Tri Pointe Homes Inc (Delaware) (TPH) 2018 Q1 法說會逐字稿

Greetings, and welcome to the TRI Pointe Group First Quarter 2018 Earnings Results. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Chris Martin, Investor Relations for TRI Pointe Group. Thank you, Mr. Martin, you may begin.

Good morning, and welcome to TRI Pointe Group's earnings conference call. Earlier today, the company released its financial results for the first quarter of 2018. 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, including statements concerning future financial and operating performance, are forward-looking statements that involve risks and uncertainties. A discussion of such risks and uncertainties and other important factors that could cause actual financial and operating results to differ materially from those described 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. Except as required by law, 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 the conference call. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through TRI Pointe's website and in its filings with the SEC. Hosting the call today is Doug Bauer, the company's Chief Executive Officer; Mike Grubbs, the company's Chief Financial Officer; and Tom Mitchell, the company's Chief Operating Officer and President.

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

Thanks, Chris, and good morning, everyone, and thank you for joining us on today's call. I'm pleased to announce that 2018 is off to a great start for TRI Pointe Group. As first quarter new home deliveries increased 22% year-over-year, homebuilding gross margins expanded 390 basis points and fully diluted earnings per share rose to $0.28 per share from $0.05 per share in 2017.

Net new orders for the quarter increased 15% against a tough comp last year. Thanks to an absorption pace of 3.8 orders per community per month. This sales pace was 11% higher than the first quarter of 2017, which appears to be a good indication that the newly implemented tax reform rules and the recent rise in the interest rates have not had a significant impact on our business.

We believe that job growth, household formations and higher wages are the fuel for housing demand, not interest rates or tax policy, and these fundamental drivers continue to improve. All this serves as a positive sign that housing dynamics in our markets remain healthy. And there are motivated buyers within each market segment as we continued to produce a differentiated product that appeals to the entry-level, move-up, luxury and Active Adult segments.

At TRI Pointe Group, we are building homes that are specifically designed for lifestyles and life stages. Homes that go beyond really satisfying the need for shelter and instead create an emotional connection with the buyer. As evidenced by our consistently strong sales base and gross margins, there is a considerable segment of buyers that will pay a premium for this type of product.

Fortunately, we have seen this market niche become increasingly less crowded, as several of our competitors have either moved away from providing a premium brand experience or have moved down in price point in effort to capture a bigger share at the entry-level market. While there is certainly merits to this strategy, we feel that our shareholders are better served by us staying true to our core competency of adding value to the homebuilding process through quality, design and innovation, while providing an excellent customer experience.

With our diversified product segment strategy, the first-time homebuyer is an important component of our business. In fact, this buyer segment represented approximately 30% of our new home orders in the first quarter. However, our approach of selling lower-priced homes is the same as selling higher-priced homes. Designed product that resonates with buyers and stands out from the competition and promise an outstanding customer experience. We believe this operating philosophy enables us to consistently generate above-average sales paces despite having one of the highest average selling prices in the group. We are proud of what we build at TRI Pointe Group and believe that we have significant runway ahead of us to take our business to even greater heights.

With that, here is some color on each of our markets. Our operations in California once again delivered excellent results in the quarter, with Diego leading the way in terms of pace and profits. The lack of existing supply in the coastal areas of the state continues to be a great driver of new home demand and pricing power. It has also compelled many new homebuyers to consider housing alternatives further inland, which just helps spur demand in our communities located further inland in both Southern and Northern California. Average sales prices of homes delivered in California rose 29% year-over-year in the quarter, largely due to mix, but also as a result of measured price increases throughout the state.

Our Quadrant brand in the State of Washington is really starting to make a significant impact to TRI Pointe Group's bottom line, as pretax income increased to 117% year-over-year in the quarter. A combination of strong job growth, low levels of supply and new home product perfectly tailored for the market led to an absorption pace of 5.1 homes per community per month and ASP growth of 17% year-over-year. While we have not seen signs of affordability impacting demand as of yet, we are making a conservative effort to offer more affordable options for millennial buyers in this market.

