Q3 2019 Earnings Call
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<unk> This conference is being recorded.
It's now my pleasure to introduce your host Chris Mourn Investor Relations. Thank you you may begin.
Good morning, welcome the Tri Pointe Group earnings Conference call.
Earlier today the company released its financial results for the third quarter of 2019 documents detailing these results, including a large deck under the presentations tab or they want to companies Investor Relations website at Www Dot Tri Pointe group Dot 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 statement that involve risks and uncertainties.
Got you know such risks and uncertainties and other important factors that could cause actual financial and operating results could differ materially from those described in the forward looking statements are detailed in the company's filings made with the FTC, 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 made during the course of this call. Additionally, non-GAAP financial measures will be discussed on this conference call reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with gap can be accessed through Tri Pointes website and it yeah.
<unk> filings with the FCC.
Hosting the call today is that dollar the Companys Chief Executive Officer, Mike Rob.
Company, Chief Financial Officer, Tom Mitchell, the company's Chief operating officer in President and Glen Keeler, The company's Chief Accounting officer without I'll now turn the call over to Doug.
Thanks, Chris.
Good morning, everyone and thank you for joining us today as we go over our results for the third quarter of 2019.
Update you on our next Gen strategy I discuss current market trends.
Good morning group delivered strong results and had an outstanding third quarter as we exceeded our stated guidance for deliveries.
Average sales price gross margins in S. DNA leverage.
We continue to see improvements in our business from our focus on operational efficiency, including our 12 point sales and marketing objectives.
Order trends remain positive and all our markets with strong momentum throughout the quarter as evidenced by 25% year over year increase driven in part by an 8% improvement net absorption rate.
The combination of lower mortgage rates elevated consumer confidence.
Hi, existing home supply has created a favorable environment for industry.
I point group is taking advantage of this positive backdrop with our premium brand strategy.
That focuses on design innovation and the customer experience to differentiate ourselves from the competition, while providing value to our customers.
We also made further progress during the quarter and our efforts to grow.
Diversify our business from both a geographic and product offerings standpoint.
That's part of our next 10 strategy with a goal of 6 billion and add your revenues.
The large component that growth will come from increased volume and market share in all of our existing markets.
We'll be augmented by entering new markets through either organic expansion or M&A.
In California, we continue to leverage our long term legacy land positions.
Well the number of new communities that offer multiple price points and product segments.
Our new land purchases complement our existing pipeline and our focus on core locations would affordable price points.
As we look at our California operations and the result.
We continue to be encouraged with our position its high demand market.
In 2019 over one third of our deliveries were price below 500000.
It over two thirds were priced below 750000.
Given the diverse nature of the California economy.
Hi, demand low supply markets and our unique design offerings, we expect to see continued long term success in the state.
Outside of California, we remain committed to increasing the size and scale of our operations.
Targeting a top 10 market share in each market.
We continue to invest in developing our presence in early stage market.
As they begin to make a positive contribution to the bottom line.
Specifically, our current focus is on growth in the Carolinas in Texas.
We believe these states will have significant future growth that will fuel and further diversify our company.
Our teams in Raleigh, and Charlotte had done an outstanding job building relationships.
Controlling new land positions.
We now own or control 845, lots, which represents 14 future communities.
First of which will open in the third quarter of 2020.
With our acquisition of a builder in the Dallas Fort worth market in December 2018, Trendmaker delivered 610 homes in 2018 from our three Texas Division.
With a proven operation in Houston, and our new teams in Austin, and Dallas Fort Worth we're poised for growth.
Our strategic goal over the next three to five years is to deliver 1800 homes annually from the state of Texas.
In addition, we are actively looking at M&A opportunities in select markets.
To that end, we have promoted Mike Mcmillan.
Hey, long time, Tri Pointe executive to lead our effort.
We will continue to acquire discipline approach, while maintaining a strong balance sheet liquidity.
As we execute on our long term growth strategy through either organic expansion or M&A activity.
We believe the long term outlook for the housing industry supports our growth objectives.
The millennial cohort is entry into that prime homebuilding homebuying phase of their lives.
And aging baby boomers are looking to downsize an amazing numbers.
