Tri Pointe Homes Inc (Delaware) (TPH) 2016 Q3 法說會逐字稿

Greetings and welcome to TRI Pointe Group's third 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. I would now like to turn the conference over to Chris Martin, VP 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 third 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 in its most recent Annual Report on Form 10-K and its quarterly reports on Form 10-Q.

The Company undertakes no duty to update these forward-looking statements that are made during the course of this call. Additionally, non-GAAP financial measures will be discussed on this conference call. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through 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. Thanks for joining the call to review our results for the quarter. TRI Pointe Group delivered another strong quarter of profitability. I'm happy to report that each of our homebuilding brands made positive contributions to the bottom line, a testament to the well-balanced diversified nature of our Company. Because of the strong success we enjoyed in 2015 and a 2016 plan that was focused on replenishing our land pipeline and opening new communities, we experienced year-over-year declines in several financial and operational metrics this quarter. While the declines this quarter were expected, we are effectively executing on our plan of replenishing and opening new communities, which we believe will provide the catalysts for strong steady growth that will provide positive year-over-year comparisons for future years.

Beginning in the fourth quarter, we expect to re-establish a year-over-year increase in community count and we have already seen tremendous success with strong orders from our new communities. We're off to a good start for orders and with our positive community count growth, we expect double-digit order growth year- over-year in the fourth quarter. We continue to build a best-in-class culture by sharing best practices across our organization and staying committed to being a leader of design and innovation in our industry. I believe it is this culture in the mindset that differentiates us from the competition and enables us to produce outstanding results. For the quarter we generated $34.8 million of net income or $0.22 per diluted share, which resulted in $137.3 million of net income through September 30, which is a 14% growth over the same period last year.

Additionally, our homebuilding gross margin percentage for the quarter was 21.8% as compared to 20.4% in the same period last year. As I've stated in the past, the business of production homebuilding does not follow a path of linear progression. Issues such as timing of community openings, shifts in product mix, and changes in local market dynamics can swing a builder's results from quarter-to-quarter. These swings are a normal part of homebuilding and while they can cause near-term volatility, they do not impact the long-term strategy or outlook for our Company. As such, we remain in a great position to deliver on our goal of 5,100 to 5,400 homes in 2018 thanks to our significant inventory of lots owned or controlled and our team's passion and commitment to growing our six homebuilding brands for the next several years.

With that, here is some color on our various brands in the markets in which we build. Pardee Homes, which was once again a significant driver of our Company's success in the third quarter both in terms of profitability and absorption pace. In the San Diego division of our Pardee Homes brand, we continue to reap the benefit of having low cost land positions in some of the most desirable locations in the county, which resulted in gross margins in excess of 30% and an absorption pace of about four homes per community per month for the quarter and over five homes per community per month year-to-date. We continue to capitalize our market conditions by offering multiple products within our Pacific Highlands Ranch master plan community with two unique product offerings that have been very well received and will contribute to strong deliveries in 2017.

In addition, we have activated the remaining planning area of our Ocean View Hills master plan community in Chula Vista. We've had strong sales at our first product offering, which has sold 47 homes since opening in April of this year at an average sales price of $493,000. We're looking forward to the next two products, which are on schedule for opening later this year and because of their affordable pricing below $400,000, we expect strong absorptions. In the Inland Empire division of our Pardee Homes brand, demand remained strong for entry level and move-up products east of the I-15 Corridor. We've had excellent absorptions of 5.5 orders per community per month thanks in large part to our product pricing that falls within the local FHA and conventional loan limits.

The grand opening of three projects in late August in our West Ridge Community in Lake Elsinore is off to a great start with 53 orders to date and will fuel significant order growth for 2017. In addition to great absorptions, our homebuilding gross margins were above the Company average during the quarter thanks again to our low cost land basis. Finally, the Las Vegas division of Pardee Homes brand continues to perform well for us. For the third quarter, we saw good demand and pricing activity in all sub-markets. Our new products have been well received and have helped push our absorption pace to over 3.3 homes per community per month for the quarter. Overall demand feels broad based both from a location and buyer segmentation standpoint, which will facilitate excellent growth in 2017 and beyond.

