Q2 2019 Earnings Call
Greetings and welcome to Tri Pointe Group second quarter 2019 earnings Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Chris Martin Investor Relations Officer. Please go ahead.
Good morning, and welcome to Tri Pointe groups earnings Conference call.
Earlier today the company released its financial results for the second quarter of 2019.
Documents detailing these results, including a slide deck under the presentations tab are available on the company's Investor Relations website at Www Dot Tri Pointe group Dotcom.
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 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 statement financial measures to the most comparable measures prepared in accordance with GAAP can be assessed through Tri Pointes website, and it is filings with the SEC.
Hosting the call today is Doug Bauer, the Companys, Chief Executive Officer, Mike Grubbs, The Companys, Chief Financial Officer, and Tom Mitchell, The Companys, Chief operating officer, and President with that I will now turn the call over to Doug.
Thanks, Chris Good morning, and thank you for joining us today as we go over our results for the second quarter 2019.
Update you on our long term strategy and discuss current market trends.
Good point group delivered strong results for the second quarter 2019 generated net income of $26.3 million or 18 cents per diluted share.
We met or exceeded all of our guidance metrics for the quarter.
Our orders for the quarter were up 11% year over year with a strong monthly sales base of 3.4 homes per community.
Which was comparable to the second quarter 2018.
In addition, we paid off $382 million of senior notes.
That matured in June of this year.
And we ended the period with a net debt to net capital ratio of 37.7%.
These results leave us well positioned to achieve our full year guidance at the beginning of the year and pursue our long term strategic initiatives.
These initiatives include unlocking the value embedded in our long term, California assets.
Growing our market share within our existing operations and achieving better scale on our early stage markets.
Contrary to the current narrative.
We believe California continues to be a great place to be a homebuilder.
Thanks to the strength of the state's economy.
The undersupplied nature of the housing market and continued job growth.
While demand has softened in certain high cost markets. We continue to have great success in other parts of the state such as San Diego in the inland Empire.
Thanks in part to the low land basis associated.
With our long term, California assets.
We are able to have great success in these markets by providing a compelling value proposition for our buyers, while delivering strong margins at entry level move up and luxury price points.
Another way, we are seizing on the opportunities that exist in California is to capitalize on two of the fastest growing buyer segments in the market.
Millennials and baby boomers.
It should be noted that our initiative to design and produce more products at affordable price points has been very effective.
In Los Angeles, our new Skyline community in the Santa Clarita market has had great success and we are now planning on an active adult community in phase two of skyline.
Additionally, in the inland Empire Altice.
Our active adult community in Beaumont continues to gain momentum and is currently selling homes between 300 to $500000.
Also the success of our market rate offering in Sundance has accelerated the development.
Of a 4000 unit community called out well.
Which will be a new affordable Master plan community in banning scheduled to open late next year.
At estimated price points in the range of 300 to $500000.
In San Diego, our affordable product offering out west and in Santi.
Implied a soul in Chula Vista continue to be strong performers.
With that success, we had planned and we'll be starting development on metal wood.
And 845 unit community in fall Burke.
Metal wood is anticipated to open in early 2021 with selling prices between four to 700000.
Well, we believe California will continue to produce great results for our company for years to come.
We see an equally bright future for our operations outside of the state.
We have an established presence in some of the best homebuilding markets in the country.
Markets with great housing fundamentals job growth and a lack of available supply.
Each of our brands has an opportunity to take advantage of these favorable market trends over the next several years.
And increase their annual deliveries, thereby enhancing their local economies of scale.
This is especially true for a relatively new operations in Dallas.
Austin and the Carolinas, where the upfront investments have been made with the ICSI expectation of solid returns down the road.
Thanks to our strong balance sheet and experienced management teams, we have the capital and know how necessary to make these initiatives the reality either organically or through acquisitions.
With that I'd like to give some color on our existing markets.
Overall demand was strong throughout the quarter.
And we experienced a very consistent sales pace in April may and June .
The decline in interest rates no doubt had a positive impact on buyer activity and likely help extend the selling season into the summer.
We were also able to scale back on some of the incentives implemented earlier in the year and raise prices in several of our markets.
In California, we experienced a strong monthly absorption pace of 3.8 homes per community at an average sales price of 667000 for the quarter.
We had very healthy demand at our communities in San Diego and the inland markets of the state.
But experienced continued softness at higher price points in the coastal markets.
Buyers in both northern and southern California have migrated east in search of more affordable housing alternatives.