The spring selling season got off to a strong start in the Southwest, as our operations in Nevada, Arizona and Colorado all produced a sales pace above the company average in the first quarter.

In Nevada, orders were up 77% year-over-year, thanks to a strong market reception for a number of our newly opened communities.

In Arizona, our community count was down year-over-year, but absorption pace and margins of homes delivered were higher.

In Colorado, we are seeing the benefits of our recent market repositioning as net orders increased 22% in the quarter. While that increase was off a little base, we're excited about our prospects in this market going forward given the strong housing fundamentals on the positive response our new communities have received.

In Texas, our Austin operations also benefited from recently opened communities, which drove year-over-year order growth of 113% in the quarter. Similar to Denver, we see a big opportunities to significantly expand our presence in Austin. Our order pace in Houston held steady in the quarter, while margins expanded 130 basis points versus last year.

Finally, orders increased 31% year-over-year for Winchester Homes in the Mid-Atlantic as we have seen improving market conditions.

At this point, we have a lot of positive momentum in all of our markets as we head into the latter stages of the spring selling season.

With that, I'll turn the call over to Mike for more details on our financial results from the quarter.

Thanks, Doug. Good morning. I would also like to welcome, everyone, to today's call. I'm going to highlight some of our results and key financial metrics for the first quarter and then finish my remarks with an update on our expectations and outlook for the second quarter and full year 2018. At times, I'll be referring to certain information from our slide deck posted on our website that Chris mentioned earlier.

Overall for the first quarter was marked with strong results as highlighted on Page 6 of our earnings call slide deck. Home sales revenue was up with $583 million for the quarter and 924 homes delivered at an average sales price of $630,000. Our homebuilding gross margin percentage for the quarter was 22.7%, and our SG&A expense as a percentage of home sales revenue was 12.9%. Net income came in at $43 million or $0.28 per diluted share.

For the quarter, we posted a 15% increase in net new home orders and a 3% increase in our average selling communities on a year-over-year basis. 16% of our new home orders were from our long-term California assets. Overall, absorption rate increased 11% to 3.8 homes per community per month for the quarter compared to 3.5 homes per community in the prior year period. You can see the historical monthly cadence of orders on Slide 28. As for our overall selling communities, during the first quarter, we opened 10 new communities, 5 in California, 3 in Arizona, 1 in Nevada and 1 in Texas. We closed 9 communities, resulted in an ending active selling community count of 131. Our active selling communities at the end of the quarter is shown by state on Slide 7.

So far through the first 3 weeks of April, we have continued to see strong demand and have written a total of 388 orders. We ended the first quarter with 2,143 homes in backlog, which was a 24% increase compared to the same quarter last year. The average sales price in backlog increased 12% to $650,000 (sic) [$658,000], and the total dollar value of our backlog increased 39% year-over-year to over $1.4 billion.

During the first quarter, we converted 59% of our fourth quarter ending backlog delivering 924 homes, which was a 22% increase compared to the same quarter of last year. Approximately 43% of our deliveries for the quarter came from California and 17% from our deliveries came from our long-term California assets versus 39% and 10%, respectively, in the same quarter in 2017.

Our average sales price of homes delivered was $630,000, up 22% from last year. This resulted in home sales revenue for the quarter of $583 million, up 49% from the same quarter last year.

Our homebuilding gross margin percentage for the quarter was 22.7%, an increase of 390 basis points as compared to the same period last year and exceeded the high end of our guidance range, primarily due to the mix of deliveries in the quarter from our high margin California projects.

For the first quarter, SG&A expense as a percentage of home sales revenue was 12.9%, which was a 280-basis point improvement compared to 15.7% for the same period in 2017. The year-over-year improvement in our SG&A percentage was largely due to the increase such as a result of the 49% increase in home sales revenue.

