Tri Pointe Homes Inc (Delaware) (TPH) 2018 Q3 法說會逐字稿

Greetings, and welcome to the TRI Pointe Group Third 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, Vice President of Investor Relations. Thank you. You may begin.

Good morning, and welcome to TRI Pointe Group's earnings conference call. Earlier today, the company is released its financial results for the third 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 we begin the call, 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 this conference call. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through TRI Pointe's website and in its filings with the SEC.

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

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

Thanks, Chris, and good morning to everyone joining us on today's call.

TRI Pointe Group once again delivered strong results in the third quarter posting net income of $64 million or $0.43 per diluted share. Home sales revenue increased 19% year-over-year to $772 million, and gross margins expanded 180 basis points to 21.3%. We generated a healthy order pace of 2.7 homes per community in the quarter, which was on par with the order paces we delivered in 2015 and '16 but was below the exceptionally strong sales activity we experienced in the third quarter of 2017.

As we look at our order trends for the third quarter 2018 and into October, we are seeing a softening of consumer motivation and demand. Even though the overall fundamentals continue to point to a strong housing market, we believe homebuyer demand has slowed in response to higher borrowing costs and a significant price appreciation our industry has experienced over the last few years. We believe that this is a normal reaction on behalf of the consumer, and we are closely monitoring this dynamic in all of our markets as we sharpen our focus on the sales process and ensure that our product offerings are consistent with market demand profiles.

To be clear, we do not feel that the outlook for our industry or our company has been altered in the long run. With respect to the industry, we continue to see a tremendous opportunity ahead of us, thanks to a strong economy, job growth and healthy consumer confidence, which, along with pent-up demand from young adults, should lead to growing household formations for years to come.

On the supply front, the number of new and existing homes on the market remains at low levels. And finished lot availability in the core locations in which we build remains constrained. All of these factors would suggest that the new home market has room for continued expansion and that the current slowdown the industry is experiencing will be temporary.

Against this backdrop, TRI Pointe will continue to focus on design and innovation to grow our premium lifestyle brands in the entry level, move-up, luxury and Active Adult product segments.

We believe our steady approach to all our buyer segments and unique product offerings differentiates us from the competition and meets the lifestyle needs of today's consumer. We continue to develop affordable new home solutions for all our buyers, while maintaining our land acquisition focus on core market locations.

Our operations at California once again posted solid results for the third quarter as the state continues to be one of the most undersupplied housing markets in the country, making the need for new homes and, in particular, affordable homes, critical to its future. This bodes well for our company as we own over 12,000 lots in Southern California, which allows us to target affordable product segments in Los Angeles, San Diego and the [Inland Empire] markets.

We have made significant progress on the planning and development of our long-term California assets and are excited about the grand openings of Skyline in Santa Clarita; our new Active Adult community, Altis, in Beaumont and a new highly desirable village in our Pacific Highlands Ranch master plan in San Diego. Outside of California, the long-term strategy for TRI Pointe is to maximize our existing operations and to grow our company through both organic and the M&A activity focusing in on the Southeast and Texas.

Periods of adjustment, such as what we're experiencing today, often prove to be great opportunity for well-capitalized companies like ours to plant the seeds for future growth. It is in times of adversity that strong companies with disciplined management teams can take advantage of market turbulence to make smart moves and grow market share. To that end, we are very excited to announce our entry into the Charlotte and Raleigh, North Carolina, markets under the TRI Pointe Homes brand.

This expansion will be led by Gray Shell, a proven leader in the homebuilding industry with over 20 years of experience. This greenfield expansion allows the time to build the best-in-class team that will implement the proven strategies of TRI Pointe in a prudent and capital-efficient manner.

We are also excited to share that our newly minted Sacramento division is making progress and now owns or controls over 500 lots and will open its first community in the first half of 2019. These small bites of growth are the seeds to your strategic plan over the next decade and will further establish TRI Pointe Group as a leading homebuilder in the U.S.

With that, here's some brief color on the markets in which we build. As I mentioned, our California operation had a solid quarter with a monthly order pace at 3.1 homes per community and average sales prices and gross margins above the country average. Order activity was in line with our expectations in the Inland Empire and coastal Southern California, while Northern California experienced order softness in the quarter.

Seattle is a great example of a market that has experienced significant price appreciation, and our margins have expanded nicely as a result. However, we have experienced a significant shift in buyer motivation anticipating that we have may have reached an affordability threshold near the end of the last quarter.

We made some adjustments to pricing to stimulate demand. As a result, our monthly order pace for the quarter was 3 homes per community, which was higher on a sequential basis from the second quarter.

In the Southwest, both Phoenix and Las Vegas enjoyed stable market conditions. We continue to see healthy gross margin improvement compared to the same quarter in the prior year. In Phoenix, we are especially excited about the opening of 7 new communities during the first half of 2019, including our much anticipated Avance community located 15 minutes from downtown Phoenix.

