Tri Pointe Homes Inc (Delaware) (TPH) 2018 Q2 法說會逐字稿

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

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

Good morning, and welcome to TRI Pointe Group's earnings conference call. Earlier today, the company released its financial results for the second 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'll now turn the call over to Doug.

Thanks, Chris, and good morning, everyone, and thank you for joining us on today's call. TRI Pointe Group delivered another quarter of strong financial results in the second quarter of 2018, highlighted by year-over-year delivery growth of 13%, home sales revenue growth of 35% and operating margin expansion of 220 basis points and pretax income growth of 63%. We executed on our strategy of disciplined growth in our existing markets while maintaining an emphasis on design, innovation and the customer experience in all of our communities throughout the country. We also met or exceeded all of our stated guidance for the quarter, once again demonstrating our ability to execute on the goals we set forth to the investment community. So we're proud of our growing track record of delivering a level of consistency with our quarterly results. We've always run our business with a long-term mindset, keeping our focus on how best to position the company for the next 3 to 5 years, rather than the next few quarters.

To that end, we continue to make investments and pursue strategic initiatives that will result in a more sustainable and diversified homebuilding company over the long run. It is this mindset that compels us to build out our long-dated California assets, rather than settle for short-term land-sale gains. This decision has yielded significant profits for our homebuilding operations and has resulted in an attractive pipeline of lots in our land-constrained space of California for years to come.

We've taken that same long-term approach with our operations outside of California and believe that there are excellent opportunities to grow our local market share with each of our existing brands. While there will always be some short-term fluctuations in the mix of delivery, community count and other aspects of our business as our company evolves, we have a great sense for who we are as a company, and what we can achieve. As a result, we are as excited as ever about the long-term prospects of TRI Pointe Group.

With that, here is some high-level color on the state of our operations. In general, housing market conditions remain favorable, thanks to a strong economy, low levels of existing home inventory and deep consumer demand, from millennials to baby boomers. Cost pressures and labor availability issues persist in all of our markets. But we have adapted to this new reality, successfully managing our production schedules and implementing price increases in most of our communities to make up for these higher input costs.

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Sorry about that. We saw healthy demand for our homes during the second quarter as evidenced by our sales base of 3.4 orders per community per month. Although it is currently difficult to assess the impacts of rising rates and higher home prices, we recognize this can create a pause in the purchase process. However, we believe any pause may be temporary due to the depth of demand and low supply of new and retail houses.

In terms of regional color, California continues to be a strong homebuilding market for us. While our order pace of 4.5 orders per community in the state was lower than last year's comp of 5.4, it reflects our overall commitment to maintain the appropriate balance between price and pace, with an average sales price in backlog of $730,000. These price increases resulted in healthy margin expansion in several markets within the state, most notably in the Bay Area. Additionally, we saw a year-over-year increase in the sales base in the Inland Empire, a sign that the local economy is thriving and that homebuyers continue to look for more affordable housing options. This evolving trend bodes well for our company given our sizable lot position in the Inland Empire.

At our Quadrant brand in Washington, orders were down for the quarter, but the real story is the earnings Quadrant is contributing to the company, growing pretax income by over 150% for the quarter versus last year. Our average selling price increased from $620,000 to $762,000 year-over-year, all while homebuilding gross margins continue to expand north of the company average. Backlog average sales price was $944,000 as of the end of the second quarter versus $717,000 in the prior year. Going forward with these higher average selling prices, we would expect, and are planning for, slower absorption as we reap the financial rewards of this supply-constrained market. Our operations in the state will get a boost in the second half of the year with the expected opening of 6 new communities.

Our operations in the Southwest continue to perform well, thanks to a combination of strong local market fundamentals and successful new community openings. In Las Vegas, with a diversified product offering from entry level to luxury, we saw orders increase 21%. In Phoenix, where we are at the tail end of a number of communities, but we're poised to open approximately 10 communities over the next 9 months. More importantly, we messaged our goal of at least 18% gross margins for Phoenix at our Investor Day in 2016, and we are pleased to be ahead of that plan this quarter. Additionally, we have made a concerted effort to grow our presence in both Nevada and Arizona, increasing our lots under control in these states by 28% and 21%, respectively, since the beginning of the year. Given their relative affordability and increasing diversified local economies, we believe that both markets are poised for long-term growth.

In Texas, Houston continues to be a steady performer for us. While our operations in Austin have really started to hit their stride, posting solid year-over-year order growth and margin improvement in the quarter. As we look to the long-term, Texas will be a significant growth engine due to its strong local economy and business-friendly climate.

Finally, we experienced some order softness in the Mid-Atlantic early in the quarter, but activity rebounded nicely in June, giving us optimism for the remainder of the year. Additionally, we saw deliveries increase 37% and gross margins expand 50 basis points year-over-year.

