Tri Pointe Homes Inc (Delaware) (TPH) 2018 Q4 法說會逐字稿

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

I would now like to turn the conference over to your host, Chris Martin, Investor Relations. Thank you, 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 fourth quarter and full year of 2018. Documents detailing these results, including a slide deck under the Presentation 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 in 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'll now turn the call over to Doug.

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

2018 was an excellent year for TRI Pointe Group as the company achieved several milestones and posted record results in a number of key financial metrics. We eclipsed the $3 billion mark in home sales revenue for the first time in our company's 10-year history, by delivering a record 5,071 homes at an average sales price of $640,000. We generated homebuilding gross margin of 21.8%, representing a 130-basis-point improvement from the previous year. These improvements to both revenue and margins, coupled with the benefit of a lower tax rate, resulted in diluted earnings per share of $1.81 for the year, a 50% increase over 2017.

During 2018, we continued to pursue our long-term growth objectives, with our organic start in the Carolinas and the acquisition of Dallas-Fort Worth-based builder in December. While our full year results underscore the strength of our operations and the appeal of our home offerings, the market as a whole experienced a slowdown in the second half of 2018, as years of cumulative home price appreciation, combined with a sharp rise in mortgage rates created a more challenging demand environment for our industry.

The weaker order trends we experienced in the third quarter carried into the fourth quarter as potential buyers continued to exercise caution with their home purchase decision, which resulted in a 15% decrease in our backlog units at year-end 2018. We believe slowdowns such as this are normal occurrences over the course of a housing cycle and do not feel we are headed for a prolonged downturn, given the strong underlying fundamentals of our industry and our economy. Beginning in January, we've seen a sequential increase in demand and a weekly improvement in orders through February. With that said, we realize that the housing market has changed, and we've taken steps to adjust to this new reality, while maintaining our focus on what's best for our shareholders and our company over the long term.

We continue to make a concerted effort to reduce costs -- further reduce our input costs and overhead expenses in an effort to keep our cost structure in line with today's demand environment. This meant renegotiating terms with land sellers, vendors, trade partners and suppliers and tasking our department heads to lower costs and, in some cases, reducing headcount. While these were difficult actions to take, they were necessary in light of the current demand environment.

Additionally, we continue to value-engineer our homes in an effort to lower the total cost of construction. Our land underwriting criteria continues to incorporating more conservative and disciplined approach. In some cases, prospective land deals may be land bank and/or ventured with our builder partners to reduce capital and improve our risk-adjusted returns. As we continue to focus on our operational excellence, along with disciplined land and land development activity, we expect to generate significant cash flow from operations, which we will use to reduce our leverage, buy back shares or make opportunistic land purchases or M&A activity in the future.

As part of our operational excellence program, we've implemented our 12-point sales and marketing performance program to achieve our demand and pricing objectives. In today's challenging new home market, we are laser-focused on being more effective at lead conversion by creating an emotional connection with our entry level, move-up, luxury and active adult buyers.

We continue to focus on building our premium lifestyle brand in each of our markets. This type of reputation takes years to cultivate and it starts with building quality homes, with an emphasis on design and innovation in locations where people want to live while providing an excellent customer experience. We've differentiated our product at every segment of the market, which reinforces our status among homebuyers as a premium lifestyle builder. Mike will share some of these successes in his remarks.

In short, the recent market softness has prompted us to reexamine our business in a number of ways; land development, direct and indirect building costs, sales and marketing and land acquisition strategies are all getting increased scrutiny, which is a healthy exercise in any market environment. We continue to be positive about the long-term outlook for our industry and are in a great position to capitalize on its future. With the strength of our balance sheet, our differentiated premium brand focus and our seasoned leadership team, we are confident of our continued growth and success.

With that, I like to turn it over to Mike for more details on the numbers.

Thanks, Doug. Good morning, and welcome, everyone, to today's call. I'm going to highlight some of our results and key financial metrics for the fourth quarter and full year ending December 31, 2018, and then finish my remarks with our expectations and outlook for the first quarter and full year 2019. At times, I'll be referring to certain information from our slide deck posted on our website that Chris mentioned earlier.