During the quarter, our effective tax rate was 25.5% compared to 36% the period a year ago. The decrease in our tax rate was related to the Tax Cuts and Job Act, which lowered the federal tax rate to 21%. Our tax is expected to be in the range of 25% to 26% going forward.

During the first quarter, we invested $82 million in land acquisition and $101 million in land development. The focus of our land acquisition strategy is to target land for communities, which will deliver homes in 2020 and beyond, as we currently own or control substantially all the land needed to meet our planned deliveries through 2019.

At quarter end, we owned or controlled approximately 28,000 lots, which 7% are located in California. And based on the midpoint of our 2018 delivery guidance, the number of years of lots owned or controlled is 5.4, fuels an appropriate years of supply to support our business. A detailed breakdown of our lots owned will be reflected in our quarterly report on Form 10-Q, which we filed [today]. In addition, there is a summary of lots owned or controlled by state on Page 27 in the slide deck.

Turning to the balance sheet. At quarter end, we had $3.1 billion of real estate inventories and our total outstanding debt was $1.5 billion, resulting in a ratio of debt-to-capital of 42.9% and a net debt-to-net capital of 36.9%.

We ended the quarter with $917 million of liquidity consisting of $325 million of cash on hand and $592 million available under our unsecured revolving credit facility.

Now I'd like to summarize our outlook for the second quarter and full year 2018.

We expect to open 16 new communities, and close out of 19, resulting in a 128 active selling communities as of June 30, 2018. During the second quarter, the company anticipates delivering approximately 50% to 55% of its 2,143 units in backlog as of March 31, 2018, at an average sales price in a range of $620,000 to $630,000. The company anticipates its homebuilding gross margin percentage to be in a range of 21% to 21.5% for the second quarter. And lastly, we expect our second quarter SG&A expense range -- ratio to be in a range of 11.5% to 12% of home sales revenue.

For the full year 2018, we continue to expect to grow average selling communities by 5% on a year-over-year basis from 2017 and deliver between 5,100 and 5,400 homes at an average sales price of approximately $610,000. The company is updating its full year 2018 homebuilding gross margin percentage to be in the range of 21% to 21.5%, raising the low end of our previously stated range of 20.5% to 21.5%.

Lastly, we continue to expect SG&A expenses to be in the range of 9.9% to 10.3% of home sales revenue and our effective tax rate in the range of 25% to 26%.

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

Thanks, Mike. In conclusion, I'm extremely pleased with our results this quarter. We met or exceeded all of our stated guidance for the quarter and ended the period with 39% increase in backlog dollar value as compared to last year. We also generated an order pace of 3.8 homes per community per month despite selling homes at an average price that is significantly higher than our peer group average. We believe that our performance this quarter is a direct result of our strategic emphasis on quality, design and innovation, while providing for an excellent customer experience.

This strategy drives traffic, orders, premium pricing and lead to higher customer satisfaction. Given the recent consolidation in our industry and increasing focus on the entry-level buyer segment by our competition, we see an improving competitive landscape on the horizon for TRI Pointe Group, which we believe will lead to market share gains for our 6 homebuilding brands. We have a lot of great opportunities ahead of us, and I'm excited for what the future holds.

Finally, I'd like to thank all of our team members for a job well done this quarter. Growing a unique and differentiated company like ours takes a lot of teamwork and cooperative effort. I appreciate your contributions in making TRI Pointe Group what it is today.

With that, that concludes our prepared remarks, and now we can open it up for questions. Thank you.

(Operator Instructions) Our first question comes from the line of Alan Ratner from Zelman & Associates.

So first one on the gross margin. Obviously, the company-wide improvement is really impressive. But I think, probably, what's even more impressive from your release, you mentioned that you actually saw improvement in each of your brands. So it shows that the company-wide improvements' not just driven by mix from more California deliveries. So was hoping that maybe you could just talk a little bit more about what you're seeing on the cost side of the business? There is a lot of chatter about higher lumber prices and concern if that's going to result in some roll-off of the improvement later in the year or into 2019. So how are you finding the ability to push price in excess of cost inflation across the entire country kind of adjusting for the mix on the land side?