Moving on to our TRI Pointe Homes brand where we operate in Southern and Northern California and Denver. In our Southern California division, our coastally located projects continue to perform well with an absorption pace of 3.4 homes per community per month for the quarter. Our unique product offerings and strong positioning within the Orange County market consists of two actively selling communities in the Rancho Mission Viejo master plan and two located in Orchard Hills master plan in Irvine. We will diversify our presence in Orange County even further in the coming months as we introduce our new moderately priced Art Deco inspired homes in the neighborhood of Parasol Park within Great Park master plan community in the first quarter of 2017. Our communities in the Inland Empire west of the I-15 Corridor also gained traction with buyers as market conditions have improved.

As a result, we have experienced strong traffic absorption averaging four homes per community per month. We've also seen a shift in our buyer profile in these communities as traditional Orange County buyers, including the Asian-American demographic segment, have demonstrated a desire to move Inland to obtain more value and affordable housing options as compared to Orange County. In Northern California, strong job growth and the lack of available supply in the core Bay Area has created an urgent need for new home construction. However, the same dynamic has pushed affordability to the upper limits for many new home buyers. As a result, our absorption pace was down from 3.2 to 2.0 for the quarter on a year-over-year basis, but our homebuilding gross margin percentage was higher by 170 basis points.

Due to lack of supply in these markets, we are anticipating continued margin strength, but our absorption pace may be slightly slower than our Company average. The Denver market continues to demonstrate solid market fundamentals with strong demand and price appreciation. We look to capitalize on these conditions with several new product offerings in the fourth quarter that will be at affordable price points. We have a strong land pipeline that gives us confidence in our plan to increase volume significantly by 2018.

Moving to the Pacific Northwest and our Quadrant brand, housing fundamentals remain strong and we enjoyed strong price appreciation during the quarter resulting in a 550 basis point improvement in homebuilding gross margin percentage compared to the same period last year.

Our sales efforts, however, were hampered by the recent close-out of several of our communities, which left us with seven open communities at the end of September. We will reverse this trend in early 2017 as we expect to open nine new communities by May of 2017 and a total of 12 for the full year primarily in the core east side market of King and Snohomish counties. At our Maracay brand in Arizona, deliveries increased 26% during the quarter compared to the same period last year thanks in part to an improving labor situation, which helped drive our average cycle time down from its peak. Orders started slowly during the quarter, but bounced back nicely in September. Sales got a boost late in the quarter with the opening of two new communities in the Meadows master plan community in Peoria, which generated 21 orders within the first two weeks of opening.

For the nine months ended September 30, orders have increased 6% year-over-year, which demonstrates our belief that housing fundamentals continue to be strong in Phoenix and Tucson. In Texas, our Trendmaker brand turned in another profitable quarter and increased orders by 4% year-over-year. Our team in Houston has done an excellent job navigating this difficult market by maintaining a strong presence in highly desirable locations while negotiating favorable terms for many of our current and future lot takedowns. We're also in the process of evaluating several acquisitions of small lot opportunities that will enable us to introduce new product at lower price points. Lastly, our organic expansion into the Austin market continues to progress as we have opened our first two communities and have three more in the pipeline for next year.

Lastly, market conditions for Winchester Homes in the Mid-Atlantic region remains mixed, but we're seeing signs of improvement and are optimistic for 2017. Absorption pace was down slightly from last year's third quarter, however, up 8% for the nine months ending September 30 while our homebuilding gross margin percentage continued to improve year-over-year for both the quarter and the nine month period ending September 30. As part of our repositioning strategy, we recently introduced a well-designed luxury townhome in the Bethesda market. In addition, we opened an entry level townhome priced in the high $400,000s near the metro station in Silver Springs, Maryland. This is an excellent example of our opportunistic acquisition strategy to fill entry level, move-up, and luxury buyer needs close to major transportation, employment centers, and excellent schools in the Maryland and Northern Virginia markets.

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

Thanks, Doug, and good morning to everyone. I'd like to welcome you to our call today as well. As Chris mentioned earlier, we posted a slide deck on our website, which includes charts detailing orders, deliveries, and absorption rates by homebuilding brand or division for the third quarter ended September 30, 2016. In addition, slide 7 highlights our progress through the first nine months of the year. We've also provided certain key operating metrics by state in today's press release announcing our earnings for the quarter. Slide 6 of the deck provides a snapshot of some selected operational highlights from our third quarter. Home sales revenue was $579 million for the quarter on 1,019 home deliveries at an average sales price of $568,000. Our homebuilding gross margin for the quarter was 20.1% and net income came in at $34.8 million or $0.22 per diluted share.

