Tri Pointe Homes Inc (Delaware) (TPH) 2017 Q3 法說會逐字稿

Greetings and welcome to the TRI Pointe Group third quarter 2017 earnings conference call. (Operator Instructions.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Chris Martin, Investor Relations. Thank you, sir, you may begin.

Good morning and welcome to TRI Pointe Group's earnings conference call. Earlier today, the company released its financial results for the third quarter of 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 risks and uncertainties. A discussion of such risks and uncertainties and other important factors that could cause actual operating results to differ materially from those in the forward-looking statements are detailed in the company's filings made with the SEC, including in its most recent annual report on Form 10-K and its quarterly reports on Form 10-Q. The company undertakes no duty to update these forward-looking statements that are made during the course of this call.

Additionally, non-GAAP financial measures will be discussed on this conference call. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through TRI Pointe's website and in its filings with the SEC.

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

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

Thank you, Chris, and good morning, everyone joining us on today's call. I'm pleased to announce that TRI Pointe Group posted another quarter of strong results, highlighted by year-over-year net new order growth of 36%, backlog dollar value growth of 56% and earnings per share growth of 118%. We once again met or exceeded our previously disclosed guidance for deliveries, average sales price and homebuilding gross margins in the quarter.

As we guided, we also closed a significant land sale in the quarter, selling 69 lots in our Pacific Highlands Ranch community in San Diego for a net profit of $56 million. While we will continue to be opportunistic, our plan going forward is to reduce land sales in order to maximize our homebuilding operations by capitalizing on our strong land inventory to grow our top and bottom line.

In general, our business showed solid improvement during the quarter. Of course, similar to most builders, we continue to experience challenges related to labor and material cost pressures. Fortunately, because we predominantly operate in high-demand, supply-constrained markets, we have benefited from a rising home price environment. This has enabled us to partially or sometimes fully offset the cost increases.

California continues to be our most consistent market, with favorable market dynamics from the entry-level, move-up, luxury and active adult product segments. Strong job growth and persistent supply constraints in both northern and southern parts of the state have been excellent drivers for our business, as evidenced by the 66% growth in net new home orders in California for the quarter. We continue to see robust demand and outsized margins in a number of our communities along the coast and further inland. These trends position our company well, given our long land position of over 16,000 lots in the state.

Our operations into Washington State continue to benefit from a healthy market as we focus on core locations in King and Snohomish counties, which have resulted in new home order growth of 71% year-over-year and a 29% increase in our average selling price for the quarter. Our Quadrant team continues to grow its premium brand while delivering higher profits. The strength of this market is fueled by strong job growth and significant supply constraints for new housing that we continue to see into the future.

I am also encouraged by our performance in the southwestern markets. As an opportunistic builder in Las Vegas with diversified geographic and product offerings, we appeal to a number of buyer segments and generate an above-average order pace. In Arizona we are making great progress in achieving both our key initiatives and targets that we presented at our 2016 Investor Day. Gross margins for our Maracay brand improved 150 basis points year-over-year during the quarter, while our order pace was a healthy 3.9 homes per community per month.

In Texas, our thoughts, prayers and resources continue to support all those people that have been tragically impacted from the devastation brought on by Hurricane Harvey. It is a testament to our entire team that bonded together to help restore the communities in which they live and work. Like most other builders, our active communities did not suffer significant damage from the storms and were back open for business shortly after the storm subsided. It is still too early to understand the ultimate impact of the hurricane on the Houston economy, but we think the near-term impact for us is approximately 30 deliveries being pushed from 2017 to 2018. We remain committed to helping our team members, the people of Houston and the surrounding communities as they continue to recover from this event.

Finally, our operations in the mid-Atlantic trended positively in the third quarter. Buyer sentiment is improving in the region, which translated into year-over-year order growth and margin expansion. We are encouraged by the trends we are seeing at our communities in both Maryland and northern Virginia and are excited about our repositioned product offerings that will be coming to the market soon. We are confident that our strategy will continue to provide bottom line improvement in the future years.

