Tri Pointe Homes Inc (Delaware) (TPH) 2016 Q4 法說會逐字稿

Greetings, and welcome to the TRI Pointe Group fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Martin, Investor Relations for TRI Pointe Group. Thank you. Mr. Martin, 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 fourth quarter and full year ending December 31, 2016. Documents detailing these results including a slide deck under the Presentations tab are available on the Company's Investor Relations website at www.TRIPointeGroup.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call which are not historical facts are forward-looking statements that involve risk and uncertainty. 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. Good morning, everyone. Thanks for joining us as we review our results for the fourth quarter and full-year 2016. Last November, we hosted an Investor Day where we laid out the strategic vision for TRI Pointe Group by highlighting three key themes for our Company.

Those three themes are, number one, combine the asset-turning mindset of a production homebuilder with the design, innovation, and operational leadership of a high-end builder. Number two, balance strategic growth initiatives with a return on capital focus, and number three, unlock the value of our longer dated assets in California. I'm happy to report in 2016, we executed on these initiatives, which resulted in another strong year of profitability for the Company and a great foundation for growth in 2017 and beyond.

We average a healthy sales base of 3.0 home sales per community per month for the year while posting an average selling price of $553,000, the second highest average selling price in our peer group. We also generated homebuilding gross margins of 21.2% for the year, which was above our peer group average and converted 68% of our quarterly backlog on average for the year.

These achievements are a direct result of TRI Pointe Group's dual focus on being a high absorbing production builder and a leader in design, innovation, and operational excellence. 2016 was also a year in which we maintained our balance between investing for the future and generating a healthy return on our capital. We closed out of 43 communities and opened 63, which provides us with a 19% increase in active selling communities to start 2017 as compared to 2016.

We also increased our year-end inventory balance by 16% over the prior year setting the table for additional delivery growth in the future. These investments, combined with our strategic decision to generate more of our profits going forward from homebuilding activities rather than land sales, diminished our returns in the near term, however, we expect these decisions will result in better and more consistent returns in the future.

In 2016, TRI Pointe Group also made further strides towards bringing our longer dated California assets to the market. At our Investor Day, we highlighted examples of how we reduced the time and development cost to bring several of our projects to market through innovative community design and thoughtful planning.

We've made progress on the planning and development of our longer dated assets since that time as evidenced by the recent entitlement approvals for our planned 1,200 unit Skyline Ranch project in Santa Clarita, California, and our planned 4,300 unit project in Banning, California. We continue to believe that much of our longer dated land portfolio is undervalued relative to its book value and remain confident this will become evident in our results as we bring these assets to market.

As planned, we had a fantastic grand opening in our Aliento community in Santa Clarita, California this month. The opening showcased three of the five planned product types and the five-star recreation center. This community has been well received by the market with an interest set of over 2,500 people and over 3,000 people attending our grand opening weekend. We're optimistic about the future performance of this community and it appropriately represents our future offerings.

With that, here are some brief highlights for the quarter -- from the quarter, I should say. Overall, we saw good demand trends in the markets in which we build during the fourth quarter of 2016. Fourth-quarter orders increased 21% on a year-over-year basis thanks to a 10% increase in our absorption rate and a 9% increase in our community count.

Order activity remained strong throughout the quarter, and we did not get a sense that the rise in mortgage rates materially impacted our business. Labor cost increases and availability remain an issue in many of our markets, and we anticipate this to be an ongoing issue for our business in 2017. Fortunately, we've been able to offset this cost inflation with price increases in most instances.

Our operations in Southern California, the Pacific Northwest, Nevada, and Arizona experienced strong demand in the fourth quarter with sales paces above the Company average. Our success in these markets have been driven by a combination of healthy market fundamentals, excellent community positioning within core locations, and the successful rollout of new product offerings. Operations in Northern California continue to benefit from a lack of available housing supply in the area, which translated into an improvement in both sales pace and margins in the quarter.

Our sales pace in Houston also improved on a year-over-year basis which helped generate a 46% increase in orders in the quarter. While there remains an elevated supply of new home communities in the market, we are becoming increasingly convinced that Houston has bottomed based on the level of activity we've experienced and the renewed sense of consumer confidence we've seen in our communities.

In the mid-Atlantic market, pricing improved in many of our legacy communities in the quarter, which resulted in a 260 basis point year-over-year improvement in gross margins. We are rolling out several new well located communities with updated product in this area in the coming months and are excited about their prospects given better pricing environment.

