth quarter would be sort of one of the strongest in the year from a gross margin perspective. I mean, are we resetting where gross margins are or is it that this fourth quarter is just going to be a little bit lower than -- and so, one shouldn't say okay, we've had this reset level for the fourth quarter this year and therefore 2017 is a little bit lower on average, is that -- or is a wrong way to look at that?

No. I think, it's difficult with us, because we're a relatively large Company, but we're really not. And so we do have quite a bit of mix shift when you look at how much a percentage of our California deliveries come to our overall total. So we still see -- and we look at our business on a year-over-year basis, we have margin expansion from 2015 to 2016 and we still believe we will have a margin expansion from 2016 to 2017. It's just, the quarters are going to be somewhat spiky here and there.

Jack Micenko, Susquehanna.

Hi, good morning. Obviously TRI Pointe is defined as probably one of the better absorption rate builders out there, but when I think about conceptually 2017, do you think that 10-5 number moves higher because you're mixing in some lower price point or is it that the California product is just so high that it won't really move the needle? I'm just trying to think or understand how you guys think about some of the impact of moving maybe lower [SP] in the mix but sometimes that has a higher absorption component to it.

Yeah. Jack, it's Mike. You know, we typically look at our business planning process where companywide we average around three. Clearly the first half of the year we average higher and in the back half of the year we average lower than that, but we usually look at our business at around an average of three. That will change slightly with mix, as we're doing some smaller product. They typically in California might absorb at a faster pace, but we're looking maybe just a slight tick up in our absorption overall for 2017 and 2018 based on our mix count, but it's nothing significant.

Okay, thanks. And then you've repurchased your shares admirably in terms of where you're at and where your base has been, where the stocks at today. How do you think about price? I mean, would you characterize the buyback as price-sensitive or more methodical? And then with the net debt just under 40% here, is that the right kind of level you guys look at going forward? Thanks.

Yes. We've talked about -- I'll talk about this second question first. Our debt-to-cap we've always said from the very beginning when we formed a company back in 2009 that we would maintain our debt-to-cap below 50% and we've clearly been averaging in the low 40%s and even in the middle of this year that's a relatively low position for us. Typically we average around the mid-40s in the middle of the year and start paying down on our line as we move through the balance of the year. So we think that mid-40s run rate is a pretty good rate for us, as we continue to grow to deliver units in 2018 and we're acquiring more land in order to do that. Related to the stock price and the stock repurchase, we have an overall Board authorization of $100 million worth of shares, through most of the quarter we were blocked out because of the significant transaction we did on our bond transaction. Most of our shares were purchased under a 10b5-1 plan and it is somewhat price sensitive. I mean we had a -- we put a range in there and acquired shares within our price range. We haven't really discussed at what point would we -- what's the dollar price per share that we would purchase or not purchase moving forward.

We're being opportunistic. We think there's additional implied value in our assets because of the RMT nature and that our book value is significantly understated and because of that we think that our price is understated and we've acquired shares.

Patrick Kealey from FBR.

Hi, good morning. Thanks for taking my questions. The first question, you talked about last quarter rolling out some more modestly priced homes in the Houston market. So, can you maybe give us a little bit of an update on how that process is going and then maybe what you're seeing on the more modestly priced home market in Houston?

Hi, Pat this is Doug. What we talked about last quarter was actually securing lot positions in sections with slightly smaller lot configurations, more in the 50 and 60 foot width compared to our typical 70, 80 and 90s. So the actual product would not be delivered until late 2017 going into 2018 because of the nature of the developing the lots and so forth. So it's not quite that quick to bring that product to market. But over the next three years, we do see an opportunistic nature and trend maker broadening our scope of product offerings still being a very premium value in that marketplace but penetrating not only the larger lots but the smaller lots. And you will see over the next three years their ASP coming down, because of that, that's for sure. But you don't see anything there right now, because we don't have anything right there.

Okay, great. Thank you. And then maybe as we kind of come to the close of the month here, can you maybe give us an insight into how July is tracking maybe versus last year and then kind of any trend that maybe sticking out here early in third quarter?