During the quarter we opened 16 new communities; five in California, four in Texas, two in Arizona, two in Nevada, one in Maryland, one in Virginia, and one in Washington. In addition, we closed out of 10 communities during the quarter resulting in the quarter ending active selling community count of 123 as shown by state on slide 8. For the fourth quarter of 2016, we anticipate opening nine new communities and closing out of seven resulting resulting in 125 active selling communities as of December 31, 2016. This ending active selling community count of 125 results growth of 20% year-over-year from our active selling community count of 104 as of December 31, 2015 as we previously guided to. Our new home orders for the quarter started off slow in July and the trend continued into August.

But from the last week of August through the end of September, we opened 8 of our 16 new communities and in September, we saw a resurgence in our order pace and ended the month with orders up 26% year-over-year. Our order pace has continued to be strong into the first three weeks of October at approximately 2.75 orders per community per month. For the full third quarter, we had 932 net new home orders, down 6% compared to the same period in 2015. Our overall absorption rate was 2.6 homes per community per month for the quarter and continues to be strong at 3.2 homes per community per month for the first nine months of 2016. However, due to the lower than expected new home orders in July and August, our full-year new home deliveries will likely be at the lower end of the previously stated range of 4,200 to 4,400 homes.

Backlog ended the quarter down 145 homes or 8% compared to last year's third quarter to 1,711 homes with an average sales price of $555,000. The corresponding dollar value of backlog decreased 14% year-over-year to $950 million. During the quarter, we converted 57% of our second quarter ending backlog delivering 1,019 homes resulting in a 10% year-over-year decrease in deliveries and a corresponding 10% year-over-year decrease in home sales revenue to $579 million, which was in line with our previously stated guidance. Our average sales price for homes delivered in the quarter was $568,000, a 1% increase from $564,000 for the comparable period a year ago. As we previously guided, our homebuilding gross margin percentage for the second half of the year was expected to be approximately 20%. For the quarter, our homebuilding gross margin percentage was 20.1%, which was down 90 basis points year-over-year from 21%.

However, for the nine months ended September 30, our homebuilding gross margin remained strong at 21.8%, up 140 basis points year-over-year from 20.4%. SG&A as a percentage of home sales revenue was 10.9%, which was 210 basis point increase compared to 8.8% in the same period in 2015, however a 40 basis point improvement compared to 11.3% sequentially from last year. The increase in year-over-year for the quarter was due to the unfavorable leverage impact of 10% lower home sales revenue in addition to incremental sales and marketing cost associated with the opening of new communities as well as a rise in broker co-op commission and the incremental G&A costs associated with growing our Company including our organic expansion into Austin and Los Angeles. For the fourth quarter, we expect our SG&A expense ratio to be approximately 9% of home sales revenue resulting in a full-year SG&A expense ratio in a range of 10.5% to 10.7%.

During the third quarter, we spent $166 million on land acquisitions and $73 million on land development. Year-to-date we have spent a total of approximately $705 million on land acquisition and land development. The focus of our land strategy is to target land for communities, which will deliver homes in late 2018 and beyond as we currently own or control all of the land needed to meet our planned deliveries for 2017 and over 90% of our planned deliveries in 2018. As it relates to our balance sheet at quarter-end, we had approximately $3 billion of real estate inventory representing 29,713 lots owned or controlled, of which 59% are located in California. Our lots owned or controlled represent an implied seven years of supply on a trailing 12-month basis.

A detailed breakdown of our lots owned is reflected in our Form 10-Q, which will be filed later today and in addition, there's a summary of lots owned or controlled by state on page 22 in the slide deck. At the end of the quarter, our total outstanding debt was $1.4 billion resulted in a ratio of debt-to-capital of 43.7% and a net debt-to-capital of 41.3%. We ended the quarter with $129 million of cash on hand and additional liquidity of $421 million available under our unsecured revolving credit facility. Now I'd like to update everyone on our $100 million share repurchase authorization. For the quarter, we repurchased 852,500 shares at an average price of $12.22 per share for an aggregate dollar amount of $10.4 million.

As of the market close yesterday, we have purchased a total of 2.7 million shares at an average price of $12.04 per share for an aggregate dollar amount of $32.8 million leaving us with $67.2 million remaining under our current $100 million share repurchase authorization. Before I summarize our outlook for the fourth quarter and full-year 2016, I'd like to remind everyone of our Investor Day to be held on November 10. As part of our Investor Day presentation, we will be providing our preliminary guidance for 2017 and 2018. As for the fourth quarter guidance, we anticipate opening nine new communities and closing out of seven resulting in 125 active selling communities as of December 31, 2016, a 20% increase over 104 active selling communities as of December 31, 2015.