Fortunately, we have a significant presence in the inland Empire in southern California.
Any growing presence in places like Green Valley Fairfield.
And Mount House in Northern California, which allows us to capitalize on this trend.
Our operations in Seattle perform well during the quarter with a monthly absorption pace of 3.4 homes per community.
Which is a strong sales rate considering our average backlog sales price of 857000.
After a period of softness at the end of last year. We believe the market is found stability.
And is starting to regain some of its momentum.
We recently shifted our focus to more affordable attached and detached product in the core areas of the market.
And these new offerings have been well received.
In Arizona, Mary Kay delivered the best monthly sales pace out of all of our brands, averaging 5.6 orders per community in the quarter.
Driven by healthy market dynamics and the successful opening of several new communities.
The order strength was evident across a number of buyer segments, which allowed us to push prices higher in several of our releases.
The Las Vegas market is stable. However, it is still fueled by incentives in select products and sub markets.
Our positioning and product offerings enabled us to achieve a monthly absorption pace above the company average at 3.8 homes per community.
We're also encouraged by our future project land pipeline.
Our Colorado operation continues to improve as province doubled in the quarter.
As compared to last year.
Thanks to a combination of higher closing volumes and better margins.
Our shift to more affordable product has been well received and we now have a land pipeline to allow for significant growth in this market.
Turning to our Texas operations, Houston, and Austin experienced a nice lift in monthly absorption pace during the quarter.
With Austin, leading the way at 3.6 homes per community.
Our recent acquisition in Dallas is performing to plan and we look forward to expanding our presence in this robust market.
Now with operations in the top three markets in the state we are poised for Texas to be a larger contributor to our overall business.
Finally, our Winchester brand continues to find its stride.
With Virginia fairing relatively better the Maryland.
Our recently opened Wessex community in Tysons corner garnered 16 orders in its first few weeks of being open.
And we are optimistic this is a positive sign for future community openings in the DC market.
With that I'd like to turn it over to Mike for more details on our financial performance in the quarter.
Thanks, Doug I would also like to welcome everyone to today's call.
I'm going to highlight some of our results and key financial metrics for the second quarter, and then finish my remarks with an update on our expectations and outlook for the third quarter and full year 2019.
At times also 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 provide some of the financial and operational highlights from our second quarter.
Home sales revenue was $692 million for the quarter on 1125 homes delivered at an average sales price of 16 615000.
Our homebuilding gross margin percentage for the quarter was 17%.
And our SGN a expense as a percentage of home sales revenue was 12.1%.
Net income came in at $26.3 million or 18 cents per diluted share.
For the quarter net new home orders increased 11% on a 12% increase in average selling communities.
Overall monthly absorption rate of 3.4 homes per community was consistent with the same quarter in the prior year.
You can see the historical monthly cadence of orders on slide 28.
So far in July orders are up 10% year over year.
As for our overall selling communities during the second quarter, we opened 13 new communities.
Five in Arizona three in California.
Two in Texas, two in Washington, and one in Nevada.
Well its 13 communities, resulting in an ending active selling community count of 146.
Our active selling communities at the end of the quarter as shown by state on slide seven.
We ended the second quarter with 2208 homes in backlog at an average sales price of 652000.
For a total dollar value of $1.4 billion.
During the second quarter, we converted 61% of our first quarter ending backlog delivering 1215 homes with an average sales price of 615000, resulting in home sales revenue for the quarter $692 million.
Our homebuilding gross margin percentage for the second quarter was consistent with our guidance at 17%.
It's worth noting that our current quarter gross margin was impacted by 190 basis point increase in incentives compared to the same quarter last year.
Due to the softness we experienced in the back half of 2018.
And earlier 2019, as we're moving through our inventory homes.
However, as Doug previously mentioned, we've seen incentives decrease in certain markets and as a result, our overall incentives in backlog of trended down.
As mentioned on the last earnings call, we expect our margins to increase in the second half of the year as we deliver a higher percentage of our revenues from California, and more specifically, our long term, California assets.
For some additional color as of June Thirtyth 2019, we had 1942 homes in backlog that are scheduled to close in the second half of this year, you'll need a homebuilding gross margin of over 24%.
I will give some additional guidance on homebuilding gross margins for the third quarter and full year later in the call.
For the second quarter as DNA expense as a percentage of home sales revenue was 12.1%.
Which was 140 basis point increase compared to 10.7% for the same quarter last year.
