Tri Pointe Homes Inc (Delaware) (TPH) 2017 Q2 法說會逐字稿

Greetings, and welcome to the TRI Pointe Group 2017 Second Quarter Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Chris Martin, Vice President of Finance and Investor Relations for TRI Pointe Group. Thank you. You may begin.

Good morning, and welcome to the TRI Pointe Group Earnings Conference Call. Earlier today, the company released its financial results for the second quarter of 2017. Documents detailing these results, including a deck -- a slide deck under the presentations tab, are available on the company's Investor Relations website at www.tripointegroup.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call which are not historical facts are forward-looking statements that involve risks and uncertainties. A discussion of such risks and uncertainties and other important factors that could cause actual operating results to differ materially from those in the forward-looking statements are detailed in the company's filings made with the SEC, including in its most recent annual report on Form 10-K and its quarterly reports on Form 10-Q.

The company undertakes no duty to update these forward-looking statements that are made during the course of this call. Additionally, non-GAAP financial measures will be discussed on this conference call. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through the TRI Pointe website and in its filings with the SEC.

Hosting the call today is Doug Bauer, the company's Chief Executive Officer; Mike Grubbs, the company's Chief Financial Officer; and Tom Mitchell, the company's Chief Operating Officer and President.

With that, I will now turn the call over to Doug.

Thank you, Chris, and good morning to everyone joining us on the call today. I'm pleased to report that TRI Pointe Group recorded another quarter of strong operational and financial performance highlighted by the 15% increase in net new home orders and a net income of $32.7 million or $0.21 per diluted share. We met or exceeded our previously stated guidance for new home deliveries, home building gross margin and quarter-end community count and put ourselves in a great position to achieve our goals for the back half of the year, thanks in part to a 31% increase in the value of our backlog.

In general, the excellent sales momentum we experienced in the first quarter continued into the second quarter and in certain markets, that momentum accelerated as the quarter progressed. A majority of our communities continue to generate sales at a pace that allowed us to push pricing higher, which helped offset cost increases and resulting in improved margins in a number of our markets. Part of our strong sales pace this quarter can be attributed to the overall strength of the markets in which we build. But I believe an equally important factor is the uniqueness of our home offerings and the attention to detail we put into the design and development of our communities. We pride ourselves on being at the forefront of homebuilding design and innovation and believe that this is a key differentiator for our company as well as an important factor in why we have delivered a better-than-peer-group average sales pace on a consistent basis.

TRI Pointe Group has put a particular emphasis on creating unique homes and living spaces that appeal to 2 of the biggest market segments in our industry, Millennials and Active Adults. For Millennials, it started out with our award-winning Responsive Home, which we launched at the International Builders Show in Las Vegas in 2016. These homes featured the latest in in-home technology, flexible floor plans and authentic functional interior and exterior designs that cater to the wants and needs of Millennials. We have put this concept into production at our Strada community in Las Vegas, and the response has been overwhelmingly positive, with 31 orders since its debut this past March.

We plan to build on our success at Strada by implementing some of the core concepts of the Responsive Home throughout our homebuilding brands. We are also broadening our product offerings for the Active Adults in several of our markets by designing age-targeted communities that are integrated into our existing master plans. Our research has shown that this age cohort is increasingly interested in staying connected to the community as a whole rather than living in an isolated age-restricted development.

We have recently previewed Verano, a new Active Adult neighborhood at our Aliento master-planned community in Santa Clarita, California. Response has been extremely positive, and we anticipate strong sales after our grand opening in mid-August.

At our Pardee Homes brand in the Inland Empire, we are currently planning and developing [Altis], a 700-unit Active Adult community within our successful Sundance master plan. This strategy will enable us to increase our deliveries from Sundance by a 150 to 200 homes per year and is a formula that will help maximize our adjacent 4000-unit master plan as well and increase our overall returns. In addition, both of our Winchester and Maracay brands are currently developing similar Active Adult concepts in their respective markets, and we're excited about their prospects as well.

In terms of regional trends, our operations in the Western markets turned in another solid performance, as strong job creation and a lack of existing home inventory have created a supply-demand imbalance that shows no signs of changing anytime soon. Our operations in California, the Seattle metro area, Las Vegas and Phoenix, turned in great results this quarter characterized by a healthy sales pace and stable to improving margins.

The San Diego market continues to be a hot market for us at entry-level, move-up and luxury price points. We once again, enjoyed particularly strong order activity in our Pacific Highlands Ranch master plan in San Diego, where we have diversified our product offering to target a number of buyer segments and are seeing strong demand across the board.

The Inland Empire market continues to improve, and sales activity accelerated for us as the quarter progressed. We have strong demand trends on both sides of the I-15 corridor, enabling us to raise prices and increase full year deliveries at a number of our communities.