During the fourth quarter, we expect to deliver approximately 85% of our 1,711 homes in backlog as of September 30, 2016 at an average sales price of approximately $550,000 resulting in new home deliveries for the full year that will be at the lower end of our previously stated 4,200 to 4,400 homes. We expect our homebuilding gross margin percentage to be approximately 20% for the fourth quarter resulting in our full-year percentage being in the range of 20.5% to 21.5%. Lastly, we expect our fourth quarter SG&A expense ratio to be approximately 9% of home sales revenue and full-year SG&A expense ratio to be in the range of 10.5% to 10.7%. I'll now turn the call back over to Doug for some brief closing remarks.

Thanks, Mike. In conclusion, I'm very pleased with the progress we have made year-to-date in re-establishing new communities and activating our long-term assets. We hit on our stated guidance for ending community count, deliveries, home sales revenue, and homebuilding gross margin percentage. And while the absorption pace in the quarter was slightly lower than it was last year, I am encouraged by the 26% year-over-year increase in new home orders we experienced in the month of September. In addition, we have seen higher absorption pace of 3.6 homes per community per month year-to-date at our new communities opened in 2016 versus 3.1 homes per community per month at our communities that opened prior to 2016, which is an encouraging sign for the future of our Company.

All of our brands have demonstrated an ability to evolve and adapt to changes in their respective markets and it is this ability that cuts to the core of what Tri Pointe is all about. Instead of chasing the market, we challenge ourselves to redefine it based on strategic consumer research and careful analysis about where the market is headed. We like to think of ourselves as innovators not just homebuilders and we believe that this mindset serves both our customers and our shareholders well. As always, I want to thank all of our team members for their commitment in executing our business plan to date. This concludes my prepared remarks and we'll be happy to take your questions. Thank you.

Thank you. (Operator Instructions) Alan Ratner, Zelman.

Doug, I was hoping just to dig in a little bit more on the order activity through the quarter; pretty big drop-offs in July and August, bounced back in September. You mentioned new community openings in September. How would you kind of characterize that bounce back in overall activity between strength in the new communities versus did you also see a similar improvement in your existing communities as well and if that was the case, were there any pricing actions taken during the month that might have drove that improvement?

Really, Alan, July and August was little bit unseasonably warm and it caused order flow in July and August along with some communities that opened later in the quarter kind of change the overall make-up of the quarter in orders. I would say that in the openings, we've seen tremendous success both in the Pardee brands in Inland Empire, Arizona, strong interest in San Diego through the end of the third quarter. And as I mentioned earlier, our new communities are absorbing at a higher pace in 2016, I think it was 3.6 per community per month versus 3.1. So, it is indicative of where we really think the new communities are going to flow.

One quarter over the year doesn't make the whole year and actually we're pretty much where we expected to be. As we mentioned at the beginning of this year, we're resetting the table at the kitchen so to speak to bring on all these new communities for some really nice growth going into 2017 and 2018 and really double-digit order growth in the fourth quarter. It's all about setting that table and getting those stories in place and we're very excited about the initial results. It hasn't resulted in any different pricing strategies as a matter of fact, if anything pricing strengthened as you hope with such strong demand. Tom, you want to add anything to that?

I would say in response to your question that we have seen a similar pick up in our existing products and it all just wasn't driven by our new product absorption. So, generally an overall pickup in September and we're quite positive that it's increased and continues to flow into October as well.

And second follow-up if I could. Last quarter you didn't give official guidance, but you highlighted that you expect margins to be up and 2017 versus 2016 so just curious if that's still your expectation at this time.

Alan, this is Mike. We're going to get more color on that at our Investor Day here in a few weeks. But I think for the full-year 2017, we don't see margins materially different one way or another. We'll wait and see how we finish up the balance of this year and the quarter. But I say next year, the trend is a little bit mirror opposite of this one. We see margins lower in the first half of the year, but strengthening through the back half of the year in 2017 similar to what we saw in 2015 and as you know, that's being dictated specifically by our California higher margin projects as and when they deliver.

Nishu Sood, Deutsche Bank.