Our operations in Colorado have really gained traction with a significant growth in orders, deliveries and margins in the quarter. This was the result of product repositioning we implemented a year ago.

In Texas, we continue to see better demand trends at more affordable price points in both Houston and Austin, while pricing has remained firm in both markets. Over the near term, we look to grow our business in Texas as we continue to see strong economic fundamentals in affordable housing.

Finally, the Mid-Atlantic remains a stable market for us. We remain optimistic about the region, given its steady fundamentals and the undersupplied nature of the market and are excited about our 6 new communities that we'll open in the second half of 2019.

Now I'd like to turn it over to Mike, who will go into more detail on the numbers.

Thanks, Doug. Good morning, and I would also like to welcome everyone on today's call.

Overall, the third quarter was marked with strong financial results as highlighted on Page 6 of our earnings call slide deck. Home sales revenue was $772 million for the quarter on 1,205 homes delivered at an average sales price of $640,000.

Our homebuilding gross margin percentage for the quarter was 21.3%, and our SG&A expense as a percentage of home sales revenue was 10.7%. Net income came in at $64 million or $0.43 per diluted share.

For the quarter, net new home orders were down 18% on a year-over-year basis on a 2% decrease in average selling communities. Our overall absorption rate for the third quarter was 2.7, which was below last year's pace, however, as Doug mentioned, was comparable to the third quarter absorption rate we experienced in 2015 and 2016.

As for our overall selling communities, during the quarter, we opened 13 new communities: 6 in California, 4 in Washington, 1 in Nevada, 1 in Texas and 1 in Colorado. We closed 18 communities resulting in an ending active selling community count of 125. Our active selling communities at the end of the quarter is shown by state on Slide 7.

A quick update regarding the accelerated development and build-out of our long-term California assets. During the quarter and year-to-date, 18% of our net new home orders were from these assets, consistent with the same period last year. During the fourth quarter, we expect that 13 of our 19 new community openings will come from our long-term California assets with the opening of 4 communities at Altis, our 700-unit Active Adult community located in Beaumont; 4 new communities at Skyline, our 1,200 unit master plan in Santa Clarita; and 5 new communities at Pacific Highlands Ranch in San Diego.

We should start to see deliveries from those projects in the second half of 2019, which will benefit our homebuilding gross margins as our long-term California assets delivered margins well above the company average.

We ended the third quarter with 2,101 homes in backlog, which was a 7% decrease compared to the same quarter last year. The average sales price in backlog increased 4% to $681,000, and the total dollar value of our backlog decreased 3% year-over-year to $1.4 billion.

During the third quarter, we converted 53% of our second quarter ending backlog delivering 1,205 homes, which was an 8% increase compared to the same quarter last year. Approximately 43% of our deliveries for the quarter came from California, including 17% from our long-term California assets.

Our average sales price of homes delivered was $640,000, up 10% from last year and up 1% from last quarter. This resulted in home sales revenue for the quarter of $772 million, up 19% from the same quarter last year.

Our homebuilding gross margin percentage for the third quarter was 21.3%, an increase of 180 basis points compared to the same period last year. Our gross margin percentage increased in all but one of our homebuilding brands during the quarter. For the third quarter, SG&A expense as a percentage of home sales revenue was 10.7%, an increase of 50 basis points compared to 10.2% for the same period in 2017, primarily due to the impacts of ASC 606 and higher selling costs.

During the third quarter, our effective tax rate was 23.5%. The rate was lower than our previously stated guidance, largely due to the benefit of energy credits taken during the quarter. We expect the tax rate for the fourth quarter to be in the range of 25% to 26%.

During the third quarter, we invested $193 million in land acquisition and $113 million in land development. Year-to-date, we have invested an aggregate total of approximately $763 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 2021 and beyond. At quarter-end, we owned or controlled approximately 28,400 lots, of which 57% are in California.

Based on the midpoint of our 2018 delivery guidance, the number of years of lots owned or controlled is 5.5. We continue to focus on accelerating our long-dated California assets and investing in faster-turning communities in our markets outside of California. A detailed breakdown of our lots owned will be reflected in our quarterly report on Form 10-Q, which will be filed this week. In addition, there's a summary of lots owned or controlled by state on Page 30 in the slide deck.

Turning to the balance sheet. At quarter-end, we had approximately $3.4 billion of real estate inventory. Our total outstanding debt was $1.5 billion, resulting in a ratio of debt-to-capital of 43.7% and net debt to net capital of 42.3%.

We ended the quarter with $570 million of liquidity, consisting of $83 million of cash on hand and $487 million available under our unsecured revolving credit facility.

With respect to our stock repurchase program, during the quarter, we repurchased a little under 10 million shares of common stock for a total aggregate dollar amount of $139 million. As of the end of the quarter, we had approximately $61 million remaining on our $200 million stock repurchase authorization.

Now I would like to summarize our outlook for the fourth quarter 2018 and full year. The company expects to open 19 new communities and close out of 14, resulting in 130 active selling communities as of December 31, 2018.