In Houston, our order pace softened this quarter, which corresponded with the recent slide in oil prices. Despite this, our traffic numbers have been strong, and we are excited about rolling out a number of new communities under the $400,000 price point later this year and into 2018. We continue to establish our Trendmaker Homes brand in Austin, with 5 communities currently opened for sale and are very excited about the openings of our Lakes Edge project, which is a showcase community in an excellent location with strong buyer interest.

Orders were up 23% year-over-year in the Mid-Atlantic, driven by increased demand for our entry-level product and strong interest in our new Active Adult offering, at our Two Rivers community in [Crofton,] Maryland.

In summary, we had strong performance this quarter and are well positioned in each of our markets as we enter the back half of the year.

Now I'd like to turn it over to Mike, who will provide some more details about the numbers. Mike?

Thanks, Doug. Good morning. I would like to also welcome everybody to today's call. As Chris mentioned earlier, we had 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 the second quarter ended June 30, 2017.

We've also provided certain key operating metrics by state in today's press release announcing our earnings for the quarter.

As Doug mentioned, we're pleased with the second quarter results, as we met or exceeded our previously issued guidance for new home deliveries, homebuilding gross margin and quarter-ending community count. In addition, net new home orders increased 15% compared to the second quarter last year.

Slide 6 of the earnings call deck provides a snapshot of some selected operating highlights from the second quarter. Home sales revenue was $569 million in the quarter on 1,071 home deliveries at an average sales price of $531,000. Our homebuilding gross margin percentage for the quarter was 20.1%, and net income came in at $32.7 million or $0.21 per diluted share.

Through the second quarter, we opened 20 new communities: 10 in California, 3 in Colorado, 3 in Washington, 2 in Maryland, 1 in Texas and 1 in Nevada. However, due to the strong new home orders for the quarter, we closed out of 12 communities, resulting in an ending active selling community count of 131, 4 ahead of our guidance. Our active selling communities at the end of the quarter is shown by state on Slide 7.

As I just mentioned, for the second quarter, we've reported a 15% increase in net new home orders on an average community count that was up 6% from the prior year period. We also saw our year-over-year percentage increase in net new home orders accelerate sequentially throughout the quarter, with orders up 10% in April, 12% in May and 25% in June. Our overall absorption rate increased 9% to 3.8 homes per community per month for the quarter compared to 3.5 homes in the prior year period, and 3.5 homes in the first quarter of this year. You can see the historical monthly cadence of orders on Slide 29.

In addition to our new communities that opened in 2016 and 2017, absorption at a higher rate -- our new communities that opened absorbed at a higher rate of 4.1 orders per community per month versus 3.4 orders per community for communities opened prior to 2016. This trend continues to reinforce our confidence in the acceptance of our new product offerings in their respective core market locations.

We're continuing to see strong order activity in July. So far through last weekend, we've written 326 orders, 46 more than the entire month of July last year.

We ended the second quarter with 2,108 homes in backlog, which was a 17% increase compared to the same quarter last year.

The average sales price in backlog increased 11% to $635,000, and the total value of our backlog increased 31% year-over-year to $1.3 billion.

During the second quarter, we converted 62% of our first quarter-ending backlog, delivering 1,071 homes, which was an 8% increase compared to the same quarter last year.

Our homebuilding gross margin percentage for the second quarter was 20.1%, which was in the middle of our guidance range, and up a 130 basis points sequentially from the first quarter.

For the third quarter, we anticipate homebuilding gross margin percentage to be in the range of 19% to 20%, and expanding to a range of 21% to 22% for the fourth quarter.

We continue to expect that our full year home building gross margin percentage will be in the range of 20% to 21%.

For the second quarter, SG&A expense as a percentage of home sales revenue was 11.6%, which was a 30 basis points increase compared to 11.3% in the same period in 2016. However, a 410 basis point improvement from the first quarter.

The year-over-year increase was related to the addition of incremental G&A costs associated with the strategic growth of our company. As we've mentioned on our last call, our G&A run rate in 2017 is approximately $34 million per quarter, and its contribution to our SG&A expense ratio is significantly impacted by the leverage of our homebuilding revenues on a quarter-over-quarter basis.

For the full year 2017, we continue to expect our SG&A expense ratio to be in a range of 10.2% to 10.4% of home sales revenue.

During the second quarter, we invested $123 million in land acquisition and $107 million in land development. Year-to-date, we've invested a total of approximately $400 million in both land acquisition and 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 the land needed to meet our planned deliveries through 2018.

At quarter-end, we owned or controlled approximately 29,000 lots, of which 58% are located in California. Based on the midpoint of our 2017 delivery guidance, the number of years of lots owned or controlled is 6.1. 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 is 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 $3.2 billion of real estate inventory. Our total outstanding debt was $1.6 billion, resulting in a ratio of debt-to-capital of 47.6%, and net debt to net capital of 45.8%. We ended the quarter with $557 million of liquidity, consisting of $115 million of cash on hand and $442 million available under our unsecured revolving credit facility.