The question I wanted to ask first was on SG&A. You folks have traditionally run a pretty lean organization SG&A wise. This year your SG&A up year-over-year obviously with all the growth and in the third quarter as well, SG&A coming a little bit higher than expected obviously reflected in your guidance for the full year as well. I was wondering if you could break down for us the pieces that drove the variance that caused SG&A to be higher this quarter and your expectations for the year and how should we think about it like what proportion of the increase in SG&A spend is just related to the surge in growth? And you're going to continue to grow as you're talking about with your longer-term 2018 targets. So, how should we think about SG&A leverage going forward?

Nishu, this is Mike. SG&A was a little bit higher and we are guiding a little bit higher too as I tried to cover it in my comments, but what we see specifically is a significant increase in broker co-ops in some of our communities. That's had about a 30 basis points difference. We saw commissions around 2.4%, 2.5% for the quarter of our overall revenue so that's a big expense line that hits the SG&A immediately and that's up from 2.1% I think over the same period last year. And then we've been growing our staff obviously to be able to grow to the deliveries of 5,100 to 5,400. So, we've seen about a $5 million increase in gross dollars in G&A in just building the overall infrastructure of our Company to be able to deliver the growth that we see in the out years. SG&A; on the S side, it's about 5.4% of revenue and I think on the G&A side for the quarter is roughly about the same, 5.4% or 5.5%.

Nishu, this is Tom. Additionally it should be noted just on the S side that we do have some very specific plans and improvements underway in marketing efforts of our larger master plan communities that are scheduled to come to market and so that has some additional expense items there because we're planning on the Sundance active adult, we've got our Ocean View Hills community reactivated, our Aliento community up in LA, as well as the West Ridge Community out in Lake Elsinore. So, those have maybe a higher than expected spend right now to bring those products to market.

Second, I wanted to ask Doug you mentioned improving labor position and you specifically referenced Maracay in Phoenix and that is a 180 degree opposite of what almost every other builder has been saying and especially about the Phoenix market. So, just wanted to get some color on that. Now you have some pretty long tenure divisional management teams and so you had some success at navigating the difficulties last year, but if you could just kind of give us some more color on that? How your experience on the ground seems to be so different than what we're hearing from the other builders?

Phoenix has been obviously a challenging place for labor and it continues to be such, but we have seen as I mentioned our cycle times improve from its peak and that really occurred at the beginning of the year. As you mentioned, our teams at Maracay led by Andy Warren have average tenure of well over 20 years and it's really a partnership, it's not just lip service and it's not just trailer talk. But what Jeff Eschliman, our VP of Operations, and Andy and the whole team there did was set out for the year what we expect. We've got tremendous growth planned for this year and going into 2018 to buy into our business plan and to be part of that business plan. In the end, the trades would rather know that their paycheck is there on a consistent basis with jobs that are set up for there's no interruptions, they're paid on time and if you have them buy into your business plan, you will reduce cycle times and that's exactly what we did.

And just last one if I could. The Investor Day, you mentioned you're going to go over long-term financial targets so we look forward to that. Just thematically maybe a little bit of a teaser about what else you'll be covering; land positions, land investments, what should we expect?

We're going to hit on the accomplishments that we had from our strategic outlook in November 2015 that a lot of you attended. We're going to talk about some of the differentiators of the Tri Pointe brand of companies. We're going to hit on our long-term land assets, which we feel gives us visibility in our margin profile going forward because of this low cost land and how we can bring that on much more rapidly than what we anticipated when we closed in 2014 and we'll also talk about some of the value attributable to that land. So, those are kind of the highlights in addition to giving more of guidance for 2017 and 2018. As I mentioned earlier, this year at the beginning we were setting the groundwork for a very strong plan for 2017 and 2018 and frankly we're very excited about where we sit today, where the markets are still heading, and able to achieve our business plan growth of deliveries up to 5,100 to 5,400 by 2018. That all takes planning and implementation now, it doesn't happen in September 2017 as you know.

Stephen East, Wells Fargo.

Doug, thanks for the color on the California markets, I guess if we could dig a little bit deeper. You talked about the Inland Empire being pretty strong and then you touched on Northern California. I'm interested in what you all are seeing there on those two markets on pricing and pace. And on the Inland Empire, were you going down in price points? What's stimulating the buying if you will in that particular market? And then what type of pricing power do you have in Northern California because we're seeing and hearing that the pricing side of it is really checked up and so margins might come under pressure more broadly for the industry so I was interested in your view there?

