Tri Pointe Homes Inc (Delaware) (TPH) 2017 Q1 法說會逐字稿

Greetings and welcome to TRI Pointe Group's first-quarter 2017 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is my pleasure to introduce your host for today's call, Mr. Chris Martin, Vice President of Finance and Investor Relations. Thank you, you may begin.

Good morning and welcome to TRI Pointe Group's earnings conference call. Earlier today the Company released its financial results for the first quarter of 2017. 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 its most recent annual report on Form 10-K and its quarterly report on Form 10-Q.

The Company undertakes no duty to update these forward-looking statements that are made during the course of the 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 of GAAP can be accessed through TRI Pointe's website and its filings with the SEC.

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

Thank you, Chris, and good morning to everyone who has joined us on today's call. I am pleased to announce that 2017 is off to a strong start for TRI Pointe Group. Orders grew 13% in the first quarter on a year-over-year basis due to a 10% increase in our average selling community count and a strong absorption rate of 3.5 orders per community per month.

Deliveries and homebuilding gross margin percentage came in ahead of our guidance because of the solid execution by our teams in the field. We also made further strides in our efforts to unlock the significant value embedded in our long dated California asset by bringing new communities to market and making progress in the development of several projects in Southern California. In addition, we are very pleased with the strong sales results we are seeing from our recently opened communities.

We are excited to share the details behind our performance this quarter, but first I wanted to briefly address recent news regarding Starwood Capital Group. We greatly appreciate Starwood's eight-year investment in the Company, as well as their contributions while serving on our Board of Directors.

Starwood's recently announced disposition of its TRI Pointe shares in no way alters our outlook for the Company nor does it change our confidence in our ability to execute on the goals and initiatives we outlined at our Investor Day last November.

Accordingly we are pleased to reiterate our guidance for 2017 as we outlined during our last earnings call. In addition, we continue to believe that 2018 will be consistent with our goals presented at our November 2016 Investor Day, including our expectations that we will deliver between 5,100 and 5,400 homes for the full-year 2018.

Our senior management team, with the full support of our Board, remains as excited as ever about the future of TRI Pointe Group, and we are confident we have the right talent, strategy, and leadership in place to enhance shareholder value over the long-term.

The homebuilding industry remains on solid footing as we enter the latter stages of the spring selling season. In March the Conference Board's consumer confidence index rose to its highest level since December 2000, signaling an increased sense of optimism around business, jobs, and personal income that is conducive to increased home buying activity.

After a rapid rise in the benchmark 10-year treasury following the presidential election, mortgage rates leveled off and have recently come down from their near-term highs, keeping homeownership affordable and attractive. In addition, the supply of new and existing home inventory and all our markets remains at historically low levels, underscoring the need for additional housing.

Complementing these macroeconomic tailwinds are strong housing fundamentals in most of our markets in which we build and a consistent focus on operational excellence by each of our brands. California continues to produce outstanding results with 39% order growth for the first quarter on a 25% increase in communities and an 11% increase in our monthly absorption rate.

We continue to sell homes at a rapid clip in Southern California thanks to the factors I just mentioned and the premium designed well located nature of our communities which allows us to stand out from our competition.

In particular I would like to note the strength of our Pardee brand in San Diego, which is selling homes at a pace above the Company average across multiple product segments, from entry-level homes at selling prices from the mid to $300,000 level to luxury homes above $2 million.

In northern California the strong local implement trends and continued lack of supply helped drive a 39% increase in orders for our operations in the market in the first quarter. These same factors drove demand and pricing higher in the red-hot core Seattle markets of King and Snohomish counties, where our operations turned in the best sales pace in the Company for the quarter along with a 28% increase in our average sales price as compared to last year.

The sales base in our other Western markets also remained above three homes per community per month for the quarter, a good indication that local market conditions are healthy. Our Houston operation continues to show signs of stabilization, as evidenced by the 11% year-over-year increase in orders and a mild contraction of incentives.

Finally, our operations in the mid-Atlantic also posted improvements in both sales pace and margin. Each of our homebuilding brands made positive contusions to our bottom line for the quarter and, more importantly, contributed to the overall sense of optimism that we have about the future of TRI Pointe Group.

We also have positive news to share with respect to our long dated assets in Southern California. In February we opened three product types of our Aliento master-plan community in Santa Clarita, located in Los Angeles County. We have had tremendous response generating 42 orders through April 23, 2017. We are extremely pleased with the demand Aliento has generated and we plan to open a fourth product line later this quarter that will be a 95-unit active adult age qualified neighborhood which currently has 1,100 homebuyers on our interest list.