It's obviously an important question, Alan. This is Doug. Generally speaking, we've been able to pass along pricing increases due to the strong demand, which has been offsetting some rather large increases in material price, specifically lumber, as well noted, and also the challenges with labor and the cost of labor. Through the first quarter, our company had a weighted average of about 2.2% increase in cost. Our pricing across all the different brands, but it depends on different markets and submarkets ranges from flat to 5% in the first quarter, so it varies. And so generally speaking, we're offsetting that cost challenge.

But we look to the rest of the year. I still think material cost and labor are going to continue to be an issue.

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a lot of keys to our success in the labor front, and it really starts with the relationships that we have with subcontractors and the vendors and constantly developing a strong bench strength that allows our operating teams to build the homes timely and convert them into successful closings. So it's a very challenging environment. But generally speaking, we're able to offset those cost challenges with pricing.

Great, Doug. And then second question, if I could. So it looks like you guys actually generated some cash -- positive cash flow in the first quarter, which is pretty unusual given the seasonality of the business. So just curious if you can talk a little bit about your expectations on cash flow for the year, maybe relative to the $90 million-or-so you generated in '17? And how are you thinking about the balance sheet these days, given all the various potential uses of cash?

Yes, Alan, it's Mike. Yes, we did generate about $150 million of positive cash flow for the quarter. We had anticipated that because of the amount of land act and land acquisition dollars that were being spent in the first quarter was relatively light for the balance of the year. So we still think we'll be cash flow positive this year, probably mid-$200 million. We're around $100 million, pretty consistent with last year. We do have the expectations of still spending between $900 million and $1.2 billion on land and land development throughout the year. Balance sheet wise, again, we are kind of at a low point from net debt to cap, I think, since we put the company together at 36.9%. We still see operating in debt to capital in the low to mid-40s throughout the year kind of peaking in the third quarter and then falling off again at year-end.

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

Maybe I'll just follow on Alan's gross margin. Strong gross margin this quarter. Your full guide moves up a little bit, but it's still below. I guess, is that -- what's the driver of that? Is that because mix shift in California will lease off? Or was it, Doug, what you were talking about, the inflation in materials that are continuing to accelerate? And then, if you could just answer -- talk a little bit about how you all buy your lumber and how you lock that in versus how you all are pricing the house?

Yes. Stephen, this is Mike. On the margins -- margins do fall off a little bit throughout the year, as we mentioned, what our full year guide is compared to what we delivered in 1Q. 1Q was relatively high, as we guided too, because of the mix of deliveries in California and then even so a large percentage of those were coming from our long-term California assets for the quarter. So it's pretty much all mix driven. We raised the bottom end because of the fact that all of our brands saw some margin accretion throughout the quarter, and we've been able to see some pretty good price movement that is offsetting our cost increases at some of our projects. And then another reason, probably margins were anticipated to fall off a little bit, as we have a significant amount of deliveries still coming from communities that are not yet open for the balance of the year. We only opened 10 communities in the first quarter. We said we're going to open around 65 for the full year. So most of those are happening in the back half of the year. That's why we didn't raise our overall delivery guidance. So...

Steve, this is Tom on the lumber topic. Obviously, it is a hot topic out there, and we have seen a lot of activity and movement, and it is a significant cost for us. As we look at lumber, we tried to be smart about it and each one of our brands is doing a little bit differently. It's not uniform throughout all the brands. Some are buying direct, and some are buying turnkey through our framing contractors. The one thing we do have the ability to do is typically get about a 90-day lock. And so right now, we're again buying smartly and locking for those 90 days when we have the ability to see a little movement in the lumber prices.