During the fourth quarter, the company anticipates delivering approximately 80% to 85% of its 2,101 units in backlog as of September 30, 2018, at an average sales price of $640,000.

For the full year, the company expects to deliver between 5,025 and 5,130 homes at an average sales price of $635,000. The company anticipates its homebuilding gross margin to be in the range of 20% to 20.5% for the fourth quarter and the full year to be in the range of 21% to 21.5%.

Finally, we expect our fourth quarter SG&A expense ratio to be in the range of 8.8% to 9.2% of home sales revenue, resulting in a full year SG&A expense ratio of 10.1% to 10.5%.

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

Thanks, Mike. I'm very pleased with our performance this quarter and believe that TRI Pointe Group is well positioned to take advantage of the opportunities that arise during this period of adjustment in our industry.

We already made some strategic moves to enhance our presence in existing markets and establish ourselves in new markets, and we will be evaluating other opportunities as they arise doing so in a prudent, disciplined and opportunistic fashion.

While we are currently experiencing some softness in demand, I remain optimistic about the future of TRI Pointe Group. Many of our recently opened communities are performing well, and I'm excited about the prospects for our new communities that are coming online ahead of the spring selling season.

As Mike mentioned, we are currently targeting land-buying opportunities for 2021 and beyond, meaning we own or control essentially all the lots for homes expected to close through 2020. Our land position allows us to deliver positive cash flow for the next several years providing the tool to maintain a solid capital structure and liquidity.

In the meantime, we will continue to operate and execute to close out the year on a strong note, making adjustments to our pricing and marketing strategies where necessary to meet the demand profile of our customers and achieve our order pace goals.

Our company's leadership is comprised of industry veterans who know how to compete effectively in challenging demand environments. This experience coupled with our strong balance sheet, product differentiation and excellent market positioning makes TRI Pointe Group well positioned for long-term success.

Finally, I'd like to thank all of our team members for their continued contributions to this success. Lost in all of the noise surrounding the current trajectory of the housing market is the fact that the TRI Pointe Group is poised to have our highest year of profits in our company's history, all coming from our core homebuilding operations. This is no small feat in our competitive industry, and I'm appreciative of your efforts.

That concludes our prepared remarks, and now we'll be happy to take your questions.

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

Congrats on the expansion into the Carolinas. So Doug, you mentioned the -- I guess, the price adjustments you made in Seattle, which seems to have had at least a positive impact on the absorption sequentially. I was hoping maybe you can give us a little bit more color in terms of what exactly did you adjust, maybe quantify that if you can. And are there any other markets where you made similar adjustments where you didn't quite see the same elastic -- elasticity to the demand, in other words, orders did not really increase? Just trying to get a feel for how elastic the consumer is today to discounts or incentives.

Yes. It's a good question, Alan. And it really is project-specific speaking to Seattle. One of our new projects that we opened at a price point that's over $2 million sold very well in its -- in the King County area, whereas some of the other projects that we were selling as prices have rose in Seattle, we adjusted through incentives and pricing anywhere from the mid-single digits to as high as 10%, just to stimulate demand. Once we got there, you kind of -- you found the momentum. I was actually out walking the track, and it was on one particular project that we actually had to make that adjustment. It's not like it's across the universe is my point. And the salespeople are really back to not taking orders and they are selling homes. I mean, you're grinding out sales. I mean, this is very normal to the homebuilding business. And I think as we reflect back, 2017 was probably the peak of the selling season.

Got it. That's helpful, Doug. And I guess just on that point, I mean, I know it's just one specific community, but that's a big adjustment. And one thing we hear a lot from builders is really reluctance to make those types of cuts because of the backlog and protecting the backlog and making sure you don't have a spike in cancellations. So, a, I guess, how did you avoid that in this particular situation? And then -- and b, when you look at the success you had there, is there a thought of perhaps becoming more aggressive in some of the other markets where your sales pace has pulled back, thinking Northern California, for example? Or are you already doing that?

Alan, this is Tom. Again, good follow-up with that. It's important to note that, that specific example in Seattle was really relative to a new community opening, and so we didn't have that backlog. But we immediately recognized when we came out with a lack of demand that we could make a shift and make that happen. At most of our other operations and projects throughout all of our areas, we've really implemented more promotional activities, Make Your Move type events that are really more incentive focused. In particular, we've had some success relative to financing incentives and locking in some good financing for buyers that seems to have stimulated demand.

Great, Tom. And if I could just squeeze in one last one. Just in terms of the timing of when these kind of incentives have come under wraps here, is this something that really gained steam towards the end of the quarter into October? Or was it in place for most of the third quarter?

No, I'd say it was later in the third quarter that it began to be evident that we needed to increase and stimulate demand.