This presents a compelling opportunity for increase housing.
Nationally the rate of new home construction remains below the historic trend line.
Which suggests suggests that the industry is not keeping pace with household formations.
That much of the existing home supplies in need of replacement.
The opportunities even more pronounced in our markets, which highlight several of our key drivers of new home construction, including an increase in household formation above average job growth.
Overall quality of life.
In light of these positive factors, we believe the outlook for industry and particularly of Tri Pointe group is bright.
Now some quick market color.
We experienced another quarter, a strong demand in California with orders up 26%.
Compared to the prior year any monthly absorption rate of 3.4 homes per community.
Our San Diego Inland Empire in L. Lake County projects continue to perform well.
In Northern California, the market has rebounded nicely.
And we experience a 36% year over year increase in absorption rate.
It's hard to our strategic shift to more affordable locations. He said the core be area.
In places such as Solano and East Contra Costa County.
We're extremely pleased with our teams first project in Sacramento and are excited open our next two projects in December .
In Seattle, we saw a nice year over year uptick in our monthly absorption rate.
The 3.3 homes per community has the market is found its 14 after a period of softness in 2018.
By the market remains challenging at the high end.
We have recently introduced several new communities, which have been well received at pricing below 750000.
The Phoenix market has been our strongest market [noise].
And remain positive throughout the quarter.
Orders were up 60% for the quarter on a 15% increase in our monthly absorption rate.
Driven by healthy market dynamics and well located communities.
We are well positioned to continue our growth in this market with several new committee slated for 20 to 20 and beyond.
Our operations in Las Vegas continue to improve.
Demonstrated by an increase in their monthly absorption rate the 3.4 homes per community compared to three in the prior year.
We continue to be opportunistic while focusing more on the entry level buyer segment.
But the recent introduction of two affordable communities.
Starting price points ranging from the high two hundreds.
To the mid 300.
Overall, we have an excellent land position for 2020 M. beyond.
We remain bullish on the long term outlook for Denver has the market continues to attract employers that provide good high paying jobs.
Demand remained strong at our current projects with price elasticity that helped improve margins.
We are expanding our presence in the entry level at first time move up segment.
Focusing on our land acquisition efforts on projects with average sales prices under 500000.
As I mentioned earlier, our Trendmaker brand in Texas will factor heavily into our growth plans.
Houston, Dallas Fort worth in Austin, our three of the biggest homebuilding markets in the country.
And we believe we can grow our volumes into a top 10 market share.
Our Houston Division has been successful rolling out new home designs, which it has helped increase our monthly absorption rate by 17%.
Our Austin Division has similar success driving their monthly absorption rate the 3.2 homes per community compared to 2.2 in the prior year.
Lastly, our Dallas Fort worth acquisition has been fully integrated into our systems.
In our land team, it's been busy acquiring in controlling over 500 additional lots.
Focusing on bringing new homes to the market had average sales prices under 350000.
Finally at our Winchester homes brand in the mid Atlantic our operations and started to improve.
We experienced a sizable year over year improvement in our monthly absorption rate to 3.4 homes per community compared to 2.5 in the prior year.
Our recent new home offerings have been well received a good sign that our ongoing home new home design repositioning will continue to drive future success.
With that I'll turn it over to Mike for more details on our results this quarter fight.
Thanks, Doug I would also like to welcome I want to todays call I'm I'm in a highlight some of our results and keep financial metrics for the third quarter and then finish my remarks with an update on our expectations and outlook for the fourth quarter and for your 2019.
The times I'll be referring to certain information from our slide deck posted on our website that Chris mentioned earlier.
Slide six of the earnings call Slide deck provides some of the financial and operational highlights from our third quarter or home sales revenue was 746 million for the quarter on 1187 homes delivered at an average sales price of 629000.
Our homebuilding gross margin percentage for the quarter was 22.6% interest expense as a percentage of Homesales Robyn new was 11.6%.
Net income came in at 63 million or 44 cents per diluted share.
That's where our overall selling communities during the third quarter, we opened 15 new communities.
Three in California, three in Texas to in Maryland to in Virginia to in Nevada to in Washington, and wondering Arizona.