At Collins ranch in San Diego, order activity continues to be robust with good price elasticity across all product segments. Last weekend we opened two new communities to very strong demand with selling prices between $1.3 million and $1.6 million. In addition we recently received approval for a revised tentative map, which will yield an additional 64 lots creating an opportunity to generate even more profit from this valuable asset.

With that I would like to turn it over to Mike for some additional details about our results for the quarter.

Thanks, Doug. Good morning. I would also like to welcome everyone to today's call. As Chris mentioned earlier, we posted a slide deck at our website which includes various key operating metrics as well as charts detailing orders, deliveries, and absorption rates by home building brand or division for the first quarter ended March 31, 2017. We've also provided certain key operating metrics by state in today's press release announcing earnings for the quarter.

Overall we are pleased with the first-quarter results as they exceeded our previously issued guidance for new home deliveries and homebuilding gross margin percentage. In addition, net new home orders increased 13% compared to the first quarter in the prior year.

Slide 6 of the deck provides a snapshot of some of the selected operational highlights from our quarter. Home sales revenue was $392 million for the quarter on 758 home deliveries at an average selling price of $517,000. Our homebuilding gross margin percentage for the quarter was 18.8% and net income came in at $8.2 million or $0.05 per diluted share.

During the quarter we opened 14 new communities, six in California, three in Texas, two in Arizona, two in Washington, and one in Nevada. In addition, due to the strong new home orders for the quarter, we closed out of 15 communities resulting in an ending active selling community count of 123, as shown by state on slide 7.

As I just mentioned, for the first quarter we reported a 13% increase in net new home orders on an average community count that was up 10% from the prior year period. Our overall absorption rate increased 3% to 3.5 homes per community per month in the quarter compared to 3.3 homes in the prior year.

In addition our new communities that opened in 2016 and 2017 absorbed at a higher rate of 3.7 orders per community per month versus 3.2 orders for communities open prior to 2016. This result reinforces our confidence in the acceptance of our new product offerings in their respective core market locations.

So far in April through last weekend we have continued to see strong traffic and orders, with our absorption rate increasing to 3.8 orders for the month. We ended the quarter with 1,734 homes in backlog, which was a 13% increase compared to the same quarter last year. The average sales price in backlog increased slightly to $585,000 and the total dollar value of our backlog increased 14% year-over-year to just over $1 billion.

During the quarter we converted 64% of our fourth-quarter ending backlog, delivering 758 homes, which was 10% higher than our guidance. Our overall homebuilding gross margin percentage for the first quarter was 18.8%, which exceeded our guidance by 80 basis points.

As we discussed on our last earnings call, the first quarter 2017 was the lowest in terms of our deliveries from our projects in California, which typically deliver the highest average sales price and generate the highest homebuilding gross margins for our company. Our projects in California will continue to contribute a higher portion of our deliveries in the second quarter and as a result we expect our home building gross margin for the second quarter to be in a range of 19.5% to 20.5%. In addition, for the full-year 2017 we expect our home building gross margin to be in the range of 20% to 21%.

The first-quarter SG&A expense ratio as a percentage of home sales revenue was 15.7%, which was a 270 basis point increase compared to 13% in the same period in 2016. This year-over-year increase for the quarter was due in part -- due to the unfavorable leverage impact of 7% lower home sales revenue and 210 basis points was related to the addition of incremental G&A costs associated with the strategic growth of our Company.

Our G&A run rate in 2017 was approximately $34 million per quarter and its contribution to our SG&A expense ratio is significantly impacted by the leverage of our home building revenues on a quarter-over-quarter basis. For the full-year 2017, we expect our SG&A expense ratio to be in the range of 10.2% to 10.4% of home sales revenue.

During the first quarter we invested $76 million in land acquisition and $87 million in land development. The focus of our land acquisition 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 through 2018.

At quarter end we owned or controlled approximately 29,000 lots, of which 59% are located in California. Based on the midpoint of our 2017 delivery guidance, the number of years of lots owned or controlled is 6.2. Our goal is to continue to shorten the duration of our land pipeline by continuing to focus on accelerating our long dated California assets and on investing in faster turning communities in our markets outside of California.

A detailed breakdown of our lots owned will be reflected in our quarterly report on Form 10-Q, which will be filed later today. And in addition there's also a summary of lots owned or controlled by state on page 28 in the slide deck.