And just to add a point on the incentives, as a company -- and again, we've been through these market changes before, and they're not all -- you can't paint a brush on it. Many of our markets are moving along at a good pace. But interest rates have gone up. Pricing have gone up for several years. So everybody's got to be on their A game when it comes to sales and marketing. But as a company when you look at our sales incentive per delivery, as a company, it actually went down 50 bps. It went from 3.9% to 3.4%. So are you going to continue to have to grind out sales going forward in 2019? I'm not trying to sugarcoat it. Yes, I mean, that's the market we're in, but we've been doing this for 30 years. We've got one of the most experienced management teams at all our brands, and so they're very motivated and excited about hitting their results going forward to the end of the year and into next year. It's back to blocking and tackling in the fundamentals of selling homes and building them.

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

Wanted to follow up a little bit on the incentives. I think, Doug, you just mentioned that -- this is kind of normal as you pointed out over the many, many years of operating in the business. Everyone -- every customer always likes to feel they get a deal. And so to a degree, there is a sort of a normal range of incentives. In general, where would you put that range of incentives versus where we are today?

Well, what's normal? I've been doing this for 30 years, as I mentioned, and I've never been through any sort of an adjustment in the housing cycle that's normal, Stephen. But typically -- this pick on Texas, this pick on -- in Houston, as the oil crisis went through that areas for several years and incentives range from 7% to 9%. I would say typically, roughly speaking as an average, say 3% to 5% is a broad range, but all cycles are different. Each project, you have to manage individually to meet its pace goals. So it's really hard to paint a brush on it.

And Stephen, just -- this is Mike, just to give you some color on that. What we delivered in the third quarter, the average incentive was 3.3%. So roughly speaking, that's $20,000 a house. Clearly, it's different in different markets, but we would expect that number to go up, I would think, as we deliver houses in the first and second quarter.

But again, it's well within a normal range from what we've been experiencing. When we have softening demand, we need to incentivize the consumer to jump in, and it's very typical.

Yes, that makes sense. If we could talk a little bit about the broader market environment. One of the things that's a little different this time, I'm guessing, is the degree to which you have some competitors in the market that have gone to great lengths to standardize their product and even embrace spec building to a greater degree than maybe we've seen in the past. Obviously, a lot of reasons for that. Was curious whether or not -- first of all, whether you're really bumping up against that in your price points? Or if largely, you sort of sidestep by virtue of our price/mix? And to the degree that you do see it, do you see that as limiting their ability to -- well, the market's ability, generally, to operate through incentives because there's just not that many levers to pull when you have a standardized product. In other words, is it hitting the ASP quicker, the actual reduction in the ASP?

It's a great question, Stephen. Obviously, there's -- some of the larger builders have definitely gone to more of a standardization, but our buyers and our universe is really focused on offering strong design, innovation and options to their buying process, and that experience really differentiates ourselves. And frankly, at our price point, from entry level to move-up, to luxury to Active Adult, I mean, that's a huge differentiator for us. Not only is it a huge differentiator with us for the customer but also with the trades and the land seller. So as I mentioned before, we're going to stick to our steady approach being well diversified. Affordability in the core markets is a relative term, and we'll continue to focus in on that, and that means that we're going to build and design product that has attached smaller square footages but hit that right price point, whether you're in Orange County, Austin, Phoenix, D.C.

Great, that's helpful. And then last one from me regarding margins, generally kind of a two-parter. Lumber pricing has, obviously, come back a lot. Different builders have a little bit more of a lag time between when they might actually see that. I'm guessing you guys will probably be on the later side. What that -- what I'm trying to figure out is that are we more likely to see that for you guys the benefit in 2Q next year? Or would it start showing up in 1Q? And it would be reasonable to think that the lumber packages kind of in that sort of 3% to 5% range of selling price or 5 -- just -- actually, I shouldn't give you a range. If you could just tell us, like the lumber pack in general, what percent of the selling price is it for your homes? That was the lumber question. And then the second one is, remind me, I think you told me that attached product does not have necessarily a lower margin when we're out there recently. Can you just sort of revisit that? When we hear you say attached product, should we be thinking any margin implications there?

Yes, Stephen, this is Tom. I'll take some of that and try to hit on all of it. Relative to the attach product, first, it definitely does not have a lower margin. The reason we're interested in attach product in a lot of our markets is because it provides a more affordable opportunity and lower ASA -- ASP that's going to relate to a broader segment of the market. So that's the reason behind our push there. And we're finding that it has equal margins to our detach product as well. On the cost side, you're right, lumber has been a big benefit to us lately. We do expect to see some of that benefit in the -- beginning in -- late in the first quarter of next year. But I'd caution you to not think that it's going to be automatically a windfall to the bottom line because we still are finding significant cost increase, the tariffs. I don't expect it to have a huge impact to our margins going forward.

Just so I'm clear, you are specifically referring to the combined cost picture, not factoring in any incentives that you would have to do, right? So barring any incentives...

Correct.

Okay, got it. Just wanted to make sure...

Yes, the lack of pricing power is going to have an impact on that as well.