We closed 11 communities resulted an ending active selling community count of 150.
We're active selling communities at the ended the quarter are shown by state on slide seven.
For the quarter net new home orders increased 25% on a 16% increase in average selling communities.
Our overall monthly absorption rate of 2.9 homes per community was an increase of 8% compared to the same quarter in the prior year.
Our new home orders are shown by state on slide eight and you can see the historical monthly cadence of orders on slide 28.
So far through today October orders are up 45% year over year.
We ended the third quarter with 2312 homes in backlog up 10% from last year.
Our average sales price and backlog was 645000 for a total dollar value of 1.5 billion an increase of 4%.
Our backlog dollar value as shown by state on slide nine.
During the third quarter, we converted 54% over second quarter, ending backlog delivering 1187 homes that average sales price of 629000.
Resulting in home sales revenue for the quarter of 746 million.
Approximately 42% of our deliveries for the quarter came from California, including 29% from our long term, California assets.
Our new home deliveries are shown by state on slide 10, and home sales revenue by state are shown on slide 11.
Consistent with our comments on previous earnings calls about the growth of our margins in the back half of 2019.
Our homebuilding gross margin percentage for the third quarter improved 130 basis points to 22.6% compared to the same quarter last year.
And improved 560 basis points sequentially from last quarter.
The sharp increase in our homebuilding gross margin for the quarter was primarily due to delivering a higher percentage of homes in California.
More specifically a higher percentage of homes from our long term, California assets, both of which yield margins well in excess of the company average.
For the third quarter SGN expense as a percentage of home sales revenue was 11.6% a 90 basis point increase compared to 10.7% for the same period last year.
But improved 50 basis points sequentially from 12.1% last quarter.
The year over year increase in our SGN, 8% percentage was due to a decrease as a result of our 3% decrease in home sales revenue.
And higher overhead costs as a result of our expansion spansion initiatives into the Carolinas, Sacramento, Austin, and Dallas Fort worth markets.
During the third quarter, we invested 112 million in land acquisition and 89 million in land development.
Year to date, we have invested to aggregate combined total of 523 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 2022 and beyond.
At quarter end, we owned or controlled approximately 28500 lots, which represents 5.9 years of supply base, our last 12 months of deliveries.
A detailed breakdown of our lot own will be reflected in our quarterly report on Form 10-Q , which we filed later today.
In addition, there is a summary of lots owned or controlled by state on page 27 in the slide deck.
Turning to the balance sheet at quarter end, we had approximately 3.3 billion a real estate inventory.
Our total outstanding debt was 1.4 billion, resulting in a ratio of debt to capital of 40.4%.
Net debt to net capital of 38.2%.
We ended the quarter with 549 million of liquidity consisted of 130 million a cash on hand, and 419 million available under our unsecured revolving credit facility.
During the quarter, we repurchased a little over 3 million shares of our common stock at a weighted average price per share $13.75.
For a total dollar amount of 42 million.
We have approximately 58 million remaining available from our 100 million dollar share repurchase authorization.
Now I'd like to summarize our outlook for the fourth quarter and full year 2019 as shown on page 24, and 25 of the slide deck.
For the fourth quarter of 2019, the company expects to end the quarter with 10 fewer communities as a result of our strong absorption rate and the second and third quarters, resulting in a 140 active selling communities as of December 31st 2019.
We expect our active community count to be backup in the 150 range by the ended the first quarter because we plan to open over 20, new communities during the quarter and over 60 communities for the full year 2020.
The company anticipates fourth quarter deliveries of 73% to 77% of its 2312 homes in backlog as of September Thirtyth 2019.
Resulted in full year deliveries between 4000 804900 homes.
Nobody expects its average sales price to be 620000 for both the fourth quarter and the full year 2019.
Got it expects its homebuilding gross margin to be in a range of 20.5% to 21.5% for the fourth quarter.
Resulting in a full year homebuilding gross margin to be in a range of 19% to 20%.
Yeah, we expect to assess DNA expense as a percentage of home sales revenue will be in the range of 9.2% to 9.6% for the quarter.