As it relates to our balance sheet, at quarter end we had approximately $3 billion of real estate inventory. Our total outstanding debt was $1.4 billion, resulting in a ratio of debt to capital of 43.6% and net debt to capital of 41.3%. We ended the quarter with $129 million of cash on hand and additional liquidity of $371 million available under our unsecured revolving credit facility.

Now a quick update on our share repurchase activity. Since our Board authorization on February 23, 2017 through the close of trading yesterday we have purchased over 1.2 million shares at an average price of $12.35 for a total of approximately $15 million, leaving $85 million available under our $100 million stock repurchase authorization.

And now finally I would like to summarize our outlook for both the second quarter and the full-year 2017.

For the second quarter the Company expects to open 18 new communities and close out of 14, resulting in 127 active selling communities as of June 30, 2017. In addition, the Company anticipates delivering approximately 58% of its 1,734 units in backlog as of March 31, 2017 at an average sales price of approximately $550,000. The Company anticipates its homebuilding gross margin to be in a range of 19.5% to 20.5% for the quarter.

For the full-year we are reiterating our guidance from our last call. 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 2017 to be in a range of 20% to 21% and our SG&A expense ratio to 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 of 2017.

With that I would like to now turn the call back over to Doug for some closing remarks.

Thanks, Mike. In conclusion, we continue to focus on our three key differentiators to drive value for our shareholders. These differentiators are: one, combine the asset-turning mindset of a production homebuilder with the design and innovation leadership of a high-end builder; two, balance strategic growth initiatives with a return on capital focus; and lastly, unlock the value of our long dated assets in California, as highlighted in our press release issued last week.

Maintaining this focus served us well in the first quarter and we believe that it will continue to benefit home buyers and shareholders alike in the future. Our progress for the first quarter of 2017 put us in a great position to achieve the goals we set for this year and beyond. By converting 64% of our beginning backlog in the quarter and ending the period with 13% more units in backlog, as compared to the same period last year, we are in great shape to reach our delivery goal of 4,500 to 4,800 homes for the full-year.

Gross margins coming in above our projections in the first quarter give us a good base from which to build as the year progresses and keeps us on track to reach our gross margin goal of 20% to 21% for the full-year.

Finally, I would love to thank all of our team members at our six homebuilding brands on continuing to generate results for our shareholders. Your passion and focus on operational excellence helps separate us from our competitors while giving our customers a great home ownership experience.

That concludes our prepared remarks and now we would like to take your questions. Thank you.

(Operator Instructions). Alan Ratner, Zelman & Associates.

Good morning and nice quarter. First question I have on the gross margin, so strong results this quarter, better-than-expected. And Tom, you had a comment in the release just talking about potential pricing power especially with your absorption level as strong as it is, similar to comments we've heard from other builders.

So as you look at your full-year guidance, which you've kept unchanged, the 20 to 21, there's obviously a lot of moving pieces here. There's the potential for pricing power. There's the mix from your newer communities. There's cost inflation.

So, at this stage in the game I was hoping you could just kind of frame out the potential upside and downside [bias] to that margin guidance range. Because on the surface it would appear that you are positioned to maybe come in closer to higher-end if that pricing power does come to fruition. But I'd love to hear your thoughts on that, thank you.

Alan, this is Mike and then maybe Tom can jump in. But we left it unchanged at this point. We're sitting here through April. There's a lot to go here in the spring selling season. But we are off to a very good start from a Company perspective.

We have seen some slight lift in our margins moving forward. We are very encouraged by the new communities we've opened in California and we've seen some pretty good price appreciation in those markets so far. But it's still somewhat early in the year to think about changing those. But I would say the end of next call we'll have a lot more color on our margins moving forward.

I would also -- this is Doug -- say that I think you heard about the tariff imposed yesterday, although a lot of that has been baked into the marketplace on lumber. But since the fourth quarter, costs on lumber have increased quite a bit. So, on the cost side we continue to, as all builders, battle that equation. So we will have better clarity by the end of the second quarter as we continue to see a pretty darn good selling season.

Understood. Thanks for that color. And second question, if I look at your portfolio, you have a pretty diversified product mix here. As you mentioned, I think you've got product north of $2 million in California you mentioned and obviously some entry-level product as well. So. I think you and others had highlighted late last year some softness at the higher-end and maybe the lower price points were performing a bit better.

I was just curious how that looks today. Have you seen the high-end stabilizer pick up a little bit relative to where it would've been pre-election and -- or are you still seeing the relative strength from the more entry-level product?