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

Doug, just looking at California, the absorptions were down pretty significantly. Can you talk a bit more about what you think the drivers are? I mean, I sit here look at it and when we walk that market, we heard the international buyer had been -- had really pulled out to a significant degree. But how much of it is that? How much of it do you think is true affordability versus just sticker shock that the consumer needs a little time to work through, if you will? And are you really seeing the consumer do anything differently other than hesitate on the actual purchase? And then could you expand a little bit more on your strategy to combat it? I know in the short run, it's primarily incentives. But as you look out into maybe the spring selling season and into '19, you mentioned some attached. Is there anything else that you all might do to change what's happening in the business?

Stephen, it's Tom. A good question. California is a big part of our operations. And again, we had such a strong first half of the year. I do believe a natural reaction to what's happening when you combine rates and sticker shock is an appropriate way to put it. Certainly, the lack of the international buyer has had an impact. They're less prevalent now. They're not completely out of the market, but they are significantly reduced from what we were seeing a year ago at this time.

But we're still -- I mean, you look at the sales pace in California, 3.1, I mean, that's still very solid. And going -- as far as going into first quarter, you're not going to change a lot in product on the first quarter. Where we have a huge advantage, Stephen, is, is going forward into the rest -- the later part of '19 really the 2020 by us controlling these 12,000 lots in Southern California. That -- those programs, whether it's Skyline, Altis as Active Adult, PHR is obviously going to be move-up, we have several other communities that we're working on in San Diego, they all provide affordable product alternatives. And we have a land base is that is -- gives us a significant advantage. California is housing constrained. Yes, I mean, house prices have risen over the last few years due to lower interest rates, but we're pretty blessed with a strong balance sheet, but most importantly, land that we own that we can design and build affordable product going forward. But it's not going to magically happen in the first quarter, I'll tell you that. I mean, it's just timing process.

Just to add to do that, just so that everyone knows, a 100% of our margins -- our absorption [degradation] came from our entry-level product. We absorb better in our move-up, luxury and Active Adult. But it's primarily related to product availability within that market segment, and that's why Tom's talking about going to more of attach product to bring that price point back down. We just absorbed really well in our entry-level product in all of our markets in 2017.

Okay. Yes, that makes a lot of sense. I got you. And then the [can rate] jumped up. I was wanting to understand how much of that is the inability to qualify versus people getting cold feet, if you will. And then when you look at your backlog, gross margin versus what you produced in the third quarter, what type of delta are you seeing there?

Yes, on the [can rate], Stephen, I'd say, the most significant factor there is really the inability for some of our contingent buyers to convert the sale of their home in a timely manner. And so obviously, as we're getting closer to year-end and wanting to make that year-end goal and plan, we're cleaning that up. But there has been an increase in resale inventory, and I think that market has slowed as well. So a big part of our success going forward is going to be how we manage that contingent buyer.

Okay.

And our backlog margins, Stephen, for the fourth quarter are actually outside of our range that we just provided, but we still have some units to sell, and we just assume with additional incentives, that margin is going to come in a little bit.

Our next question comes from Jack Micenko with SIG.

First, a high-level question. I hear you're changing some of the product targeting, and it's going to take some time, maybe 2019, 2020. Thinking about the 5.5 years of inventory, what's happened in the last several quarters changed your view on whether 5.5 is the right number, 5.4, something along those lines?

Well, I mean, that 5.5 is kind of interesting number because it's heavily skewed by the California 12,000-plus lots that we own. So you really got to break it down, Jack, to each individual area. In some of our divisions, we are actually very undersupplied in the 1- to 2-year range. And generally speaking, if you take out the Pardee California long-dated assets, they're really around that 2 to 3 level. So we'll continue to manage that level. So I don't -- you really need to dissect that 5.5. That's obviously, we do the math work for you, but you really got to break it down by division and by company. We have a slide in the deck that breaks it down by...

Slide 30.

Slide 30.

But fundamentally, this recent pause has not changed our shift in what we feel is the right level of inventory that we carry forward.

Yes, perfect. That's what I was getting at. And then, Mike, I guess more specifically on the G&A and 606, I was under the impression that it was a beginning of the year event, but we have the G&A numbers ticking up in the back half. Is there something around 606 that is heading more in the back half? And then can you give us maybe what the dollar amount would be so we can figure out what maybe the big give-up on margin was versus the G&A side?

Yes, I mean, when you look at ASC 606, the impact of that is continuing impact as we open new communities. And so we're -- this quarter, we're, what, 50 basis points higher year-over-year. And that was primarily related to the 13 California communities that are coming out. As I mentioned 13 of the 19 California communities are coming from the long-term assets and more specifically 5 of those from Pacific Highlands Ranch. Those are highly amenitized models where you put a lot of dollars in it upfront. So that's a pretty big impact. Overall, when you look at I think year-to-date, it's about been an 80 basis points difference. And that math is in the 10-Q if you want to see it. We do have that what the numbers would look like without ASC 606, a reconciliation.