Now I'd like to turn it over to Mike for some additional details about our results for the quarter and the full-year 2016.

Thanks Doug. Good morning, everyone, and thanks for joining us on the call today. I would also like to remind everyone about that we posted a slide deck on our website which includes various key operating metrics as well as charts detailing orders, deliveries, and absorption rates by homebuilding brand or division for both the fourth quarter and full year ended December 31, 2016. We've also provided certain key operating metrics by state in today's press release announcing our earnings for the quarter and full year.

Overall, the fourth quarter marked a meaningful conclusion to 2016 with strong results highlighted by significant progress made on the groundwork necessary to meet our 2017 and 2018 targeted growth that we discussed at our Investor Day in November.

Slide 6 of the deck provides a snapshot of some selected operational highlights in the quarter. Home sales revenue of $771 million for the quarter on 1,427 home deliveries at an average selling price of $540,000. Our homebuilding gross margin percentage for the quarter was 20%, and net income came in at $57.9 million or $0.36 per diluted share.

During the fourth quarter, we opened 10 new communities, five in California, two in Washington, one in Colorado, one in Maryland, and one in Texas. In addition, we closed out of nine communities during the quarter resulting in a year ending active selling community count of 124 as shown by state on slide 8. This year ending community count resulted in a 19% increase year over year from 104 communities as of December 31, 2015.

For the fourth quarter, we reported a 21% increase in net new home orders, an average community count that was up 9%, the first positive active community count comparison for the entire year. Our overall absorption rate increased 10% to 2.5 homes per community per month for the quarter compared to 2.2 homes per community per month in the prior year.

As far as the cadence of orders throughout the quarter as shown on slide 33, orders were up 8% in October, 31% in November, and 28% in December. Our Company-wide absorption rate for the full year was 3 orders per community per month. In addition, the new communities opened in 2016 absorbed at a higher rate of 3.3 orders per community per month versus 2.9 orders for communities opened prior to 2016. This result reinforces our confidence in the acceptance of our new product offerings in the respective core market locations as we move into 2017.

As we roll forward into 2017, our January orders resulted in a 17% increase year over year from 2016, and we've continued to see strong traffic and orders for the first three weeks in February. On a quarter-to-date basis, for the first seven weeks, our net new home orders are up 9.2% year over year.

Backlog ended the year up 3% compared to last year to 1,193 homes with an average sales price of $554,000. The corresponding dollar value of backlog decreased 5% year over year to $661 million. During the fourth quarter, we converted 83% of our third-quarter ending backlog delivering 1,427 homes resulting in the 2% year over year decrease in deliveries. Home sales revenue decreased 9% year over year to $771 million largely due to the 7% decrease in average sales price to $540,000.

Our homebuilding gross margin percentage for the fourth quarter was 20%, which was in line with our stated goals, and we ended 2016 with a full-year homebuilding gross margin of 21.2%, an increase of 10 basis points over the full-year 2015. Rising land prices and construction costs in a tight labor market have limited the opportunities for margin expansion with a relative stability of our annual homebuilding gross margin percentage shows that we've been successful in using home price appreciation to offset these rising input costs.

SG&A expense as a percentage of home sales revenue was 9.2%, which was an 80 basis point increase compared to 8.4% in the same period in 2015, however 170 basis points improvement compared to 10.9% sequentially from last quarter. The year-over-year increase for the quarter was due to the unfavorable leverage impact of the 9% lower home sales revenue in addition to incremental sales and marketing costs associated with the opening of new communities as well as the rise in broker co-op commissions and the incremental G&A costs associated with growing our Company including our organic expansion into Austin and the Los Angeles markets. We remain focused on controlling our SG&A cost while ensuring that our infrastructure adequately supports our growth.

We have instituted many Company initiatives in 2017 related to SG&A expenses in order to reduce our overall SG&A cost per delivery. We expect to improve our SG&A expense ratio as a percentage of home sales revenue by approximately 40 to 60 basis points for the full-year 2017.

During the fourth quarter, we invested $178 million on land acquisition and $87 million on land development. For the full-year 2016, we invested a total of $970 million, $624 million on land acquisition, and $346 million on land development. The focus of our land strategy is to target land for communities which will deliver homes in 2019 and beyond, as we currently own or control all of the land needed to meet our planned deliveries for 2017 and 2018.