Well, as I mentioned earlier, we had a very strong second quarter, you sell most of your houses 60%, 65% in the first half of the year and then the second half of the year paces will slow down and we've seen in kind of the normal seasonal adjustments. Some of the markets have been a little more affected than others, because I think the heat -- it was very, it's been very warm in Phoenix, Las Vegas, lot of heat back in the Mid-Atlantic lately. So -- but that's all seasonal. The demand trends that we see, our foot traffic, the web traffic and the desire to buy homes is still very strong as we talk to our operators.

Susan Berliner, JP Morgan.

Hi. I was wondering if you guys could talk about I guess labor issues and labor costs in the various markets? And it didn't seem like you talked about that impacting gross margins, and I was wondering if you could just elaborate on that?

Yes, Susan. This is Tom. Certainly it is an issue in almost all of our markets as the industry continues to be challenged from a labor perspective. On the cost side of things, it is impacting our direct costs. We continue to see periodic increases primarily related to labor, but we do have some material cost increases. Overall for the year, we're projecting cost increases on average of about 3%. We are able to maintain margin because most of our markets are having the corresponding increase in pricing as well. So overall it's an issue, it continues to be an issue, but we do see the rate of those increases slowing in several of the markets. So we're encouraged that we're starting to maybe get to a new equilibrium and have some slowing of those cost increases.

Susan I'd add, this is Doug. You know in the Phoenix markets, which have been very labor constrained. Labor constraints come because building permits and starts kind of go up in a stair-step fashion. Labor just doesn't move that quickly. And you know our operation in -- Maracay Homes operation is actually seen -- their cycle times increased to 15 and then they've actually come in a little bit, as labor is slowly making adjustment in that market, which has seen building permits rise in a double-digit fashion. So, it's out there and it's an issue that the industry has continued to battle with but we're seeing some improvements in our markets as well and seeing our cycle times kind of flattening out are coming in just a little bit.

Great. And then I just wanted to go back to Houston. I was wondering if you can talk about incentives and margins and talk about what you're seeing year-over-year?

Incentives, year-over-year. When you look at -- I'll just go from January 2015 to the second quarter of 2016. Incentives rose, say around anywhere from 6% to 8% in the first quarter of 2015 and they can be upwards of 13% -- 12% to 14% in the second quarter. So they've risen substantially. We are at the higher price point. So that may have something to do with that percentage. But our orders as we mentioned we're very pleased, actually. Our orders were up 7% and our margins -- the beauty of our model in Houston that we keep articulating on is it's really a just-in-time inventory and in pricing terms and conditions. I mean we are constantly re-pricing and reconfiguring our terms and conditions because we're basically taking finished lots down by section and a section can range from 15 to 30 lots. So it gives us the ability to basically re-price our position not only in new sections, but also on -- within our sections.

Great, thank you very much.

Will Randow, CITI.

Hey, good morning guys and congratulations on the progress. I guess this was covered in a few different ways, but I'll ask it differently. When you think about capital allocation as well as overhead expenses. How should we think about what you are telegraphing with, I'll call it from a growth as well as margin perspective, to state it differently, are you positioning over the next few years to really a lean SG&A, potentially to sub 9% generating cash and focusing on buybacks and dividends. Or should we think about the way you are positioning things to kind of grow the top line but at the cadence of teens or better considering you have recently [weaned lockout] and generated some cash last year?

Will, it's Mike. That was lot of questions, I'll see if I can remember those. I mean I think we are looking at growing our business. We've talked about that and highlighted that that we think we can grow our brands organically to that 5,100 to 5,400 delivery count, that means we are growing the top line but corresponding with that we believe we'll get significant operating leverage. I don't think we're going to get below that sub-9% level that you've heard some other builders talk about, but I do see us getting the 9% handle on our leverage by 2018. Moving forward, we still feel pretty good about our margin and what our margin expansion could potentially be because of the deliveries we're going to have out of California and we own most of that land at relatively low basis and going to be building it out of multiple brands using both TRI Pointe and Pardee. So right now we are a spender of capital. So we've talked about that being negative cash flow in 2016 and relatively flat in 2017 but then generate pretty significant positive cash flow by 2018 as we get to those kind of volumes.

I don't know if I touched on all them, but I hit most of them I think.

Yes. definitely. So the message is pretty consistent. As a follow-up, I guess what kind of holds you back from getting sub 9% on SG&A? Can you kind of provide some incremental color on the specific drivers of why it can't get there sooner?