Slide 6 of the earnings call slide deck provides some of the financial and operational highlights from our fourth quarter. Home sales revenue was $1.1 billion, on 1,727 homes delivered at an average sales price of $649,000. Our homebuilding gross margin percentage for the quarter was 21.9% and our SG&A expense as a percentage of home sales revenue was 9.1%. Net income came in at $99 million or $0.70 per diluted share. Our fourth quarter net income included a $17.5 million charge for legal settlement related to litigation that we've previously disclosed in our SEC filings, involving a lawsuit filed by Scripps Health in connection with the Pardee Homes land sale that occurred in 1987. In addition, we incurred transaction expenses related to the acquisition of a Dallas-Fort Worth-based builder that closed in December. Excluding these expenses, adjusted net income was $113 million or $0.79 per diluted share.

Slide 7 of the earnings call slide deck provides some of the financial and operational highlights for the full year 2018. Home sales revenue was $3.2 billion on 5,071 homes delivered at an average sales price of $640,000. Our homebuilding gross margin percentage for the year was 21.8% and our SG&A expense as a percentage of home sales revenue was 10.6%. Net income came in at $270 million or $1.81 per diluted share. Excluding the legal settlement and transaction expenses I previously mentioned, adjusted net income was $284 million or $1.90 per diluted share.

For the quarter, net new home orders were down 24% on a year-over-year basis on a 2% increase in average selling communities. Our overall absorption rate for the fourth quarter was 2.1 homes per community per month, which was below last year's fourth quarter pace of 2.8. For the full year, our absorption rate was 3.0 homes per community per month. As for our active selling communities, during the fourth quarter, we opened 18 new communities, 14 in California and 1 each in Arizona, Colorado, Texas and Washington. Of the 14 new committees opened in California during the quarter, 12 were from our long-term California assets. Since opening these -- those communities in the middle of the fourth quarter, we sold 36 homes at sales prices from $300,000 at Altis or 700 unit active adult community located in Beaumont, 61 homes at sales prices from $500,000 at Skyline or 1,200 unit master plan in Santa Clarita and 114 homes at sales prices from $1.1 million 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 deliver margins well above the company average. In addition to our 18 new communities, we added 14 active selling communities in Dallas-Fort Worth, with our acquisition at the end of December. The closeout of 11 communities during the quarter resulted in an ending active selling community count of 146.

Our active selling communities at the end of the year is shown by state on Slide 8. We ended the fourth quarter with 1,335 homes in backlog, which was a 15% decrease compared to the same quarter last year. The average sales price and backlog increased 2% to $672,000 and the total dollar value of our backlog decreased 13% year-over-year to $897 million. During the fourth quarter, we converted 82% of our third quarter-ending backlog, delivering 1,727 homes, which was a 2% decrease compared to the same quarter last year. Approximately 46% of our deliveries for the quarter came from California, including 18% from our long-term California assets. Our average sales price of homes delivered was $649,000, up 2% from the same quarter last year. This resulted in a home sales revenue for the fourth quarter of $1.1 billion, which was consistent with the same quarter last year.

Our homebuilding gross margin percentage for the fourth quarter was 21.9%, an increase of 20 basis points compared to the same quarter last year. Our homebuilding gross margin increased in 10 of our 12 operating divisions with deliveries for the quarter on a year-over-year basis.

For the fourth quarter, SG&A expense as a percentage of home sales revenue was 9.1%, an increase of 190 basis points compared to 7.2% for the same period in 2017, primarily due to the impacts of ASC 606, higher selling costs and costs associated with expansion into the Carolinas, Sacramento and Dallas-Fort Worth market.

During the fourth quarter, we invested $41 million in land acquisition and $79 million in land development. For the full year, we invested an aggregate total of $883 million in land acquisition and land development. At quarter end, we owned or controlled approximately 27,740 lots. Based on our full year 2018 deliveries, the number of years of lots owned or controlled is 5.5. A detailed breakdown of our lots owned will be reflected in our annual report on Form 10-K, which will be filed later this week. In addition, there is a summary of lots owned or controlled by state on Page 31 in the slide deck.

Turning now to our balance sheet. At year-end, we had approximately $3.2 billion of real estate inventory. Our total outstanding debt was $1.4 billion, resulting in a ratio of debt to capital of 40.7% and a ratio of net debt to net capital of 35.5%. For the full year of 2018, we generated $310 million in cash flow from operations and ended the quarter with $846 million of liquidity, consisting of $278 million of cash on hand and $568 million available under our unsecured revolving credit facility.