The year over year increase in our SGN a percentage was due to the decrease leverage as a result of 10% decrease in home sales revenue.
At higher overhead costs as a result of our expansion initiatives into the Carolinas, Sacramento, Austin, and the Dallas Fort worth markets.
At quarter end, we owned or controlled approximately 28000 lots, which represents a 5.8 year of supply based on our last 12 months' deliveries.
Detailed breakdown of our lots owned will be reflected in our quarterly report on Form 10-Q , which we filed this week.
In addition.
Theres, a summary of lots owned or controlled by state on page 27 of the slide deck.
Turning to the balance sheet at quarter end, we had approximately 3.3 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 net debt to net capital at 37.7%.
During the quarter, we drew on our $250 million term loan facility and paid off the $382 million in senior notes that were due in June .
We ended the quarter with $590 million of liquidity, consisting of 171 million of cash on hand, and 419 million available under our unsecured revolving credit facility.
Now I would like to summarize our outlook for the third quarter and full year 2019.
For the third quarter of 2019, the company expects to open 14, new communities and closed out of 12 communities, resulting in a 148 active selling communities as of September 32019.
In addition, the company anticipates delivering 45% to 50% of its 2208 homes in backlog as of June 32019.
At an average sales price of 620000.
Nobody expects its homebuilding gross margin percentage to be in the range of 21% to 22% for the third quarter and its SGN a expense as a percentage of home sales revenue will be in the range of 12% to 12.5%.
Lastly, the company expects its effective tax rate to be in the range of 25% to 26%.
For the full year the company reiterates its previous guidance of delivering between 4000 605000 homes at an average sales price of 610 to 620000.
Additionally, the company expects homebuilding gross margin percentage to be in the range of 19% to 20% for the full year.
The company expects its full year EPS DNA expense as a percentage of home sales revenue will be in the range of 11% to 12%.
And then finally the company expects its effective tax rate.
For the full year to be in the range of 25% to 26%.
I'll now turn the call back over to Doug for some closing remarks.
Well, thanks, Mike in summary, I'm very pleased with our performance this quarter, we met or exceeded all of our previously stated guidance from last quarter's call.
Generated a strong order performance throughout the quarter.
Paid off a near term debt maturity and improved our leverage ratios.
We're also we are also furthered our strategic initiatives by growing our operations within our expanding national footprint.
Well it takes some time for us to realize the full benefit of these investments we are confident that tri Pointe is on a path to becoming a more diversified.
Well rounded homebuilder with the same premium brand focus that has differentiated us from our competitors.
Finally, I would like to thank all of our employees for their contributions in making Tri Pointe what it is today.
In particular I'd like to thank my good friend and partner Mike Grubbs.
Who announced his retirement earlier this month effective at the end of this year.
As you know Mike was a founding member of Tri Pointe Group and has played an integral role in every phase of the company's evolution.
He will certainly be missed by everyone in the organization, but we will continue his legacy a prudent financial discipline and trust within the financial community when Glen Keeler, Our current Chief Accounting Officer assumes the role at the end of the year.
That concludes my prepared remarks, and we will be happy to take on your questions. Thank you.
Thank you at this time, we'll be conducting a question and answer session. If you would like.
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One moment, please while we poll for questions.
Our first question today comes from Alan Ratner of Zelman and Associates. Please go ahead.
Hey, guys. Good afternoon, and first off congrats to both Mike and Glenn on on the upcoming changes in their in their lives.
Mike It's been great working with you over the years.
So I guess the first question I just wanted a quick housekeeping question that 10% July increase I just want to confirm is that an apples to apples number I guess through July 24th or whatever or is that over all of July for last year.
Yes, it's apples to apples.
Okay cool thanks.
And then the second question.
Doug I appreciate all the comments on the pricing environment. It sounds like you've been able to pull back on some incentives through the spring and I think that's generally been the trend we've heard from other builders, but to be perfectly honest I'm, a little bit surprised I guess that the the pullback hasnt been.
Even greater or I guess, you haven't you've seen more pricing power in general just given how strong it seems like the acceleration has been on the order side I mean, you put up over 20% growth and in June and a lot of other builders did as well and when we've seen that in the past several years I think when order growth has accelerated like that it's generally come alongside some pretty aggressive price increases and it seems like this time might be different in terms of how builders are really approaching the price versus pace dynamics. So can you just talk a little bit about what you're seeing in your expectation if pricing power.