All in all, it was a great quarter for TRI Pointe Group. Most of our markets continue to produce excellent results, with our 6 brands delivering on the strategic objectives that we provided at our 2016 Investor Day. These trends, coupled with the biggest quarter-ending backlog in our company's history, give me great confidence in the future of the company.

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

Thanks, Doug, good morning. I'd also like to welcome everyone to today's call. I'm going to highlight some of our results and key financial metrics for the third quarter and then finish my remarks with an update on our expectations on an outlook for the fourth quarter and the full year 2017.

As Chris mentioned earlier, we've 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 third quarter ended September 30, 2017. We've also provided certain key operating metrics by state in today's press release announcing our earnings for the quarter.

Overall, the third quarter marked with strong results, as highlighted on Page 6 of our earnings call slide deck. Our home sales revenue was $649 million for the quarter on 1,111 homes delivered at an average sales price of $584,000. Our homebuilding gross margin percentage for the quarter was 19.5%, and net income came in at $72.3 million or $0.48 per diluted share.

Significant progress was also made during the quarter on the groundwork necessary to meet our 2017 and 2018 targeted delivery growth, discussed at our Investor Day in November 2016. For the quarter we posted a 36% increase in net new home orders on a 9% increase in average selling communities on a year-over-year basis. In addition, we continued to accelerate the development and buildout of our long-term California assets. During the quarter, 18% of our net new home orders were from these assets, up from 10% the same quarter last year. We anticipate opening 4 additional new communities from these assets in the fourth quarter, with the opening of our Weston community, previously referred to as Castlerock, located in San Diego, California.

As for overall selling communities, during the third quarter we opened 10 new communities: 3 in California, 3 in Nevada, 2 in Washington, 1 in Arizona and 1 in Virginia. We closed 14 communities, resulting in an ending active selling community count of 127. Our active selling communities at the end of the quarter is shown by state on Slide 7.

As I just mentioned, for the third quarter we reported a 36% increase in net new home orders on an average community count that was up 9% from the prior year period. Our overall absorption rate increased 27% to 3.3 homes per community per month for the quarter compared to 2.6 homes per community in the prior year period. You can see the historical monthly cadence of orders on Slide 27, culminating with September being the strongest month in terms of both number of orders and absorption for the quarter.

We ended the third quarter with 2,265 homes in backlog, which was a 32% increase compared to the same quarter last year. The average sales price in backlog increased 18% to $654,000, and the total value of our backlog increased 56% year-over-year to $1.5 billion.

During the quarter we converted 53% of our second quarter ending backlog, delivering 1,111 homes, which was a 9% increase compared to the same quarter last year. Our average sales price of homes delivered was $584,000, up 3% from last year and up 10% from last quarter. This resulted in home sales revenue for the quarter of $649 million, up 12% from the same quarter last year. Our homebuilding gross margin percentage for the third quarter was 19.5%, the midpoint of our guidance range. For the fourth quarter, we expect our homebuilding gross margin percentage to be in the range of 21% to 22% due to a larger mix of high-margin California deliveries.

For the third quarter, SG&A expense as a percentage of home sales revenue was 10.2%, which was a 70-basis-point improvement from the second quarter -- or from the same period last year, and a 140-basis-point improvement from the second quarter. This year-over-year improvement in our SG&A percent was largely due to the increase in leverage as a result of our 12% increase in home sales revenue.

I want to take a moment to talk about our tax rate. During the third quarter our effective tax rate was 38.9% compared to 36.6% in the same period a year ago. This increase was partly due to the loss of the energy credit deduction that has not been renewed by Congress for 2017. In addition, expired unexercised stock options negatively impacted our tax rate for the third quarter. We expect our tax rate for the fourth quarter to be approximately 37%, resulting in approximately 37.5% for the full year 2017.