I'll start and I'm sure Mr. Mitchell can finish. But as I mentioned Northern California, the need for new housing is very significant. Unfortunately here in California, we have this little thing called [ECON] so that really prohibits the entitlement or lengthens the entitlement timeframe. So it's a very unique set of circumstances in especially the Bay Area because you've got this strong employment growth, lack of housing, but we saw absorption pace as we mentioned come down to two a month. But we haven't been seeing much in incentive growth at all because frankly the way I look at it, Stephen, is the demand funnel because pricing has gotten pretty steep has just gotten smaller, but there's no supply. So, there's some ECON 401 button there that between the ECON demand and supply, there's just not a lot of projects to compete against. So, we still feel our margins will stay. They were very strong going into 2017, we just may absorb less than what we historically as a company would want to forecast at three homes per community per month. Tom, you want to talk about Inland Empire?

Stephen, we've seen really strong market conditions in the Inland Empire both east of the I-15 Corridor, which primarily serves our lower price points, but kind of a resurgence of those markets west of the I-15 as well that has a little bit higher of a price point that's primarily served by our TRI Pointe brand. As we stated, we see kind of an influx of those traditional Orange County buyers that are seeking a better value and more affordable options going to the western side. On the eastern side, we have been fortunate by introducing some really price sensitive products at the lower end of the affordability range primarily within FHA's loan limits that have been very successful.

That new opening of the West Ridge Community in Lake Elsinore is all targeted specifically for that and it's been very well received. One other thing just on Northern California, we did quite a bit of analysis on it. We have had a softer third quarter. But as we went back over the last four years, we really saw a trend which was not following the typical seasonal patterns of a lot of the other marketplaces. So, we've seen a much higher propensity of sales activity in the first half of the year and then a pretty strong slowing in the second half over the last three or four years. So, we don't see it as much different than what happened last year and we're hopeful that we'll see the same level of pickup in the first quarter of 2017 that we did in the first quarter of 2016.

And then without stealing your thunder for the Analyst Day, this year was a lot about revitalizing the pipeline et cetera so a lot of dollar spend. As you look forward on your capital allocation, the similar type approach in 2017 or do you take more of your cash and apply it to either debt reduction or share repurchase like you did this quarter?

I think from a share repurchase, we're in the market opportunistically. We're currently under a 10b5-1 plan that will expire here in a couple of days. We have $67 million or so left outstanding under our plan and we'll continue to be in the market if we see our stock at the current prices that it's currently trading at. But as far as overall capital, we typically spend that $800 million to $1 billion on land and land development, we see that continuing into 2017. But we will be generating quite a bit more of revenue because of the volume increases and so you won't see as much of a negative cash flow in 2017. But then when we look out into 2018, Stephen, we do see pretty significant free cash flow coming back to the Company from there on. These long-term assets are just taking a lot of capital to get those positioned to delivering houses.

And then in 2017 you've got a couple of big ones in California coming on, correct? Timeline of those?

Yes, that's correct. Early in the first quarter we see our Aliento community coming to the marketplace. Later in the year, we see our Castle Rock community down in San Diego coming to the marketplace. And then as we mentioned in the notes, we've got two new communities coming in our Ocean View Hills master plan down in San Diego as well. So, there's been a pretty significant land development spend relative to that.

We'll lay that out in a lot more detail in the Investor Day where we'll show you a pipeline of how all the long-term assets, any asset over 400 units in California, how that rolls into our homebuilding deliveries pipeline.

Jack Micenko, SIG.

This is actually Soham Bhonsle on for Jack. So, we were down in the Mid-Atlantic couple weeks ago and got a chance to see your developments in Cabin Branch in Silver Springs and we actually came away quite positive on the region overall, however, it did sound like August maybe you had a lull. However, overall it seems like the market is picking up and it was a little surprising that Winchester was down year-over-year despite having a largely flat community count in the region. Could you maybe give us more color there and what margins did there specifically year-over-year?

Actually the absorption pace was slightly down in the third quarter, but it's more important to look at the year-to-date numbers. Our orders were up 8% for the nine months ending September 30 and our gross margins continue to improve, as I mentioned, both in the quarter and for the year-to-date.