Stephen, I would add. This is Doug. I mean, we saw a lumber kind of peak, Tom, in the first quarter. It settled out a little bit after the end of the quarter for the first couple of weeks, but I think it was a fall -- it could be a fall settlement. We obviously are locked into Q2 because we, as Tom mentioned, lock out -- lock in our contracts for 90 days. But I think it's going to continue to be a challenging environment on the cost side. And I think all builders will be working very hard to keep pricing ahead of their cost environment. It's just -- that's the nature of the beast right now.

Okay. All right. And then the other question I had revolved around orders. One, on your closeouts and your openings, any significant mix shift toward or away from California? And then, are you seeing any change in buyer behavior with options, square footage, et cetera, as they go through the order process?

Yes, Stephen, this is Tom, again. Nothing of significant shift relative to mix. We are excited about several new community openings coming in California and specifically at Pacific Highlands Ranch down in San Diego. We have the remaining Western planning areas that are some of the premium lots. And later this year, we'll be opening 5 different products there, so that is one to highlight and note.

Yes, Steve, just a follow-up on that, just on the mix. We opened 5 in California. We actually closed 6 in California. So that's -- (inaudible) any concern for most folks and that's where the -- a lot of the higher margins are coming from.

Yes, got you. And buyer behavior?

Yes. Very consistent, again. We are operating in really high demand, low supply markets. And so our buyers out there are motivated. And we see good engagement in really all our markets and all our product offerings.

Our next question comes from the line of Stephen Kim with Evercore ISI.

This is actually Chris, on for Steve. So you're guiding for another big jump in closing ASPs in 2Q '18. Can you speak to what's driving that increase and also if your backlog ASP up to $644,000 during the quarter? I think you previously mentioned you're moving away from specs. So what's preventing you from lifting the full year closing ASP guide?

Yes, this is Mike. On the ASP guide. So it's primarily mix for the increase. I mean, if you look at last year, last year from 1Q to 4Q, we went from a low ASP to a high ASP. This year, we're kind of going from high ASP to a lower ASP, when you go through the quarters from 1Q to 4Q. So the comp sets are going to look kind of funny in the first couple of quarters. And you are right on specs, which is one of the reasons why our backlog conversion is maybe not going up in second quarter. We talked about that. When you look at -- I'll explain maybe backlog conversions a little bit. When you look at the orders on Page 28, it was like lightning struck in March. We've got a surge of orders in March, and our absorption pace went up to 4.4. We had probably about 150 more sales than we anticipated, so we're having to bring down our backlog conversion on

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related to the specs. Last year, going into the second quarter, we had 365 completed specs, and this year, we only have 201. So you're right, we are going away from completed specs and we're seeing better revenue in our dirt starts and better margins in our dirt starts moving forward.

All right. And then -- so yesterday one of your competitors discussed long-term opportunities in off-site construction. Is this something that you've been exploring even though you are continuing to build a higher price point?

I'm sorry, I didn't hear. This is Doug.

Yes, so a competitor discussed technology backed off-site construction opportunities yesterday. And so this is something about we've sort of heard more about like companies such as Katerra. Are these -- have you considered, I guess, employing more off-site construction or potentially partnering with any of these ventures?

Yes, Chris, this is Tom. It's certainly been a topic, and we have had multiple discussions with a number of companies, and we are exploring that technology, and we certainly see that as a wave of the future. Right now, we currently are not operating in that capacity, but we do, again, want to invest and improve our ability to do some off-site panelization in the future.

Our next question comes from the line of Jay McCanless with Wedbush Securities.

The first one I had, the number you gave for April orders, I think you said 388 for the first 3 weeks. How does that compare to last year?

Well, last year, if you look at that chart -- again, Jay, it's Mike, sorry. We had 524 orders. This year, we're averaging around 125 to 130 a week for the first 3 weeks. So if you throw that on top of that, we'd be around that, I don't know, 500, 510 number, which is pretty comparative to last year, we're at 524. Yes, we did pull forward a lot of orders. And I mean, when you look at March compared to the previous year, we are up 130 orders during the month alone in March. So some of that got pulled forward. So we feel good about being close to that comp in April. That was a very difficult comp set for us.