The majority of our land development expenditures in 2016 were associated with the acceleration of our long-term California assets. At year end, we owned or controlled 28,309 lots of which 61% are located in California. Based on the midpoint of our 2017 delivery guidance, we've lowered the number of years of lots owned or controlled to 6.1 years.

Our goal is to continue to shorten the duration of our land pipeline by continuing to focus on accelerating our long-term California assets and investing in smaller faster-turning communities in our markets outside of California. A detailed breakdown of our lots owned will be reflected in our Form 10-K, which will be filed later this month. And in addition, there is a summary of lots owned or controlled by state on page 32 in the slide deck.

As it relates to our balance sheet, at year end, we had approximately $2.9 billion of real estate inventory. Our total outstanding debt was $1.4 billion resulting in a ratio of debt to capital of 43% and net debt to capital at 39.1%. We ended the quarter with $209 million of cash on hand, and additional liquidity of $421 million available under our unsecured revolving credit facility.

Now a quick update on our share repurchase activity. During the quarter, we purchased 1.5 million shares at an average price of $11.66. For the year, we purchased 3.6 million shares at an average price of $11.82 for a total of $42 million. At December 31, 2016, our stockholders' equity is $1.8 billion and book value per share was $11.46, up 11% from a year ago.

Now I'd like to give an update on our outlook for 2017. For the full year, we are reiterating our guidance from our Investor Day this past November. We expect to grow average selling communities by 10% and deliver between 4,500 and 4,800 homes at an average selling price of $570,000.

We expect our homebuilding gross margin for the full year of 2017 to be in a range of 20% to 21% with quarterly fluctuations based upon the mix of our deliveries in California, which I'll talk about in a minute. As I mentioned earlier, we expect to improve our SG&A expense ratio 40 to 60 basis points and be in a range of 10.2% to 10.4% of home sales revenue. In addition, we anticipate gross profit from land and lot sales of approximately $45 million, most of which is expected to close in the third quarter.

I want to spend a few minutes on the quarterly fluctuations we expect to see throughout the full-year 2017 in order to put some more color around the trajectory of our results. The first quarter will be the lowest in terms of deliveries for the full year, whereby we expect to deliver approximately 58% of our 1,193 homes in backlog as of December 31, 2016.

In addition to the first quarter being the lowest in terms of deliveries, it is also the lowest in terms of our deliveries from our California projects, which typically deliver the highest average sales price and generate the highest homebuilding gross margins for our Company. Correspondingly, we expect to deliver a higher percentage of deliveries from projects in California in each subsequent quarter throughout the year.

As such, our average sales price in the first quarter is expected to be in the range of $520,000 to $525,000, and our homebuilding gross margin to be approximately 18%. As we move into the second and third quarter, we expect our average sales price to be in a range of $550,000 to $560,000, and our homebuilding gross margin to be in the range of 19.5% to 20.5%.

And then lastly, for the fourth quarter in which we expect to deliver our highest percentage of homes in California, we expect our average sales price to be in the range of $610,000 to $620,000, and our homebuilding gross margin to be in a range of 21% to 22%. Now, I'd like to turn the call back over to Doug for some closing remarks.

Thanks, Mike. In conclusion, we feel great about our business as we head into the spring selling season. The housing fundamentals appear to be stable to improving in all of our markets, and we are well positioned to take advantage of these conditions with several new product offerings in well-located communities.

Longer term, we will continue to adhere to our production homebuilder roots while maintaining an emphasis on design, innovation, and operational excellence to drive solid margins in our entry level, move up, and luxury market segments. We will also continue to balance our near-term profit and return goals with our focus on investing in the future.

This dynamic is currently playing out in all of our markets, the most notably in California where we are experiencing great success in our existing communities while simultaneously moving closer to bringing our longer dated assets online. We made great strides in 2016 and believe that we are in a great position to achieve our goals in 2017 and beyond as we laid out at our Investor Day in November.

Finally I'd like to thank the talented men and women of this Company for all their hard work this year. You are the ones that take our goals and ambitions for this Company and make them a reality, and I'm appreciative of your efforts. This concludes our prepared remarks, and we will be happy to take your questions. Thank you.

(Operator Instructions)

Alan Ratner, Zelman & Associates.

Hello, guys. Good morning. Congrats on all the progress and thanks for all the disclosure and guidance. It's very helpful as always. Mike, first question, I just wanted to double check. Did you say that quarter-to-date orders were up 9%?