With respect to our stock repurchase program, for the quarter, we repurchased 541,000 shares for an aggregate dollar amount of $6.7 million. For the full year, the company repurchased approximately 10 million shares for a total aggregate dollar amount of $146 million. Last week, on February 21, we replaced our previously stock repurchase program with a new $100 million authorization that will expire in March 2020.

Now I'd like to summarize our outlook for the first quarter and full year 2019. For the first quarter 2019, the company expects to open 9 new communities and close out of 7 communities, resulting in 148 active selling communities as of March 31, 2019. In addition, the company anticipates delivering 55% to 60% of its 1,335 homes in backlog as of December 31, 2018, at an average sales price of $600,000. The company expects its homebuilding gross margin percentage to be approximately 16% for the first quarter. The decrease in homebuilding gross margin percentage compared to the previous quarters is a result of the lower mix of deliveries from California, and more specifically, a lower mix from our long-term California asset, higher incentives on inventory homes at year-end and purchase accounting adjustments related to the acquisition of the Dallas-Fort Worth builder. Due to the low number of homes expected to close in the first quarter, the company anticipates its SG&A expense as a percentage of home sales revenue will be in a range of 15% to 16%. Lastly, the company expects its effective tax rate to be in a range of 25% to 26%.

For the full year, assuming similar market conditions to what the company is currently experiencing, we anticipate delivering between 4,600 and 5,000 homes at an average sales price of $610,000 to $620,000. In addition, the company expects its homebuilding gross margin to be in a range of 19% to 20% for the full year with the higher mix of deliveries from our California assets in the third and the fourth quarter of 2019. Finally, the company expects our full year SG&A expense as a percentage of home sales revenue will be in a range of 11% to 12%. The company expects its effective tax rate for the full year to be in a range of 25% to 26%.

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

Thanks, Mike. In conclusion, I'm very proud of our company's performance in 2018. We set records in a number of key operating metrics. At year-end, our book value per share increased to over 17% year-over-year to $14.52 per share, which is a testament to the earnings growth generated from our homebuilding operations. I'm also extremely proud of how far the company has come over the last 10 years, from a small start-up in 2009 to a national builder with annual revenues in excess of $3 billion.

While there is some uncertainty regarding the near-term outlook for our industry, we continue to have confidence in the long-term trajectory of our company. We believe that we can double our revenues over the next 10 years, while continuing to maintain strong operating margins. Our goal is to increase market share in our existing divisions and manage smart growth in our early-stage divisions, which include Sacramento, Austin, Dallas-Fort Worth and the Carolinas. Lastly, we will utilize our strong financial position to expand our geographic presence through organic expansion and/or acquisitions. Our leadership team has been through several housing cycles and knows how to compete in difficult market environments, as well as identify opportunities when they arise. This experience, coupled with our strong balance sheet and strategic focus, gives me great confidence in the future of TRI Pointe Group.

Finally, I'd like to thank our team members for their contributions to another great year. While the road ahead may be less certain than the years past, I know we have the right people in place to successfully achieve our long-term goal.

That concludes our prepared remarks. And now we like to open it up for questions. Thank you.

(Operator Instructions) Our first question is from Stephen East with Wells Fargo.

Doug, maybe you can talk a little bit about what the trends you all were seeing from a demand perspective as you moved through the fourth quarter and maybe a little bit more detail on what you all were seeing in January and February? And I guess, specifically there, I'm wondering also about incentives. Have you been able to back off incentives as we've entered the new year versus what was going on in the fourth quarter?