Good question. This is Tom. I think we are really confident in the high-end. We've definitely seen stabilization in that marketplace and that is really throughout Southern California, Northern California, up in Seattle. We continue to see strong demand at our high-end.

That would be evidenced by the couple of openings we just had down in Pacific Highlands Ranch in San Diego offering product from $1.3 million to $1.7 million. And we see really strong deep demand there and we've had great order flow at the high-end.

Good to hear, thanks. Good luck, guys.

Mike Dahl, Barclays Bank.

Thanks for taking my questions. I wanted to ask about the difference in absorption and interesting comments around kind of the newer vintage communities versus the legacy. And even the legacy seemed to be absorbing at a decent pace.

But when you see that difference on your new communities versus the ones opened prior to 2016, is there anything that you are looking at as far as some sort of action that can bring up the legacy communities towards the newer vintage communities? Or what else are you seeing kind of drive that? Is it just better location or product mix? Any additional color you can give there?

It's Mike. Obviously on some of the older communities as you near close out you're going to have probably a slower absorption pace. But what we are more encouraged by is the pace of our absorption at our new communities that we've opened over the last call it 15 months. And as you know in our guidance for 2017 and 2018, we do show a slight increase in our overall absorption rate for the overall Company, so that kind of feeding right into that.

But we feel really good about our absorption pace. I mean, being able to average [3.5] at our price point -- I think we've got the second highest price point in the sector and we average at a pretty good pace. But I think it's all based on our new product, the consumer experience, the design and innovation that we have in our product has just been well received in our locations.

Got it, thanks. And then my second question on the comments around April absorption -- and this isn't meant to be nitpicky, but I just assume it will be a question. I think last year you were running at 3.9 sales a month in April, so -- where for the first quarter you had shown some improvement in absorption. It seems like it's tracking down very slightly year-on-year in April.

I know there's an Easter shift this year, potentially some issues in California around some of the weather or some of the other things. But just curious what your thoughts are, what you can tell us on how you are viewing the spring. Obviously still a very strong level, but just address some of the concerns that may be out there if you highlight absorption, that has actually flipped back down a little bit.

Yes, Mike, obviously April is our toughest comp set; we've mentioned that all year. I think we had 477 orders last year and absorbed at about 3.9. But we see this month kind of in that same ZIP Code. We did not expect to have better absorption pace in April than what we had in the previous year. But I think when you look at May and June moving forward, that's where we started outpacing last year. But we feel that's a pretty high absorption pace last year, 3.9, and we are right there this year.

Yes, definitely. Thank you.

Jack Micenko, SIG.

Good morning, guys. Looking at backlog conversion, we stepped down a little bit year-over-year in 1Q and I think that gap widens based on your guidance. In 2Q I'm wondering if there is anything specific driving that. Is that perhaps labor or weather or anything in there that we should be thinking about for the balance of the year?

NO, I don't think there's anything specific, Jack. Obviously our backlog conversion is down slightly in 2Q because we've pulled forward, I don't know, 50-plus units into 1Q. And when you look at our backlog in the communities that we have opened, we've opened more than 50% of our communities in California this year so far to date and a lot of the communities that opened in the fourth quarter. And so, those take a little bit longer to build because they are typically higher end units.

Okay, that makes sense (multiple speakers).

(Multiple speakers) related to construction or labor or anything like that that's affecting that.

All right, got it. And then, Mike, on the buybacks it looks like -- and correct me if I'm wrong, it looks like you are comfortable paying a higher price than you paid in the past. Has you or the Board's thinking changed on buybacks or anything around there? It does seem like you are pricing about 10% higher on a valuation basis than you've been.

Yes, I think our stock has been trading higher, but we typically don't comment on our trading decisions or the timing of those decisions. We're under our 10b5-1 plan now for the next couple of days and then we are typically an opportunistic purchaser after that. And as I mentioned, we've bought about 1.2 million shares so far roughly in the last 30 days and we have about $85 million of our authorization left, so we will just leave it at that.

All right. Thanks.

Stephen East, Wells Fargo.

Thank you. Good morning, guys. A quick follow-up on the gross margin. Mike, it's pretty dependent on California closings, obviously. Does weather pose any risk as you move through the year on this? And then can you talk a little bit about your California gross margins versus the rest of the Company's gross margins? Give us at least some idea of some magnitude of swing.

Maybe if you look at our Investor Day deck you'll see the difference -- maybe I will talk about the margins in Pardee in California. They are relatively high because of our land basis that we have there. They are North of 30%, which you would expect given the long-term nature of those assets. And that's why we're excited about pulling more of those forward in our homebuilding operations.