Resulting in a full year SNA expense in the range of 11% to 12% of home sales revenue.
And then lastly, the company expects its effective tax rate to be in a range of 25% to 26%.
With that I'd like to turn the call back over to Doug for some closing remarks.
Thanks, Mike in conclusion, I'm very pleased with our raise results this quarter.
Again, we exceeded our stated guidance and all of our key operational metrics for the quarter and are poised to deliver on our original full year guidance that we gave at the beginning of the year.
We posted a 25% increase in overall, new home orders, which includes a 26% increase in orders in California.
We also made further progress towards our goal of growing Tri Pointe group into a stronger and more diversified homebuilder.
Our quality homes customer experience and customer satisfaction continues to drive referral sales.
We remain confident in our outlook for the homebuilding industry as well as our company's balance sheet and liquidity.
Our top tier management teams have us well positioned to focus on growing our business, while maintaining the flexibility of a modest leverage structure and opportunistic share repurchases overtime.
In closing I want to thank all of our Tri Pointe group team members on an excellent quarter, well remain steadfast in bringing the year towards a successful clothing.
That concludes my prepared remarks, and will behave happy to take your questions.
Thank you we will now be conducting a question and answer session. If you'd like to ask your question you May Press star one on your telephone keypad a confirmation total indicate your line is any question Q you May press star too if you like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star G. Our first question comes from the line of Alan Ratner with Zelman and Associates. Please proceed with your question.
Hey, guys. Good morning, Congrats on a strong results and good quarter.
Yeah.
I guess first question. Most importantly wanted to just checking and see how are you in the company and employees are doing with all these various fires in California.
And less importantly, whether there's been a you know any impact to operations as a result of that.
Yeah, I'll take it or a quick crack and Tom's here to first of all I mean, our thoughts and prayers are with all.
Firefighters and families affected we actually I had a young shoeprint assistance superintendent affected from one of the earlier fires a couple or about a month ago, but he is he and his family are doing fine.
As far as their operations they have not been affected a p. ginnie up in northern California has always been notorious for.
Hi, setting their meter show that I don't think anything's changed in a in the 30 years that I've I've been doing this business in California, but you know unfortunately for all our community communities everything is okay.
Okay, and our people are most importantly, our a okay and.
You know just our thoughts and prayers are with everybody Memphis.
Unfortunately, Californians got fires and grass, the world's got hurricanes and tornadoes and other things like that so hopefully we can move on and get a better weather systems coming through the area.
I appreciate that and that good luck with a with everything there second question really strong margin performance this quarter and obviously some of that was mix, but but it seems like it was even a bit stronger than you guys were anticipating.
I was hoping maybe you could just a you know talk a little bit about what you're seeing in general on the margin front, maybe you know looking at the portfolio. Excluding the add long dated California assets, what is the trend been there and what what does it look like in backlog.
And I guess, just more and more broadly heading into 2020 should we expect a similar year of volatility in terms of the mix from these communities or do you think you're entering a point now where where the a deal flow through it should be a little bit more consistent or stable from quarter to quarter.
Yeah, Yeah, we certainly do see that a lot less volatility moving forward into into 2020 as you know as California has obviously had a better sales that's what really drives our margins more so when you look at margins in general I mean, California is typically you know about 24%.
And that margins outside of California around 16, right now that historically it's been.
You know a little bit higher but because of the additional incentives a couple hundred basis points of additional incentives that we saw this year from the back end of last year as well. The early part of this year as brought those margins down outside of California, but we are seeing improving conditions in most of those markets outside of California, clearly your margin being you know 22.6 this quarter a lot.
That was related to pulling forward more the long term, California assets ended the quarter.
Even more specifically PHR.
I think we've highlighted before you know those margins are north it.
30%, but we do see a little bit more consistent trend in the fourth quarter, you know first and second for at least what we see in our backlog right now for a margins moving forward.
That's very helpful. Thank you for that Mike and then if I could just squeeze in one last one you guys mentioned that deep product and mix change. If you will hear more dense product smaller more affordable product I'm. Just curious as you kind of look at these communities as are opening up where the there as a product is introduced are you actually.
Seeing a shift in the the composition of your buyers are you seeing you know whether it's some.