Stephen, I'll let Mike talk about the incentive percentage. But overall, as we indicated, I mean in the second half of 2018, fourth quarter was a combination of interest rate periods and some affordability concerns definitely slowed the absorption pace. I think you saw that in our numbers, so it's pretty self-explanatory and every builders had the same results. We were going through changing market conditions, which is for 30 years in the business, is very normal, as I indicated. Obviously, the fed took their foot off the pedal a little bit on interest rates. I guess, we'll probably all say that has some contributing factor to some of the success in the first 7 weeks of this year. Every week seems to be getting stronger. We've had some very strong openings in Phoenix, as we mentioned, everybody likes to talk about our California portfolio, between Altis at an average -- from sales prices of $300,000, which is our active adult, all the way up to $1.1 million to $2 million down in Pacific Highlands Ranch. We're selling homes at a very good pace. Up at Skyline Ranch, we have the ability and the luxury because of our land basis to produce more affordable price point, and that's been partly contributing to our success at the Skyline, prices of $500,000. So overall, I mean, one of the reasons why we gave guidance for the year compared to both our competitors is what we feel right now is, okay, here it's not going to be great, it's going to be a grind, but we're pretty excited about it. We had a great team, we had a great brand that continues to differentiate itself. So that's why we gave the guidance. And if the market turns and makes a U-turn, we'll tell you all about that in the next quarter or 2. But right now, we're feeling pretty positive, to be honest with you, I'm not going to get too above my skis though.

Fair enough, fair enough. And on the incentives?

Yes, Stephen, it's Mike. On the incentives, so for the units that we delivered in the fourth quarter, our incentives ran about 4.6% of our home sales revenue, which is up about 130 basis points from the third quarter. And then currently sitting in backlog are incentives about 3.5%. And we've seen that back off slightly as we moved into January and February.

Okay, that's exactly what I was looking for. And then as you look at your gross margin, your fourth quarter, what drove that big dip in the fourth quarter? And it sounds like both from what you did in the fourth quarter and what you just now talked about, a fair amount of conservatism in your guidance for this year, but I didn't know if there was anything in particular that was going to weigh on your gross margins and thus the guidance of '19 to '20?

Yes, I mean, it's a good question. Maybe instead of saying conservative, I said may be our guidance is a little cautious in that perspective since we're 7 weeks into this year so far. But yes, the first quarter is obviously very tough. What drove that is really the pull forward of lot of deliveries in California in the fourth quarter. Typically, we average anywhere from 38% to 42% of our deliveries in California. And for the fourth quarter, we delivered around 46%, so a pull forward. A lot of those high margin, high ASP projects that we sold in the first half of the year when orders were still strong. Of course, finally, California was difficult on an order perspective on the back half of the year. So our first half of the year is a tough comp for us because we closed very few units in California and even more specifically, those long-term California assets. Having said that, we've had good success, as we mentioned on the -- on our call, with some of the long-term California assets, those 12 mono complexes that we opened right at the end of last year. So that should help our margins going forward. I mean, just to give you some perspective, even though our margins are 16% in the first quarter, we're currently sitting with almost 1,700 units in backlog. This is at the end of January and our margins are 21.3%. So we have pretty good conviction in where our margin are going in the back half of the year to offset kind of that tough start in the first quarter.

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

So I was hoping to dig in a little bit to just get an update on the margin profile of some of those long-dated California assets. I know in the past, you've kind of highlighted that they're obviously well above the company average, I think roughly 30% is the number you gave about a year ago, maybe a little bit less than that. I'm just curious with the market conditions, as you described in the softer sales environment, when you look at maybe the 1,700 homes in backlog of the ones that are in the long-dated communities, is that 30% still a good number to think about? Or have you seen outsized pressure there, given California is a little bit softer today?

Actually -- Alan, this is Mike. I mean, I think the numbers may be slightly higher than that, probably around 35% and a lot of that based on the strength of Pacific Highlands Ranch, we clearly had some successful openings there and a high amount of deliveries, 110 units coming from ASPs that are between $1 million and $2 million, and we have a very low basis there.

Got it. So I guess, first follow-up on that, Mike, if you can maybe just quantify what the other communities outside of Highlands look like? But then, just a bigger picture question then, several of your competitors have made this line in the sand comment that, we're going to deliver these many homes in 2019 regardless of market conditions and, obviously, that could have negative implications for margins if demand remains choppy. But it would seem like with your land pipeline, if you wanted to, you could put a little bit harder on those projects and get more volume and not really have that big of an impact on margin, given they're well above average. So can you just talk a little bit about the thought process there, whether that's coming to -- into your strategy at all?

Yes. And this is Tom. We've certainly had a lot of discussion about that, and we do have the benefit of the long-dated assets and the margins that we have there. So we're constantly trying to optimize our performance and manage that price basically. So we continually look at that, and I think we've got the right recipe until right now, and we'll continue to monitor as we go forward.