Absolutely. And just to kind of play off of that, can you talk about what drove the additional strength in March? And then play that into as you go into the back half of the year, the way we're modeling, it looks like you guys are going to have a ramp in the community count which ought to give you a nice quarter pop as we move into '19. Is that the right way to think about it?

Well, our expectations is we hope to get order pops as we open new communities. And as I mentioned, I think, in our guidance, we're opening about 26 new communities in the first half of the year, but we'll be opening close to 40 in the back half of the year. So -- and some of those are delivering units this year. So we hope to have a pretty good backlog going into '19.

As far as demand -- Jay, this is Doug. It's really broad-based. It's across all product segments, entry-level, move-up, luxury and Active Adult. It's across all of our brands through the first 3 months of the year. So again, we're not -- the whole discussion about rates and the tax policy definitely are not having any effect on demand. I mean, it's really -- I continued to focus on, call it, ECON 101. I mean, there is just not as much supply as there is demand and there is enough constraints in the marketplace. The retail market is, I think, what reported yesterday at 3.6, I think, months of supply. So most our markets are very undersupplied. I think the data just came out from -- that showed that consumer pricing plans despite higher rates are showing a cyclical high of about 6 months out. The consumers are continuing to focus on purchasing, and you're seeing that obviously in the millennial all the way through the baby boomer. And so we're seeing it broad-based, and we don't want to jinx it, but we hope the second quarter continues to do well. It's one quarter under our belt, but we've got a lot of wood to chop.

Jay, the other thing just to note is our new product offerings continued to sparkle with the consumer. So we consistently get a higher order and absorption pace out of those new product offerings as we open new communities.

And the last thing I wanted to ask about, could you update us on how much you'll have left on your stock repurchase authorization? And was the shares trading basically just above tangible book? Why aren't you guys talking more about share repurchase opportunities?

Jay, it's Mike. As you mentioned, our current authorization is $100 million. We did not use any of that during the first quarter. We intend to use that from an opportunistic perspective. But right now, we're not currently in the market.

Our next question comes from the line of Carl Reichardt with BTIG.

I wanted to ask a little bit about Las Vegas, which, as you noted, has shown a lot of strength. And can you talk or maybe just refresh my memory as to the land-based there, if that was part of the WRECO come over? And then how sort of margins, in general, look relative to the long-dated California assets?

Yes, Carl, this is Tom. Good question. Vegas has not had a lot of legacy assets relative to the WRECO transaction. So we continued to be able to source new land opportunities that consistently perform in our general underwriting guidelines. And so we're really pleased with the personnel that we have in Vegas, the long-term relationship that they have in that market and their ability to source great land opportunities. And as you know, they've grown their market share consistently over the last 4 years. So we really feel like we're hitting on all cylinders there.

Yes, I would add, Carl, like Tom said, there is no legacy and land that came over. I would applaud that team in Las Vegas, led by Klif Andrews that they have really epitomized the culture and the strategy of our company of designing and innovating new product, both at the entry-level, move-up. They are killing it with some new product. And with that comes good with good absorption. They're getting good pricing. We are pricing product at $1 million in Vegas, all the way down to $300,000 to $400,000. So that falls right in line with our opportunistic nature of being in market places in all 4 of those quadrants. So I applaud the team led by Klif. They continued to do well, and it's a strong market. And as you know, it's also a very land-constrained market. But the relationships and the amount of time that our Pardee brand has existed in Las Vegas gives us a big advantage and, hence, the reason for their success.

And then asked about Arizona as well. So that's the market where your lot positions is relatively thin and store counts down. I'm curious as to sort of the strategy to regrow that business, given the tech is a little bit of a drag on a relative growth basis?