Lower lower income younger buyers or is this more just a function of this the same buyer pool, but perhaps just a tracking more of those buyers to your communities and kind of stealing knows from other builders or the existing market.
Hey, Allen Good question, it's Tom.
Certainly we have not seen a significant shift in our buyer pool demographics remain fairly constant from prior years.
But we are seeing a continued interest in a younger buyer segment and so we are anticipating going forward that that is going to be a an expanding makeup of our demographics.
Great all right guys. Thanks, a lot.
So thanks [laughter].
Our next question comes along and Steven came with Evercore ISI. Please proceed with your question.
Yeah. Thanks, a lot guys and good quarter you things. So just a follow up if I could alans question about the margins and the impact of California and outside California.
You mentioned that a you know as you go forward here over the next few quarters margins to be Alomar, sustainable and I think you attributed that to the fact that the a california related demand is strengthening and it seems I guess, you're saying to a <unk> reached a level that is that would allow you weigh more sustainable share of California.
Deliveries I just wanted to make sure I got that right and then I wanted to ask about non California. You mentioned that there was incentives that were elevated is there a trend there that you anticipate towards diminishing a incentives that would allow the margins to move up from the 16% rate a in the new.
Your term or is that something that we'll just have to wait and see on a you know later into 2020.
Yes, Stephen this is Mike again, I mean, its citizens in general were up about 200 basis points year over year for the quarter and kind of year to date for the company a under lift on deliveries right and so I'm not with my comment related to incentive we have seen incentives trending down there down about 20 basis points.
This quarter over last quarter on deliveries and we see that trend continuing.
As it relates to California.
You know margins are down and you know a couple hundred basis points of California, just like the arden or outside markets. So it wasn't.
Well it says on the outside of California, So we've seen that consistent trend, but we do see California, and the long term, California assets delivering a more consistent.
That pace, if you will end up for Q1 Q in Twoq and that's why we think our margins or more.
Representative of kind of the for your range.
In addition, I'd add Stephen that for the divisions outside California.
As we look at our backlog in orders in certain markets. You know we've seen a well we'll continue to see slight improvement in their margins over the next year too as we continue to grow those divisions and they create more operational efficiencies.
All right embedded in that is there any assumption that some of the new areas like a close to my heart Khalaf County, North Carolina would come in at a higher than.
Average margin for the outside of California part of your business in other words higher than a 16% level or.
Would there be you know what people used to call a dumb tax you know where you kind of get in there and initially you kind of get a lower margin.
Well I mean, we do underwrite through an 18% to 20% margin I guess, we'll find out if there's a dumb tax when we actually start delivering houses there, but right now our full expectations is that our margins.
I would be significantly above that 16% and care lives as we start delivering homes and I think I'd answer that that should see tongue cash question, which is that the good term a you know that's a function of.
In my mind, the operating team and.
And we've got a very strong team and the Carolinas So.
I'm not anticipating a.
Much in you so as you call that dumb tax and we are targeting margins.
North of 16% and and we continue to underwrite deals.
Turning to 22% in higher depending on the the risk profile of the asset and add a and what we've got to deliver show, we're pretty optimistic about the Carolinas a Texas is a is also going to be a big growth market. A bar show a you know we're going to see continued returns a increase in rich.
Turns over the next several years as we expand into those markets that you know require less capital, but turned capital more efficiently.
Yeah, Hey, Brad.
Sorry, Steve and I'm just.
Add on one thing to that I've been in general as we're opening new projects and bringing new projects into the marketplace. We expect a.
Better margin profile than that 16%.
Right, Yeah, no offense to a grand team that that a dumb tax expressing a is a bob toll holdover from Bob toll from years ago.
The last one from me related to opening up the these new could these.
Next round of communities out your land spend has been pretty moderate for kind of a while and I'm wondering whether or not the rate of land spend.
I'm not in absolute dollars I think of it you know sort of as a run rate of your deliveries are revenues, but relative to the size of your of your sales lets say should we be thinking that this is a level of land spend that you can sustain or is it your anticipation that you're going to look to invest a higher level as you go for.
<unk> to fund a greater acceleration.