Do you expect that to accelerate as the year goes on or if you think this is kind of what we should expect for the next several years just kind of is this fairly flattish pricing environment.
Yes ill, let Tom died and is the question too, but I mean.
Generally speaking.
The pricing environment incentives been very project and market specific.
But if you take the kind of take a couple of steps back and remember there is a pretty big adjustment in the second half of 2018, and then you look at.
Our premium brand space that we build in.
Probably and I'm not going to speak for the other builders, but we're always.
Pulling the levers of pace versus price and.
I'm very proud of the fact that.
Our company, yet ASP well north of 600000 is able to keep pace with.
Frankly, the entry level price points. So some of the other buyers and that's really due to that our premium brand positioning that differentiates ourselves. So I you know I continue to think going into the second half of the year that that in certain markets and certain projects. We will have a pricing power in certain markets or you know be flat and maybe a couple of projects will have a little bit more incentives. So it's.
I call. It a very normal market, we're pretty excited about where we stand right. Now we're very excited about the second half of the year and going into next year or two we've got Oh, our positioning in both the entry level move up and luxury price points is resonating with many consumers.
Yeah Allendale, the other thing I'd add to that is.
Basically we also had a lot of built up inventory in the industry and a that was probably leading to less price elasticity on on that type of product, but overall as Doug mentioned, we're encouraged as we go forward on a month over month basis to see more price elasticity in most of our markets.
And on that inventory comment to Tom how would you characterize the situation today do you feel like builders and mostly works through a lot of those excess specs that were built late last year.
Yes, definitely we are we have a lot of success in the first couple of quarters.
We're back down to about two per community.
Got it okay. Thanks, guys. Good luck.
Thank you Mike though.
The next question is from Stephen Kim of Evercore ISI. Please go ahead.
Yes, Thanks, a lot guys congratulations on the quarter and also Mike congratulations as well or you'll be missed.
Well I hope this isn't a sign of a of any have any changes to the negative in terms of financial disclosure, but I don't think you gave a land spend this quarter I was wondering if I could get that to start off with.
Actually I'll get that to you here in a minute Stephen I'll have to look that up but that's no Oh no sign we just did put it in his prepared remarks this time.
[laughter] figured okay, well your S.P. in backlog it came down about 20000, I think sequentially. Your closings ASV actually rose 10000 sequentially I assume that's probably just due to the longer cycle time of higher priced units and all that but I was wondering if you didn't lower your ASP guide for the year for closings, but it would seem that you know the drop in ASP backlog, probably should eventually flow through in closing so I want to make sure that I'm thinking about that properly why you didn't change your full year I S.P. Guide you know what does that say about the back half <expletive> piece.
Yeah, I mean, it it's kind of one of those things are raised or backlog ASP, just never seems to flow through.
On our delivery is the just because most of the time the majority of or a lot of our backlog is California units and you know probably Washington units with a higher espies.
And they take a little bit longer to build so they sit in backlog a little bit longer.
And some of the other markets were able to sell and close within the existing quarter. So we still have confidence in our full year, a S.P. guide I would say I think our orders for the quarter were around 600000, though.
And so you know ASP and backlog will be will be coming down after we deliver some of those long term, California assets in the third quarter.
Got it but it sounds like it's more like the backlog is going to come down to kind of where the closing price is Brett closing price will continue to sort of live where it is for the foreseeable future.
That's correct.
Okay, Great that's what I wanted to understand a little bit better.
I'm also a from a just a a a housekeeping perspective, the dunhill orders you know what I can you give us a time for how much that was and then lastly, gross margins would be wrong would we be wrong in thinking the gross margins compete are likely to peak in the third quarter or.
You know it is there is that due to lumber timing, a lumber and things like that or is it conceivable that you could see a gross margins continued to improve sequentially I think margins will be relatively flat between threeq and Fourq. You. You know originally we said that we thought our margins to be a little bit higher in Threeq you.
HM you know with the delivery of some of the longer term assets those are blowing flowing into fourq you. So I'd say, it's relatively flat for three June four two.
Okay. That's helpful.
Thank you.
And I'll get back to you on that land number.
Yep, Okay. Thank you.
The next question is from Truman Patterson of Wells Fargo. Please go ahead.
Hi, Good morning, guys. Thanks for taking my question and nice results.
What I wanted to follow up on Alan's questions for a little bit of clarity.
Could you guys give the magnitude of the incentive decline in order incentive declined during the quarter and possibly break out between.
Some commentary between California and in your markets and then.
The inventory levels that you guys said our normalized today.