But California is typically generating margins well above the Company average and ASPs well above the Company average. So it does drive our margins to a certain extent, especially when you start adding in product north of $1 million, $1.5 million at very high-margins at Pacific Highlands Ranch for instance.

This is Doug. As far as weather, weather was an issue -- it rained. We're over the drought here in California, but shifted a few things between model openings maybe 30 days here or there. But nothing is material to change our guidance for the whole year.

Okay, fair enough. And Doug, you all did -- you released that paper about your six big communities and big plans. I guess the timeline, you've already got some open, you are in the process of opening. How long do these projects take you to run? And I guess just a little bit more broadly, you have upscaled a lot of them, etc. It looks like you've got more upfront investment.

I'm just wondering how you all look at the risk return of these communities. And then could you also tie that into your inventory is the longest in our group. And how quickly you think you bring your inventory down and what would you like to see as a normalized year supply if you will?

Stephen, it's a good question and actually all those long dated assets, if you reference the November 2016 Investor Day, we actually put together a detailed schedule of the 12,900 lots that shows how we forecast those being delivered over the next I believe it was seven years, maybe eight years. I don't have it right in front of me.

So, we've got pretty good visibility on how we see those assets turning. Ultimately as we've mentioned in several instances, we like to have the overall number of years of inventory down to about 5.0 versus 6.2. That 6.2 is highly affected by the long dated assets, so you will see that coming down to 5.2 over the next couple years.

But the flipside, those long dated assets are generating significant value. We highlighted what we thought the value of those assets were last November and now we are very accrued to those assets. And as I've always said, all builders are not equal when it comes to the land inventory. And that reverse mortgage trust we did a couple years ago, two and half years ago, is continuing to bear fruit.

Stephen, this is Tom. One thing I would just add to that relative to the risk profile, in optimizing these communities I think we are doing a really good job of making sure we are cognizant of what we are delivering.

One of the things we continue to do is define product segmentation and we have enhanced the segmentation opportunities of each one of these communities, as well as have a very defined phased delivery model in our land development. So we are taking on bite-size chunks that we can manage and look out to the marketplace to see how we best proceed.

And if I can on that, we saw some really nice active build in your mid-Atlantic market. You're opening some -- you've switched up a little bit. You're opening more active adult in California. Where do you think that goes as a part of your business and does it become a much bigger part of these six communities that you've got?

Yes, absolutely, great question. Thanks for highlighting that. We do see that demographic playing a key role for us going forward and we will be increasing our deliveries in that demographic, particularly in upcoming communities. We've got a great opportunity to maximize that and we see it as an additive demographic to our volume. So it's taking the volume we have in those existing communities and increasing it.

So, first up will be this smaller partial that we talked about in our Aliento community. We've got huge demand there. It is just a 95-unit community that we will begin to open in the second quarter this year. But our big one will be through our Sundance offering out in Beaumont and that's going to be about a 700 unit community. But each of our other communities going forward, we are looking at the possibility of adding that active adult segment.

Thanks a lot. I appreciate that, Tom.

Mark Weintraub, Buckingham Research Group.

As you've indicated, you've got great margins and great returns from the California assets, particularly Pardee. And presumably as this has come up already on the call, some of the other geographies aren't as profitable.

And I guess I'm trying to understand to what degree is this the inverse situation that, whereas Pardee has these long dated very valuable land assets, is it that some of the other operations just have less well-positioned land that's just not that much more valuable than where it is on the books let's say?

Or is it that there are operational improvement opportunities at some of these builders and/or lack of scale? Maybe a little bit more clarity on how things can play out outside of the California operations, which, good news, they are going to become a bigger part of the mix and are doing great, but the other operations, what can be the strategy there?

Good question, Mark. This is Doug. Really, and I think we've tried to articulate this a number of ways, but the TRI Pointe Group kind of has the best of both worlds. We've got these long dated assets that we are owning to continue to bear fruit from for a number of years going forward.

At the same time we've got a merchant home-building production mindset in all the other brands which continue to find new land opportunities, design and innovate new product so that ultimately their margins in some areas will grow in that 18% to 22% range as we continue to underwrite and stay disciplined to that.

And so, we look at the operations and companies outside of California to kind of rise the tide hopefully over time as they continue to source new opportunities, design new product, and execute at its highest level. And obviously we have seen that in Seattle. We are seeing that in Phoenix and we will continue to see that in the mid-Atlantic going forward too as we bring on new opportunities.