During the quarter, we successfully issued $300 million of 5.25% senior notes due in 2027, and we also modified our revolving credit facility, extending maturity to 2021 and decreasing the commitments from $625 million to $600 million.

Now a quick update on our share repurchase activity. We were very active in the second quarter, in which we purchased a little under 8 million shares at a weighted average price of $12.43 for a total aggregate dollar amount of $99.2 million. At the end of the quarter, we had substantially utilized the full amount of our $100 million stock repurchase authorization. As we announced in our press release earlier this morning, on July 25, our Board of Directors authorized an increase of an additional $50 million to our previously authorized $100 million.

Now I'd like to summarize our outlook for the third quarter and full year 2017.

For the third quarter, the company expects to open 10 new communities and close out of 19, resulting in 122 active selling communities as of September 30, 2017. The large number of communities closing out in the third quarter is a result of the higher-than-anticipated absorption rate we experienced in the first half of this year, leading to earlier-than-expected closeouts.

For the third quarter, the company anticipates delivering approximately 50% to 55% of its 2,108 units in backlog as of June 30, 2017, at an average sales price of approximately $570,000.

The company also anticipates its homebuilding gross margin percentage to be in a range of 19% to 20% for the third quarter.

The following comments are related to our updated and amended full year guidance. As it relates to our community count guidance, we previously expected to grow average selling communities by 10% for the full year 2017 versus 2016. Once again, due to the higher-than-anticipated absorption rate we experienced in the first half of the year, causing a number of communities to close out earlier than expected and decreasing our average active selling community count, we now expect to grow average selling communities 8%. This adjustment in no way affects our overall guidance of deliveries for 2018. We continue to reiterate the opening of over 60 new communities this year, and we now expect to end the full year with a 132 active selling communities.

I'm also happy to report that we're raising the lower end of our 2017 delivery range from 4,500 to 4,600 homes, resulting in an updated guidance for deliveries to a range of 4,600 to 4,800 homes. Our full year average sales price is still expected to be approximately $570,000. We anticipate 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.

And then lastly, we are raising our original expectations for land and lot sale gross profit from approximately $45 million to $50 million, most of which is still expected to close in the third quarter.

Now I'd like to turn the call back over to Doug for some closing remarks.

Thanks, Mike. In conclusion, TRI Pointe Group produced solid results in the second quarter of 2017 and enters the second half of the year with strong momentum. Our 31% year-over-year increase in backlog dollar value to end the period leaves us well positioned to achieve our goals this year and next. I'm excited about the progress we have made in developing our long-term California assets. We're scheduled to open 4 new communities by year-end at Weston, formerly known as Castle Rock, at our new master plan in San Diego. In addition, we have made significant progress in development of Skyline in Santa Clarita, a 1200-unit master- planned community. We continue to emphasize design and innovation throughout our homebuilding operation and are confident this will drive strong results and keep us at the leading edge of consumer preferences.

I'm optimistic about the outlook for our industry and in particular, for our company, as we look to not only deliver on our guidance for 2017 but also, achieve our target of 5,100 to 5,400 deliveries by the end of 2018.

Finally, I want to thank all our team members for another outstanding quarter.

With that, it concludes my prepared remarks, and we'd like to open the call up for any questions.

(Operator Instructions) Our first question comes from Alan Ratner with Zelman & Associates.

Doug, I wanted to drill on a little bit first on the pricing side. You mentioned seeing some pricing powers throughout the quarter, and given the strong order activity in the quarter as well as into July, it doesn't look like it's really had much of a slowdown impact on your sales pace. So was curious, maybe if you could, first off, just talk a little bit more about the level of pricing power you're seeing? Maybe talk about the activity within markets in your footprint as well as across price points. Are there any areas where you're seeing outsized pricing power? And if you can quantify that relative to costs, that would be great. And then I have a follow-up.

Sure, Alan. Yes, it does vary by marketplace. I would say, generally speaking, along the Western part of the U.S. from Seattle down through California into Phoenix, we're seeing average revenue increases around anywhere from 3%, and then Seattle upwards of 5% and 6%. On the cost side, we are continuing to see cost pressure on labor and in lumber, in particular. As noted, the Canadian wildfires, although it doesn't impact our current backlog, [Hat] is increasing lumber prices, which will continue to impact costs, going into the latter half of this year, as we build out and start future homes in the second half of this year. Everything that we've started so far is -- was already priced in. So generally speaking, the Southwestern part of the U.S. is very strong. I would say that in the Mid-Atlantic, in Houston, pricing is flat. Although, we are seeing nice momentum in the entry level in the Mid-Atlantic, especially in our Cabin Branch master plan in Maryland, along with our Landsdale again, in the entry level. In Houston, though, I will note that the average net incentive, I think, was 12.9%, second quarter, Tom, last year, and it's about 9%. But there is a -- seems to be, at least our price point, a direct correlation with the oil prices and sales pace. And hence, the reason our sales pace soften in Houston. So that's kind of a general overview. Tom, do you want to add any more color to that?