Could you guys just.
Elaborate on whether you think industry inventory levels.
Our normalized as we enter the seasonally slower period.
Yes ill Rambo Theres some numbers here real quick Truman it's Mike.
So order incentives as a percentage of our orders for Fourq. You 18 was 66.9% once you as by seven and then Twoq was for seven.
And then delivery incentives.
For once he was 5.8 and it was 5.4.
For Q2.
And then our backlog incentives.
Were 3.6 in Q1 and it's in 3.4 in Q4, but when you look at it monthly the cadence I think we've dropped from about.
5.9 to 5.1 on a monthly basis, so we're seeing progressive incremental improvements in incentives as we move.
Throughout each of the month within the quarter.
Okay, and then just on track really helpful.
Okay, and that's why you're hearing that from an inventory perspective, I mean for us thats somewhat normalized that usually two to three homes per community is while we have were not.
Huge their spec builder across all the markets.
Because of our pricing.
Okay. Okay. Thanks.
Looking at Phoenix, or Arizona orders were up.
90%.
Could you guys elaborate a little bit on what was driving this is it purely market did you guys have some flagship community openings, maybe discuss the repeatability of this going forward too that's some pretty tremendous growth.
Yes.
We we opened five new communities.
In the first part of the year and it definitely German had a significant impact I mean, the market is is good very good and Phoenix were and we're we're very well positioned in some of the major employment.
Yeah quarters in the Southeast Valley, but we also opened a project just outside of Phoenix call. The bonds. If you go to our website.
Right right, along the South mountains with four communities I believe there. So just you know just timing of a lot of communities opening some of which are wish we would open a little earlier, but you know we had some rain during the winter as you probably remember.
But needless to say, it's a very positive sign for Phoenix were very excited about our Mary Kay Division in Phoenix, and we see continued growth.
Going into 2020 2021 with that division so it's all.
Very strong results from the marketplace.
Yeah, I would just add trim in that all of our teams do a great job and.
[noise] preview marketing in generating interest for our new communities or new communities continue to perform very well and that many times, we're opening with a significant amount of pre sales and strong demand and we're off to great starts and have excellent momentum moving forward, which is our goal.
All right. Thank you guys.
Thanks for taking a follow up to Steve's question, we had 66 orders a in DFW for Trendmaker.
For the quarter.
The next question is from Mike Dahl of RBC capital markets. Please go ahead.
Hi, Thanks for taking my questions.
Hi, Mike wanted to I wanted to.
Get a little more more color on the the sequential step up in.
In the second half and clearly you guys have been monitoring that just given the mix of longer term, California, but.
Based on those.
Comments, you just made around the incentives and both orders and backlogs can can you help break down kind of of the.
Call. It 450 basis point step up sequentially second half versus to Q, how much is lands mix.
Versus.
Better pricing dynamics.
Well I mean, it's a little bit of both right there in Atlanta mixes some of its of the geography is of what we're closing you know you know were closing more California units within the long term, California assets and a significant amount of those are coming from our Pacific Highlands Ranch.
Projects would you know the margins are relatively high.
And that's on the heels of US opening those five new communities. There at the end of last year in the beginning of this year that that had a tremendous sales, but we've also had pretty good pricing power in San Diego, specifically at that PHR on the higher end. Your ASP is there close to a million dollars for that whole division because we're doing we're building between 300003 million.
So it's a little bit of both but.
The significant increase in margins are coming from a just a lot of more California deliveries in the back half of the year and then a lot within the long term, California assets.
Versus the first half of the year, we sold a lot of inventory units and we're moving through those and not many California deliveries in the first Oh from the long term, California assets.
Right, Okay, and then some of the some of the better incentive activity and selective pricing power would be more of an impact for first half of 20 close things at this point.
Correct Yeah.
Okay.
And then if you back to the conversation around to ask peas, and mix and as you noted kind of order ASP is dipped a little below 600.
That's the first time in a while but we've seen seeing that I think some of the commentary you've made so far around the new community openings and some of the positioning it seems like the mix is a little down the price spectrum, how should we be thinking about the.
You know a 600, a a good run rate going forward do you think it will do you think it will moderate further here's how how should we be thinking about things like various piece going for high yeah. As its Mike again, we are focused on coming down price point, I mean, I think 600, a pretty good number for two probably 2020, but just what's sitting in backlog again, a lot of the sales of the long term, California assets happen.
In the first half of the year and you know primarily in in a lot of it and once you and even a little bit of it.