Yes, good question. Andy and his team at Maracay are poised for growth. As you may remember, they pulled in a lot of sales and orders from '18 into '17, which created a little bit of a timing difference and a reduction in their active communities. Their absorption pace still continues to be very strong. We are very bullish on Phoenix. And more importantly, their margins continue to increase as we told the investors at our November 2016 Investor Day that our goal was to get our margins up to 18%. As Mike mentioned, a number of our brands are rising to that challenge. But we have a lot of new communities opening in the second half and really into the first half of next year that are going to be very, very strong. We see a lot of growth out of Phoenix. It's really just timing differences. And with Andy's leadership there and that team, I'm not worried about the growth that's going to happen there. It's going to be great, and they are executing at all levels, and they are also doing a wonderful job of designing products, developing new sites with great place making. They'll create a sense of place for our homebuyers that resonate. We see it in our absorption pace. We keep highlighting it, but there is a huge differentiator that all our teams are working on every day to make ourselves different than the competition, and the results are continuing to pan out that way.

Just to add to that, Carl, it's Mike. I mean, we are at kind of community challenged there in -- at Maracay for the whole year just because -- while we're -- even though we're opening at least 7 or 8 new communities, we're closing out over the corresponding amount of communities. So you won't see the growth in community count up here until probably '19.

(Operator Instructions) Our next question comes from the line of Jack Micenko from SIG.

Wanted to ask a little about the SG&A ratio. The guide is still flat year-to-year. If you back into what ASPs are doing in the conversion rates, it looks like that may be a little conservative, although it does sound like you're opening some more communities in the back half. Mike, can you just talk about why that number maybe is staying flatter than it would maybe otherwise suggest?

Yes, you're referring to SG&A. You cut out a little bit, Jack, on your question. Is that what's you're referring to?

Yes, sorry, I was referring to the pace of that.

Yes, remember, we talked about last quarter about the implementation of ASC 606. And as we opened more communities, we're going to get a larger impact of the expenses associated with that, which would have been previously capitalized and amortized as the units closed. So that is what's primarily having the impact.

Okay, okay. And then Doug, going back to something you said in the prepared comments, you talked about maybe the niche becoming less crowded. I'm curious, is that just in California? Or are you seeing that throughout the footprint? And then, where are you seeing that? Is it less buyers for land deals? Is it -- I don't know, is it density of neighboring communities? Where are you seeing the tangible evidence of that, that gave you the confidence to sort of call that out in the call?

Yes. We were just going around the country over the March-April time frame. And I would tell you that it does definitely start on the land side. I mean, it's still very competitive, but I would tell you, generally speaking, for the strategy that we have in all our markets across the country, we are seeing less competitors in our so-called ZIP Code of land. And so those raw materials are important to our future. And so we're very excited about continuing to expand that market share with our premium brand experience and differentiated product strategy and -- so that's where it started. We're also feeling it on the -- on a positive way on -- in some of our areas with the subcontractors. I mean, we offer our product with options. The option revenue is an important part of our equation. And frankly, subcontractors make a little bit more on options than when you have a standard house. So all these little nuances that are happening on the ground every day are very important to our brands, and we continue to see an increasing market share for those 6 brands because of that and other things.

Our next question comes from the line of Mark Weintraub from Buckingham Research Group.

Question relating to those long-term California assets. As you're seeing the market continued to feel tighter and tighter, as we think about the pace at which you can bring on Skyline, Meadowood, Banning, et cetera. Is the -- is that pace a function of process? Or is it market condition? And if the market condition continue to look as good as they are, could we see some acceleration in how you go about monetizing the longer-term California assets?

Mark, this is Tom. Good questions, certainly. Well, both market conditions and process come into play in making those decisions. I would say, relative to our near term, it's more process-driven. And so the timing of those assets coming to market are really with our ability to perfect the planning and design and land development to bring them to market. As you said and suggested, Skyline is right in the wheelhouse. That land development is underway, and models are to be started there soon. So we're looking forward to that. And as we are positively moving through our Sundance community with the introduction of Altis, a new 700-unit age-targeted Active Adult community. We will be beginning land development on Banning as well. And as I said earlier, the big news is down at Pacific Highlands Ranch we're moving into our more Westerly planning areas, and we're going to have 5 new product offerings coming later this year. That will begin to see deliveries from next year.