No, I think that was well covered. Alan, as you know, our San Diego market, in particular, has had excellent price elasticity at all price points. Our entry level down in our community in Chula Vista is doing really well as well as our move-up markets in Pacific Highlands Ranch. So we're particularly encouraged there. And then I'll just note that the Inland Empire has shown some pretty dramatic improvement in market conditions overall, in -- both in terms of absorption and price elasticity. So we're encouraged by that.

Great. I appreciate all that detail. I guess on the follow-up there, just, are there any markets or price points where you feel like you're hitting a little bit of a resistance point on price, and I guess, how much further do you have to run there? And finally, if I could squeeze one last one in, and I apologize. But just if you can give an update on the current mix of your business between price point, entry level, move-up, Active Adult, that would be great.

I'll take the latter part of that question, Tom can talk about the first part. But our order activity through -- year-to-date through June 30, still is about 30% entry level, about 50% to 52% move-up and the balance, luxury.

Yes. On the pricing resistance, Alan, we have begun to see some resistance from the consumer in our Northern California markets, particularly some of the core Bay Area markets that have a high level of competition and affordability is an issue. Overall though, we do see a favorable interest rate environment that is offsetting that. And so it hasn't significantly impacted our absorption to date. But at some new product offerings we had in Dublin, there is quite a bit of competition there, and we have not seen the usual response to that opening and the ability to raise prices immediately.

Our next question comes from James McCanless with Wedbush Securities.

We'll move on to the next question.

Our next question comes from Stephen East with Wells Fargo.

Actually, this is [Paul Sadowski] on for Stephen. I've got a couple of questions here. I guess, first off, what would be the driver behind your lower year-over-year, and potentially lower quarter-over-quarter gross margin guidance for the third quarter? And then, conversely, what would reverse that trend going into the fourth quarter?

Yes. We talked about that. This is Mike. We talked about that, the cadence of our margins throughout the year and the year-over-year comparison when we set the table at the beginning of the year. Our margins are slightly off in the third quarter to the 19% to 20% versus what we had previously indicated, 19.5% to 20.5%. It's really just mix issues. And then what happens is, we have a lot more deliveries in California in the fourth quarter at higher price points, much higher margins. A lot of our long-term California assets are delivering in the fourth quarter, driving that margin up.

Okay. And then can you compare and contrast, the difference between Pardee and TRI Pointe order rates, given they're in similar markets, and then what drove the order decline in Phoenix, was that community-count driven?

Yes. I don't know. Orders -- just to start with orders for the quarter. I mean, the absorption pace, I think, at TRI Pointe was 4.4%, Pardee was 5.6%. Pardee has a very high absorption rate in the Inland Empire as well as San Diego, which is a pretty constrained market down there. TRI Pointe numbers include Colorado, which we have not seen as high of absorption pace as we have in California.

And as far as Maracay, [Paul], you're asking about the absolute in orders?

Right, right.

Yes, that's attributable to community count. And the timing, we -- last year, we opened a new -- 4 new communities in Tucson at our Center Pointe master plan, and that had a big impact in opening results in '16. So it's all community-count driven, and market there is still very strong.

Our next question comes from Stephen Kim with Evercore ISI.

This is actually [Chris] on for Steve. I was hoping to see if you could address the 6% decrease in ASPs -- in closing ASPs during the quarter. Because I think in California, your closing ASPs are down around 19%. And I was just wondering, sort of, whether that's an internal geographic mix issue or sort of a community count opening sort of issue. And just -- yes, any color on that.

Yes, this is Mike again. Again, the ASPs, as it relates to the quarter, we had originally guided around $550,000 for the middle 2 quarters of the year. And what's happened, just mix shift. We brought in more units in some of the lower-price point markets into quarter, and so we delivered a $531,000 for this quarter. We're expecting ASPs around $570,000 for next quarter. It's all mix shift. And you can see in our backlog, our backlog has grown up to $635,000, which is -- puts us in good shape to deliver fourth quarter ASPs around $610,000 to $620,000, which is what we had originally guided to. So it's just mix shift between the quarter.

It's Steve Kim. Sorry, just jumped on late. Question I had for you. I think in your response to [Paul's] question, or maybe somebody before -- right before that, it was about -- you made reference to the lower mortgage rate environment in helping you out a little bit. I wasn't sure if your comments were specific to the Bay Area or Northern California. I would assume it would probably be more general -- generalized commentary. So in -- could you expand on that a little bit? Like, what you think the benefit that you saw or have seen recently from lower rates has been? And what is your expectation as you head forward into 2000 -- let's say, the back half of this year?