So just switching to California, we've increasingly heard and Doug, you mentioned SECA and how these impact fees are adding to your [cost] business in California. Given that you have an outsized concentration in California relative to other builders, is there any way you could size how much these impact fees are like affecting margins and do you see any of these headwinds going into 2017?

We'd have to do some analysis to see what the impact fees have in California because it varies so greatly from jurisdiction, county, city. But our projects that we own and control in the Pardee Homes brand, a lot of those projects have their entitlements in place, all of them primarily except for Otay Mesa and a project up in Stockton. We are finishing some entitlements in San Diego at Meadowbrook. But I'd have to get back to you on that percentage, I'm not sure it's real relevant to our overall margins because our low land basis overall for the bulk of those land holdings is pretty damn strong. So, we'll have to dig into that if that's something that you want us to follow up on.

That's a good point on the land basis. And then just lastly in terms of ASP going forward, what is your general expectation and specifically your ability to offset I think you mentioned a 3% increase in labor cost last quarter? How much room do you think you guys have to offset those prices via ASP growth and then are you expecting any increases in material costs going forward?

This is Mike. We will see ASP growth going forward into 2017 and 2018, but that's primarily mix related. If you're asking about pricing power, that's dictated by every market and each market is different on what we're seeing on the cost increases and labor pressures versus ability to move pricing to cover it.

But the general expectation is that ASP growth will cover labor increases or materials?

That's correct.

Jay McCanless, Wedbush.

First question I had, could you refresh us on your outlook for fiscal 2017 land sales and what you think the timing of those will be?

Again, that's part of what we're going to cover in the Investor Day. But as we mentioned, Jay, we are only going to have probably one more land sale and that would be in 2017 more than likely probably in the third quarter and it's a sale in PHR so it's of a significant nature. But after that in 2018, we don't plan on any land sales moving forward, anything of any material nature anyway.

Okay. And then could you repeat the numbers that you gave for October sales for the first three weeks of October and how did that compare to last year for the same time period?

What I said is that our absorption pace for the first three weeks of October is contingently relatively strong at about 2.75. October is a tough comp set for us, much better comp set in November and December for us. But I think October was around 2.8 last year so it was a strong month for the Company last year as well.

And I think the thing we're most encouraged about is this is actually the first quarter where we see positive community count trends. We've been up against it every month until September, we barely turned the corner. But fourth quarter will be the first quarter in 2016 where we actually have positive average community count comps.

And double-digit order growth.

Will Randow, Citigroup.

Most of them have already been answered, but just wanted some follow-up as you talked about 2018 I know you'll get into more detail and we look forward to seeing that in person. But your current land buy when you're looking at markets like the Inland Empire, are you seeing any I'll call it softening in land prices which will allow you to kind of boost the closings outlook for 2018?

Will, this is Tom. No, we haven't seen any softening in land values in the Inland Empire or really any of our markets for that matter. We continue to see strong competition and improved market conditions so I think that will be indicative of land values going forward. What is great for us is our long land basis and low cost in our California markets given the amount of lots that we have in our Pardee brand and that's why we're accelerating bringing those to market and we expect to be able to capitalize on those positions.

Congrats on the progress.

Stephen Kim, Evercore ISI.

This is actually Chris on for Steve. You mentioned that September strengthened, but I wasn't clear if you're primarily attributing that to the new communities coming on or if you felt an improvement in underlying demand. And can you comment specifically on whether you saw an improvement in demand and if there is anything specific to call out with respect to geography or buyer type?

We had overall strengthening in that 26% month-over-month increase. We obviously had some nice pops in some new communities that opened as I mentioned in my prepared remarks, but overall the breadth of the order growth in September was broad based.

And then on operating margins, do you think labor rates from your subcontractors might increase due to changes in the Fair Labor Standards Act?

Say that again, I didn't understand your question.

I'm saying the Fair Labor Standards Act, there have been changes with the minimum wages and wondered how that might affect your subcontractors and then your operating margins?

We see continued pressure on labor costs that's going to continue inclusive of the Fair Labor Standards Act. As we stated previously though an effect on margins, we don't see it having too big of an effect as we feel that our pricing power will outpace our costs relative to labor.

And then just finally, do you have any more plans to repurchase shares by the end of the year and will it be done opportunistically?

This is Mike. As I mentioned, we currently have about $67 million available under our share authorization and if you see, we've been active subsequent to the quarter and will probably continue to be active if our stock continues to trade at the values that it currently is at.

Alvaro Lacayo, Gabelli & Company.