And.
For Q at the higher price points at the 1 million to $3 million range in San Diego and so those are already kind of walked into backlog and impacting the orders are overly SP, but I mean, six hundreds roughly with it.
You know just below the company average I guess for the full year.
Right, we're encouraged by our buyer offerings going forward, we're well positioned and.
We think.
Overall around that 600 is a it's a good place to be.
Okay, great. Thank you.
The next question is from so on Basel, let's see I'd ESI Ji. Please go ahead.
Hey, good morning, guys.
So first question was on clean count to this years, obviously growth figure there.
But as we look beyond 2019.
Is this sort of double digit growth the target or is it sustainable.
Or do we sort of step up this year and then you work through that next year and we accelerate out yet on it it it's Mike. It's a good question. Let me just step up this year is primarily the acquisition of Dallas right. We added communities there and so when you just look at the pure averages at the end of the year, you know were up roughly 12% a year over year going into 2020, it's more a you know mid single digits on the community Count and then it probably steps up a little bit more from that into 2021.
Got it all right. Thank you.
And then Doug as we start delivering more projects from those you know Greenfield operations that we have in several divisions.
Yes makes sense, Okay, and then longer term.
Obviously, it sounds like you're still bullish on California, but thats, 50% business, but as you look a year or two out where do you sort of want to get that down to.
And we sort of another geography, but if you could just talk about the geography as you want to get bigger in.
I I don't think it happens in a year timeframe I mean, it takes anywhere from two to four or five years to bring assets into the marketplace and turn it but you know we see tremendous growth in and outside of California, and the Texas Southeast markets, but we continue to see.
Growth in California, a Sacramento, the L.A. division with some more affordable price points that were targeting so you know the narrative on California has been <unk>, We think you know significantly overblown.
It's a it's a state. That's that's you know really has a housing crisis and we have the ability to not only deliver more affordable price points and luxury price points in southern California, but we also had more importantly, the teams to find a land and be able to deliver that here in a very entitlement constrained state. So it's going to be a continued growth outside of California, yeah. When measured growth inside California is the best way to put it.
Got it and if I could just sneak one in on active adult one of your peers. This week highlighted some just things slow slower to pick up there have you guys seen the same or are your price points.
I guess just more favorable there.
Yeah, I think I mean active adult buyer is definitely a a little bit more measured a in the second half of last year with <unk> with interest rates are a tipping up and now they sit back down, but they're definitely out as a percentage of our business is actually growing a Mike what's the yeah.
Just a follow on to that I mean, its ordinary we saw for active adult was really strong. This quarter is actually 4.1, a which is one of the higher absorption rates, but it's only 2% of our business right now of our orders. So that just you know just a couple of projects can swing that pretty quickly just to give you. The overall absorption rate because I'm sure. It will be one of the questions that entry level were four seven.
Move up were three to luxury to nine and then for one for the active adult and the average was three four and I wanted to answer the question. It's Steven again asked about land and land development, we apologize not putting that in our prepared remarks, but landec was 87 million Atlanta developing was 86 million for the quarter for a total of 173, so that puts us year to date at three await for laying back and land development 308 million.
Hi, great. Thanks, guys.
Hey, thanks.
The next question is from Carl Reichardt, a B.T.I.G. Please go ahead.
Hi, guys like are too young to retire.
[laughter] I wanted to ask about California outside the legacy assets, just trying to get a little more granular there so given the Sacramento expansion in some some looks at some other markets outside of legacy well, how or how are margins trending there Doug are in and sort of what's your expectation for what your your mix of product outside the legacy will look like will it be overtime sort of a similar split between entry level and and move up or or could you expect more of that been aggressive move towards towards first time buyers in those markets outside legacy.
Oh, Hey, Hey, Carl this is a <unk> questions and as you know we're we're certainly very encouraged by our operations are outside of our legacy assets as well.
I wouldn't say that as we look at the different markets, where we see the biggest potential for growth in that being our Sacramento market. Obviously, that's more of a opportunity to reduce our S.P. overall, but in general we will have a diversified portfolio approach to that market like we have in all of our markets.
Similarly, I'd say the inland Empire continues to show strength and we're encouraged by our ability to have strong demand and generate significant margins and we are.
Actively in the acquisition phase for several new acquisitions that were really encouraged by its our positioning going forward again has been to capitalize on lower ASP with a buyer segment, that's probably shifted a little bit towards that entry level buyer.
