Douglas Bauer - Chief Executive Officer Michael Grubbs - Chief Financial Officer Thomas Mitchell - President & Chief Operating Officer Chris Martin - Vice President of Finance and IR.

Alan Ratner - Zelman Nishu Sood - Deutsche Bank Stephen East - Wells Fargo Jay McCanless - Wedbush Securities Will Randow - Citigroup Alvaro Lacayo - Gabelli & Company Alex Barron - Housing Research Center Dan Jacome - Sidoti.

Greetings and welcome to TRI Pointe Group's Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to, Chris Martin, VP of Finance and 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 third quarter of 2016. Documents detailing these results including a slide deck under the presentations tab are available on the company’s Investor Relations Web site 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 are forward-looking statements that involve risk and uncertainties.

A discussion of such risks and uncertainties and other important factors that could cause actual operating results to differ materially from those in the forward-looking statements are detailed in the company’s filings made with the SEC, including in its most recent annual report on Form 10-K and its quarterly reports on Form 10-Q.

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 those non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through the TRI Pointe's Web site and in its filings with the SEC.

Hosting the call today is Doug Bauer, the company’s Chief Executive Officer; Mike Grubbs, the company’s Chief Financial Officer; and Tom Mitchell, the company’s Chief Operating Officer and President. With that I will now turn the call over to Doug..

Thank you, Chris, and good morning everyone. Thanks for joining the call to review our results for the quarter. TRI Pointe Group delivered another strong quarter of profitability. I am happy to report that each of our homebuilding brands made positive contributions to the bottom line, a testament to the well balanced, diversified nature of our company.

Because of the strong success we enjoyed in 2015, and a 2016 plan that was focused on replenishing our land pipeline and opening new communities, we experienced year-over-year declines in several financial and operational metrics this quarter.

While the declines this quarter were expected, we are effectively executing on our plan of replenishing and opening new communities which we believe will provide the catalyst for strong steady growth that will positive year-over-year comparisons for future years.

Beginning in the fourth quarter, we expect to reestablish a year-over-year increase in community count and we have already seen tremendous success with strong orders from our new community. We are off to a good start for orders and with our positive community count growth, we expect double digit order growth year-over-year in the fourth quarter.

We continue to build a best in class culture by sharing best practices across our organization and staying committed to being a leader of design and innovation in our industry. I believe it is this culture and the mindset that differentiates us from the competition and enables us to produce outstanding results.

For the quarter we generated $34.8 million of net income or $0.22 per diluted share which resulted in $137.3 million of net income through September 30, which is a 14% growth over the same period last year. Additionally, our homebuilding gross margin percentage for the quarter was 21.8% as compared to 20.4% in the same period last year.

As I have stated in the past, the business of production homebuilding does not follow a path of liner progression. Issues such as timing of community openings, shifts and product mix, and changes in local market dynamics can swing a builders results from quarter-to-quarter.

These swings are a normal part of homebuilding and while they can cause near-term volatility, they do not impact the long-term strategy or outlook for our company.

As such, we remain in a great position to deliver on our goal of 5100 to 5400 homes in 2018, thanks to our significant inventory of lots owned or controlled and our team's passion and commitment to growing our six homebuilding brands for the next several years. With that, here is some color on our various brands and the markets in which we build.

Pardee Homes, which was once again a significant driver of our company's success in the third quarter, both in terms of profitability and absorption pace.

In the San Diego division of our Pardee Homes brand, we continue to reap the benefits of having low cost land positions in some of the most desirable locations in the county, which resulted in gross margin in excess of 30% and an absorption pace of about four homes per community per month for the quarter, and over five homes per community per month year-to-date.

We continue to capitalize on market conditions by offering multiple products within our Pacific Highlands Ranch master plan community. With two unique product offerings that have been very well received and will contribute strong deliveries in 2017.

In addition, we have activated the remaining planning area of our Ocean View Hills master plan community in Chula Vista. We have had strong sales at our first product offering which has sold 47 homes since opening in April of this year at an average sales price of $493,000.

We are looking forward to the next two products which are on schedule for opening later this year and because of their affordable pricing below $400,000, we expect strong absorption. In the Inland Empire division of our Pardee Home brand, demand remains strong for entry level and move-up products east of the I-15 corridor.

We have had excellent absorptions of 5.5 orders per community per month, thanks in large part to our product pricing that falls within the local FHA and conventional loan limit.

The grand opening of three projects in late August in our West Ridge community in Lake Elsinore is off to a great start with 53 orders to date and will fuel significant order growth for 2017. In addition to great absorptions, our homebuilding gross margins were above the company average during the quarter, thanks again to our low cost land basis.