I have just a question on absorptions, the comment around sort of the new communities versus the old communities driving better absorption. Can you just maybe break down a little bit how much of that is market mix versus a apples-to-apples per market and then maybe highlight some of the markets that are seeing a bigger improvement versus others?

This is Mike. As Doug mentioned in the prepared remarks, what we've seen and we constantly do an analysis on how our communities are performing and so we look at the communities that have opened in 2016 where I think that they're just coming on with better product and better well located and we've seen an increase in absorption. This year year-to-date we're at 3.6 orders per community for our new communities. Our legacy communities that were open prior to 2016 we're seeing 3.1 orders per community and overall we're at 3.2 for the Company and we've seen that across the board. There's about that same gap in each of our markets I'd say with the exception of maybe Texas, but everywhere we've seen better absorbing communities on the ones that we've currently opened and we expect to see that. You typically get better absorptions at the beginning of products and sometimes when communities are getting a little bit older, the choice of lots wane a little bit. So, we just think it's encouraging for us that the consumer's accepted our product very well and it's outpacing the market.

I'd add to that. You look at the three segments of our Company, we were very well diversified between entry level, move up, and luxury. And as we've introduced new communities in all three of those segments in various locations whether it's Arizona, California, the East Coast, up in the Northwest; we've had different layers of success based on those three segments.

And then on SG&A the full-year guidance of 10.5% to 10.7%, a little bit higher, there's a lot of growth going on as well. As you look forward and you see maybe where industry peers are in the low 9% and some even below that, how do you think about SG&A, SG&A leverage and you're balancing that out with your growth plans going forward?

This is Mike again. Again I think we talked about even on the last call by 2018 our expectations are to deliver on our goal of 5,100 to 5,400 units. We get significant operating leverage based on that and we see ourselves somewhere in the mid to high 9%s by 2018. This year we had to tweak our SG&A guidance a little bit primarily because of the softness in orders in July and August attributed to lower closings for the year, which is bringing in our homebuilding revenues than what we thought and that's offsetting some of that G&A expense associated with our growth into other markets. So, we're kind of setting the table in 2016 so we should see pretty good SG&A leverage moving forward from here.

Alex Barron, Housing Research Center.

Sorry if I missed any commentary at the beginning regarding specs. But can just comment on your spec strategy whether that's changed any recently versus earlier in the year and also roughly what percentage of closings come from specs?

Alex, it's Mike. It's so different by market as you know. Technically since 40% plus of our business in California, it's all 100% spec. We're starting phases with our buyers and then by the time that we close the houses so there's not any standing inventory typically in California. But we've definitely adjusted our spec formulae if you will in Texas as that market has slowed down over time because we do see clearly better margins on door sales than we do on our spec sales typically.

And then I would add, Alex, in some markets where you've got labor constraints let's say the Pacific Northwest, we'll push a little bit on starting more specs to make sure we get the homes in the marketplace and completed because of that. So, it's market by market. There's no overall secret formula for our spec strategy. Overall though we try to be very cautious about that and in California when we open up phase of 10 or 12 homes, we won't look to open the next phase until we get at least 50% to 65% of those homes pre-sold and under good loan conditions. So, it's a very tightly managed process as we look even here in California.

In general, Alex, I'd say we're on average about two to three spec homes per community.

And then as it pertains to the pick-up in September versus the other months, did you guys do anything? It sounded like the broker commissions went up a little bit, but did you guys do anything else in terms of a special incentive? And roughly if a home is a spec right now, by when would you need to sell it in order to close it in December?

We've got our in-house mortgage company ideally by the middle of November, but in many cases you could run it until the end of November depending on the status of the homebuyer.

Dan Jacome, Sidoti.

I think all of my questions have been answered. And sorry to beat a dead horse, but just on the upcoming Investor Day, I think you said you're going to discuss 2018. Are you going to be laying out specific metrics in goals or ranges for SG&A and gross margin at that point?

Yes, we will.

And then lastly, I think I heard it correctly you expect ASP to be up next year and possibly into 2018?

That's correct. We see an increase in ASP based on the mix that we currently have in our pipeline.

Thank you. We reached the end of our question-and-answer session. I would like to turn the call back to Doug Bauer for closing comments.

Thank you everyone for joining us today. We look forward to chatting at our next call covering our full-year results for 2016. Have a great weekend and thank you for attending our call today.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.