But safe to say, there hasn't been any major changes to that strategy year-to-date, right?

No, no changes.

Yes, I'd add -- I mean, like Tom said, we look at each project as we roll up the business plan. Obviously, the long-dated assets in California have above-average margin profile that Tom -- Mike just mentioned, and we obviously are managing to a profit and pace scenario, whereas, you may have a project that you bought 2 years ago and the margin profile is less, and you're going to want to move that a little quicker. So they all have different case studies. I mean, we literally go to each project and manage them that way. And obviously, the California assets, I know a lot of people get concerned about California, but we're very blessed to have very strong assets in California with a very strong margin profile at least here in Southern California. And Northern California was a very tough second half of the year, and I anticipate that Northern California will be -- there's going to be a tough year going into this year. But in Southern California, what is it Mike, we own and control over 15,000 lots. We've a pretty good head start than everybody.

Our next question is from Stephen Kim with Evercore.

This is actually Chris on for Steve. So looking at your land strategy, a lot of your peers are adopting this more asset-light approach by increasing the proportion of option lot. Is this something that you would consider doing on a go-forward basis?

Yes. We've always looked at how to maximize our risk-adjusted returns. As I mentioned in the remarks, we've employed a fair amount of land banking, especially in some of the higher priced land acquisition targets that we have encountered, probably more in the West Coast and a little bit on the East Coast so that continues to be a strategy. We also have very good relationships with several of our builder partners, and we came up on that to reduce our capital commitment. And then third, I mean, we tie up land, and we put it under option, and we don't close until the entitlements are in place so that's a strategy we continue to employ throughout every market.

Got it. And then on...

Hey guys, actually it's Steve Kim, I wanted to jump in, if I could, with a question on incentive. In general, when Chris and Trey and I have gone on our market visits, we've heard that in this period of recent rate volatility, customers are really kind of favoring these quick move-in homes in other words spec homes, more than they historically might have. But our sense that a lot of the builders haven't really adjusted incentive strategies to reflect this and so may actually be discounting homes more than they needed to. So I guess I was wondering, like, have you -- do you agree that in today's -- today's buyer is maybe a little bit more open to a spec-driven product assortment and that, therefore, there might be an opportunity for you and others in the industry to actually hold back incentives until later in the build process for the homes that you have that are either through cancellations or whatever close to -- something you would typically have incentivized heavily?

Stephen, this is Doug, and I'll let Tom chime in here. But typically where we have close to finish inventory spec designer homes, those typically end up having a higher incentive percentage than our dirt starts and that's typically the way we see our pricing paradigm going forward. Tom, I don't know if you have anything to add to that.

Yes. Stephen, I would agree with you that there is an interest in a completed spec home right now. Obviously, interest rate volatility had a lot to do with that. We've certainly taken advantage of it. But again, most of the incentive dollars we're spending are related to financing incentives. And then, obviously, a larger portion goes to options and upgrades. But in general, I agree with Doug that we're not incentivizing extra on a spec until it's closer to inventory.

Our next question comes from Jay McCanless with Wedbush.

So when I look at some of the markets you guys are in, especially, California and Seattle, you've seen pretty big increases in existing homes -- in competing existing homes for sale as well as price trends starting to slow. What are guys seeing on the ground right now, and I guess, with absorptions being up or being down thus far in February based on what's on the slides? It seems like you guys are still seeing a pretty fair amount of competitive pressure out there?

Yes. Jay, this is Tom. I think you're absolutely correct, in those markets, both California and Washington State, Seattle, Puget Sound in particular, we've seen an increase in resale inventory and certainly a softening in demand that put a lot of competition amongst us than the resale market and certainly leading to slower absorption for us overall. California markets have shown some pretty healthy improvement for the first couple of months of this year, comparatively the Q4. Up in Seattle, we've had the benefit of some increases, but it doesn't feel like it gotten that full bore demand profile back yet.

And then with the Dallas acquisition work, did you all generate any quarter spend during 4Q, then maybe with the orders which all disclosed in the slides, can you tell us how many of those came from that acquisition in the first couple of months of this year?

On the first couple of -- well, Jay, there was just a handful of orders. We closed right in mid-December so there is only a handful of orders related to last year that were in the orders number. There was roughly 130 units in the backlog number though that we came into this year with. And I don't have the Dallas off hand for the first 7 weeks, but I can get back to you on that.