We just opened a new opportunity in the mid-Atlantic in Maryland called Two Rivers. There is some very strong demand in the active adult area. And those are the type of opportunities that will kind of rise the tide for the companies outside of California.

Mark, this is Tom. I think we also will see trending margin improvement in some of those other markets as the legacy assets kind of wind down and close out. And we will have a higher mix of our newer, more innovative products, as Doug just mentioned.

And can you give us any sense as you look at the margins on the newer products at these operations now how they compare to let's say the more legacy? What type of spreads are you seeing?

Well, we underwrite to the 18% to 22% range. And typically the newer projects are opening at those underwriting margins versus the legacy projects. So, we will continue to stay disciplined that way. Obviously you've got well-located, very well executed communities, but you are also battling all the other challenges in the business, whether it's land prices, lumber costs, fees. So there's a whole balancing effect that goes on here as you continue to play in the merchant home building segment with the rest of our Company.

And Mark, we have been pretty transparent about our margins in all of our brands. So I think if you just look back to the November Investor Day you would see what those trailing margins have been. [We hope seeing] margins I think at [9.30] for those other brands.

And clearly we have articulated many times that as we work through the legacy assets and the new products that are coming on, new products coming on at typically higher ASPs, higher absorptions and higher margins are going to bode well for the Company moving forward into 2018 and 2019. And that's why we lifted our margin guidance for 2018 at our Investor Day higher than what it is in 2017.

Okay, great. As I hear this it sounds like it is kind of just the legacy land position. Operationally you feel good about where the other builders outside of California are just really -- just going through the land positions.

That's correct.

Okay, thank you.

Jay McCanless, Wedbush.

Good morning, guys. First question I had, I was wondering if you could walk me through from the guidance that you guys gave for 1Q on February 22 to the results that we are seeing today. Because you guys closed a lot more homes at a lower price and a better gross margin than what you had anticipated call it 60 days ago. What happened in the month of March to take you from that guidance to what we are seeing today?

That's a great question. It's Mike. We basically pulled forward a handful of units in a lot of our brands and divisions, but primarily at lower ASPs. So we brought forward a few more at Maracay in Phoenix, 10 or 12 in Las Vegas, 10 or 12 in the Inland Empire, a handful in Winchester.

So bringing those forward into the quarter at lower ASPs affected our ASP slightly. But as we mentioned, there's this myth that the Inland Empire doesn't do that well. We generate very good margins in the Inland Empire through our Pardee brand, and so that had some impact on the margin in the upward trajectory.

Got it. So should we think something maybe a little bit in terms of backlog [in terms of] 2Q? Should we be a little more conservative with pulling those units forward or do you guys think you are going to be trying to ramp up spec sales? What is kind of the game plan for hitting that absorption number for 2Q?

I think we are on track with our absorption number for 2Q, but you were talking about the delivery number. So backlog conversion is 58%, so we're closing let's call it roughly 1,000 units for the quarter. We clearly have spec inventory in Texas and we have spec inventory in Las Vegas that if we get better-than-expected sales we are moving through some of that a little bit quicker. But I think we feel good about where we sit today on our Q2 guidance for sure.

Okay, sounds good. Thank you.

Stephen Kim, Evercore.

Thanks, guys. Strong quarter. Just wanted to ask you a couple of questions about your land and inventory. Can you update us on what your land spend was in the quarter in terms of for development -- what you spent on development as well as acquisition?

Yes, it's Mike. We invested $76 million in land acquisitions and $87 million in land development. So it was relatively a light quarter from that perspective. Clearly California rain impacted us somewhat on the land development side. Since we have a lot of long dated assets under operations we had probably spent a little less in land development than we anticipated during the quarter.

And is that likely to accelerate as we go forward?

Yes, it is. We guided for the full-year that land and land development was roughly $900 million to $1.1 billion. And so, we may be probably on a lower end of that as we look for the balance of the year now.

Okay, got it. And by chance do you have a homes under construction number yet? This is a dollar number, sorry.

Sure, hold on one second or ask another question while I'm finding that.

Sure. Yes, absolutely. And if you want to get back to me on that that's fine. I wanted to just talk also --.

It's about 1,600 -- there's about 1,600 units -- homes under construction right now and about 1,100 of those are sold.

Okay, and do you have a dollar value of those 1,600 units roughly?

I don't have that offhand, no.