Finally, the Las Vega division of Pardee Homes brand continues to perform well for us. For the third quarter we saw a good demand on pricing activity in all sub markets. Our new products have been well received and helped push our absorption pace over 3.3 homes per community per month for the quarter.

Overall, demand fuel is broad-based both from a location and buyer segmentation standpoint, which will facilitate excellent growth in 2017 and beyond. Moving on to our TRI Pointe Homes brand where we operate in Southern and Northern California and Denver.

In our Southern California division, our coastally located projects continue to perform well with an absorption pace of 3.4 homes per community per month for the quarter.

Our unique product offerings and strong positioning within the Orange County market consists of two actively selling communities in the Rancho Mission Viejo home master plan, and two located in Orchard Hills master plan in Irvine.

We will diversify our presence in Orange County even further in the coming months as we introduce our new moderately priced Art Deco inspired homes in the neighborhood of Parasol Park within Great Park master plan community in the first quarter 2017.

Our communities in the Inland Empire west of the I-15 corridor also gained traction with buyers as market conditions have improved. As a result, we have experienced strong traffic absorption averaging four homes per community per month.

We have also seen a shift in our buyer profile in these communities as traditional Orange County buyers including the Asian American demographic segment have demonstrated a desire to move inland to obtain more value and affordable housing option as compared to Orange County.

In Northern California, strong job growth and a lack of available supply in the core Bay Area has created an urgent need for new home construction. However, this same dynamic has pushed affordability to the upper limits for many new home buyers.

As a result, our absorption pace was down from 3.2 to 2.0 for the quarter on a year-over-year basis, bur our homebuilding gross margin percentage was higher by 170 basis points. Due to lack of supply in these markets, we are anticipating continued margin strain but our absorption pace may be slightly slower than our company average.

The Denver market continues to demonstrate solid market fundamentals with strong demand and price appreciation. We look to capitalize on these conditions with several new product offering in the fourth quarter that will be at affordable price points.

We have a strong land pipeline that gives us confidence in our planned increase volume significantly by 2018.

Moving to the Pacific Northwest and Quadrant brand, housing fundamentals remain strong and we enjoyed strong price appreciation during the quarter, resulting in 550 basis point improvement in homebuilding gross margin percentage compared to the same period last year.

Our sales efforts, however, were hampered by the recent closeout of several of our communities which left us with seven open communities at the end of September.

We will reverse this trend in early 2017 as we expect to open nine new communities by May of 2017 and a total of 12 for the full year, primarily in the core eastside market of King and Snohomish County. At our Maracay brand in Arizona, deliveries increased 26% during the quarter compared to the same period last year.

Thanks in part to an improving labor situation which helped drive our average cycle time down from its peak. Orders started slowly during the quarter but bounced back nicely in September.

Sales got a boost late in the quarter with the opening of two new communities in the Meadows master plan community in [indiscernible] which generated 21 orders within the first two weeks of opening.

For the nine months ended September 30, orders have increased 6% year-over-year which demonstrates our belief that housing fundamentals continue to be strong in Phoenix and Tucson. In Texas, our Trendmaker brand turned in another profitable quarter and increased orders by 4% year-over-year.

Our team in Houston has done an excellent job navigating this difficult market by maintaining a strong presence in highly desirable locations, while negotiating favorable terms from many of our current and future lot takedown.

We are also in the process of evaluating several acquisition of small lot opportunity that will enable us to introduce new product at lower price point. Lastly, our organic expansion into the Austin market continues to progress as we have opened our first two communities and have three more in the pipeline for next year.

Lastly, market conditions for Winchester homes in the Mid-Atlantic region remains mixed but we are seeing signs of improvement and are optimistic for 2017. Absorption pace was down slightly from last year's third quarter, however, up 8% for the nine months ending September 30.

While our home building gross margin percentage continued to improve year-over-year for both the quarter and the nine months period ending September 30. As part of our repositioning strategy, we recently introduced a well-designed luxury townhome in the Bethesda market.

In addition, we opened an entry level townhome priced in the high 400,000s near the metro station in Silver Springs, Maryland.

This is an excellent example of our opportunistic acquisition strategy to fill entry level, move up and luxury buyer needs close to major transportation, employment centers and excellent schools in the Maryland and Northern Virginia markets. With that, I will turn the call over to Mike to provide some financial highlights for the quarter..

Thanks, Doug, and good morning to everyone. I would like to welcome you to our call today as well. As Chris mentioned earlier, we have posted a Slide deck on our Web site which includes charts detailing orders, deliveries and absorption rates by homebuilding brand or division for the third quarter ended September 30, 2016.