Overall, you know as you look to the coastal markets.
We see those markets being a little more challenged currently because of the higher price points and so we are looking continuing for infill opportunities to offer product at a little higher density again to bring down our average selling price.
So there's a lot of the diversity in California and that diversity holds true in each one of our operations as well.
Thank you Tom and then you started to answer my next question, which is right. So given California has been softer than other markets given that your perspective is that there's still a lot of long term value in the state which makes sense.
Have you started to see any movement from some of the privates that are still around and sizable understate towards towards looking to to to sell their businesses would you be interested in something like that given that you've also got a mandate to try to diversify out of the state.
Hi, This is Doug Karl now, we haven't seen any of that from any of the prime it's.
So.
You know, we would love to.
Take a look at that opportunity obviously, we'd look at it as more of a land acquisition because we've got a strong teams in most of the marketplaces, but no we haven't I haven't seen anybody.
In any form or fashion.
Is that true outside of California, as well, Doug I think I ask you. This every quarter.
Yeah, we continue to see some activity in the M&A front are you know our focus is really to.
Growing our you know really start divisions in the Carolinas were having really strong success and and and tying up land there and getting going there in 2020 with our first communities Austin, Dallas, Sacramento L.A., but on the heels of that with our strong balance sheet. We continue to look at M&A opportunities, primarily in the south east and the North West.
Great. Thanks Gents.
Thank you Carl.
The next question is from Scott Schrier of Citi. Please go ahead.
Hi, good afternoon.
Earlier, you talked about twice elasticities in some of your markets and looking at your monthly absorption pace through the quarter. It looks like it trended a little more evenly than the past few years I'm curious if there's anything to read into there whether it was incentives used to moderate if interest rates were a factor or if it's indicative of a better demand for your price point of a product, perhaps some folks are a little more confident in the economy or the stock market I know typically concerns or to the downside. We saw you know the new home sales print show more activity in the 500 K. to 750 K range than what we've seen so yeah I'm just curious on that the absorption pace, how it trended through the quarter.
Well I think your it not as a key differentiating point for Tri Pointe and refocus.
In both entry level, which is about 30% of our orders.
Roughly a 50% as move up first and second 17% luxury and 3% active adult year to date.
When we look at our strategy is more of a premium brand strategy or a with with our customers that doesn't mean, you know higher price as I said were 30% entry level, but clearly at our absorption pace and our E. S. P. The consumer is is locking in on our product offering a in many market areas and it starts with the land planning always through the product offering and that premium brand strategies is a big differentiator as and I applaud. The results of some of the builders are going to the entry level I think that's great, they're doing really well and we love entry level buyers that come into the market. Because then they become move up buyers first time in second time, so the food chain and the housing business is great. It and we're well we're well positioned in it very differentiated ourselves from a from a the competition that's for sure.
Scott This is Tom I I'd basically add to that relative to your question I think there's a little bit of everything you suggested happening that has led to an extended selling season for us. So as we look at the market going forward interest rates certainly of health or stronger demand overall as Doug just went through our our product offerings are focused on being a premium brand and design and innovation certainly differentiates and makes a difference.
But when you look at a year over year relative to demand and absorption on a monthly basis. We've had the least decline in absorption over this last quarter than any of the prior or seasonality in other years. So we're we're definitely optimistic and encouraged by that.
Thanks for that and then my next question really hits to the points that you both were talking about in your differentiated product offering and in the land market. It seems like there's a lot more capital that's chasing after the entry level type land does that create opportunity are you seeing potentially any easing in some of the more that move up tight land that that's more of where it where you focus on.
It's great question, and and you know in certain certain I mean, the land business for 30 years I've been in this business is always super competitive it at all levels, but.
Clearly with a majority of the competition looking for the lower entry level price points in where we offer a premium brand strategy at entry level move up and and so forth. It does give us a a a strong baar baar clean position at the table. So we we continue to focus on very well located land close to employment corridors.
We're not going to chase price points out to the hinterland. So to speak so great question and it does help us, but it's still very competitive out there.
Great Thanks, and good luck.
Thanks Scott.
The next question is from Jay Mccanless of Wedbush. Please go ahead.
Hey, good morning, everyone. Congrats Mike.
The first question I had is on specs and what percentage of your closings. This quarter I'm started out as background and how does your last year.
I don't have that number.
Off or the paper that we have in front of US Jay will get back to you on that but I mean, we obviously close more specs during the quarter than we did in the previous year I'll just have to get back to you on that.