Okay, that's fine. I can follow up later. Second question or my last question relates to the SG&A. You've talked about where you see SG&A for the full-year, which is a good level. The SG&A was elevated this quarter. I think you had emphasized that it is due to the fixed SG&A.

But when we sort of run the numbers we are still having a little bit of difficulty closing the gap. So I wanted to see if we could understand a little bit more about what the quarterly cadence might look like going forward.

For instance your guidance would seem to suggest for the year that your SG&A ratio is going to show some very healthy improvement in the back three quarters of the year. Would that also be true that you would see a declining year-over-year ratio in the second quarter or is this going to be entirely a function of the back half being down year-over-year?

No, no, no, no, we see a significant reduction in the second quarter as well. I am glad you asked that question 44 minutes into the conference call because that's the one number that we didn't provide guidance on and I wanted to give some clarity on it.

But as we mentioned, we are comfortable with our range of 10.2% to 10.4%. That's roughly made up about half G&A, half S. Let's call it 5% to 5.1% G&A and 5.2% to 5.3% on the S side. Clearly the G&A is divided by 4. We are not hiring and firing people based on the deliveries that we have, so that's a fixed number.

And then about call it 3% of that 5.2% to 5.3% is kind of a fixed number as well, that's model operations, sales and advertising, the amount of dollars that we are spending on opening new communities. And the other 2%, 2.4%, whatever the numbers are remaining are more variable based on units. And I think if you use that kind of rule of thumb within 10 or 20 basis points here or there you're going to get to the right cadence.

But there is clearly significant reduction in our SG&A percentage on a quarter-over-quarter basis and pretty dramatic in the fourth quarter. Because you remember the midpoint of our number is roughly 4,650 units and the cadence we closed call it 700 to 750 units in 1Q, we're going to close about 1,000 in 2Q. And it ramps up about 300 units thereafter each quarter roughly to get to that 4,600 midpoint. And at the same time we are increasing our average sales price each of those quarters. So there's a lot of leverage on that number moving forward.

All right, great. That's very helpful. Thanks very much, guys.

Nishu Sood, Deutsche Bank.

Thanks. Just following up on the SG&A. If I heard you correctly I think you mentioned that about 200 bps of the SG&A was due to spending related to some of the longer-term projects. so about $8 million or so if I ran those numbers correctly. Now your SG&A guidance for the year you've obviously maintained.

So that $8 million, was it anticipated or has it been offsetting cuts? And more importantly, if it is related to the longer-term land development, obviously you guys are doing all kinds of great things with the long-term assets, but it does add a layer of expense from a development perspective. Would that affect later this year the SG&A? Would it affect 2018 or 2019? How should we think about that as well?

I want to make sure I understand your question. So clearly there was an increase in our overall G&A quarter over quarter from 1Q of 2016 to 1Q 2017. As I mentioned, we are running roughly $34 million a quarter and that's pretty consistent with what it got ramped up to in 2016. I think we spent $33 million, $34 million roughly in the fourth quarter of 2016 as well as.

And so that's related to -- when we say our strategic growth, it's not just related to long-term assets. It is really related to the addition of Austin and our Los Angeles operation when we opened Aliento. But that run rate is going to be pretty good for the next couple years because now we have those people in place to get to the operational levels that we are talking about in 2018, that 5,100 to 5,400 deliveries.

Got it, got it. Okay so I guess then the question is -- maybe the assumption there is incorrect that the development of the longer-term assets will be SG&A heavy.

So is there -- is that the way we should -- I guess we are thinking about it that just in your normal G&A run rate, like you mentioned $34 million, that would incorporate any of the land development, entitlement, etc., activities around the longer-term assets. I'm just trying to parse out the effect of -- there's the merchant builder, then there's the long-term assets. I'm just trying to parse out the impact on SG&A.

This is Tom. I think you are correct in your latter assumption that the long-term assets do not have a significant impact on our SG&A at all. It is not a heavy spend relative to developing those assets.

Got it, got it. Also related to that cash flows, you were just talking about this as well, the $900 million to $1.1 billion of land spend. You've talked previously I think about having positive cash flow in 2018. As you have really begun to ramp development of these long-term assets, as you talked about at your Investor Day, how should we think that the cash flow from operations shaping up?

I think it was a negative $150 million or so last year. Are we looking at a similar number for this year? Are we still on track to turn positive in 2018? Will it be meaningfully positive? And again, trying to understand the impact of the longer-term assets on the development of the cash flow trajectory.

Thanks for that question. 2017 -- it's roughly about $200 million of negative cash flow this year primarily related to those long-term assets and how much we are spending. And we still anticipate that we will be cash flow positive in 2018 and more so in 2019.