Jack, wanted to add one point on your land question. I mean -- and we pointed this out in the earnings call script that we went over. We're in great shape for delivering through 2019 through 2020. Our focus is going to be on generate positive cash flow to allow us to have the capital leverage to do what is appropriate to increase and protect shareholder value over the long term. So we're very -- we've been to this party before, so to speak, and we're very confident on our balance sheet going forward, and our position for the next couple of years is in excellent shape.

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

First question on the ASPs for the third quarter. It came in stronger than expected, I think stronger than you kind of indicated. Just want to understand the driver of that. Is there some mix effect that drove that in terms of higher price point deliveries? Or is that still just reflecting the stronger pricing environment early this year?

It's a little bit of both, Nishu. It's a little bit of both. But mix did have some impact on it as well. And you could see our backlog margins continue to grow as well -- ASPs, yes, sorry.

Got it, got it, okay. And you mentioned the long-term California assets as they -- the ones you're opening now, as they deliver in the second half of '19 that they -- that those communities carry higher than company average gross margins. So just want to understand, is that -- how do those new communities' gross margins compare against what's likely to close out? So does that offset that effect? And then obviously, there's pricing pressures here. So just want to understand kind of the weight of that gross margin lift relative to other factors that are going on? How much of that's going to carry through as we get to second half of '19?

Yes, I mean, I think, we're not really giving guidance on our overall margins for '19 yet, but you should see margins probably lower in the first half of the year and then higher in the back half of the year because of the expected deliveries coming from these newer communities. We mentioned, historically, the long-term California assets generate margins well in excess of the company average and they're typically at higher ASPs. So the weighting of that has a pretty good impact on our overall gross margins. Right now, we have currently about, what, 17 communities, I think, open from the long-term California assets. We're adding 13 to that. They're -- clearly, during this period, there will also be some that close out, but I think the sheer volume of communities coming from the long-term assets is going to be a greater percentage than it was this year. So it has some impact in a positive direction on margins.

Got it. So even weighting it overall against what's you're delivering under the long-term assets, you'll have more opening than closing. That will, obviously, be a kind of positive force for margins. But then what about as well, from our previous conversations I had understood that your lower price point long-term assets in California don't necessarily -- they have, obviously, great margins, but maybe not as high as some of the really high price point ones like PHR. So is that kind of a countervailing effect as well?

A little bit. I mean, not too many of the long-term California assets have margins below the company average. I mean, most of the ones that we're opening up will have margins in excess of the company average.

And relative to -- Nishu, relative to our PHR offering, I mean, we have a lot of product coming to the market. This will be the highest number of active communities that we'll have at any one point in time, and it is by far in our best village of PHR. So we're really optimistic about those new offerings.

Our next question comes from the line of Mike Dahl with RBC Capital Markets.

I wanted to follow-up with the first question just around kind of the product discussion and then specifically relating to the long-term assets opening up in the 13 communities. And to the earlier comments around looking at the front end of communities, adjusting strategies on pricing, could you comment on whether you've looked at or made any adjustments to the 13 new community openings from the long-term assets? And then also as related to that just remind us what the average price point is in those? I know it's in the Qs, I just don't recall offhand.

Yes, that -- Mike, this is Tom. The price points really vary by project, and so you've got a real dichotomy between PHR at the upper end with all our new product offerings being over $1 million and then out into our Beaumont offerings with our Active Adult introductions starting in the mid-300s. So there's a pretty big band there. And then relative to the offerings overall, again, we're very optimistic. But we really haven't changed strategies. We are wanting to make sure that we're coming to market with attractive pricing to gain momentum at these new projects. It's critical to get off to a great start, but we really aren't implementing any different strategies at the opening of all our new product offerings.

I will add to that, Mike, Skyline, I noted in the earnings call that we're opening here in November, that's been in the planning stages for some time, and that does afford product types in a more affordable price range to the, call it, the L.A. County buyer. So we're very excited about that. That was all planning that's gone on for the last 6 to 12 months prior to the opening. Then you look forward and you look forward to some of the other long-term assets that we have both in the Inland Empire and San Diego. We have the ability to further plan those for affordable price points. We've done all kinds of planning with our Banning asset next door to Beaumont. You get down to Otay and Meadowood, all the projects that are in the Q. That's why we have the distinct advantage of designing and building product at a more affordable price point for years -- for many years to come in a very supply constrained market. So we definitely have a huge advantage here going into those markets for the next several years.

Mike, one more thing to add, just to give you some perspective. The average sales price of our year-to-date deliveries so far in the long-term California assets were $778,000. Last year, that was $569,000. So -- and -- I would expect as we move forward, that number is going to grow probably little bit, the weighting of PHR.