That's correct, 9.2%. January, we were up 17%. We have difficult comps set when you look at that chart that we mentioned on slide 33. When you look at our absorption pace historically 2016, we had pretty strong February, March, and April.

Got it. Okay, that's helpful. And was there any weather impact included in that February result? I know you've had some pretty wet weather out in California so just curious if -- (multiple speakers).

In January, our orders were up 63% I think in California. We had a really strong January in California, but we have not seen really that much impact on weather associated with our order flow, and we've had some pretty good community openings as well.

Yes, it's Doug. I would just add on the weather question, the drought is over but it will have a little bit of impact. It's not impacting our guidance for the year. What it ends up doing is deliveries get pushed from the second to third, third to fourth.

It will make the third and fourth quarter a barnburner, as I called it, and this happened for me back in the mid-1990s when we had a huge rainstorm. But our communities are all open, Tom, as we know, and frankly, the traffic and results through even in the last week have very strong so we're very optimistic.

Great. That's good to hear. Second question, Doug, I guess just curious to get some of your thoughts on the M&A environment and what you're seeing out there. I know the southeast is one area where you've highlighted you're always looking and whether it's organic or through M&A.

I think you've mentioned that those are some markets you have some interest in longer term. So curious since the election now that there's a little bit more optimism in general in the business environment, and stock prices of course going up certainly helped. Maybe you could just give us an update on what you're seeing on the M&A front and any potential opportunities out there, and if so, which markets specifically might you be looking at. Thank you.

On the M&A front, as we've always continued to believe, we kind of offer the best of big and small having the resources of a big Company while operating locally with our six brands, and we do continue to see packages.

We haven't fallen in love with anybody, but we continue to look at opportunities in the southwest, the east coast, and the southeast, so I think that activity will continue primarily with the small, medium-sized builders that maybe have reached some capital constraints that they have in their program.

Do you get the sense at all that people might be waiting for more clarity on tax reform before pulling the trigger either on the buy or sell side, or do you think that's not really a major factor that you are seeing?

I haven't heard that discussion at all yet. I think the biggest discussion has been what's the new HUD Secretary going to be like, what is he going to challenge that area with. But on tax reform, infrastructure spending and the like, it's actually created a positive environment for most CEOs in most industries.

Got it. Thank you, guys. Good luck.

David East, Wells Fargo.

Thanks. Actually, this is Paul Przybylski on for Stephen. I was wondering if you could give a little bit of color on your 2017 land-spend targets and how that would break out between land acq and development and if there were any regions that you were particularly targeting for investment this year.

Yes, this is Mike. Our land spend this year is about $900 million to -- land and land development, sorry. $900 million to about $1.1 billion, and when you look at that, it's a mix of about $500 million land, $400 million land development. On the high side, probably $600 million land and $500 million land development. So we're clearly spending more on the land development side because of the long-term assets this year.

Okay, and then with rates moving up, I was wondering if you had noticed any change in your customer preferences. Are they looking at smaller floor plans? Or have they made any changes in their design center spend?

As of right now, we haven't seen any significant shift in their preferences, although the conversation has begun. They are looking at alternative mortgage structures rather than the traditional 30-year fixed. Many of them are desiring some long-term rate locks, and I think it would be inevitable as rates go up for them to shift into smaller product types and probably look for more affordable solutions.

Okay, thank you.

Stephen Kim, Evercore.

Yes. Thanks very much, guys. Thanks for all the color as always. My first question related to your gross margin outlook, obviously for the reasons you explained, it's going to be a little bit stronger here at the end of the year. And I know a lot of that commentary is probably built around your expectations for what communities you will be selling those homes out of here over the next six months.

I was curious as to if you could comment a little bit on the cost assumptions that are embedded in those gross margins figures, I think 21% to 22% you said for the fourth quarter. I assume you're not assuming any price increases from where we stand today in your outlook, but could you talk about what you're thinking about with respect to cost increases over the course of the next two quarters that would impact your fourth-quarter closings? Thanks.

Yes, Stephen. This is Mike. When we do our underwriting, we're typically not putting price appreciation in there but on the cost side, we're looking at probably about a 2% increase in overall building costs throughout the year.

Okay. And that's a -- (multiple speakers).

Our margins are really being driven -- our margins are being driven by, as you mentioned, California specifically and then even some of the newer communities that are opening in California, and we have some more communities opening in Pacific Highlands Ranch and delivering more units in California in the back half of the year. A significant amount of units.