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

Thanks, Doug, and 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 second quarter and then finish my remarks with an update on our expectations and outlook for the third quarter and full year 2018.

At times, I'll be referring to certain information on our slide deck posted on our website that Chris mentioned earlier.

Overall, the second quarter was marked with strong results as highlighted on Page 6 of our earnings call slide deck. Home sales revenue was $769 million for the quarter, on 1,215 homes delivered at an average sales price of $633,000. Our homebuilding gross margin percentage for the quarter was 21.4% and SG&A expense as a percentage of home sales revenue was 10.7%. Net income came in at $64 million or $0.42 per diluted share.

For the quarter, net new home orders decreased 7%, while average selling communities increased 3% on a year-over-year basis. 18% of our new home orders were from our long-term California assets. Our overall absorption rate remained strong at 3.4 homes per community per month for the quarter.

Looking at the macro picture related to orders over the last 2 quarters and year-to-date versus the micro picture over the last 3 months, our year-to-date orders are an increase of 3.5% on an absorption rate of 3.6 per month, well ahead of our expectations at the beginning of the year.

Based on our pull forward of orders into the first quarter, creating a lack of available products in some communities and certain markets, we felt good about our absorption pace of 3.4 for the quarter, against a difficult comp of 3.8. We're not ignoring the fact that our absorption rate has decelerated from March through June and are cognizant of the fact that higher rates and higher home prices may have caused the consumer to pause in certain markets. You can see the historical monthly cadence of orders on Slide 28.

As for our overall selling communities, during the second quarter, we opened 17 new communities; 6 in California, 5 in Nevada, 2 in Virginia, 2 in Texas, 1 in Arizona and 1 in Washington. We closed 18 communities, resulting in an ending active selling community count of 130. Our active selling communities at the end of the quarter is shown by state on Slide 7.

We ended the second quarter with 2,271 homes in backlog, which was an 8% increase compared to the same quarter last year. The average sales price in backlog increased 5% to $668,000 and the total value of our backlog increased 13% year-over-year to over $1.5 billion. During the second quarter, we converted 57% of our first quarter ending backlog, delivering 1,215 homes, which was a 13% increase compared to the same quarter last year. Approximately 42% of our deliveries for the quarter came from California, including 17% from our long-term California assets versus 41% and 15%, respectively, in the same quarter in 2017.

Our average sales price of homes delivered was $633,000, up 19% from last year. This resulted in home sales revenue for the quarter of $769 million, up 35% from the same quarter last year.

Our homebuilding gross margin percentage for the second quarter was 21.4%, an increase of 130 basis points as compared to the same period last year, due to the mix of deliveries in the quarter from our high margin California projects as well as increased margins in all of our brands.

For the second quarter, SG&A expense as a percentage of home sales revenue was 10.7%, which was a 90-basis-point improvement compared to 11.6% for the same period in 2017. The year-over-year improvement in our SG&A percentage was largely due to an increased leverage as a result of a 35% increase in home sales revenue.

During the second quarter, our effective tax rate was 24.9% compared to 36.8% in the same period a year ago. Our full year tax rate is expected to be in the range of 25% to 26% going forward.

During the second quarter, we invested $163 million in land acquisition and $111 million in land development. Year-to-date, we've invested an aggregate total of approximately $457 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 2020 and beyond, as we currently own or control substantially all of the land needed to meet our planned deliveries through 2019. At quarter end, we owned or controlled approximately 29,000 lots, of which 58% are located in California. Based on the midpoint of our 2018 delivery guidance, the number of years of lots owned or controlled is 5.5, which we feel is 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 will be filed later today. In addition, there's a summary of lots owned or controlled by state on Page 27 in the slide deck.

Now turning to the balance sheet. At quarter end, we had approximately $3.2 billion of real estate inventory and our total outstanding debt was $1.5 billion, resulting in a ratio of debt to capital of 41.7% and net debt to net capital of 37.4%. We ended the quarter with $827 million of liquidity, consisting of $240 million of cash on hand and $587 million available under our unsecured revolving credit facility.

Now I'd like to summarize our outlook for the third quarter and full year 2018. During the third quarter, the company expects to open 15 new communities and close out of 17, resulting in 128 active selling communities as of September 30, 2018. During the quarter, the company anticipates delivering 50% to 55% of its 2,271 units in backlog as of June 30, 2018, at an average sales price of $630,000. The company anticipates its homebuilding gross margin percentage to be in a range of 21% to 21.5% for the third quarter. And lastly, we expect our third quarter SG&A expense ratio to be in a range of 10.8% to 11.2% of home sales revenue.