During the third quarter we invested $118 million in land acquisition and $108 million in land development. Year-to-date we have invested an aggregate total of approximately $622 million in 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 28,000 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 5.9. Our goal is to shorten the duration of our land pipeline to approximately 5 years by continuing to focus on accelerating our long-dated California assets and investing in faster-turning communities in our markets outside of California. A detailed breakdown of these lots owned will be reflected in our quarterly report on Form 10-Q, which will be filed later today. In addition, there's a summary of lots owned or controlled by state on Page 26 in the slide deck.

Turning to the balance sheet, at quarter end we had approximately $3.3 billion of real estate inventory and our total outstanding debt was $1.7 billion, resulting in a ratio of debt to capital of 47.5% and net debt to net capital of 45%. We ended the quarter with $555 million of liquidity, consisting of $162 million of cash on hand and $393 million available under our unsecured revolving credit facility.

With respect to our stock repurchase program, during the quarter we repurchased a little under 1 million shares of common stock at a weighted average price of $12.83 for a total aggregate dollar amount of $12.5 million. That brings our total repurchases for the 9 months ended September 30, 2017, to approximately 9 million shares at a weighted average price of $12.48, for a total aggregate dollar amount of $112 million. As of the end of the quarter, we had about $38 million remaining under our $150 million stock repurchase authorization.

Now I want to look at -- I'd like to summarize our outlook for the fourth quarter and full year 2017. The company expects to open 14 new communities and close out of 10, resulting in 131 active selling communities as of December 31, 2017. During the fourth quarter the company anticipates delivering approximately 75% to 80% of its 2,265 units in backlog at an average sales price of $630,000 to $640,000. The company anticipates its homebuilding gross margin percentage to be in a range of 21% to 22% for the fourth quarter, resulting in a full-year range between 20% and 21%.

And then finally, we expect our fourth quarter SG&A expense ratio to be 7.6% to 7.8% of home sales revenue, resulting in a full-year SG&A expense ratio of 10.2% to 10.4%.

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

Well, thanks, Mike. In conclusion, we had an outstanding quarter that enabled us to meet or exceed our goals. Additionally, we ended the period with a record backlog dollar value that gives us great visibility into the rest of this year and confidence in our business plan for 2018.

It is important to note that we hosted Investor Days for the last 2 years that highlighted our goal of delivering 5,100 to 5,400 homes in 2018. Because of our operational execution and our excellent land position, I am pleased to report that we are on track to meet that goal.

Another strategic shift that we messaged at last year's Investor Day was the desire to reduce land sales and focus on homebuilding growth. While we had a large land sale during the quarter, going forward our focus will be on generating profits from homebuilding operations that we believe will result in a more consistent earnings stream and better returns over the long term. We have made great strides as a company, and thanks to a committed management team, wise investments and the strategic path we took, we are now in a great position to continue to grow the company and drive year-over-year improvements to our bottom line.

Finally, it is appropriate to thank all of our team members who have been a big part of this incredible journey and have made us the company we are today. Because of you, the future for this company is bright. And with that, it concludes our prepared remarks, and I'll take any questions. Thank you.

(Operator Instructions.) Our first question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question.

Great quarter. Congrats on the strong results. Doug, my first question, as I look at your absorption rate right now and look back at your Analyst Day last November, you're running a little bit heavier than, or better than kind of the 3.1 absorption pace that you expressed back then, and it sounded like you kind of expected that rate to continue for the next couple of years.

So my first question is just with absorptions running maybe 5%, 10% above that level currently, how are you thinking about the price and volume dynamic across your footprint? And maybe just thinking about California in particular, where do you see the push points on affordability at this point in terms of driving price and margin higher versus absorptions? Thank you.

Thanks, Alan. It's been a good quarter. It's a very good homebuilding market. There's strong demand across all product segments. And so it's a very healthy market. We as a company plan around 3 homes per community per month overall, as we've indicated over the last year or 2, and we'll continue to do that. And we were blessed by a little stronger quarter. Now, with the strength in orders, you're constantly balancing the levers of price and pace to offset cost increases, most notably on labor and materials, as I noted earlier. But overall, our markets that we operate in have had that type of pricing power elasticity.