In community Count Yeah. It's a great question. Steven This is Mike again. This year were around 800 at 900 million I think our original guidance was probably 900 billion to roughly a billion at the beginning of the year, but as you can imagine that's coming up at yields or the last six months last year that we didnt tie up a lot of land at that point in time, So land spend is down this year.
Comparatively to what we think it might be in 2020, and 21 and as we have.
Expectations to grow as Doug mentioned as part of the next and you'll see us spending.
More money in land spend moving into 2020 and 21.
But as we spend money on a land land development, we're very cognizant of the balance sheet focusing in on a positive cash while keeping all our or levers open to us. So yeah. We we are we're actually quite flat with the long term assets and generate a lot of cash flow for the company even though.
You know I'd say, they're sitting out there and there are slowly generating cash flow. It's an earnings I should say the cash was very strong so that helps our growth pattern for the next several years.
Great. Thanks, a lot guys good job in the quarter.
Thank you.
Our next question comes on line of Truman Patterson with Wells Fargo. Please proceed with your question.
Hi, Good morning, everybody Nice results first wanted to touch on your as gene a ratio you know it's been increasing as you've expanded into Charlotte rally you know Sacramento and DFW.
How long do you think it'll take for these markets to mature where you could start seeing some as gene a leverage.
Or at the same time do you think that you'll continue expanding into new metro's.
And that dashing a ratio will continue ticking up.
Yes, good question in Germany.
I think we would probably be a talk about this but in an organic startup nature. I mean, we're not we haven't given any guidance for 2020, but I can tell you generally speaking.
On an organic startup you're going to lose money for the first two to three years. It two years and then year to your breakeven. Your three you breakeven and then year four and five you start generating more profits and started cleaning out that's inorganic model right there and that's.
Pretty consistent and so you know that goes obviously weigh on our S. DNA in in the next couple of years, just because were intentionally growing both organically and add to actually some acquisitions.
So that that's the way I would look at it Mike if you want to add as well I'd just say that the post assay six so six you know our.
Expectations down the road and as you know it would probably be in that tenant. After 11 to have that was probably nine and have to tenant at prior to that AMC six so six that out at about a 100 basis points up into sales and marketing category, but those ex patients wouldn't be achieved probably until we start delivering units from those expansion markets right. Now so it's not going to be next year, let's put it that way.
Maybe the high end of that range with not certainly the low end of that.
Okay. Okay. Thanks for that and then you've discussed a a few points on on this call about you know your effort to bring down prices in several markets.
Could you guys just elaborate on that a little bit further, which which markets you're actually going down.
The price structure, if you will and are you does this mean that youre.
Rotating more towards the entry level product.
Well.
Our mix right now is about 30, 31% entry level, 50% first second time move up.
15, 16% luxury and the balance active adult.
What naturally happen you know, whether we build entry level and the inland Empire, whereas we push east Truman too.
The markets in Dallas, and the Carolinas, and and even markets in California, where we bill higher density solution.
Our entry level percentage over the next several years will slowly grow.
It probably <unk>, having gone through in factored it exactly out five years for an hour four or five years, but it's definitely any greater than 30 <unk>. It could have approached 30, 540% in the end a as we continue to push forward and really it's you know it's still focused on our premium brand strategy call a premium.
Plus on the entry level first and second move up our active adult business is also growing so that's those percentages will be shape. The only luxury that we really have is down and PHR and you know that goes out for another.
Couple of years, but you know, we're well positioned and even in California, as we pointed out two thirds of our deliveries are under 750 I mean, that's.
Actually I know for people and Carolina, that's a in entry level price point for California for most people. So so we're continuously working on higher density solutions, especially in the infill markets in California, D.C. and other areas like Seattle, while also pushing on smaller product.
More efficient product to hit that more affordable price point.
Okay. Okay, and then just following up on me out order incentives I believe you said that they were down 20 bips quarter over quarter do you have the number in front of view on what that was down year over year.
Yes, so a the incentives for.
This year year to date is 5.4% and that's on deliveries.
And it was 3.4% last year in 2018 year to date for the nine months.
So pretty I would tell you.