For the full year 2018, we continue to expect to grow our average selling communities by 5% on a year-over-year basis and deliver between 5,100 and 5,400 homes. We're increasing our full year average sales price to $625,000 from $610,000. We also continue to expect full year 2018 homebuilding gross margin percentage to be in a range of 21% to 21.5%, and SG&A expenses to be in a range of 9.9% to 10.3% of home sales revenue. Finally, we expect our effective tax rate to be in a range of 25% to 26%.

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

Thanks, Mike. In summary, I'm very pleased with our results this quarter. We grew pretax income by 63% year-over-year, thanks to healthy increase in both revenues and gross profit margins.

We look forward to opening over 30 new communities in the second half of 2018, building a strong foundation for the future. We also ended the quarter with 8% more homes in backlog than we had last year, putting us in a great position to achieve the full year delivery goal we set for ourselves 3 years ago of 5,100 to 5,400 homes. Most importantly, we maintained our focus on creating a more balanced, well-diversified homebuilder with an emphasis on delivering shareholder value over the long term with our focus on delivering homes with a premium lifestyle brand. This emphasis has served us well since our founding 9 years ago, and we believe it will continue to do so in the future.

Finally, I'd love to thank all of our team members for delivering another great quarter and contributing to the culture and spirit of the company. You are the ones that turn our vision for TRI Pointe Group into a reality, and I am thankful for all your efforts.

That concludes our prepared remarks, and we'd be happy to take your questions. Thank you.

(Operator Instructions) Our first question comes from the line of Steve East with Wells Fargo.

Actually, this is Paul Przybylski on for Stephen. First, I was wondering -- ASP growth in orders was higher than what we were expecting. Was there any shift in focus to price over pace this quarter? Or do you think it was rate or just price growth-driven slowing?

Paul, it's Mike. Really no cognizant shift over price over pace. We've continued to see -- get both when you look at our year-to-date orders at 3.6 that's pretty consistent with last year. I think we reminded everybody at the beginning of the year that we would be relatively flat in orders the first half of the year because of the difficult comp, but on top of that, we've increased, I think -- our year-to-date ASP's around $632,000, I think our quarter, $633,000, was up about 19%. Year-to-date, it's up about 20% on price. We kind of saw that going to the first quarter and part of the second quarter and that's why we had confidence in raising the bottom end of our margin guidance last quarter.

I would add to that. Paul, this is Doug. Price and pace is something that we manage at the project level, and continue to do so. And it varies in geographic location and the type of community. I mean, for example, up in the state of Washington, as I mentioned, we're reaping significant financial rewards at our price in our communities in the state, primarily in King and Snohomish County. And most of those projects have a relatively small size. So you're really maximizing price and I -- you don't want to slow it down too much, but you're really -- you've got some very strong margins that we are pulling to the P&L this year and going into next year. So that's -- every community is a little different.

Did you notice any difference in demand between entry level and the move-up buyer in the quarter?

Our entry level demand absorption pace is actually a little bit higher than move-up during the quarter. And looking at our projects, Mike, if I recall...

Yes. When you look at demand -- sorry, my microphone was cut off. When you look at our absorption pace by product type, we were -- hold on just a second, Paul, let me get to that information. I mean, for the quarter, we absorbed -- yes, absorption rate -- sorry, about that, our absorption rate quarter-to-date on the entry level was 4.7, 3.2 on move-up, 2.9 on luxury and then Active Adult was 4.1 to average the 3.4. And when you look at year-to-date, it's 5.0 for entry, 3.4 for move-up, 3.1 for luxury and 3.8 for Active Adult.

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

Yes, just sort of following up on Paul's question. I just wanted to get a sense for -- if you could describe what the demand picture looked like through the quarter? Perhaps maybe you could give us the sense for a monthly order cadence and maybe what you're seeing so far in July? And I think you mentioned that the comp was, obviously, tough in 2Q. Well, it gets a lot tougher in 3Q. And so I was just -- wanted to make sure -- and see if you could provide us some color on whether we should expect a meaningful decline again in orders growth in 3Q before rebounding in 4?

Yes, Stephen, it's Mike. I mean, when you looked at the monthly cadence on that slide -- I think, it was on Page 28 instead of 27 -- we did see a deceleration. Obviously, the high point was March. We talked about that on the last call, that we haven't seen that kind of a piece in a long time. April was a difficult comp for us, but we have seen absorption fall off. A lot of that has to do with availability of product. I mean, when we start dissecting it, last year in San Diego, we had some $300,000, $400,000 condo projects. We had 75 orders from there last year. This year, we were closed out, and we only we had 3 orders for the quarter. So that was a significant impact. Currently in July, we're running at about 2.7 through last week. So again, a little additional continued deceleration going into the end of the month. It is a difficult comp set for us. We -- the one thing we're excited about is, we have a lot of strong community openings coming in the third quarter and the fourth quarter for the balance of the year, for instance, we're opening our new Active Adult in the Inland Empire, we're opening 4 new communities in PHR in the fourth quarter. We've got our new Skyline project in Santa Clarita opening, a lot of new projects in Quadrant, as Doug mentioned in his prepared remarks. So we feel pretty good about the back half of the year, but 3Q is definitely a difficult comp set for us. But the one thing I'd say, even though our orders were down, I mean, our backlog is continuing to lengthen out. Our backlog is still, from the unit perspective, is up 8% year-over-year, and our ability to build those -- we seem to still have a difficulty getting in the 60s on a backlog conversion. So just sell those too early really doesn't bode well for the company from a margin perspective.