It is going to be a factor that we continue to watch very closely as we go into 2018, because pricing has to -- can't just have an infinite increase when you're tracking people's incomes and pocketbooks. So we're going to track that carefully going into 2018 as we expect to deliver those 5,100 to 5,400 homes.

Great, I appreciate that, Doug. And the second follow-on question there, so you mentioned the long-dated California assets. I think you mentioned it was 18% of orders in the quarter. Just curious if you can give us an update on the performance of those communities in terms of absorptions, margins relative to the Pardee performance we've seen of late, which is kind of high 20% type gross margins. Is the performance out of those long-dated assets kind of consistent with what we've seen out of Pardee for the last couple of years?

Yes, Alan, this is Mike. The margins that are being delivered from those assets so far current year-to-date are north of 28%, and that's down from last year. But what you have to remember is in the fourth quarter, we deliver a lot more units in some of the higher-priced, higher-margin communities like Pacific Highlands Ranch, hence why our margin is so much higher in the fourth quarter. So it's tracking as we expected, in the high 20s.

Our next question comes from the line of Stephen East with Wells Fargo. Please proceed with your question.

Yes, this is Paul Przybylski on for Stephen. I was wondering, looking out into '18, if you could give any color on your community count growth expectations and if it would be possible to match this year's growth, and then if you could give any kind of color or guidance on '18 gross margin or if we should look at the year-over-year improvement in the fourth quarter as something that would be reasonable for next year.

Yes, Paul, this is Mike. I mean, we're still reiterating kind of our numbers that we had put out there at our Investor Day in November 2016 related to 2018. And the only exception is the average community count, which we talked about last quarter because of the increased pace that we've seen, our average community count is coming down because we've been closing out of communities sooner. We'll give an update to that at our fourth quarter call as to what we think our average community count will be in '18. But it's still growing.

As you look at the plan, Paul, as we've indicated our delivery targets, and we indicated this in the Investor Day, it was 5,100 to 5,400. So we expect to have still double-digit growth as we go into 2018.

Okay. Can you give any color on California demand trends among the submarkets and the product segments and if you're seeing any pricing fatigue? I think on the last call you mentioned there was a little bit of that in northern Cal.

Yes, Paul, this is Tom. We continue to see high demand trends in all of our California markets, from San Diego to the Inland Empire and certainly up in northern California as well, and I think that's reflected in our outstanding order growth. Last quarter we did mention a little concern relative to affordability on the high end up in northern California. As Doug mentioned, we continue to balance pace and price, and affordability is something that we're watching closely. But right now, no big caution signs there and we continue to see strong demand at all price points.

Our next question comes from the line of Jack Micenko with SIG. Please proceed with your question.

I wanted to talk about community count a little bit. I think on our math, you guided to sort of a 1 to 3 number, then it came in up 10. And so was it some of the older communities hadn't closed out yet in the average number, or were you able to get some communities opened a little faster? Just trying to reconcile those two numbers.

Oh, Jack, you're talking about for the quarter?

Yes.

Yes, we actually -- I think we had guided to closing 19 communities, and we only closed 14 during the quarter, so that's really what impacted the ending balance. We opened exactly what we thought we were going to open from a new community perspective.

Okay, got it. And is there a way to sort of think about California by product segment? Obviously, first-time will absorb a bit faster. What was the mix of, say, first-time to move-up in the state in the quarter?

This is Doug, Jack. Right now, we're running -- our order mix is running around 31% entry-level, 50% move-up, 18% luxury and 1% active adult.

And was that meaningfully different than, say, a year ago?

No. It's still trending that direction. We continue to be opportunistic in our land purchasing efforts. We are focusing as a company, though, in pursuing lower price points with our premium brands, whether it's in Texas or along the coast, whether it's building more attach programs in the higher-density areas of the coast, to the East Coast, in Texas under our Trendmaker brand. We're pursuing more 50-foot-wide programs that bring our average selling price down but still offer the premium brand.