Well, I'll take the interest rate question. I mean, generally speaking, interest rate has -- are obviously going up in a very modest fashion through the Fed. And there's been not a large impact to mortgage rates, which has continued to make housing a very affordable alternative, especially when you look at the rents in many of the major metropolitan areas. So we continue to believe that interest rates don't drive demand. They do drive pricing decisions and how much you can afford in a house as far as a house price point. So it's still a very favorable interest rate environment. And despite the affordability price points getting frothy in the Bay Area, you're still able to find the demand in the current interest rate environment to sell homes. It's still very competitive. And because price points have gotten higher because with land prices, regulatory issues and fees, that's caused a little less sales velocity, but not -- hasn't hindered our demand. It's just something to be noted. You've got to watch your price points in all your markets.

Yes, no doubt. I guess, what I meant was, with the lower rates, are you're seeing that -- or with the relatively low rates, are you seeing that manifest in itself in option of an upgrade more? Or more in terms of people maybe buying a slightly larger footage, or a little closer in, because you had referenced Dublin, which was a little further out being a little weaker. We were just in Seattle and we saw that really incredible design center you've got up there. So I'm just trying to figure out the degree to which the rate outlook is factoring into your thinking around what the customer is going to be wanting in terms of living closer in or buying more or less options and upgrades.

Stephen, this is Tom. Yes I think, certainly, from the consumer standpoint, the thought process of affordability relative to monthly payments factors into all of those buying decisions. And certainly, the desire to be closer in is the key driver, driven by monthly payments as well as the ability to personalize their home through options and upgrades. So we do see that as a favorable environment that we're factoring into our offerings going forward, without a doubt. My comment was more specifically a general comment relative to the overall environment that we're seeing in most of our markets. As it relates to Dublin, the comment was not necessarily tied to financing and lower interest rates in specific, but more of a caution from the consumer as we're moving into higher price points. And we've just seen a little less on the absorption side relative to that.

Our next question comes from Mark Weintraub with the Buckingham Research.

One question was, I see as you had mentioned a really nice pickup in orders from Pardee, California. And maybe, a little bit more color, how much of this is some of what can be the very high-margin Pacific Highlands Ranch-type business? And clearly, it's going to be helping you in the fourth quarter, I think, you indicated. Is there any reason why we're not going to continue to see this mix help you -- 2018 versus 2017?

Yes, Mark, this is Mike. We're -- obviously, we've been talking about our long-term California assets since the Investor Day back in 2015. We made a lot of progress -- or 2016. We made a lot of progress this year. We've already opened 8 new communities from those -- that list of 10 assets. We have 4 more to open this year. Currently, year-to-date, we've had about 13% of our deliveries coming from long-term assets, but we expect a significant amount more to happen for the balance of this year. And those margins are well north of the company average. So we're excited about the progression. That's why we feel like we have margin expansion going into '18 as we mentioned last year.

Okay, great. One small one. On the land profits going from $45 million to $50 million, is that a function of higher price? Is it a function of different land being sold?

Yes, Mark, this is Tom. Yes, we've been very fortunate relative to one parcel in particular that we are selling down in Pacific Highlands Ranch to be achieving a little higher price point than we originally anticipated.

Okay, great. And then lastly, I see also Winchester, a very big pickup in orders there. And I think, also, that's a homebuilder where there's a fair bit of transition going in, in terms of the homes going to market. And maybe if you could just provide a little bit more color of what's happening at Winchester, and how we should be expecting progress at that builder in the months and perhaps into 2018 as well?

Sure, the big news there was, you it picked up, the orders. And we saw a particularly strong orders in our entry-level price points at Cabin Branch, Landsdale and a community called Piedmont. Now those communities don't -- carry margins that are below the company average, but it's good to get the acceleration, pull that through the turn of the balance sheet and then be able to redeploy that capital as we look to open new communities. We talked about our new Active Adult community in Two Rivers. We've got also a market rate program. We've got a number of new communities in Loudoun County and Brambleton. And so as we see the second half of this year, some of these new openings going into '18, we anticipate our margin profile to continue to improve going into 2018 and '19 at Winchester.

Our next question comes from Jack Micenko with SIG.

Sort of a related question, looking at the absorption by brand, your 2 best brands were Quadrant and Winchester. And I think those are the -- maybe 2 of the brands where you've maybe spent an incremental amount of time in terms of retooling those 2 franchises in the last couple of quarters. Am I drawing too much of a conclusion to where you've been spending incremental time? Or is this a result of some of -- maybe some increased focus at the corporate level? And are there other markets where you can maybe look at doing some of the same things?