Got it. Apologies, I don't have a slide deck in front of me. So -- but thanks for that color on the 3Q, 4Q transition. The second question relates to SG&A. Obviously it's been a real bright spot for you. But I guess, I was a little curious about the deviance versus your guidance. Your guidance on the SG&A was much higher than where you ultimately have come out. And it looks like your guide on 3Q and even the year also seems a bit higher than your recent trajectory would suggest. So I wanted to understand if there was anything unusual that you -- that maybe aided your first half kind of SG&A? Or conversely, if there was anything unusual that you were thinking you would have to bear in the back half of the year, which would sort of underlie your SG&A guide?

Yes, it's a good question. SG&A was a little bit of a surprise during the quarter. I mean, a lot of that came from the additional home sales revenue from the additional deliveries that we've pulled forward. So that affected, obviously, the denominator to help that percentage. One thing that -- with ASC 606 still, we're still adjusting to that on how to manage that moving forward. We do have a lot of openings in the back half of the year and all those expenses are going to hit SG&A associated with that in the back half of the year. We've also got our Active Adult, which requires a lot of dollars up front that will be spending in the third quarter. That's why we kind of raise that percentage a little bit in 3Q. But other than that, no other significant changes in the business, no changes really in broker co-op or commission structures that would affect SG&A. It's really just a timing of those expenses related to new communities.

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

First, I just wanted to ask about the commentary -- the press release sent on the call here, where you're highlighting that you remain focused on the development of the longer-term California assets versus land sales. I just wanted to -- it seems like you put that out there to address something specific. Just wanted to understand what you're trying to address there? What was the kind of purpose of highlighting that here?

Well, I mean, I think, one of the highlights is ahead of 3Q -- next quarter is a very difficult comp because we had a large land sale last year in 3Q, and we wanted to just keep reminding people that we're focused on growing our homebuilding EPS and growing our homebuilding operations. And so it's just a continued focus on our long-term assets. They deliver margins north of 30% for us. So it's a big part of our business moving forward, and we want to let everybody know that we're -- continued focused on that and that's why we continue to talk about it. We talk about how many percentage of our orders and deliveries come from the long-term assets because it affects our overall results.

Nishu, it's Doug. I mean, as I stated in my remarks, there is a concerted effort to focus on those long-term assets, we felt we were probably unfairly criticized in previous years about land sales and obviously they're not as consistent as homebuilding deliveries. So what we're very proud of is, is the earnings that we're generating from the company now are coming from homebuilding operations, which are much more consistent and that is a significant earnings growth year-over-year and it will continue to grow, as Mike mentioned, because we are pulling those long-term assets to the P&L over the next several years.

Got it. Understood.

And Nishu, just one other point on that. Mike did kind of cover it, but we are super excited about the success that we have planned in the back half of the year with 15 new products opening from those longer-term assets, and they're very well positioned, and we're super excited to introduce them to the marketplace and think they're going to have some phenomenal success.

Got it. And the second question I wanted to ask was on the pricing power and gross margins. At this point, with enough builders having reported, it's clear that builders with high-quality positions have seen very strong pricing power, widespread gross margin beats across the board. You folks, obviously, have a very high quality set of assets (technical difficulty) and margins came in line kind of different than the trend we've seen from the other builders. Just wanted to understand what the offsets might have been there? Have you not seen the similar pricing power? Is there some mixed issue affecting it? Is higher price land flowing through? (technical difficulty) strength across -- what is a high-quality portfolio that you have?

Nishu, this is Doug. I'm not sure I follow you. Actually margins have increased along with pricing and revenues. So maybe you can clarify what you're getting at.

Just the -- I mean, a lot of builders have seen, even just over the last 3 or 4 months, kind of step-ups in their margins -- 50, 100, even a 100-plus basis points in some cases -- so, reflecting a kind of surge in pricing power for good locations over the last 6 months. So just was wondering, I'm sure you folks are seeing the same thing. So whether are they -- they were (inaudible) mixed offsets or...