Got it, okay. My second question then relates to some of the comments around kind of the incentives picking up towards the end of the quarter and then thinking about October and understanding the month's not over yet. But when you think about whether the incentives and just your overall product strategy for that matter, the demand responses as having the intended effect, could you give us color on just how the first few weeks of October are trending? If I look at the last 2 years, you've got a lot -- you had a lot going on both years: '16, you were pretty flat October to September in terms of absorption rates; last year, you obviously had a really strong September that you were comping against. So it was a little different. Just any directional commentary you can give us on October would be great.

Yes, I would say, it's still a grind with higher interest rates and the consumer adjusting to those rates with the pricing that's going on that has increased for years, I'd say, going into the -- I mean, not only is it seasonal. You obviously have a seasonal period that you're heading into right now, but it's a grind. I mean, there's no more order takers, and we're going to have to slightly scratch for everything that earn out there. So the sales force and all our teams are going to earn their money going forward.

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

Doug, you mentioned M&A looking at deals in Texas and the Southeast, I think, you referred to. When you talked earlier this year you were talking about more private deals coming over the transom but at pricing that was not attractive. Has that changed much in the last 6 to 9 months? Has the change in business begun to change the perspective of privates who you might be interested in, in those markets?

In select cases, yes. Yes, I would say that there's a slow realization that we're -- in market adjustment periods. So we've been very active in looking, as I mentioned, over the past year. And everybody -- I mean, we were like over 15 or 20 because we've stayed very disciplined. But I would say, there's definitely some adjustments going on going forward. And as I mentioned, this is when companies with strong balance sheets can make a big adjustment. And again, you're kind of crawling before you walk, walk before you run. I don't -- but we're definitely going to take advantage of it because at TRI Pointe company, I believe, Texas has a huge area of growth for us. It's got a strong economy, affordable housing. And as you know, you look at the map in the U.S., we're not in the Southeast. We're very excited about bringing Gray Shell on board and spending time building our brand there at more affordable price points. So definitely some cracks in the armor for some of the small privates.

Okay. And then going back to Steve's comment or question about the international buyer, I'm trying to understand, is this -- is that a euphemism for offshore buyers who are effectively investors/speculators in homes? Or is this an issue maybe connected to H1B visas something like that? I just want to get sort of some clarification as to specifically what weakness in, say, California, Washington tech quarters you're seeing from that customer?

Yes, Carl, this is Tom. We really haven't seen or heard in our sales offices any implications of the H1B visas. So it's not that. It's more of the former as you described, and it's really that international investor-oriented buyer that we've seen a reduction in.

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

You provided some great guidance with regards to a number of new communities opening in 2019. Can you summarize that again for us, quantify in total for the company and discuss a little bit of the cadence to help us model?

Are you referring to the fourth quarter, Alex. I'm sorry, you cut out a little bit on your question. I didn't...

Sorry, I'm referring to the 2019 in the cadence...

Yes, we really haven't given any guidance yet on 2019 on community count growth. So we haven't provided anything yet. We just provided what our fourth quarter community counts were. But I would expect that 2019 is going to be relatively 4% to 5% community count growth.

And then as it relates to options and land premiums, can you talk about how those have changed in light of some of the incentives increasing?

Yes, I mean, options as a percentage of our overall sales price for the current quarter were 11.2%. And that compared to 9.9% in 2017 for the same quarter.

Again, that's a strategy that we're hoping to capitalize on and differentiate ourselves through customization and personalization for our consumer, and we see that as a highly profitable component of our business and something that really enhances the customer experience and their satisfaction. So we do have an intentional focus on that going forward.

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

Excuse my voice, I'm fighting the annual fall cold. The first question I had, what are the orders month to date for October? And how does that compare to last year?

Well, as Doug just mentioned, orders for October currently are tracking at about 2.0.

And how does that compare to last year?

I think if you look at the slide deck, last year would have been much higher, 2.95. 2016 was 2.83.

And then the...

15 of our 19 new communities are going to be opening in November. So we should see a pretty good bounce back in November.

And then the second question I had, just thinking about this expansion into the Carolinas, can you talk about the cadence of that and what type of impact should we expect to gross margin because it seems like at face value this might be just another drag on gross margin right at the time you don't need one?

No, there's no drag on gross margin. I mean, it's a slow march over the next 2 to 5 years. So it's -- I mean, it's minimal. You just -- an organic startup, you really got -- so you've got overhead cost you're starting with, and you're slowly building into a team and a pipeline.

And then the last question I had, in terms of the incentives, it sounds like most of what you all are doing now is going to affect COGS line. What about outside brokers? You all having to pay more to them. And if so would that jump on the SG&A line?

Yes, our outside broker sales have remained constant. But again, in a more challenging environment, that is an area where you could expect to see some increased costs.

Our next question comes from the line of Alvaro Lacayo with Gabelli & Company.