Right, absolutely, yes, for sure. Just to be clear, you said a 2% increase in the costs, right? Not a 200 basis point cost impact, right?

No, no, no. 2%.

Got it. Great. Then the second question I had related to if you could talk about your expectations or your plans to do anything on the active adult side. If you could just talk a little bit about what you're seeing in terms of how that market has been evolving and your plans for approaching that.

Yes, Stephen. This is Tom. We certainly have identified the active adult market, and buyer demographic is one that has a lot of upside potential. And we're currently in the planning stages on several fronts.

First and foremost, at the Aliento community that Doug mentioned where we had a very successful opening earlier this month, we have a planned 95-home community coming that is active adult, and that will be opening in the June timeframe. That will be our first foray.

But of a significant nature, we really have the planning and land development underway for a 700-unit community that's going to be out in our Sundance Community in Beaumont. So we're very excited about that, and we continue to look at that as a way to increase our volume and our growth.

Yes, that's great. Thanks very much for that color. I guess just lastly, the big question that I think is operating in people's minds is the fact that your order growth has been very strong, demand definitely seems to be good in all of your communities, particularly the ones that we saw out in California recently.

And yet we have the potential for somewhat higher rates to keep a little bit of pressure on pricing, and then also in some of those areas in the inland [wind] empire, for example, you have the loan limits which create a little bit of a ceiling.

So I just wondering if you could comment on how you think your position this year to be able to pass through the strong demand that you're seeing for your product into price increases to your customers.

Yes, I think relative to the inland empire in specific, we have probably some of the lowest priced offerings in the core markets of the inland empire available, and we feel really good about that and we have already seen that implemented to date with phase-to-phase increases on a regular basis. Again most of our projects throughout California are in core markets, so by nature they're low supply and high demand, and I think that gives us a better ability to implement pricing structures and price increases even in spite of a rising rate environment.

Yes I would add, this is Doug. When I was up in Seattle last week and all along the coastal part of the western US, there are some significant supply constraints. And despite a mild rising interest rate environment, for example, up in the northwest under our Quadrant brand, we've had several new community openings, and through the first six weeks of the year, we're averaging over five sales per community per month.

Now the communities are very strong small, and they're all infill, but we're also feeling strength in the pricing environment too with that type of sales pace, it obviously leads to that. So the underlying assumption -- the underlying fundamentals of housing is very elongated. There is a very -- there's a big lack of supply both on the new and resale, and there is a significant demand despite interest rates.

You've got cost constraints. You've got entitlement constraints. So our Company and even if you dive back into California is very well positioned with the land that we have in California entitled to move through that for the next several years. And we highlighted that in our Investor Day in November and we're beginning to see the fruits of it.

I mentioned in my earnings call remarks, the opening of Aliento. 3,000 people at the opening. It's a very -- it's a good market out there, and I think we'll be able to manage both pace, price, and margin as we move forward. We've always demonstrated that.

It's a year-over-year business. I don't get hung up on quarterly fluctuations because in California, our mix typically closes in the third and fourth quarter. It's been that way for 28 years and that's the reason why we see that. So I'm extremely bullish about the business for this year going into next year because of those macroeconomic environments.

Great. Thanks very much for that.

Jay McCanless, Wedbush.

Hello. Good morning, everyone. First question, just wanted to on the 2017 guidance where you are looking at I think for 134 communities by year end. Is that still a good target to model?

Yes, there's going to be probably a few weather delays in California. We opened about 46% of our new communities in California during the year, Jay, so there probably is some push on those, maybe 30 days or so, but I don't think that's going to overall impact the full year.

Okay. And then on Quadrant, it looked like the monthly absorption was up year over year but the community count is down. What's the plan for 2017 with growing the community count there, and are you going to be expanding to larger footprints or is most of that going to be infill?

Most of that -- those are infill communities. The Quadrant does open I think eight new communities this year, and as Doug mentioned, they're relatively small communities. And so what typically happens is by the time we get those open, we are selling at a very high pace and then there's not any product available.

Just as you saw in the fourth quarter, Quadrant's orders were down year over year but their communities were also down pretty significantly. I think their communities were down 30% in the fourth quarter year over year.

Got it. And the -- (multiple speakers). Sorry, the last question I had was just on the repurchase. How much was left on the authorization at year end and do you have a target for what you might want to repurchase this year?

Well, we -- currently, our authorization expired at the end of January and then we will update everyone as we get a new authorization in play.

Okay. Thank you.

Mike Dahl, Barclays.