Well, mix affects us quite a bit based on our deliveries in California and where they're at within California. But I mean, our margins were up a 130 basis points. I mean, I know they're on the high end of the range that we provided. I can't really speak for what other people put out there as their guidance and what they do with their actual results. I mean, we are continuing to see pricing power in most of our markets. I mean, our incentives overall reduced about 50 basis points throughout the whole company. There are some markets were incentives went up slightly. But overall, we feel good about our pricing power. Now we're using that, obviously, to battle whatever cost increases there have been in the markets.

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

Doug, can you talk a little bit about -- I think, I ask you this every quarter -- can you talk a little bit about labor cost, which you're seeing in terms of availability given that over the last 6 to 8 weeks there's been some evidence of things slowing? Has anything translated into the labor market in terms of free availability of trades or pricing?

From a cost standpoint, we've ranged from 2% to 6% through June as far as direct cost increases. Now that includes labor. We've seen a lot of material cost input, cost increases as well, Carl. Labor, as I mentioned in the prepared remarks, we're continuously managing that process and executing on delivering to our stated goals, but it's part of an everyday process right now. There's a lot of macro things that are looking to happen to help improve the labor markets, whether it's both recruitment and/or technology, which we're working on both ends. But it's a -- I would say, it's really no different than it was last quarter. Tom, I think, it's a continuous battle in all our markets when it comes to labor.

Absolutely, Carl. This is Tom. And -- we expect a very similar year as we did last year relative to input costs, and we are optimistic that the second half of this year, some of that pace of cost increase will decrease, but overall, we're anticipating about a 5.5% increase for the year.

Okay. And then as you guys look forward, let's call it the next year or 2, and you look at how price point mix is shifting across the board, what geographies do you feel most comfortable that you'd see a product mix downstream towards, let's call it more affordable products, recognizing you have a fairly wide range of product to offer?

Well, we've got the land in place for deliveries in '19 and just shy of 90% in 2020. What we started a year ago was to continue to look for locations, still offering our premium brand product at either smaller lot sizes, smaller square footage attached, and so forth. So if you could see our long-term plan, ASPs actually come down. We see, for example, in Texas, we'll start to see the diversification into smaller lots in Houston. In Austin, we focus primarily now on 40- and 50-foot wide lots that will bring our ASPs below $400,000, so that continued land buying strategy -- anything you're buying today, Carl, really delivers in 2021. So our focus is continue to be diversified in all price points.

Carl, the other -- just a quick tag onto that. Certainly, Southern California is an area where we are cognizant of the fact that we'd like to reduce ASPs, and I think you're going to see that over the next couple of years in both the TRI Pointe and Pardee brands. And that's one of the reasons we're super excited about the longer-dated assets and the introduction of some of those new communities. When you look at Skyline up in LA, that's going to be at a reduced price point, and then when you look out at Beaumont and Banning, that as well have the opportunity to lower our ASP.

Our next question comes from the line of Alan Ratner with Zelman & Associates.

So it sounds like the next couple of quarters are going to be pretty active for you on the community count side. If I'm looking at it correctly, you're basically going to be turning over about 1/4 of your projects. So I guess, if we look at your absorption pace over the last few months, it sounds like some of that might be self-induced with a lack of product, but obviously, the market seems like it's slowed as well. So as you think about these openings and you're sitting down thinking about the pricing you're going to come out to the market with and your desired absorption pace, should we -- is it reasonable to think as these projects open that you're going to let the absorption pace run a little bit, certainly stronger than what we've seen in the last few months, and therefore, maybe the pricing won't be quite as aggressive as we've seen over the past year or so? Or do you still think that the price over volume equation still skews more towards the higher margins?

Alan, this is Tom. As we said, we're trying to find that magical balance point between both pace and price. So I wouldn't anticipate us coming out and sacrificing price to get accelerated paces. So I'd caution that thought process. The other thing is, a significant amount of these openings are happening later in the year. And so I don't know that there is going to be a huge impact to the order growth relative to that. So we'll continue to manage it on a project by project basis and market to market to make sure we're optimizing all of our new offerings.

Great. That's helpful. And then just on the land purchasing side, I know you mentioned you're really buying for kind of 2020 at this point. Just based on what we're seeing in the market today, the uncertainty around rates, at what point do you either pull back the land buying, change the composition of your land buying, maybe option more versus owned? Are you at that point yet where you are actually thinking about scaling that back? Or are you still pretty much approaching the land market the same way you have over the last couple of years?