Yes. I'll take that. This is Doug. Quadrant, as you can see, the absorption pace is running about 5.3 sales per community per month versus 3.4. And that's definitely a reflection of Ken Krivanec and his team at Quadrant. That has repositioned the team in core locations throughout King and Snohomish Counties and the execution of new product design, and just doing a wonderful job and been able to introduce those new communities and get those kind of results. Not only the pace, but also the ASP and ultimately, the margin has significantly improved. Winchester, the assets are -- the velocity at Winchester really is attributable to 3 existing communities at the entry level. So we really can't take any credit for some of the new opportunities that we're working on quite yet. As I just mentioned, those opportunities get going more in the second half of this year into '18, where we believe we'll continue to see improved results all the way from the top line to the bottom line at Winchester. So it's kind of a tale of 2 different stories. Winchester is probably 6 months from really starting to deliver more of that change of some of the design and innovation and sense of place that we add to our communities, just because of the lead time in those markets to get those communities open.

Okay. And then, with the G&A number being a bit higher this quarter, and I think you're guiding next year to, I think, a 9.7% to 9.9% range. Does that range still hold, given the higher -- the investment and the fixed cost there, as you grow the business?

Yes. Jack, we don't have any intentions to change that delivery guidance yet or -- not the delivery, but the SG&A number in 2018. We still think we get significant leverage as we move forward. And so we're still comfortable with that.

Our next question comes from Mike Dahl with Barclays Bank.

Just one additional question on Winchester, and I think, going back to the Investor Day, you've talked about some of the product mix, and how that should help absorptions over the next couple of years. But it does seem to be playing out, I think, faster than some of your original expectations would have contemplated. So just curious to hear your sense of how much of that is due to incrementally better market conditions in some of those markets than you anticipated? Or whether or not there's anything else you're doing to kind of intentionally accelerate through some of those positions?

Yes, Mike. This is Doug. Winchester, incrementally, the market has gotten stronger. I'd say, the strength of the market has been more on the entry level and move-up, as we've seen in a number of our communities. And frankly, the pace, we had a pace of 4.2 sales per community versus 3.0. There has been a little softer pace at the $900,000-plus price point. We've got a couple of communities like that. But again, as we look into the second half of this year, we're very excited about our Active Adult Play in [Crofton]. We're adding a market rate program in the same community at Two Rivers. We're adding both market rate and Active Adult in Brambleton. So you'll see more of that impact on both velocity and -- I'd say, velocity is very healthy at 4, but most importantly, margin improvement going into 2018 and beyond.

Great. And I guess, just specifically on the pace, though, because I think those were anticipated as far as some of the community offerings. Unless I'm mistaken, but I think your original plan called for kind of 7%, 8% growth in absorption, which is very healthy. But clearly, you're far outpacing that in absorption growth in the first half of the year. So just trying to understand that differential, and how much we can extrapolate.

Yes. That's correct. And I think your point is well taken. It's an incremental market improvement, especially in the market in the entry-level and market price point. And as a result, we've seen that absorption pace per community increase to 4.2 versus, I think for the year, in 2017 at Investor Day, we were around 3 -- 2.8 to 3. So it's a nice improvement in the operation there, because those are below-company margin type of communities. And the sooner we can pull those through the P&L, the better results will continue to improve in '18 and '19.

Right. Good. And one final one on my end. Just around the -- I think there was a question earlier around some of the pricing power and the comment, I think, qualitatively around cost, and how some of the lumber may or may not flow through. But is there anything you can quantify for us? And sorry if I missed this, but as far as what your costs were running up sticks and bricks in terms of 2Q, and what your expectation is for the back half of the year?

Yes. As I mentioned, generally speaking, up and down the West Coast, the Western part of the U.S. from Phoenix, California, up to Seattle, we saw pricing increases of 3% to 6%. More strength in Seattle. Along though, we are still -- continue to feel the pressure on the labor and the material side throughout the year. Generally speaking, those are running in the 4% range, Tom?

Yes.

And then, most recently, we were hoping that the second half of the year, lumber prices would maybe trail off a little bit. But the wildfires that are closing a lot of the Canadian mills are definitely having an impact for any purchasing for product that we're starting the second half of the year, going into '18. So that's going to be continued cost pressure on the lumber side, for sure.

Our next question comes from Jay McCanless with Wedbush.

The first question I had was on Maracay. The sales absorption held up there pretty well, but the community count was down. What are the plans for community growth there, and how is pricing in that market?

You're right, absorption pace was about 3.4 sales per community per month. Community count was down. We anticipate growing our communities, going into the 2018 period, as we look to continue to increase our deliveries. And margins are also improving, with pricing averaging around 3% -- 3% to 4% in a lot of our communities. But you're still fighting labor and cost pressures there too. So you're getting marginal improvement in the gross margins going into the second half of this year and going into '18.

Yes, Jay, just to follow-up on that. I mean, we expect I think, 4 new openings in the fourth quarter in Maracay and about another 8 in 2018. So the community count growth is coming.