Jack, the only other thing I'd add to that, as we go forward, we do have more of an emphasis and are bringing more new active adult product to market, so we should see some expansion in that segment.

Our next question comes from the line of Stephen Kim with Evercore. Please proceed with your question.

Great quarter. I just wanted to follow up on a couple of things, so mostly dealing with community count and absorptions. I think you had answered Jack's question -- I think it was Jack's question -- about the fact that you were able to end with a -- or carry a higher level of community count this quarter because you didn't sell out of as many communities as you thought, and you opened the same number that you thought you were going to. And I just found that surprising, given how massive your order growth was this quarter. It was certainly well above what we were looking for. So when I hear that you didn't sell out as many as you thought, that almost implies that your order growth wasn't as strong as you thought it might be. So can you reconcile that?

Yes, Stephen, when -- closing communities is very sensitive. Anything under 5 units available for sale, we consider it a closed community. So if you're at the end of the quarter and you have 6 community -- we're talking about a de minimis amount of orders, and so it's very difficult to predict from 1 month to the next when that is going to -- when that's actually going to close out. And also, you're looking at the tag end sales at the end of the community. So that's all it is. It has nothing to do with the strength of orders. I think the strength of our orders is evidenced by the fact that our absorption rate is at 3.3 for the third quarter, which is typically something you see in the spring selling season.

Yes, exactly. And so I wanted to kind of go there next. So I just wanted to understand what you were saying about the community count. You didn't sell out as many. You may have had more with, let's say, 6 units or something left to sell instead of like 4 or 5. Okay, that's fine.

It's an immaterial number that we're talking about.

Yes, I got it. A distinction that doesn't matter. All right. So then let's talk about the absorption rate. So one of the things we've observed is that your community count growth has been pretty strong at Pardee and TRI Pointe, and Pardee and TRI Pointe brands generally have higher absorptions than your average. And so I guess I was wondering what your ability -- what you think your ability would be to continue to see Pardee and TRI Pointe community count growth remaining strong and therefore driving stronger absorptions for the company overall into 4Q. Is that a trend that you expect to continue?

We absolutely do, and that's evidenced by our long-term California assets as well. So as you move into 4Q, we start opening more of those communities, as well as you move into 2018. We do see an increase in our average community count in California, and that's what's driving kind of all of our metrics moving forward and our ability to expand our margins.

Absolutely. And then you just mentioned about active adult being rolled out, and I was wondering if you could be a little more specific there. I think you had talked about maybe expanding that to a couple of the brands; and maybe give a sense for if the absorption rates we should expect out of those communities might be higher, even, than normal. Just if you could talk a little bit about that rollout and how it might affect the numbers.

Sure, Stephen. We have a few active adult communities currently in the marketplace in our Pardee brand, Winchester brand and also our Maracay brand. What we've been messaging is just more of a focus on that buyer segment. And really, our first, most significant offering will be in Q3 of 2018, and that's going to be bringing one of our long-dated assets to market under that demographic segment. And that's in the Sundance Community by Pardee Inland Empire. And so that's where we think we should see some significant growth in orders, and we do expect some strong absorption numbers there. That's a roughly 700-unit master-planned community with 4 different product types, so we do expect to see some significant activity from that offering.

I would add, Stephen, this is Doug. You're going to start to see more of the order growth in the active adult the second half of next year as we bring on our community at Sundance. We've got communities at Winchester that we're bringing on. So it's more of a second half of '18, going into '19 kind of activity as we continue to focus on that buyer segment.

Our next question comes from the line of Jay McCanless with Wedbush. Please proceed with your question.

Great quarter. The first question I had on Houston and Trendmaker and how you guys are shifting the product there. Are there any hurdles from land development right now as a result of the storms, or are you guys able to start turning dirt?