Hello. Good morning, everyone. This is Anthony Trainor filling in for Mike. Thanks for taking my questions. A couple of questions on some of the regional trends.

So first on Houston, impressive growth in the quarter. Can you add a little more color about what you saw within your markets, and then what the strategy going forward in that market is as you are looking at new land deals?

Yes, this is Doug. Houston in 2016 actually had record resale transactions. If I recall, I think there was 91,000 resale transactions. So as I was over there in December, we definitely feel it's at a bottom.

There is a high community count or store open locations. Stores opened so it's very competitive still, always is. I think it's the most competitive market in America, but we're definitely seeing renewed consumer confidence.

Our strategy as we mentioned at the beginning of last year, which we are implementing, is to further broaden our scope of business. Trendmaker historically has been a premium brand in the Houston market, traditionally all in the move up, building on lot sizes of 70, 80, and 90 foot widths.

And as I mentioned earlier last year, we are entering into smaller lot width size which will then eventually have a more opportunistic price point. So you will actually see the average ASP for Trendmaker go down over the next few years as we bring in a broader range of product types on 50 foot wide product all the way up to 90 feet.

We're doing the same thing in Austin as we got going there last year. We've got a broader footprint of product types and price points as well.

That's helpful. Thank you. Shifting to northern California, I wanted to follow up on a comment you made earlier about the tight inventory in the market driving improved pace and margin.

Are you pushing through same-store, same-lot price increases in the market, and is that driving the margin expansion, or are you just seeing better pace drive a quicker turn and that is what's driving some of the improvement in the margins there?

Anthony, this is Tom. I would say in northern California, again, because of our locations in high demand low supply areas, we do see the ability to continually push price.

Certainly, pace as it relates to our business has been really front loaded in the first half of the year, and that's been consistent in the last couple of years so we look to continue to have a strong pace through the spring selling season and we're maximizing our pricing opportunities as well.

Great. Thank you.

Mark Weintraub, Buckingham Research Group.

Thank you. I'm trying to piece together a few things that I was hearing. On the one hand, the optimism given certain macro development, on the other hand, recognition that the higher interest rates do have implications and, Tom, you mentioned that perhaps buyers end up with a slightly smaller home or making other type of compromises to meet affordability.

If you could just go into maybe a little bit more detail on how you think that plays out and how your inventory is set up to -- how well positioned it is for the types of developments that you think are likely to happen.

I will take a stab at that first, Mark, and I will let Tom I'm sure has some points too. But I think we're very well-positioned.

We've always been a very opportunistic homebuilder, and when you look at the mix of housing that we have in California with the Pardee brand in the inland empire and our attractive basis in our land, it will continue to afford us the ability to build a significant amount of entry level product as well as the active adult segments that Tom talked about throughout California, while also taking advantage of the supply constraints under the western part of the state, all the way from San Diego up to northern California.

That will continue to be our focus here in California. You just heard what we're going to be doing and what we've started doing last year in Houston. So, we're going to continue to look at the mix of entry, move up, and luxury being in that 30% range of entry level plus 55%, 50% to 55% move up, and then 15% luxury. And we'll continue to work those segments depending on the -- while focusing in on location. So I think we'll be able to take advantage of that very well here in California. Tom?

Another thing, Mark, that we're doing is relative to the design of our product, we're really providing optionality and flexibility. Many of our new offerings have buyer choices that will enable them to go from a base product on a more affordable nature and grow with it or expand it as they prefer. That flexibility will lead greatly to the ability to purchase one of our homes even in a rising interest rate environment.

Maybe just two follow-ups on that. One is, how dependent will you be on your customers choosing the options, the add-ons that meet your goals?

And then somewhat related perhaps, are you seeing a difference in the entry level, move up, or luxury buyers given some of the macro developments with equity markets really strong, et cetera? Maybe that's favoring the luxury buyer versus -- with rates going up, maybe that's hurting the entry level. Just seeing if what you're seeing on the ground in these regards.

As I stated, Mark, to date we haven't really seen any significant shift or difference in the profile of our buyers or the products that they are pursuing other than those early rounds of questions. Obviously, with the rate increases in 4Q last year many were concerned that they didn't lock into those rates.

So as I said, the long-term lock is very desired right now. People are beginning to talk about other mortgage products just outside the traditional fixed rate loans.

But again, it's early but as rates do go up, we want to be prepared, as Doug said, opportunistically offering a lot of different products, the optionality in our design, but again, I don't see it impacting our business and as of yet, I haven't seen the political environment shifting buyer preferences yet.