Okay, that'd be great. And then just the other question around...

I believe it's around 40, 41 orders something like that out of working communities.

That's correct.

Great. And then just the increase in the cancellation rate, was that strictly just wholly on the buyer’s part? Or did you guys cancel some of the orders out in the part of Dallas?

Yes, definitely. I mean, increasing contingencies and buyers having a tougher time moving their homes in the fourth quarter was -- and then the fact that they had some interest rate concerns as well.

Did you say Dallas, Jay, at the end as well?

Yes. I just -- I didn't know if that was part -- some of that you guys decided you cancel out or it was just like Doug said is contingency?

There was heavy can rate in Dallas at the beginning in January for us, but the can rate was relatively high in the fourth quarter, a lot of that was related to contingent sales where people just were not able to sell their homes to move into ours. So our cancellation rate just, say so far this year is 15%, which is pretty consistent with what historical averages normally are.

Our next question comes from Nishu Sood with Deutsche Bank.

This is Marius in for Nishu. My first question is about the buyers in California. Have the fires impacted your development or community opening schedule in any way?

I didn't quite understand. Did you say fire?

Yes, fire, has it impacted development?

No. I mean, at the end of last year, there was a concern up in Northern California, getting meter set with PG&E, but we fought through it. But nothing continued into this year. Our biggest issue now is, again, a lot of snow and a lot of rain.

Just for clarification, none of our developments are near or in the fire area, specifically.

All right. Thank you. And then my second question, how much community count growth do you expect from Dunhill for the full year? Can you provide that?

It should be pretty flat. Did you talk about the Dallas-based builder we bought?

Yes.

Yes. It should be pretty flat, it'd be about 14 communities for the year.

Our next question comes from Jack Micenko with SIG.

Looking at the ASP trend outlook for full year '19, how much of that is geography? I'm guessing most of it. And then how much of it is maybe product mix?

Yes, some of these geographies, Jack, because of Dallas, we're going to do roughly 300 units in Dallas at an ASP that is around 350 so that does pull the overall averages down. And then the rest of it is probably product mix.

So like would you say 50-50, maybe? Or, I mean, it's pretty hard to give us any sort of...

Dallas site has less impact. It's probably more product mix.

And then on the same sort of general theme, should we think about pace, obviously, demand-driven, but if demand is sort of constant with the change in ASP? I mean, is there going to be a meaningful change in pace from sort of how you are planning?

Well, I'd tell you, what we -- we planned on an absorption pace of 2.8 for the full year. Historically, we've at about 3.0 last year, we are at 3.3 so that seems to be at a high watermark. I think, if you look at the slide deck, it shows you historically what our full year absorption rates are. So we're planning currently 2.8. So if we see that the market is a little bit better than the spring selling season, we can outpace that and there'll be some impact on our deliveries at the back end of the year.

All right, good. And then just one last one from me. How much in the G&A line is, I think, about $700,000 in the fourth quarter from Dallas and then de novo lot in the Carolinas, is there a number or basis points which you could frame out and say, hey, this is tucked in the G&A number for '19 that wasn't really there in '18?

You also -- plus you've got the growth in some of our other -- like Austin, Sacramento, Dallas, the Carolinas, there's probably $10 million to $12 million baked in there of incremental G&A that has affected year-over-year stats.

Then wouldn't that should theoretically say it as we get through late '19 and '20 and they generate more...

Yes, but they start generating revenue obviously, yes. So we're a little conservative on our SG&A guidance from that perspective.

Our next question comes from Carl Reichardt with BTIG.

Doug, just I mean, the January absorption looks like they're down 39%-or-so, which is worse than Q4. And your February numbers are better, but obviously, you don't have many cans in those recent orders. So I'm just trying to understand sort of the confidence level here, has something happened in just the last few weeks relative to January, beyond just a normal seasonal bump that's given you the confidence that you see in running a 2.8 sort of for that year? And I'm just struggling just given January look like it was fairer, not weaker than Q4. So that's what I'm trying to figure out.

Well, I guess, I'm looking at it sequentially, November, December, we sold about 316 homes in January, we sold about 226 in December, we're up to 385. So all I can tell you, Carl, it's a battle out there and we feel pretty good, that's all...