Jay, I was just out there a couple of weeks ago. Yes, there's going to be some hurdles with some of the master plan developers, but it has, as I indicated, affected us by about 30 deliveries this year that will push into '18. We actually have a couple of communities, one in particular that we were self-developing. And frankly, the hurricane did not impact our ability to continue to move into developing that community and the lots. So we don't -- it's a little bit too early to tell what the impact is going to be 6, 9, 12 months from now. I think it's going to be an ongoing discussion. But it's a big market; there's a lot to pick from. 75%, 80% of our revenues come from the master plans that we're an option buyer there, and so far, we've got the lots that we need to deliver our '18 plan.

Good. The second question I had, in terms of the land spend, I believe you said you're bought in for '18. How far along are you for '19, and what types of opportunities are you seeing out there in the more entry-level focused, or I think you said you're going for lower price points. Is it necessarily lower price points, entry-level homes, or just taking it down on the ASP side a little bit?

It really is more down on the ASP. I'd say some more entry-level, but I'll define move-up into a subcategory, a first-time move-up and second-time move-up, if you want to get real particular. But it's more of a price movement, because we're very conscious of the fact that along the coast, you've got to be conscious of the affordability issues that are looking at all the builders as you go forward into '18 and beyond.

And to answer your first question, Jay, we're bought about north of 90% for 2019, but we haven't given what that delivery range is, so I'm not sure what it does for you. But north of 90% of our lots are already owned or controlled for '19.

The only other color I'd add to that, Jay, is that we continue to see excellent offerings at all different price points, and our goal is to continue to offer a diversified range of products in different geographic locations. So we're pretty pleased with our teams and the acquisition efforts that they've made happen so far year-to-date.

Great. And then I apologize if I missed it, but any commentary on October, how things are trending?

I didn't make a commentary on that, but so far through October, we've had 272 net sales through 10/22, so roughly about 90 a week.

Our next question comes from the line of Mike Dahl with Barclays. Please proceed with your question.

I guess just sticking with that and then going back to the absorption commentary one more time, I understand that you planned for the 3 or low 3s in terms of absorption, but clearly, you seem to be running well in excess of that and some strength continuing in October. So at this point in the year, is it -- you've still got the guide for 3.2 on absorption for the full year out there. Is it fair to say that that's more conservatism at this point, or is there something else that you're seeing in terms of the mix of communities that you'll be selling out of in fourth quarter that really would lead to a kind of a sharper deceleration in growth to get down to those full-year numbers that you're talking about?

No, I -- Mike, this is Doug. 2017, as I indicated, has been a very strong demand year. It has continued to be very strong. But we're going to continue to run our business as we've indicated at 3.2. You can't sit here and forecast exactly such a robust environment, but it's been a very good year and it continues to be a very good year. But it's also a year, for TRI Pointe, it's kind of an inflection point. We planned on moving forward with this plan of orders and delivery growth. Yes, it's better than expected from a -- when you compare it year-over-year, but it's -- frankly, it's a little bit better than our plan. And so we're going to continue to focus on that type of planning environment, and we're not going to adjust our plans for '18 because that's a good market. If the market is better than good or less than good, we obviously are going into the year with a very strong backlog that makes me feel very comfortable going into 2018 if there's any hiccups in the economy or otherwise.

Right, okay, that makes sense, and just want to be clear. It does seem like you'll go in cushioned relative to that guide, then, for '18. And then just to jump back to the comments around Houston and understand a lot of this is too early to tell, but could you give us a little more sense of how the order patterns in Houston have progressed post the storm activity?

Sure. Like I said, I was just out there recently, and just about -- was it, Tom, the week after we opened after the storm? As we were -- our team members are fighting with some of the traffic issues and roads. But our spec sales definitely have been healthy, but it's still way too early. There's, I don't know, I read [Meyer's] 165,000 homes, I've heard 135,000 homes, 85% of which don't have insurance, so they're going to have to work through FEMA. So it's going to be a long slog to get through all that, but we're cautiously optimistic in the sense that we have started more specs. We actually drove our specs down, and we actually expect an increasing margin environment because we drove our specs down as we go into 2018.