Okay, great. And then understanding that certainly the near-term stuff is going to be process dictated to a large extent. I know, in the past, you've provided projections going out all the way to 2022 for a number of these projects. As we look at those some of those out years, could those be more market impacted where we could say yes for the further out years, 2020, 2021, et cetera, that -- some of that, if market conditions are right, could be accelerated or even in that time frame is it more process?

Yes, I mean -- this is Doug, Mark. Definitely, it's a good question. And that could be the case. We will look at those numbers at the end of the year. As Tom mentioned, we are opening Skyline with some new models end of this year, Altis is opening out at Banning. So when we get a better gauge on the market conditions in the second half of the year, we'll update some of the build-out conditions of those long-term assets and demonstrate whether there has been improvement in timing changes. So we'll go ahead and do that.

This is Mike, just a follow on to that. You are asking about '21 and '22. I mean, that's really process oriented. There is no opportunity to pull forward units that we were expecting in '21 and '22 because the current market conditions are better from a hypothetical. That -- those are process -- I mean, Meadowood, those are process-oriented land development projects.

Our next question comes from the line of Nishu Sood with Deutsche Bank.

Following up on the development of long-term assets. Looking at the land and land development bucket on the balance sheet, you've been able to kind of continue with the plans of the development of long-term assets without really moving that bucket too much or putting too much into it. How should we expect that to unfold in '18 and maybe even looking into '19? Will you be able to continue to bring those assets to market and drive closings out of them in a way without driving that bucket too high? Or are we getting to a stage where they're going to need more capital, and it might require putting a little more on the balance sheet?

I don't see that -- this is Mike, Nishu. I don't see that changing significantly. I mean, we try to phase most -- even though it's large infrastructure projects, we try to phase most of that so that we're not incurring a lot of dollars upfront and those assets are turning relatively well. So we just kind of -- it's just a long continuation of projects. So I don't see a lot of movement on the balance sheet from that perspective.

Got it. Got it. Okay. And also just thinking about California, Doug, I think you addressed this pretty well in the preamble. There, obviously, have been concerns about rising rates and tax reform. And with your folks' strong portfolio in California and, obviously, very good performance out of it, it's kind of a directly counter to the fears. I think there is still some fear out there, though, that maybe what we're seeing is pull-forward. So I was wondering if you could address that. Are there anecdotes or data points out of your California operations that would either confirm or deny that we're seeing pull-forward of activity due to the changes in rates and the tax environment?

That's a good question. Actually, I'll just share a data point, just recently came out, realtor.com actually studied 30 of the most affluent U.S. counties. Obviously, a lot of those are in California. And actually from their data and this is -- after this is the November, December, January, February time frame. Obviously, tax reform had been implemented. Everybody knew about the mortgage cap and the SALT deduction. Homes at $750,000 and above increased double digits compared to homes below $750,000. So there is a data point for you when you look at the higher price of housing on the East and West Coast. And frankly, it's really -- it's all good noise to talk about, rates and tax cut, but the fundamentals of the business are what drives housing and there is just a scarcity of supply and more demand. Google has just recently got approved and expand their campus, not their campus in Mountain View, they are actually expanding Mountain View, but they are actually expanding, I think, it's 20,000, 25,000 jobs in San Jose. And frankly, Northern California has a housing crisis. It's a very acute housing crisis. So no matter how you cut, you still got to get down to ECON 101 and there is greater demand than supply even at those higher price points. And you look at the median income level of the perspective buyers in the Bay area, it's very strong and along the coastal part of California. I mean, San Diego led our -- led the company in the first quarter with absorption and pace. So it continues to show that the lack or scarcity of supply.

There are no further questions in the queue. I'd like to hand the call back over to Doug Bauer for closing comments.

Well, thank you everybody for joining us on this first quarter. We're very encouraged by our start, and we look forward to talking with all of you after June. So have a great week and a great day. Thank you.

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