In addition, Slide 7 highlights our progress through the first nine months of the year. We have also provided certain key operating metrics by state in today's press release announcing our earnings for the quarter. Slide six of the deck provides a snapshot of some selected operational highlights for our third quarter.

Home sales revenue was $579 million for the quarter on 1019 home deliveries at an average sales price of 568,000. Our homebuilding gross margin for the quarter was 20.1% and net income came in at $34.8 million or $.22 per diluted share.

During the quarter we opened 16 new communities, five in California, four in Texas, two in Arizona, two in Nevada, one in Maryland, one in Virginia, and one in Washington. In addition, we closed out of 10 communities during the quarter, resulting in a quarter ending active selling community count of 123, as shown by state on Slide 8.

For the fourth quarter of 2016, we anticipate opening 9 new communities and closing out of 7, resulting in 125 active selling communities as of December 31, 2016. This ending active selling community count of 125 results in growth of 20% year-over-year from our active selling community count of 104 as of December 30, 2015 as we previously guided to.

Our new home orders for the quarter started off slow in July and the trend continued into August, but from the last week of August through the end of September we opened 8 of our 16 new communities and in September we saw a resurgence in our order pace and ended the month with orders up 26% year-over-year.

Our order pace has continued to be strong into the first three weeks of October at approximately 2.75 orders per community per month. For the full third quarter, we had 932 net new home orders, down 6% compared to the same period in 2015.

Our overall absorption rate was 2.6 homes per community per month for the quarter and continues to be strong at 3.2 homes per community per month for the first nine months of 2016.

However, due to the lower than expected new home orders in July and August, our full year new home deliveries will likely be at the lower end of the previously stated range of 4200 to 4400 homes. Backlog ended the quarter, down 145 homes or 8% compared to last year's third quarter, to 1711 homes with an average sales price of 555,000.

The corresponding dollar value of backlog decreased 14% year-over-year to $950 million.

During the quarter we converted 57% of our second quarter ending backlog, delivering 1019 homes, resulting in a 10% year-over-year decrease in deliveries and a corresponding 10% year-over-year decrease in home sales revenue to $579 million, which was in line with our previously stated guidance.

Our average sales price for home delivered in the quarter was $568,000, a 1% increase from $564,000 for the comparable period a year ago. As we previously guided, our homebuilding gross margin percentage for the second half of the year was expected to be approximately 20%.

For the quarter our homebuilding gross margin percentage was 20.1%, which was 90 basis points year-over-year from 21%. However, for the nine months ended September 30, our homebuilding gross margin remains strong at 21.8%, up 140 basis points year-over-year from 20.4%.

SG&A percentage as a percentage of home sales revenue was 10.9%, which was 210 basis point increase compared to 8.8% in the same period in 2015, however, a 40 basis point improvement compared to 11.3% sequentially from last year.

The increase in year-over-year for the quarter was due to the unfavorable leverage impact of 10% lower home sales revenue in addition to incremental sales and marketing costs associated with the opening of new communities as well as rise in broker co-op commission and the incremental G&A cost associated with growing our company including our organic expansion into Austin and Los Angeles.

For the fourth quarter we expect our SG&A expense ratio to be approximately 9% of home sales revenue, resulting in a full year SG&A expense ratio in the range of 10.5% to 10.7%. During the third quarter we spend $166 million on land acquisition and $73 million on land development.

Year-to-date we have spend a total of approximately $705 million on land acquisition and land development.

The focus of our land strategy is to target land for communities which will deliver homes in late 2018 and beyond as we currently own or control all of the land needed to meet our planned deliveries for 2017 and over 90% of our planned deliveries in 2018.

As it relates to our balance sheet at quarter end, we had approximately $3 billion of real estate inventory, representing 29,713 lots owned or controlled, of which 59% or located in California. Our lots owned or controlled represented an implied 7 years of supply on a trailing 12-month basis.

A detailed breakdown of our lots owned is reflected in our Form 10-Q, which will be filed later today, and in addition there is a summary of lots owned or controlled by state on page 22 in the slide deck.

At the end of the quarter our total outstanding debt was $1.4 billion, resulting in a ratio of debt to capital of 43.7% and a net debt to capital of 41.3%. We ended the quarter with $129 million of cash on hand and an additional liquidity of $421 million available under our unsecured revolving credit facility.

Now I would like to update everyone on our $100 million share repurchase authorization. For the quarter we repurchased 852,500 shares at an average price of $12.22 per share for an aggregate dollar amount of $10.4 million.

As of the market close yesterday, we have purchased a total of 2.7 million shares at an average price of $12.04 per share for an aggregate dollar amount of $32.8 million, leaving us with $67.2 million remaining under our current $100 million share repurchase authorization.