I'm not saying that our margin's going up because we think the market is wonderful now. It's kind of holding on its own. But this is an event that's going to take years to kind of get through, and the good thing is the new homebuilders have product and homes that are dry and definitely will drive people to looking at making that purchase, local people. But it's still a market that does drive a lot of people from outside the area. So we'll continue to monitor it.

Mike, just to add to that, though, we have seen our absorption pace pick up. For the month of September, we were at 1.75, and year-to-date we're 1.4, and I think for the quarter, we're 1.3. So we did see improvement more recently in our absorption rate.

(Operator Instructions.) Our next question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your question.

Hi, everyone. This is Tim Daley on for Nishu. So, Doug, I wanted to follow up on a remark that you made early on the call about the Maracay growth margins. So they expanded 150 basis points year-over-year, and Winchester saw some improvement as well. So given that it's about a year since the Investor Day, I just wanted to know if you guys could update us on the divisional breakdown of the gross margins. I just wanted to know whether that 150 basis points on Maracay would kind of put us in like the high 17 range, if I just take the number that was provided on the Investor Day and add it. Is that how I should be thinking about it?

That's correct.

All right, great. And could you also provide color on some of the other like quadrants, and I know you added -- did mention the Trendmaker gross margins. But wondering if you could help us out with the other divisions as well.

Yes, I don't know if we're going to give the specific margin color right now on each of the divisions. But Quadrant, for instance, is above the company average. Maracay is around that 17% range that Doug just talked about. We gave some margin color on our long-term California assets, and typically, Pardee is in those mid to high 20s. That's about all we're adding right now. We'll maybe give some more color on our next call. And I know we typically updated everybody at our Investor Day, and we're not planning on having one of those this year on what the run rate margin has been.

But if you go back to the Investor Day and look at the guidance that we gave you for 2018, as I indicated earlier, we're sticking to that guidance.

All right, thank you. And then second question, just quickly. Are you guys tracking on the land spend guide of about $900 million to $1.1 billion for 2017? Because that implies a pretty big ramp in land spend for 4Q. I'm just curious if that's still the case, and where is this capital being deployed?

Yes, it's probably more on the lower end of that range, lower to midpoint of that range now where we sit here today. So let's call it $900 million to $1 billion. And a lot of that is coming from land development and land acquisitions here in California. The majority of the dollars come from there.

Okay, and then just quickly following up, you mentioned about a 5-year supply of land. Is that still kind of where you guys believe that you'll be, kind of in the near term, 2018 to 2019?

Yes, I think that's where we're comfortable being, yes.

Our next question comes from the line of Alex Rygiel with FBR. Please proceed with your question.

California backlog's up 58% in units; average selling price is up 23% year-over-year. I know it seemed like maybe you suggested there wasn't a big shift in mix of first-time versus move-up versus luxury. But comment just a little bit more on sort of the ASP and what's driving that, and is it just strictly new community additions? Is it positive price you're getting from existing communities? More detail would be helpful.

I think part of that's mix. Our ASPs, actually, in California for the quarter were down 11%, and so what was happening was we were delivering a lot more units at the lower price points in California during the quarter. And as you can imagine, the higher-priced units are taking longer to build, and so they're sitting in backlog a little bit longer, and that's why you've seen our backlog ASPs grow fairly significantly. So it's all primarily just mix and where it delivers within the year.

And lastly, are you seeing any cost inflation in issues with labor availability broadly, and more specifically in the hurricane-affected markets?

In Houston, we're seeing some pressure on labor and drywall prices. It's kind of early to tell. There's some people that are paying cash, some people doing remodel of their homes that were affected by the hurricane. So it's still too early. We expect, though, that we're going to see labor pressure and some price pressure going into 2018. But again, it takes a while to get these -- it's going to take a while for these people to get back into their homes and spend that money to move forward.

Overall, we do continue to see cost pressure. It ranges from 4% to 7% across the company. Labor is a big issue for all the builders. And luckily, we're in, generally speaking, good, strong demand markets that we generally get to offset that price or cost increase. But in some cases, we don't. And I don't see that lightening up as I go into 2018 because our labor force is aging, and we need to continue to focus on that as an industry.