What's that I.
I was hoping on the order side.
If we can get what that was down year over year.
[noise] [noise] <unk> [laughter] that.
[noise], it's roughly down about 180 basis points.
Okay, great. Thank you.
You know just to talk about that but option revenue at the same time option.
Year over year about 90 basis points going a lot of types were given away options as part of the incentive package, so that kinda offset some of that two basis points or decrease.
Okay. Thank you guys.
Our next question comes from the line of Mike Dahl with RBC capital markets. Please proceed with your question.
Hi, Thanks for taking my questions.
Wanted to follow up.
Kind of on I think partially on I want to Steve's questions and not on a common.
That was made around community count in the opening remarks.
Understanding it's an incredibly hard.
Metric to forecast out with any certainty but.
Yeah, It sounds like to the extent that you slowed land spend it's not going to be an impact on 2020 necessarily but potentially.
You'll have to fill in for 21 and beyond I guess with the 60 communities slated to open next year.
Could you give us some some sense of kind of cadence around that and to your best.
Our best guess, if we're traveling in this absorption around 2.9 or a little better what should we expect in terms of closeouts. So effectively just kind of cadence so from that community count growth as we make our way through next year.
Well I think by is right.
The answer is that community kind of question.
<unk> pointed out in the earnings.
Call, where we're in pretty good shape for both 2020 and 2021, our land acquisition efforts are really for 22 and beyond.
Yes, and Mike It's Mike So that cadence is relatively flat next year. So it's a pretty good a number of community is on a quarterly basis. Once he was obviously a a larger quarter for us we're opening a 20 plus communities in that quarter.
We think that our communities into year would be up about 4% to 5% year over year.
Okay. That's helpful.
And then a follow on question is just so I guess looking for a little more clarity around the comments on on margins and kind of the normalization based on the mix of.
California, which obviously should be less lumpy moving forward than it has been this year, but I guess, given the puts and takes that.
You've outlined already.
I think the plan has still been for the mix of long term.
Deliveries on long term, California, we plan to increase year on year, and 20 versus 19, which would would still argue that the margins directory should be heading north so when when we're talking about.
Kind of stabilization, our normalization and [noise].
Margins. It is it in the 19% to 20% range that we should be thinking about or given that mix dynamic.
That you have over I think next year on the year. After is there still potential for higher than that.
Well I mean as always potential for higher margins given market conditions, but I mean right now we just given guidance on that full year this year at 19% to 20% but.
You can probably see as California has a picked up you know the trajectory should be on the positive side of the.
It is it fair to still think about 2020 and 2021 as still having a plan that includes a higher percentage of deliveries on the long term land.
Yeah, it's a moderate higher percentage on long term assets.
It's fairly consistent it's not material difference.
Okay got it tended to have units in California might be higher but for the company in total since we are growing outside of California, It's probably the same person to get as my point.
Okay, Alright makes sense. Thank you.
Our next question comes from the line of Jay Mccanless with Wedbush. Please proceed with your question.
Hey, good morning, Thanks for taking my questions.
First question I had was around pricing power, we've heard numbers all over the maps from your competitors would love to hear what kind of pricing power, you're getting in on entry level as well as move up communities.
Well pricing power overall are really.
Market specific Jay we've had more pricing power in markets like Phoenix, ranging from anywhere from 2% to 4%.
But the entry level move up luxury segment all those all those markets had had various puts and takes I would I would categorize this about 40% of our communities or had some sort of pricing power.
This this year year to date, but that's also.
Net effect, our our pricing is offsetting any costs increases whether its labor materials.
Yeah. This is Tom My Dad, you know, it's fairly stable throughout most of our operations we have seen.
Or a slight reduction of incentive on the.
Year as we've gone forward, but pricing seems to have been stabilized.
And then actually incidence was going to be the next next question just wanted to see what you're seeing from competitors. You know your end everyone's trying to close out some extra homes, but are you seeing a level of incentives in any markets or any price point, that's above what you would normally see this time of year.
No again, a fairly stable.
Sounds great. Thanks for taking my questions.
Thanks Jay.
Our next question comes from the line of Carl Right Reichardt with BTG. Please proceed with your question.