Well, there's a number of things going on in the land market, Alan. Number one, as we've carved out our kind of premium lifestyle brand, to be honest with you, as we continue to focus in on core locations, and everybody else pivots to the entry level, we're actually enjoying a lot of success in our land business as we continue to focus on A locations. So that's been a real blessing for us. That's very -- we're really carved a niche for ourselves in that premium space. Our land teams are continuing to be opportunistic as we look at entry-level and move-up. We continue to look at different product. Smaller product, maybe attached, especially when you deal with infill. So again, as I mentioned, I think, earlier, you'll see as you look at 2021 and '22, the ASP mix changing and coming down because of that product mix that we're focusing on. So we don't -- we see our 6 homebuilding brands as having runway to grow in their markets, and they have room to grow both in the entry-level, move-up, and in some cases, luxury. But we are definitely cognizant of affordability in all our markets so we continue to weigh those parameters as we go through our land acquisition efforts.

If I could sneak one more, Doug, are you assuming current absorption paces on these underwriting in the 3.2 range that you're kind guiding to for this year?

Yes. I mean, it depends. I mean, if you took out Texas from our absorption pace, God, I think we'd be well north of 4 as a company. As you know, in Texas, everything is a partner in the homebuilding space. So you're really targeting 3 a month in Texas, but you're sharing it with somebody else, so you're running at 1.5 to 1.8. But everywhere else is, as we've always indicated, we continue to forecast around a 3 sale per community per month going forward and that is a function of finding the right land in A locations, close to employment quarters, good schools at the right price and the right product execution. You add all those factors up, and we continue to believe that 3 a month is achievable. What's going on in the headlines, and you guys have talked about it at Zelman, Bloomberg came out with something, I think I saw yesterday. I mean, there are some markets that are obviously going to go through some changes, but you can't forget the fact that the housing business is undersupplied significantly, both new and resale. And also, demand, both from millennials to baby boomers, continues to be very strong. So as I mentioned in our prepared remarks, you don't know exactly when things could pause, but we're still very bullish on where the housing business is going to be for the next several years.

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

I got three questions for you. The first one, unit closings came in above the top end of y'all's range for the backlog absorption. Can you just talk about what got you there and what percentage of closings this quarter were spec?

Yes, Jay, I mean -- obviously, we hedge a little bit on our backlog conversion when we give our guidance because there are so many units that can close within a week at the end of the quarter or push into the next quarter. So it's really just that, a little bit being -- a little bit conservative on it. And the percentage of specs that delivered during the quarter -- I don't know if I have that -- I'll have to get back to you on that number, I don't have that.

So the second question, could you walk me through, again, why this ASC 606 is having such a negative effect on your SG&A? And given the mix of what you're opening, should we be assuming that you guys are going to come in at the high end of that SG&A guidance for the full year?

Well, I guess, we're still uncertain where we are going to come in for the full year. It's all going to depend on how many units we deliver as well, with the wide range of the 5,100 to 5,400 that has a significant impact on what that overall percentage of home sales revenue is. But the ASC 606 is really just -- it's almost a reclassification to margin down to SG&A. Every builder is going through it -- well, most of the builders are going through that who had a calendar end at 2018. The impact on it is as we're expending dollars on all the model costs and the upfront costs associated with the community, that used to be capitalized up in costs of sales and amortized as you closed units. And now, it's down in SG&A. So it's just a geography.

And then the last one I had. And I know this is beating a dead horse, but given the pace of sales absorption, it seems like it's going to be a difficult stretch maybe to get y'all's unit closing number this year. Could you just talk again about where you're going to be opening communities? How you're going to get yourself as a company to that 5,100 to 5,400 closings because it seems like things are slowing down even more quickly than normal seasonality would suggest?

Yes, this is Doug, Jay. I actually disagree with your comment. I mean, we're ahead of our business plan. Year-to-date, we're up 3.5%, but we're actually ahead of our plan. So as we reiterated, our target at 5,100 to 5,400, I don't see a problem with that. We also messaged at the beginning of the year that orders -- we don't give guidance on orders, but that we did indicate they'd be flattish this year. We continue to see that. I mean, they're up 3.5% for this first 6 months. We got a lot of great communities to open in the second half. A lot of those communities though are actually delivering homes next year, not this year. So we're actually ahead of our business plan right now in order to make that 5,100 to 5,400.

Jay, just looking at -- I mean, with what we had in backlog and what we closed through June, we're at 4,234 units. I think that's -- backlog that can close this year plus what was already delivered. So just to get to the midpoint of that range, we need to sell roughly, let's call it a 1,000 units starting at the end of June. So that doesn't seem like a monumental task for us to be able to do that to get to the midpoint of the range. And we think we feel pretty comfortable about that.

Okay. I'm just trying to figure out if how much in the way of spec that 5,100 to 5,400 includes? And just given what seems to be a faster slowdown in the absorptions than we would have expected, I just want to make sure things from your standpoint are still on the right track, you guys think you can get to that number?