Great. Thanks much.

Jack Micenko, SIG.

Hello. Good morning. Looking at the absorptions by segment, it looks like Maracay had a really, really big uptick in pace, maybe over 40% year to year. What's driving that? Is that product type? Is that an indication of demand in that market? What's behind that?

Yes, it's a great observation, and I really give credit to two things. One, this healthy market fundamentals but more importantly, Andy Warren and his team in Maracay. I'd welcome you to come out to Phoenix and look at Tucson, our Center Pointe community execution and product. I'd go out to Meadows in Chandler, I'm sorry, up in Peoria, go out to Morrison Ranch.

Innovative product design and execution has had a significant impact on his results, and we talked about that at the Investor Day, and you hit on the right observation. Because of that emphasis on design, innovation, operational excellence, I know it sounds all corny, but Andy and his team are doing a fabulous job, and that's really what separates Andy from the competition in Phoenix.

The other thing to add to that is the land acquisition strategy. They really are looking for unique opportunities, not just the run of the mill, cookie-cutter subdivision, but they are looking to explore opportunities where they can add value because of a offering that is not very consistent in the marketplace.

Okay, great. That's helpful. And then just, Mike, on the buyback, I heard the earlier question on the buyback, the authorization now is expired. Your cadence in the fourth quarter was higher than the year run rate.

There was a dip in the stock in November, but it doesn't look like the average price was much lower relative to the rest of the year. And the question is, has the attitude changed around the buyback, more cash flow in the back half of the year maybe driving a decision or is this just opportunistic timing and I'm reading too much into it?

Maybe you're reading too much into it, Jack. It's just opportunistic acquisitions.

Okay. Fair enough. Thanks.

Nishu Sood, Deutsche Bank.

Thanks. Just following up on that, the improvement in orders, Maracay was one, Quadrant, Colorado. Those are some of the divisions which have been more of a drag on gross margins in the past year or two, so the strength there, what implications does that have for your gross margins?

I'll start with Quadrant. Actually, that story started last year. Their margins significantly improved because of the execution led by Ken Krivanec and his team on product design, innovation, and execution.

It was fairly significant last year, and we expect outstanding results from him in 2017 and 2018 and beyond as he continues to focus in the Puget Sound area. And with Maracay, as I mentioned, what Andy is doing and his focus, and we talked about this in the Investor Day, Nishu, is now to increase those gross margins in 2017 and 2018.

Our goal by the end of 2018 is we gave to the Investor Day was to get up to 18%, and that's there in the cross hairs won by the execution success he is having.

And then, Nishu, to add to that relative to Colorado, obviously, as we move through our more affordable product there, which typically had our bedroom margins, we were taxed with the upper end and that ASP is well above $550,000. We just see less demand.

You'll see improvement in margin going forward. As you noted the order pace because we've been able to bring back and reintroduce some new more affordable products into that marketplace, and we're very optimistic about that.

Got it. Got it. The question on the share repurchases as well, the pace, the strong pace of share repurchases this year, and as you laid out pretty well at the Investor Day. Have these longer term assets which are going to require time and capital to build out, so it gives TRI Pointe as a builder a little bit more of a land development flavor.

Cash flow requirements, does the level of share repurchases this year affect your ability to be able to focus on these longer term assets? Is a just a timing issue? Obviously, you will be generating cash flow from the remainder of the operations, so maybe if you could just give us your thoughts on the relative balancing of those two over the next couple of years.

Yes, Nishu. This is Mike. We don't see that stock repurchases are going to slow down our growth perspective. We still are negative cash flow this year as we continue to grow to those deliveries in 2018.

We're still very confident in the fact that we will generate free cash flow in 2018 and beyond as those assets have -- we've spent of the majority of the dollars on the groundwork and then we'll be bringing deliveries on from those communities. We don't think that has any impact on that.

Got it. Okay, thank you.

Carl Reichardt, BTIG.

Hello, guys. You mentioned $500 million to $600 million development spend for the year for 2017. How much of that is going to be devoted to California?

Well, I think I mentioned it was $500 million and $600 million on land, and it was $400 million to $500 million on land development. Carl, as you know, the majority of that is in California.

It's probably $250 million to $300 million of that is in California, not just in long-term assets but some of our other assets in northern California and southern California. But the majority of all of our land and land development spend is in California, as you can imagine just for the pure price of lots and the cost of business there.