Well, I mean growth, we're spending dollars on growth and in a lot of our markets it's pretty significant broker co-op and in some of those markets were kind of laser focused on that, on helping our G&A moving forward, but it's really spending dollars and capital on people to grow into those volumes and to go from where our guidance is this year, which is kind of in that 10.3% to 10.5% range to sub-9% would be a pretty significant change for us. So I think we feel comfortable about getting into the 9%s but I wouldn't want to bet on having an 8% handle on it.

Thank you.

Hi Will, it's Tom. I think you also have to remember, with our expansion into some markets there's some upfront G&A costs that make that prohibitive. Currently we're heading in Austin and ramping up our LA operations as well. And we do see the opportunity as we're looking at a couple other new markets for organic growth that would be prohibitive.

Stephen East, Wells Fargo.

Good morning, guys. I apologize if this question has already been answered, because we have been cutting out a little bit. But when you look at your land spend moving forward, a couple of questions there, where are you allocating or are you doing it on purpose or is it just where the deals are showing up, and just more generally have the deals gotten progressively harder to cancel?

Stephen, this is Doug. As far as land deals, I think, the two biggest things that always keep us up right now are finding land and meeting the underwriting criteria, because we are very stubborn on meeting that criteria. There are several times that we will just tell the land seller no, what generally happens though is somebody capitulates and then it's like a rebound in a basketball game that keep coming back to us, because we've got very seasoned land professionals in each one of our areas, so it is very competitive, and along with we've talked about the constraints of labor and so forth. So those two things are the ones that keep me up, and I know our operators too, because we, right now as Mike mentioned we are good for 2016 and 2017 for deliveries, it's really focusing in on 2018. So, we're making important bets now to do that, right. So, we're being very disciplined, and frankly, I see our competitors being very disciplined too, which I think is a good thing. As far as capital allocation, in pure dollars, the dollars are bigger in California than other areas, but I'll pick on Seattle. Ken is running their Quadrant operation up there, he's done a wonderful job, has a very, very seasoned land team, has been able to secure incredible opportunities in the Puget Sound area. So allocating more capital there will be an important item for us here in the short run, because we believe that market is going to continue to perform very well when you look at the job growth engine of Amazon and others. And then you look at California, I mean, the dollar amounts are just big, right, Tom, I mean, you go to Northern California to Southern California, you're going to write a check for $20 million to $50 million, that's not the case in some of the other markets.

But Stephen, I would add that, we're encouraged by market conditions in all of our markets, and we see an opportunity to grow from our existing platform and pick up additional market share, so each one of our operators is hungry and they have teams in place that can perform at higher volumes than we're currently delivering, so we're looking for acquisitions in all of our markets.

Okay. And along those lines, I think you might have answered this, but along those lines some of your competitors we've seen, some of them have not been able to offset cost and the margins have dropped and others have done a better job, and when you look at a lot of times it's geography-dependent and some of those geographies you all are in, are there any of your geographies where you're not able to offset all the cost, right now?

Yes. I mean, we've seen in some sub-areas, for example in Phoenix, where we haven't been able to offset some of the labor pressures from 2015, with pricing, some of that as I mentioned earlier has stabilized a little bit, but that's a phenomenon that frankly -- Tom and I haven't seen a lot in 28 years being in this business, and you're feeling those labor pressures across the board.

Alvaro Lacayo, Gabelli & Company.

Just a quick question, I realized you guys mentioned that you don't foresee any significant land sales for the rest of the year, but when it comes particularly to the Pacific Highlands Ranch asset, how do you guys think about the strategy in the medium-term, and is there anything unique or different about those 102 lots, residential lots you sold this quarter versus the 1,000 remaining or so lots that you mentioned on the call?

Alvaro, this is Tom. Relative to Pacific Highlands Ranch in specific, obviously that's a large-scale master plan community that we have been building in and developing for quite some time. Geographically, the 102 lots that we sold are in a different area and probably an area that is less desirable than the new area that we'll be moving into to the west of the property, which is on a ridge line with some significant distant coastal view. So, we have improving lot conditions moving forward, and while I say less desirable, they are highly desirable and in strong demand from the consumer, but relative to the new lot offerings that we'll have going forward. We are encouraged by the quality going forward there. We continue to evaluate our land sale and home building strategies that really optimize cash flow and profits. And as we get to scale, we see a shift through this elongated cycle and to trying to capture more through our home building opportunities. We will probably have another significant land sale in 2017, if market conditions allow, but as we look for 2018 and beyond, we want to capitalize on increasing community count, and keep as many of those new opportunities in our homebuilding operations.