Thanks, Hi, guys.
I want to ask about specs just first what do you run in in terms of under construction and finished specs per community now and then spec strategy to you've got some peers out there who are running.
30, 40 houses ahead of demand with finished spec and others, who are just pricing basis super low and trying to make up numbers on options. So how do you guys look at your spec strategy and recognizing it's different California, Texas, especially at the entry level.
Well just some numbers we had 295 completed homes at the end of the quarters, that's roughly two per community and we had been running probably three in that in the previous quarter. So we've kind of work down or specs. So that's why you know maybe the opposite our range on our guidance of deliveries you know didn't move a whole lot for that reason because there wasn't a lot.
It's that we had that we could sell and close within the quarter really more more so building backlog, but that's out there Tom when you talk about specs, rather well I would I would add on that we're not going to be a company that's going to run out a bunch of specs.
Because we offer more of a personalization to our product offering and so our backs as a percent never specs per community will probably I mean, it's a little low right now too, but it probably range around three to four going forward in the future because again as part of our premium brands.
Attitude, we want to give a that personalization to our buyers whether its entry level all way up to two active adult and luxury.
Thanks, Tom and then it's good to banning for a second last Q I think you've got 4000, plus lots. There I think you in the queue. You said you'd start delivering houses in 2020, there can you give us an update on sort of what kind of product you're planning on putting out there given that your your largest sort of contiguous land position.
Yeah. Karl this is Tom banning or development is going very well we're on pace than were scheduled to start our first set a models here shortly and that the product that will be very consistent with what you see right across the street in Beaumont Weve predominantly.
Five different products segments that we're working through and it definitely skews towards the more affordable price point.
And there's great values out there as you know, but if you just took a look at what we're offering in Sundance. Its basically updated versions of that.
Great. Thanks, Tom Thanks, Doug.
Thanks Carl.
As a reminder to star one to ask a question. Our next question comes on line of Arts, Alex Barron with housing Research Center. Please proceed with your question [noise].
Yeah. Thanks, guys.
I was wondering if you had any way to break down you know how the orders have been improving by kind of price range. You know like you said you have.
Third entry level, I guess, 50% move up in the rest more luxury in active adult do you have any any anything you can offer as far as you know how those different segments.
Grew I guess you over here.
Ah, Yes, it's Mike I can give you some stats on that when you looked at the Doug talked about entry level was 30% to 31% of our.
Order mix absorption rate was 4.1 on a entry level products on move up there was about 50% of our mix and absorption was 2.7.
For the quarter luxury was 15% and it was 2.4.
And then are active adult was 4% of our market overall orders and it was 2.1 on the absorption rate.
When you compare that to year over year, obviously, it's an easier comp said right last third quarter was relatively weak just running down entry was three five move up to six luxury twos.
Sorry move up was to five last year luxury was to six active adult was to seven.
[laughter].
Got it is yeah, that's very helpful. Mike.
And as far as if we look at within California, especially in Southern California is there or is there also are you getting a pick up more in the coastal areas like I'm certain inland has probably been picking up earlier, but I'm wondering what you guys are getting more and then versus coastal southern California.
Yeah, Alex I would say your comments with regard to inland and the more affordable price points are picking up the most without a doubt.
Northern California, particularly the the Bay remains choppy and we have not saying the same level of increase relative to absorption in demand there.
San Diego, our coastal market there, we've got a very unique offering and we have.
Same continued stabilize absorption there.
In Orange County, L.A., Coastally with a lower price points under a million dollars demand has been good as you move up in price point, a demand as a little softer.
Hi, [noise] or very helpful and.
How about which has been your best performing market that Arizona I'm guessing.
Yes, yes.
Okay, great. Thank you.
There are no further questions in queue I'd like to hand, the call back to Doug Bauer for closing remarks.
Well, thank you and I like to close with a a thank you to my partner of 30 years Ah Mikey is retiring on January one.
You know, we tip, our cap to Mike in.
Lets them whether glasses champagne.
Okay.
I'll take them too many a river in Utah.
I will miss them and we wish him all the best and look forward to talking to you next quarter.
Adios.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.