Got it. Great, thanks.

(Operator Instructions). Carl Reichardt, BTIG.

Thanks. To put a bow on Allen and Stevie's question about product mix, where do you sit now in terms of first-time versus move up versus active adult? And over the course of the next year and a half or so how do you see that altering?

Carl, this is Tom. Relative to the first time we're remaining fairly consistent in that 30% to 35% range. Active adult obviously is a very small portion of our business now, but as I mentioned, it definitely will be growing. I don't have the exact stats, but I would see significant growth in that segment really beginning in 2019 as we bring on our Sundance community.

I would just add, currently based on our orders, as Tom mentioned, our entry-level is 30% or so. Your move up is 45% to 50% and the balance is luxury. And that diversification has served us well as we highlighted even down in San Diego where we are building and selling homes at in the $300,000 all the up to $2 million plus.

So, we continue to believe that diversification serves us well in attracting further land opportunities across the country and making us a lot more diversified and being able to source land in really strong locations. Generally speaking land in good locations is going to demand a higher premium and probably a higher price and we will continue to focus on designing and innovating product to fit that pipeline.

Okay. Thanks, Doug. And then I have a bigger picture question on brand. We've got the legacy brands that came from Weyerhaeuser that have stayed local in their markets. But TRI Pointe obviously is the newer brand, more of a startup brand. Do you have plans to expand that to new markets?

And just as a comment, the product that we've seen that is connected to the TRI Pointe brand is, at least in my personal opinion, quite innovative and interesting. And I'm just curious if, outside of Colorado and California, you expect to move that brand to other markets. Thanks.

Good question, Carl. No, we continue to focus our brands in their current markets. We have expanded our TRI Pointe brand organically in Austin. As we discussed at the end of last year and beginning of this year, we are looking at Sacramento to expand the TRI Pointe brand.

But for states and sub markets outside of our main playing area, so to speak, we would look to bolt on another brand and an operation, whether it was in the East Coast -- I say East Coast, we have Winchester -- in the Southeast. So we will continue to look at M&A that way as more of a bolt on.

Carl, just as clarification, Doug was referring to Trendmaker brand in Austin. But also thanks for the compliment on the TRI Pointe product. I think as time goes on you will see us taking the opportunity to enhance all of our product offerings at all of our brands as we've been talking about. We held a really great design summit last year for all of our brands, and so a lot of the things you are seeing in TRI Pointe you will begin to see in the other brands as well related to product and operational execution.

Alex Barron, Housing Research Center.

Good morning, guys. I don't think I've heard about financial services. Is the number of $8 million for this year still good, Mike?

This is Tom. We feel really good about that number still for our outlook for 2017. Overall our financial services group continues to perform and we're optimizing it and we are getting good traction in all our markets.

Okay, I wanted to see if you could also comment on Houston and what you guys are seeing there. Obviously the orders were pretty good, but is that more widespread or is it at certain price points? Where do you guys expect the pricing of the orders to keep going? Is it going to keep going lower or is this a pretty stable number here?

Alex, it's Doug. As we reported, orders quarter over quarter were up 11%. Trendmaker obviously is, with an ASP at the higher end, more of a premium brand. And as we continue to look to diversify our product offering, I indicated at the end of last year that we are looking and we are going to be entering into new projects in smaller lot sizes, call them 50 and 60 foot wide products.

And so, over the next couple years you will continue to see actually the ASP for Trendmaker come down. And hopefully some mild bump in absorption pace too as you become more diversified in price point.

So we are happy with the progress. We are happy to see Houston kind of move in right steps forward. I think the biggest challenge still for Houston this year, and it will take this year to clean it up, is every builder has finished inventory that they've got to burn through. And as you burn through some of those finished completed homes there will be further stabilization and I think more shrinkage of incentives as we progress and go into 2018.

Okay, sounds good. Any comments you can offer on Denver?

Yes, we continue to be encouraged by the Denver marketplace. It's definitely very competitive, but our product mix is shifting slightly to more affordable smaller lots and we are encouraged by that. We will be having an opening of two new products in our Terrain community down in Castle Rock. And then additionally we are opening another store in Candelas up in the Arvada market that we think is going to provide some good order growth.

Okay. Good luck and look forward to what you guys do next quarter, thanks.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

Thank you, operator. I just was going to say as we continue to make progress towards our year-end goal, we welcome all of you do next quarter's call and I thank you and appreciate you joining us today.

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