And it really why we hit the EPS upside and outside the range on the delivery guidance is we were able to sell more within the quarter and close them and you know that had a little compression on our margin for the quarter as well.
Okay.
But but despite that you are I believe you said earlier you guys do you expect the gross margin to be flat from Threeq to Fourq you 19 correct.
That's correct.
Okay. So effective same same guidance range.
For both quarters.
Got it and then the other question I had well I guess two more actually share buyback could you update us on that and have you all been active on that front.
Well as we talked about at I think our first quarter earnings call. We had the authority of the 100 million, but we wanted to focus on paying down our debt for the first couple of quarters, which we just did a in June year to where we paid off the 382 million of our 2019 bonds that were maturing and so now we're probably a little bit more focused on an opportunistic basis going forward on a you know fulfilling that that authorization.
And then.
And I apologize I got knocked off the call for a few minutes.
Can you guys talk about your stick and brick cost how that's running this year versus last year.
And are you. Besides the lumber benefit are you seeing any other.
On cost inputs, it may be trending and tri pointes favor.
Yeah. It's good question Jade its Doug but.
I would tell you that are currently to your year to date, our stick and brick costs are down.
In every one of our markets except for Austin.
Uh huh.
Hi, any tiny increase in Phoenix.
And then flat in Houston, and when I say down it's down 1% to 4% our teams.
We had a very weve focused.
Because quite a bit at the end of last year going into this year on on a number of initiatives, we talked about our 12 points sales and marketing initiative, but we also had a our cost initiatives not just direct but all cost segments to the p. an hour of anywhere from 4% to 10% depending on on the division that's not just directly by the way as I mentioned so.
You know we continue to focus on our cost out of the equation.
I always believe that you have more control over your caution and there may be less price elasticity. So you always want to be Oh.
Very good operator on the cost side.
Right I appreciate you taking my questions.
Yep, that's right. Thanks Jay.
The next question is from Alex Regal, a b. Riley FBR. Please go ahead.
Thank you can you comment a little bit more on the cancellation rate. It obviously appears to have stabilized but are there any regional discrepancies there.
No Oh this is Tom were holding pretty steady Uh huh.
Low cancellation rate of about 15% overall for the entire operation.
You know we have seen a little bit higher can raise the mad in Vegas I'm. So that's something that again, it's not atypical for that market, but it is a little bit higher relative to that and then the Dallas Fort worth market again has a little higher can rate overall, but again that seems normal for what our experience in the past as them.
And then what was your option rate as a percentage of sales in the quarter and has that changed much at all recently.
It was about 10% movies exactly sure.
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7.8% in the quarter compared to 10.5% in the prior year.
So it's up about 130 big focus of ours moving forward I mean.
Thank you.
Thanks Al.
The next question is from Alex Barron of housing Research Center. Please go ahead.
Yes, Thank you and congrats Mike on the retirement and Glenn Thanks, Alex.
You know I wanted to just ask on the.
On the order side, the 10% number you gave us was that including.
Dunhill or excluding dunhill.
That was including Danielle it's a done deal at 66 orders for the quarter.
So orders were up 11%.
Okay, No I meant for the fourth of July .
It was inclusive as well yeah that was a consolidated number sorry.
Got it okay.
Then my other question was what is generally your policy on taking contingencies given that you guys. Obviously worked with a lot of move up buyers and has that changed at all.
Alex This is Tom we've got a big focus on contingency management, we think we do that extremely well.
Basically in order for us to take our home off the market we have to be very confident in the contingent sale that we're looking to and we've done a great job with that and most of our contingencies tend to come to fruition in a timely manner. So we're very cognizant of the the time frames of what we'll take a contingent.
Home to sell for and we've been very successful with that.
Got it so I could ask one last one.
In the inland Empire.
You feel the.
The current ethylene chain loan limit, it's still an issue as far as what you're able to.
To sell or not really.
We think thats a competitive advantage for us most of our offerings.
Our able to accommodate a lot of effort Jay buyers. So at our price points. We think we're currently aligned where the FHLB limits a positive for us.
Got it okay. That's good luck. Thank you.
Thanks, Alex.
There are no additional questions at this time I'd like to turn the call back to Doug Bauer for closing remarks.
Thank you and say thanks to everyone for joining us on todays call. We look forward to sharing our results with you at our next quarter's call and have a great weekend. Thank you.
This concludes today's conference you may now disconnect your lines. Thank you for your participation.
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