Okay. Good. Thank you. And then just on the back of the conversation on the labor constraints and those issues, the backlog this quarter was substantially stronger year on year, you've guided sort of for a flat -- sort of backlog conversion for the next quarter, if you can just sort of provide some highlights within your own operation that sort of gives you the conviction, sort of maintain those backlog conversions on the face of labor constraints, and is there some upside do you think to the guidance you provided?

Well. I mean, I think our backlog conversion is lower that we're guiding to for the third quarter primarily, because we pulled the units from the third quarter into the second quarter, I mean, we delivered probably 75 more units than we originally anticipated in the quarter. So, I think, we still feel pretty strong about our third quarter deliveries, is that what you're asking?

Yes. That's fine. Thank you.

Alex Barron, Housing Research Center,

I wanted to talk to you about your outlook all the way to 2018, the growth seems pretty good, I think the opportunity is good from what we can tell. My question is with regards to the communities that you guys are planning to roll out this year, next year and whatever it takes to get to the 5,400, is the mix going to change significantly as far as affordable homes or move-up homes, luxury homes or do you expect it to remain pretty much the same, and I guess also how much would you guys expand into active adult segment?

Hi. Alex, it's Tom. That's a good question. Overall, fundamentally we're an opportunistic builder and we seek to maximize profitability through diversified product offerings. And I'd say our mix should stay relatively similar to what we've currently been delivering and that's approximately about 35% of our volume being done in that entry level first-time buyer market, 45% in a move-up segment and maybe 20% in the luxury executive housing type. So, we see that to maintain fairly similarly, but we are opportunistic and we have the ability to shift as we see new value advantages in our different marketplaces.

Okay. So, not necessarily any significant drive towards more affordable or entry level stuff?

No. Actually, we continue to be very opportunistic and we have continued to demonstrate the ability to build not only at the entry level, let's say in the low threes all way up to a $1.5 million, $2 million product. And one of the things that you got to realize is, being opportunistic gives us a broader platform to grow our business and add to our land counts and our community counts. And so our operators have developed that skill set to do that and that's I think a huge distinctive advantage we have. And we're not going to focus on just one, you don't turn a ship that way. We've got -- we developed a strategy that we've been -- we've had for a long time and it's been very successful and that's being opportunistic and we'll continue to push on that strategy.

And by nature, we operate closer in, in core markets, that are close to employment centers or transportation quarters to employment centers, and so that dictates a lot of the product offerings in itself.

Okay, that's fair. And then, as it pertains to land sales, I guess, land sales have been a significant component of your earnings last year and this year. Do you guys foresee that into the future or were these just two opportunistic years that you saw but it's not going to be a major component going forward?

Yes. As I mentioned earlier by one of the questions, we continue to see our earnings growth in home building and less land sales in 2018 or really a focus on home building. We see the land that we own, that we got part of this transaction back in July 2014 from Weyerhaeuser, is a great ability -- opportunity to increase our community counts, bringing our brands here in California and maximize our profitability that way than doing land sales.

Dan Jacome, Sidoti & Company.

I think, most of my questions were answered, but I'm sorry if I missed it, I got on late. Did you guys give an update on the Aliento brand in Golden Valley?

What was the question?

The Aliento project in Golden Valley.

We have not really talked about it on the call, but we are encouraged as we've been moving through our land development efforts there in the hopes of getting that community to a grand opening in first quarter of 2017. Mike did discuss a little bit that we've got a strategy where we are employing both our Pardee brands and TRI Pointe brands in that same community. One thing to note Dan is that the Sand fire in the Santa Clarita area was burning adjacent to our Aliento community, we sustained no damage, the fire is currently 25% contained but moving in a different direction, so we don't see any immediate impact from that.

Thank you. At this time we have no further questions, I will turn the call back over to Doug Bauer for closing comments.

Well thank you everybody and we apologize for some of the snafus at the beginning of the call, but we are very pleased with the second quarter and look forward to talking to all of you at the end of next quarter, have a great week and a great day. Thank you.

Thank you, this does conclude today's teleconference, you may disconnect your lines at this time, thank you for your participation.