Like we said in our call, it's been sequential improvement week-over-week and so that gives us more optimism, I guess, and last week being our best week so far. So I think, we're feeling better about where we're positioned, what our price points are and locations that we're in, and it seems like the consumers are starting to reengage.

Let me put it to you this way, Carl. If we're reporting at the end of January, I probably won't be giving you full year guidance for 2019, but we're through almost February, and the housing businesses is tough, we've got a very seasoned management team here, and we're not getting sugar coated, you got to have your A game. We've got a 12-point sales and marketing strategy, we're hitting on all cylinders on costs, management, as we mentioned in the deck. So it's not for the faint of heart, but we're going to have a lot of fun, and we're going to kick a lot of fanny.

The only other thing I would add to that is that we're really confident in our new product offerings as well, our new projects as they come to market continue to get market share and increased demand. So we're pretty optimistic as we're bringing new product to the market.

Fair enough. I mean, I just I wanted to ask two quick ones. One is, is all of your Nevada business ex WRECO and then also, Doug, you mentioned weather and I was going to ask you about that. Your expectation for backlog conversion rate for this quarter is not too dissimilar from the last year, obviously, I'm in California, we know how bad the weather has been in the last month or so. Are you anticipating or is it assumed in your backlog conversion rate that you'll have some construction delays just getting stuff closed?

Well, there may be a few, but we also have a fair amount of inventory going into the beginning of the year so that doesn't get affected by the weather. What was the first part of your question?

Just in Nevada, as your Nevada did all legacy WRECO or is there -- what percentage of it is legacy WRECO, your current lot count versus anything you bought?

Yes, actually we're through most of the legacy assets in Vegas there, and so it's a very small percentage. And so it's all our new product moving forward.

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

I wanted to follow up on just a conversation around absorption and touching on some of those monthly trends versus the full year. So just to make sure we understand it correctly. It seems like if you kind of carry out February for a full month, you're running absorption probably down similar amount year-on-year, quarter-to-date versus what you did in 4Q so down kind of mid- to high-20s. So when you're planning that 2.8, are you then taking just kind of normal seasonal trends off of those levels so you see a pretty substantial narrowing in the year-on-year absorption trends as early as 2Q or how should we think about kind of cadence that you guys are planning for?

Yes, I think we're feeling, Mike, this is Mike, a relatively strong second quarter. So we think we're growing into the second quarter, and then, we think, in the back half of the year, we may do sort of better than we did last year. But that's kind of how we're looking at it. Obviously, the first 6 months is a very different comp for us. I think we average around 3.5 the last few years. We don't anticipate being in 3.5 for the first 6 months of the year.

Great, okay. So you do think that there could be an inflection at some point, even if modest, in the fourth quarter?

Yes.

Got it. And then Mike, just kind of a cleanup question around the 1Q margins, you talked about some of the pull forward in 4Q from the California closings. I think there is also some backlog purchase coming. Can just give us like a -- can you quantify any of that in terms of breaking down that mix impact versus purchase accounting versus just the incentive environment?

Well, incentives, we're talking about, were roughly maybe 130 basis points when we started deliveries in 4Q versus 3Q. So that incentive variance is going to pull forward into the first quarter, and that it's going to be much higher than 130 basis points because there are not going to be as many California deliveries in there. California is typically a lower percentage from an incentive perspective, and then when you look at the markets in Texas and some of other markets to much higher percentage, so a lot of it's been driven by the incentives given and then it's primarily mix, I mean, as we mentioned, we only closed 15% of our long-term California assets in the first quarter and some of those are coming from some of the long-term California assets that or may be equal or below the company average and very few coming from the long-term assets that are higher than the company average. From a purchase accounting perspective, clearly, we are not generating much margin because of purchase accounting in the first quarter from the Dallas closings. We haven't really quantified that on a basis points. So it is a quarter from the -- most of those are standing inventory units that we've incentivized pretty high rate of close in the first quarter.

Got it and makes sense. And if I could fit one more in, just as a follow-up to that, just to clarify then around incentives because you talked about the 4.6 on deliveries, but then the 3.5 in backlog. Given that geographic mix, you just called out in terms of California versus some of the other markets, I know this might be difficult. But how much of that delta between the 4.6 and the 3.5 is attributable to just a lower backlog in California then, versus like for like pull back in incentives to start the year?