Yes, I mean, I think, it's easy. And I know it's harder for The Street because you just look at numbers year-over-year, quarter-over-quarter and you don't dissect it the way we do, and we try to make this point abundantly clear. We had a -- we pulled a lot of orders in the first quarter, have less inventory within a lot of active communities to sell from, and that has an impact on your pace. You've come into a more seasonal change in the third quarter. It is a difficult comp, but it's also a reflection of the timing of new communities and when they open, as Tom said. So there's a few markets that we have our eyes on particular. But generally, most of the markets are still very healthy, demand is strong. It's really the timing of where existing communities are and what they have left to sell and what we have planned to offer later in the second half of this year. So I'm very excited about the year, and I'm very excited as we go into 2019 as we build up that order flow going into '19 and '20.

Okay. And then also on share repurchase, are you guys going to be active on that going forward?

Well, we have our authorization in place. We didn't acquire any during the second quarter. And so as we said, we'll be opportunistic with that moving forward.

Back to construction real quick, Jay. We have about 3,200 units under construction as of June and obviously, starting more units as we move forward. About 350 of those were units that were completed, of which 200 were sold. So we only had about a 150 unsold completed units, which is just over 1 per community. So all the units are started that -- to be able to make the midpoint of the range. So from a construction perspective, we don't think we're going to be that constrained.

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

On the demand side, again, I just wanted to -- I know there's 1,000 different variables -- geographies, product type -- that you build in that could affect the numbers, but when you look across your platform, I think, we're trying to figure out is the decline in sales pace. Was there any commonality to it? And then, Mike, you went through some pace by product type a little quickly, but when you look across the entire business, is there anything, whether it's product type, sub-markets, geography, I don't know, if it's attached, detached -- are there any common things when you look at where the sales pace is declining that you can say, "Hey, this is one area that we're keeping an eye on," or is it just too diverse of a dynamic at this point? And then my second question would be, I don't know if you said it earlier, but can you share with us the first several weeks of July? What the trends have been along that step down in pace we saw for the quarter?

Jack, this is Doug. I don't see a commonality across the whole company. It's very market specific. As I mentioned in our prepared remarks, the second quarter saw, the first couple of months, a little softness in the D.C. area in Quadrant. We're keeping our eyes on the Seattle market, although we recently opened a new community last week in King County and had very strong sales success for product that was over $800,000. But those would be the 2 markets that we're paying particular attention to. California, as a whole, is generally very strong. Northern California was very -- is very strong right now, both the demand and margin, and we're very excited about our openings in Southern California between our Pardee brand, especially out in the Inland Empire, our Active Adult. And then the second half of this year, we're opening 5 new communities at PHR down in San Diego. So California is looking very good still. Phoenix is looking very good. It's really a byproduct of where we are in the community life. We've got some excellent communities that are opening up in the next 9 months, later this year and the beginning or early part of next year. And Texas is very strong. So as I mentioned at the beginning of the comments, we're being most watchful of the Mid-Atlantic and Seattle, I would characterize it...

The other thing, Jack, that we haven't talked about, Vegas continues to be perform really well for us. We had 5 new product offerings in the second quarter that really hit on all cylinders. And then, I know it's small, and we've been talking about it for a while, but Denver, we've repositioned ourselves well there, and we've had great accelerated order pace there. So there is no common theme and it is market to market and project to project as Doug suggested. So we're pretty optimistic, overall.

And then anything on the first couple of weeks here in July on the trends?

Yes, Jack. I mentioned that earlier, 2.7 is the current absorption pace through last weekend. We got about 252 orders to date in July, and that's going against the comp set of, I think, 431 for July of last year. So hopefully, we have a really strong week this week.

Our next question comes from the line of Scott Schrier with Citi.

I wanted to ask a little bit about the land spend and how you're thinking about spending geographically, thinking about your comments that Texas is a really strong part of your future, your lot supply is at 3.8, Colorado, another strong state, is at 3.2. So I'm just curious in those states what you think a comfortable amount of lot supply there is? And what you're thinking about the environment as far as difficulties in getting developed lots?

Yes, Scott, this is Doug. I mean, as we mentioned, our overall land supply, using our midpoint of our range, I think, Mike, it's 5.5. Now that is -- 5.5 includes all the long-dated assets in California. If you look at the rest of the brands outside of -- and the divisions outside of Southern California, they range around 3 to 4. So our ideal inventory is about 3 to 5 as we mentioned in of our prepared remarks, and we've kind of -- we've stuck to that for the last 9 years.

Scott, on Colorado, specifically, that 3.2 is probably misleading because our goal is to grow market share there an increase volumes, which would significantly bring that number down. It's a very competitive market, but we are really looking at increasing our land spend in Colorado to capitalize on that market.