Just wanted to go back to the comments around identifying the pricing threshold in Seattle and the pricing adjustments you made to drive the sequential improvement. Can you just maybe talk to us about the different things you're looking at in terms of how you identify those thresholds? Is it just a question of absorption or are there other elements? And then when you apply that to Southern California, maybe talk a little bit about what the thresholds are there, how close you are to them and what that might mean going forward in terms of potential incentives and pricing?

Yes, this is Doug. In Seattle, in particular, it's really -- it's a case-by-case, project-by-project analysis in our marketing strategies, which can include incentives and other marketing strategies to sell homes. It's all about meeting a pace. I mean, we're focused on pace here, and we play with the dials of incentives. We play with marketing game plans throughout, sales game plans. I mean, we've been very successful with the financial, and we've had some great success with buy downs and [floor] commitments that we bought. So you play with all those levers to get to pace.

And typically, Alvaro, I'd say, we're targeting that 3 a month pace. In some instances, we might be up to 4 a month. So we're looking in actively and real-time analyzing what our absorption paces are, and we're going to implement pricing strategies to maintain those paces.

And then just as you look at your footprint on the back of rising rates and you think about affordability, I mean, what kind of momentum from a order pace perspective are you seeing in states where average selling price has been more stretched versus not? And is there a widespread because I also look at the improvement you guys had in Texas, and just wanted to think about on the back of the fact that rates will probably continue to rise and it's the expectation on order pace be disparate by segment -- by geographic segment or if it's just more of an overall footprint kind of situation?

Well, when you look at the absorption pace throughout the country, I mean, it varies by geography. You've definitely had higher price appreciation and the consumer had -- has adjusted to a slower motivation in Northern California, Seattle, but many of the other submarkets have continued to move along at a good pace. And again, we're always targeting about 3 a month other than our Texas operation, which is really around that target of 1.5, 2 a month. So that's our target going into '19, and we'll continue to play with the dials to get that pace going forward.

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

I just want to follow-up on some of those Texas comments with respect to Trendmaker. I recently saw some of your product up in Bridgeland, and it's very interesting. Looks like you're continuing to make strides in Texas, both in orders, absorption pace. Can you talk a little bit about what you're seeing? Are you seeing more pricing power? I know there's been a lot of talk about incentives. Is that a market where maybe you have to give a little bit incentives? And just in general in the market as you move kind of away from downtown into some of those areas, are you still seeing a lot demand kind of around that the outside of Houston?

When you talk about Houston, one of our strategies has been, Scott, to diversify into some more affordable price points focusing on lot sizes in that 50- to 60-foot category, and you'll see our ASP on average come down over the next couple of years. Our incentives in Houston actually came down about 3 bps from '17 to '18 -- 30, I'm sorry, 30 bps. But that's still in the 8% to 8.5% range in Houston. And you're seeing a very competitive marketplace at that more move-up product. That's for sure.

If you're just looking at the comp improvement year-over-year, it's really -- I mean, our absorption really met our expectations. I mean, the comp is pretty difficult because of the hurricane last year so -- and just a tougher market in Houston. So it's not like we're blowing absorption relative to here in Houston.

Understood. And then just on some of your prepared comments on difficulties finding finished lots and I know you're talking about a long cycle from a macro fundamentals perspective. When you look at your land acquisition right now in some of those core areas, are you finding it more difficult to underwrite deals? And just kind of on a segue to that in North Carolina as you think about ramping up your land there, how's the environment there? Are you using land deals becoming -- are they difficult or you think you're able to flip the numbers?

Well, we're just getting going in the Carolina market. So I'll tell you the land acquisition strategy and changing market conditions actually gets more challenging for the land acquisition teams because we remain very disciplined in our underwriting and our standards to meet returns for the company and its shareholders. So having been through this a number of years, it always kind of has the land sellers lagging the adjustments that are going on in the business and that typically takes 6 to 12 months for that adjustment, and that's where disciplined, experienced management teams have some pretty strong success. I used the phrase hanging around the hoop and we'll continue to be very disciplined, whether it's Carolinas, Phoenix, Texas, throughout the nation. I mean, there's adjustments going on in the business and you got to be disciplined in how you underwrite new land deals.

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

I was wondering if you guys have found any one type of incentive would be working better than another industry environment? In other words, is it better to raise broker commissions or offer rate buy downs or closing costs or what's been working for you guys, if anything?

Yes, it's a good question. It definitely is the financing incentive, whether it's a rate buy-down or we purchase forward commitments and offering those types of programs have been a strong driver for us in many of our markets.

Got it. And then as far as the share buyback activity and as you look forward to this, I guess, software environment, is that something we should expect going forward? Or was that more of a onetime thing you think?

Well, I mean we have $200 million authorization out there, and we've spend about $139 million of that. I think we're going to continue to balance the use of our capital between growth capital and return the capital to our shareholders as well as potentially pay down debt. So we'll be opportunistic from that perspective.

We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Bauer for any closing remarks.

Well, thanks, everyone, for joining us on today's call. And I want to wish everybody a great preholiday season wish, and we look forward to talking to you after the New Year. So thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.