Our next question comes from the line of Alex Barron with Housing Research Center. Please proceed with your question.

Great job on the quarter. I was curious about some of your Inland Empire communities where you have like multiple subcommunities or price points. Are you guys seeing a very different experience in terms of the sales pace and pricing power from your lowest to your highest, or are they all somewhat similar?

Hey, Alex, this is Tom. Good question. We have multiple communities out there, primarily our Sundance active community out in Banning and then our Canyon Hills out in Elsinore, where we do have multiple price points. And we're pretty thankful that we're absorbing well at all price and product segments. It does range and is skewed towards higher absorptions at the lower price points. And as we move into the higher price points, it does slow down. But there's still excellent demand at all levels.

Okay, excellent. And then can you comment on Houston? Obviously, you guys are more higher price point or move-up than other builders, but I'm curious what your experience has been so far post the hurricane in terms of where -- are you seeing more demand in one part of the city than others or at lower price points than others? Or what's been kind of the client response post the hurricane so far?

Well, as Mike indicated, we did see a pickup in absorption and sales, and there's no concentration in one particular area in the Houston markets. I was back there a couple of weeks ago, meeting with actually two of the biggest producers in the resale market. And to be honest with you, the price points above $500,000 are actually doing very well going into post Hurricane Harvey. So we'll continue to monitor it.

We as a company have stated a year ago that we wanted to be more opportunistic in our product offering, and we'll continue to do so. Our ASP has been about $500,000, and as you look at our business plan, which you can't see, you'll see the average price come below $500,000 over the next couple of years as we introduce more product that is at lower price points.

Our next question is a follow-up question from Alan Ratner with Zelman and Associates. Please proceed with your question.

Just looking at the land supply, your option share is still pretty low at about 10%. And I know the focus is obviously getting the long-dated assets online. But just curious if you could talk a little bit about what you're seeing in the land market as far as is there availability of lots for third-party developers where you could acquire lots more on a just-in-time basis if you wanted to, or are most of the opportunities out there still requiring self-development on your part?

Well, and Tom will chime in, Alan. When you look at Denver, California, Washington, the state of Washington and the Maryland-Virginia markets, generally speaking, those are self-develop markets. You tie it up under an option, you get it entitled. It takes anywhere from 6 to 24 months to get entitled. We don't close without the entitlements. So that's kind of the marketplace.

Now, I'll add, as we look at driving our land inventory down to 5, we are looking at some other opportunities to continue our growth pattern but drive more of those land purchases off balance sheet to feed into the company as we look to not only increase a more consistent earnings stream from our homebuilding operations, but then also focusing on our ROE going forward, too. A lot of builders have talked about that, and we're no different, and we're going to pursue those avenues as well. And you can pursue those avenues in California and the State of Washington and so forth because there's going to be, I think, more upside, potentially, in those off-balance-sheet activities to drive back margin growth as you put it back on balance sheet or good, stable margins.

Do you guys have a target where you see that going over the next several years in terms of what percentage is owned on balance sheet versus held off?

Not at this point, no.

Okay. And one quick just fact-checking question: do you have the incentives as a percentage of revenue this quarter versus a year ago?

We do. We have every -- go ahead. There it is. Year-to-date, our incentives as a company have actually dropped. They're about 3.9% as a percentage of single-family revenue in September versus 4.7% the prior year period. I'll also note in Houston, although the sales base up until Hurricane Harvey was not as good -- it hasn't been as good as in the past years -- but our incentives have dropped to about 8.7% versus 12.5%. So that is, hence, the reason we see and expect to see some margin improvement in 2018 in our Trendmaker brand.

It appears we have no further questions at this time. Mr. Bauer, I would now like to turn the floor back over to you for closing comments.

Great. Well, thank you. We appreciate everybody's attendance this year and -- this quarter, I should say -- and look forward to talking to you about year-end numbers in February. So have a great day and we'll talk to you after the end of the fourth quarter. Thank you.

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