Got it. And then I wanted to follow up on your comments on -- in Quadrant. Just looking at -- last quarter, you had a very strong absorption rate there and then it fell off. I know it's something you're monitoring. Did something happen there really quickly? Or are you just seeing a shift into where the traffic goes? I mean, obviously, you have that big over 20% year-on-year price increase there. So just want to see if -- what you've noticed in terms of trends changing there quickly?

Well, year-to-date, we're right on plan for Quadrant. First quarter, we pulled a lot of orders forward. So you're dealing with projects that are in the tail end of their stages, as I mentioned earlier, so your sales become a little more challenging. But notwithstanding that, we don't put our head in the sand. We've been doing this for 30 years, Scott, and we're very cognizant of the marketplace. And we had saw, as we talked about, some slower trends in that market, and we're going to continue to watch it. The flip side of it is, it's a very land-constrained market. We've got 6 new communities that we're opening, most of which are in King and Snohomish Counties, which are very strong, very close to the employment of the major employers in Seattle. So we opened up a new community. As I mentioned last week, in the mid -- I think, early to mid-8s and sold out the first release. So we're watching it carefully and like all our markets, we're going to stay on top of it. It's important to be on top of your game in this business at all times, and there's -- it's no different right now.

And one more, just wanted to ask quickly on Houston. We heard a builder had some comments that maybe there's a little bit of softness at the first-time homebuyer level there. So just wanted to see -- it sounds like you're seeing a lot of strength in Texas, but just curious if you have any comments on first-time homebuyer market in Houston?

Well, our Trendmaker brand doesn't build very many programs right now in that entry level. Anecdotally though, I was in Houston a few weeks ago, sitting with some brokers and actually, I -- at least from the dinner talk, prices under $400,000 under $350,000, absorption has been very good. But again, our average sales prices is in the high $400,000s, around $500,000. We've seen success year-to-date, quarter-to-date there, and we continue to be very bullish on Texas, as I mentioned. We're definitely ramping up in Austin. Our strategy there is to be in a lower price point still with a premium product, and diversify our offering at Trendmaker.

Our next question comes from the line of Alex Rygiel with B. Riley FBR.

Can you expand a little bit more upon the comment about pulling forward orders into 1Q?

Alex, this is Mike. I mean, when you look at the absorption pace, I mean, we typically like to average around 3.5 for the first half of the year. That's been pretty much our trend, historically. And what we saw is a strong absorption pace in the first half -- the first quarter, it was around the 3.8 and more specifically, March. March was 4.3 or almost 4.4. So we saw a lot of orders come in, which ate up some of our availability, and we slowed down our releases in the second quarter.

And then as it relates to incentives being higher in some markets, were those your stronger-performing markets or your weaker-performing markets?

No, I mean, incentives is going to be -- and when we raise incentives, that's because the market is weaker and our absorption pace is falling off.

And again, I mean, it's not a significant increase and it's certainly not indicating a trend of significant market changes in our estimation. It's a project by project decision to maintain that balance between price and pace.

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

I wanted to ask, in terms of -- I know you guys generally focus on more move-up, but in terms of entry-level or first-time like what percentage of your sales, I guess, fall in that category? And where do you see that going over the next year?

Year-to-date through June 30, I believe, our order mix was about -- just under 30% entry level. The move-up was about 40%, 50%?

No. So on the orders perspective, 27% entry, 52% move-up, 19% luxury and 2% Active Adult. And that's pretty consistent with what our deliveries were as well. Deliveries were 29%, 53%, 17%, and 1%. That's been a relatively consistent mix for us for a long time, Alex.

Right. But you guys have mentioned you're kind of tilting your price points a little lower. So I was just curious if that's going to change much or not very...

Yes, you won't see that mix change until 2021.

That's a moderate -- yes, that's a very moderate change. You're going to see correct prices on an average increase next year and then slightly down in 2020.

Got it. Okay. Now you also -- you talked about your legacy land that came from Pardee. I was wondering, is there is any plan, or did I maybe not understand, to also have your TRI Pointe brand build on that land or not really?

Yes, we've currently been building with our TRI Pointe brand in multiple locations on some of that Pardee land, and we'll do so moving forward in Southern California.

Okay. And then last, you mentioned you're going to ramp up the -- or you're introducing a lot of new communities in the Washington state, but you also mentioned you've been raising the prices. So can you give us a sense of what type of price point or what type of products you'll be introducing going forward?

Well, our price point is a function of both product and location. For the full year, our price -- average price point will be in the $800,000 range for Quadrant. And that's primarily based upon the fact that we're building in infill locations in King and Snohomish County. And that primarily results in both attached and small lot detached housing in those counties.

Well, thanks, everybody, for joining us on today's call, and we look forward to talking to you at the end of the third quarter. Have a great weekend. 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.