I can. And then can you talk little bit about specs as well, maybe what you've got in terms of specs per store now, and whether or not just given the difficulty in getting trades, obviously we've seen many of your peers move downstream, do more spec. Your price points don't necessarily lend themselves to that, but is there much change in strategy there as you look the next year or two?

Not much change in strategy. We've backed off of specs in Texas. As that market was a little bit weaker, we changed our spec strategy a little bit, but we're currently have around three specs per community when you look across the whole platform of our business.

One thing, Carl, that we did do anticipating whether it was try to go ahead and get out in front of it a little bit relative to some of our land development improvements and infrastructure we're putting in the ground. Similarly, where we have seen the opportunity, we went forward on putting some slabs in but again, not a significant shift in our overall strategy relative to spec.

Okay, great. Thanks, guys.

Alex Rygiel, FBR.

Thank you. Gentlemen, could you just real quick address some of the risks in your guidance in 2017 and maybe just identify your top three, and then also comment on whether or not the rate at which the new communities come on board is a meaningful risk?

I'm sorry, rephrase your question? What are the top three risks in 2017? Did I understand you right?

Yes, top three risks to your guidance in 2017.

I think it's all macro. I would throw it in the terms of any political uncertainty that would be created whether it's through any sort of GSE reform, immigration reform, would be probably number one. The second risk is always whether labor and those things.

That's something that we can manage and get ahead of, as Tom said. And then third is interest rate risk, obviously, but that's well documented and well forecasted, but the biggest risk is the political uncertainty, frankly. There is a lot of pluses and minuses to it, but time will tell.

Thank you.

Will Randow, Citigroup.

Hello, good morning, guys, and thanks for taking my questions.

Hello, Will.

Given the tail on land sales is a bit longer, in regards to your expectations for land sales gross profit this year, what percentage of that is in the bag or locked in at this point? Also given you have a probably a better view than you did last November, do think there's any upside to that?

Hello, Will. It's Tom. Nothing is in the bag, that's for sure. We are highly confident of our ability to deliver on that land sale, but we have not even entered out an offering package on that yet.

But given that we've messaged the most significant land sale is down in our PHR community in San Diego, we're highly confident that we're going to be able to maximize the potential of that deal.

Got it. And then also as a follow-up to a prior question, what type of cost inflation did you experience in the past quarter year over year? Where were the biggest swing factors, and I'll call it lumber, labor, lots, or other building material buckets? And then your 2% inflation expectation, do you have any strong view on which bucket you'll see the most pressure in 2017?

I would say that over the last quarter, clearly the biggest pressure came from the labor market, specifically as it relates to framing and drywall.

Got it. And then if I could just sneak one last one. It seems like you only exhausted half your repurchase authorization. Let me know if that's right, and if so, why not take the opportunity to be more aggressive given your [prostra] and not doing that growth will be sacrificed for the related repurchases.

Yes, overall. Sorry, Will. Overall. This is Mike. We spent about $42 million of our $100 million authorization, but as I mentioned, that expired at the end of January and we'll report if and when the Board decides to authorize an additional dollar amount.

Okay, got it. Thanks again, guys, and congrats on the progress.

Thanks.

Alex Barron, Housing Research Center.

Thanks. Good job, guys. I wanted to ask about the guidance for the next quarter, first quarter. I missed your gross margin guidance there. I got the other three quarters, and I got the sense that it was lower but you also mentioned that it had to do with California mix. Is that also the size of the homes or just the volume of homes relative to the overall?

Well, our lower margin in the first quarter is really specifically associated with the percentage of deliveries in California, as well as what's being delivered in California, as you mentioned, are more the inland empire projects and less of the coastal-oriented, higher ASP projects. That's why our overall ASP is down fairly significantly in the first quarter. But then when we look at our margins in backlog in the second and third quarter, they are shifting pretty significantly up.

Got it. What was the gross margin again, Mike?

The gross margin guidance that we gave for the first quarter was 18%, and then it was 19.5% to 20.5% for the middle two quarters, and then 21% to 22% for the fourth quarter. So overall, it's a 20% to 21% for the full year.

Got it, okay, thanks a lot.

This does conclude our Q&A session. I would like to hand the call back over to management for closing comments.

I want to thank everybody for attending today's earnings call, and we look forward to sharing our results after the first quarter here as we progress through the year. Very optimistic about 2017 and wish you all a great year. Thank you.

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