Okay, got it. And then on Trendmaker, I know you said you're going to be opening some sub-400 communities later this year. How far along in that process of taking the price point down for that market are you? And when do you anticipate that will be complete?

Well, it's a continued process. I think we need to be opportunistic at all price points. And so we'll see more of these communities. Historically, as you probably know, Jay, in Houston, Trendmaker is build on, really, 60-foot lot widths and bigger, had an average ASP of $500,000. So as you look out the next couple of years, that ASP is going to come down, because as we introduce more and more 54 -- 50-foot wide lot programs below an ASP of $400,000, you'll see that ASP, overall, gets to the $470,000...

$475,000.

To $480,000 range as you go into the next year and 2.

Got it. And then the last question I had, could you repeat the data on July? I missed the commentary there.

What I said there, Jay, is, we -- through last week with a week left to go in July, we've already written 326 orders, which is 46 more than the entire month of July last year. So ...

Our next question comes from Nishu Sood with Deutsche Bank.

I'm following up on the community count. Obviously, the volatility of the success in sales pace has altered the community count schedule a little bit. I think you've laid that out quite well. What about for -- as we look out to '18? You had laid out the target of 149, I believe, average, for '18? Does volatility in this year affect that schedule as we look out to '18? Or does it even out by the end of the year, and '18 should be kind of back on track?

Yes, Nishu, it's Mike. We're not really ready to make comments on '18. But clearly, if we continue at the pace that we have been, which is exceeding what our expectations were, and we continue to have more closeouts, the back half of this year accelerated to what we thought they were going to be, it's going to have an impact on the average community count in 2018. I mean, we're not really going to be able to accelerate many more communities in '18. But -- I mean, the good news to that is they'd be sitting in the backlog. So it's not really affecting deliveries, it's just really affecting that average community count.

I guess I'm asking because your guidance of 8% average for the year, since you also gave third quarter, implies that you're pretty much back on track by fourth quarter, give or take 1 or 2?

Yes, we're talking give or take 3 or 4 communities here or there. So again, we don't -- we typically plan from the company's perspective, our average absorption to be around 3.1 for the full year. And I think that's what we showed in our Investor Day for 2018. And we've been far exceeding that pace so far. And I guess, we don't want to get too far ahead of ourselves on making that adjustment yet, one way or the other. But it would clearly have an impact if we continue to see absorptions greater than what we've expected.

Got it. Got it. And actually, that was my next question, the 3.1 -- I mean, obviously, you've done a very good job of laying out all the numbers and the expectations. The 3.1 looks pretty low now, as you're just mentioning for '17 and for '18 as well. What other effect might that have on the numbers? I mean, obviously, if you're driving faster absorptions, and then pricing power could imply some upside to gross margins. On the other hand, if the absorption pace has come in lower-margin markets, like for Winchester, where you've been quite successful, or Quadrant then, obviously, it doesn't have as big an impact. How has the absorption pace varied, and what other kind of knock-on effects could that have on your outlook?

Yes. I think it's only, probably -- ASPs, I think, we still feel in line. And the absorption, you can argue whether we need to increase that absorption, which would accelerate. Obviously, we're accelerating deliveries in 2017, which is having some impact on our ASPs right now. I don't think that any of those numbers in 2018, from an ASP perspective, are too far out of line still.

And so regionally, as you look about -- you look at the deviation and absorptions against that kind of 3.1 target, where has it come regionally against your original expectations in that kind of 3.1%?

I'd say, maybe it's easier to answer where it hasn't come from, and that would be probably Houston, would be the one market where it's been below our expectations. It started out pretty strong in the first quarter and then fell off fairly significantly in the second quarter. Other than that, I mean, our absorption has either been in line or above our expectations in most of our other markets.

Our next question comes from Carl Reichardt with BTIG.

Recognizing you have a healthy lot supply, and you're continuing to focus on monetizing the California assets, and the cash you generate, you'll put back into developing those assets and you've been repurchasing stock. But looking at new land deals, Doug, is there a focus for you in geography outside of California where you'd like to book up land supply overtime? Or a price point or a target market mix, maybe towards entry level, maybe towards Active Adult, away from move-up. I'm kind of curious how you think about growing the business beyond just the monetization of the current asset base.

Yes. No, I mean, our land efforts right now, obviously, are focused on filling a little bit of 2019. Right now, we own and control deliveries for about 85 -- 80% to 85% of our deliveries in '19. So you're really making bets for late '19 and '20 and beyond. We continue to look at each one of our brands in balancing their inventory needs in that 3- to 5-year cycle. We continue to focus on assets that we can get in and turn quickly. We like to buy land that we can open and close out in 3 years for better returns. So -- and we've also indicated the 6 brands at its kind of ideal operating capacity would be about 5,500 to 6,000 deliveries year in and year out. So it's a constant balancing effect between all those brands. There's really not one particular brand that gets more attention than anything else. As far as land acquisition in targeted market segments, we continue to believe in being opportunistic from the entry level all the way up to the luxury. Obviously, the luxury in higher move-up points are probably due to the land location. It always fascinates me when I see the universities like Berkeley drive home the point that they want affordable housing closer in. Well, welcome to the fact that as you buy land closer in, the land is more expensive, it's got more regulatory issues and more fees. And therefore, the price of housing is going to be higher. So that's just the facts of life in pretty much any of the land-constrained markets. But we'll continue to be opportunistic, both entry level, move-up and luxury, over time, in each one of our markets.