I would say, because we're talking about backlog at the end of the year in that number, so most of that is from the California. This itself is the California orders in November and December from the long-term California assets, so a lot of that is just mix generated.

Our next question comes from Alex Rygiel with FBR & Co.

Could you expand a little bit upon some of the buyers that canceled in the fourth quarter? Are you starting to see them return in the first quarter? Are you starting to see the buyers in the first quarter have different views on what mortgage type to use? Or what the value of options to take in the house?

Alex, this is Tom. Probably, the biggest reason for cancellations in Q4 were really the inability for the continued buyer to move their retail product. So we are seeing their desire to get into new housing still there, they're currently out shopping. But it's just a matter of getting their head around potentially a new price for their existing home. Relative to financing, it really hasn't skewed much. There is some talk of people looking at adjustable rates, but the reality is that just hasn't happened yet.

Very helpful. And then in late 2019, what portion of your deliveries do you think are going to be coming up from your long-term assets?

Yes, it's -- I'll just give you through the months, it's roughly 15% in the first quarter as I mentioned. Third quarter is the highest, it's roughly 25%. So you're going to see a significant spike in margins in the third quarter. Barring any weather delays or construction delays, as we see it sitting here today. But for the full year, it's roughly 20% and on that comp that was 17% last year.

Our next question comes from James Finnerty with Citi.

Doug, just checking in on the balance sheet and debt maturity at the end of this year, what your thoughts are with respect to debt reduction versus refinancing? Is that something you come to a conclusion on or what are you seeing?

Yes. We've talked about -- we will probably refinance those bonds that are coming due in June. We did generate $300 million of cash flow last year. We think we're going to be generating positive cash flow this year as well. So we -- fortunately, we have the option to do either refinance or pay it within our existing debt structure right now. So right now, we're just going to monitor the markets and what that might -- outcome might be.

So for the full year, do you expect the debt balance to remain kind of stable?

I think our debt is going to be decreasing over the full year.

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

I was hoping, if you can comment on the G&A of $43 million this quarter, run rate given the acquisition going forward? Or was there more of a onetime maybe cost something in there?

I mean, well, it was a strong quarter for us, as a company had a record year from an earnings perspective so there is probably some more bonus accruals associated with that number. Short of that, we added the Carolinas, Dallas and there's more start across some of the other smaller decisions that we have. So you're going to see that run rate kind of continue now.

Got it. And can you give any comment, Mike, on the financial services? What do you expect during this year?

I didn't give any on this year, but it's -- last year, we generated roughly around $9.8 million, $10 million.

It's very comparable on a year-over-year basis to what we did in 2018.

I mean, the volumes being roughly the same, ASPs are down, I mean, it's going to be roughly the same number.

Our next question comes from Jay McCanless with Wedbush.

Just few quick ones. Number one, what percentage of your current orders or your backlog are under a contingency contract? And how is that percentage trended over the last few quarters?

Jay, this is Tom. We certainly have that as a focused initiative to better manage our contingent buyers. And I would say that percentage is actually coming down. We're taking less contingent sales than we have in the past. And obviously, we've got a fair amount of completed inventory, and we're not taking contingent sales on completed inventory. So I don't have the exact percentage, but it's certainly lower than what we've had historically.

And then on the Mid-Atlantic, still seeing some weaker results there. What -- can you give us kind of an update, I know you had some leadership changes there and maybe some product shifts. What's going on there? And how are you thinking about absorptions for the rest of this year.

Yes. Jay, this is Doug. The beginning of this year with the government shutdown, it definitely had some impact at Winchester on buyer confidence in the first part of this year. For the year, I was pleased to see that Winchester division actually, exceeded their profit plan. So the leadership led by Brad Blank has done an excellent job of kind of reengineering the sales and marketing, land acquisition and product and collaboration effect and really implementing the TRI Pointe operating strategy in the Mid-Atlantic. So we're pretty bullish about the long-term impacts that Winchester can have and a positive impact going forward and Brad's one of our strong leaders going forward to do that.

Ladies and gentlemen, we reached the end of the question-and-answer session. At this time, I'd like to turn the call back to Doug Bauer for closing comment.

Well, thank you, and we look forward to speaking with everybody at the end of the next quarter and have a great week. Thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.