Okay. Thanks for that. And then, just a question on labor subcontractor availability and cost. Can you maybe walk us through certain trades where you seeing availability either loosen or tighten? Or certain markets where things have changed, either positively or negatively over the last 6 months or so?

That's another good question. We just had our midyear operating [presidents] operating meeting. I would say, generally, and Tom, you can chime in here. Labor in general, there is cost issues. Whether it's labor, lumber has been well documented, concrete and some other materials, some smaller increases in drywall and stucco. But labor in general is kind of status quo year-over-year as far as the quarter. Obviously, there is going to be a big push for all of the builders that are on a calendar year in the second half of the year. But we have spent the whole year working with our trades to have them buy into our business plan. And keep them fully engaged in our business process, and therefore, we continue to see our convergence of our backlog feed into our business plan deliveries. I think the big -- one of the bigger issues that I continue to see in California and Seattle, actually is more on the regulatory side. You continue to see cities and counties understaffed and really, causing more delays in pulling permits than anything else. So labor year-over-year, Tom, I'd say is pretty status quo. Continued pressure, but it's status quo.

Yes. Carl, I would define it, as our teams really have grown and done a great job in planning and managing their business, and being able to work through the impacted labor and cost market, without it significantly impacting our cycle time. So we continue to be encouraged by the ingenuity of our teams and being able to manage through a tight market relative to labor that we anticipate is going to be continuing.

Our next question comes from Alex Barrón with Housing Research Center.

I was curious to hear your thoughts on the backlog conversion guidance, because it seems pretty different than anything you've done in the last several quarters. So I'm wondering, what's driving that? Last quarter, you guys were pretty conservative and, obviously, came in better than that. So I'm just kind of wondering if it's conservatism or just something else. Because you just mentioned labor issues doesn't seem to be a problem.

Alex, it's Mike. I mean, I think, what's driving it significantly is the fact that our absorption rate picked up so significant in the second quarter that we have more units in backlog than we had originally anticipated. So it's just naturally bringing down the backlog conversion ratio. And a lot of those are coming from higher-price point California communities that just take a little bit longer to build.

Got it. And then, as regards to the share buyback. Obviously, you guys had a pretty strong amount that you bought back this quarter, and you raised the repurchase authorization. Is that something that you plan on using just opportunistically, or more on a consistent basis?

No, I mean, it's something that our board has given us the ability to, when we feel like our stock is being undervalued, then we have the ability to have another arrow in our quiver, if you will, to be able to address it. We were active in the second quarter, because we felt that our stock was being undervalued, as you compare it to what we think our implied book value is. And so we took advantage of that opportunity.

Our next question comes from Alex Ratner (sic) [Alan Ratner] with Zelman and Associates.

It's actually Ivy. I wanted to follow up. I've been listening intently and wanted to ask you, really with respect, back to the affordability question. Because I think that we appreciate the rent versus buy and I think, the way, Tom, that you described that. But really, what's more important is the credit box. And your partners in the mortgage market, do you find yourself in situations where people are being turned down, because they can't access a mortgage? Or is it really much more reasonable today, and you're seeing a lot more flexibility through the underwriters that you're working with. So maybe more about the credit box, please?

Ivy, it's Tom. We do not see it really impacting the ability for our buyers to qualify, and if anything, as you suggest, it has improved. Our average FICO score for our buyers right now is about 740. So we're seeing well-qualified buyers. And certainly with a little easing of that credit box, it has not been impacting and we have not been having a high ratio of people unable to qualify.

I would add to that, Ivy. In the Inland Empire, where we have a very dominant market position in the entry level, those buyers will always be more credit-challenged. They're coming from years of different credit issues. But the credit box is improved slightly for them. Hence the reason why our absorption pace continues to be good. But it's always more of a battle on the entry level to deal with credit issues than it is in the move-up and luxury, it always has been. But generally speaking, you do see a little bit of an opening, a little bit softening in the credit box, a few programs that open up a little more to the consumer. So that is obviously helpful in the entry level. Not only in California, but also in the Mid-Atlantic, where we've had tremendous order increases there at Cabin Branch, Landsdale and Piedmont.

Thanks, Ivy. Well, thank you, everyone for joining us today. And we look forward to our third quarter call. And hope you all have a great day. Thank you very much.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.