Before I summarize our outlook for the fourth quarter and full year 2016, I would like to remind everyone of our investor day to be held on November 10. As part of our investor day presentation, we will be providing our preliminary guidance for 2017 and 2018.

As for the fourth quarter guidance, we anticipate opening nine new communities and closing out of our seven, resulting in 125 active selling communities as of December 31, 2016. A 20% increase over 104 active selling communities as of December 31, 2015.

During the fourth quarter we expect to deliver approximately 85% of our 1711 homes in backlog as of September 30, 2016, at an average sales price of approximately 550,000, resulting in new home deliveries for the full year that will be at the lower end of our previously stated 4200 to 4400 homes.

We expect our homebuilding gross margin percentage to be approximately 20% for the fourth quarter, resulting in our full year percentage being in the range of 20.5% to 21.5%. lastly, we expect our fourth quarter SG&A expense ratio to be approximately 9% of home sales revenue and full year SG&A expense ratio to be in the range of 10.5% to 10.7%.

I will now turn the call back over to Doug for some brief closing remarks..

Thanks, Mike. In conclusion, I am very pleased with the progress we have made year-to-date in reestablishing new communities and activating our long-term assets.

We hit on our stated guidance for any community count, deliveries, home sales revenue and homebuilding gross margin percentage, and while the absorption pace in the quarter was slightly lower than it was last year, I am encouraged by the 26% year-over-year increase in new home orders we experienced in the month of September.

In addition, we have seen higher absorption pace of 3.6 homes per community per month, year-to-date, at our new communities opened in 2016 versus 3.1 homes per community per month at our communities that opened prior to 2016, which is an encouraging sign for the future of our company.

All of our brands have demonstrated the ability to evolve and adapt to changes in the respective markets and it is this ability that cuts to the core of what TRI Pointe is all about. Instead of chasing the market, we challenge ourselves to redefine it based on strategic consumer research and careful analysis about where the market is headed.

We like to think of ourselves as innovators not just homebuilders and we believe that this mindset serves both our customers and our shareholders as well. As always, I want to thank all of our team members for their commitment in executing our business plan to date. This concludes my prepared remarks and we will be happy to take your questions..

[Operator Instructions] Our first question comes from the line of Alan Ratner with Zelman. Please go ahead with your question..

Doug, I was hoping just to dig in a little bit more on the order activity through the quarter. Pretty, pretty big drop offs in July and August, bounced back in September. You mentioned new community openings in September.

How would you kind of characterize that bounce back in overall activity between strengths in the new communities versus did you also see a similar improvement in your existing communities as well. And if that was the case, were there any pricing actions taken during the month that might have drove that improvement..

Really, Alan, July and August was a little bit, you know, unseasonably warm and caused order flow in July and August along with some communities that opened later in the quarter, kind of change the overall makeup of the quarter and orders.

I would say that in the openings we have seen tremendous success both in the Pardee brands and Inland Empire, Arizona. Strong interest in San Diego through the end of the third quarter. And as I mentioned earlier, our new communities are absorbing at a higher pace. In 2016, I think it was 3.6 per community per month versus 3.1.

So I mean it is indicative of where we really think the new communities are going to flow. So one quarter over the year doesn’t make the whole year and actually we are pretty much where we expected to be.

As we mentioned at the beginning of this year, we are resetting the table at the kitchen, so to speak, to bring on all these new communities for some really nice rapid growth going into -- or nice growth going into '17 and '18. And really double digit order growth in the fourth quarter.

It's all about setting that table and getting those stores in place and we are very excited about the initial results. It hasn’t resulted in any different pricing strategies. As a matter of fact if anything pricing strengthened, as you hope it would with such demand.

Tom, you want to add anything to that?.

Yes. I would say in response to your question that we have seen a similar pickup in our existing products and all of it just wasn’t driven by our new product absorptions. So, generally an overall pickup in September and we are quite positive that it's increased and continues to flow into October as well..

Great. That's really helpful, appreciate that color. And second follow up if I could, last quarter you didn't give official guidance but you highlighted that you expect margins to be up in '17 versus '16.

So just curious if that's still your expectation at this time?.

Yes. This is Mike. I mean we are going to give more color on that at our investor day here in a few weeks, but I think for the full year 2017, we don’t see margins materially different, one way or another. We will wait and see how we finish up the balance of this year in the quarter.

But I would say next year the trend is a little bit mere opposite of this one. If we see margins lower in the first half of the year but strengthening through the back half of the year in 2017, similar to what we saw in 2015. And as you know it's been dictated specifically by our California higher margin projects as to when they deliver..

Our next questions come from the line of Nishu Sood with Deutsche Bank. Please go ahead with your questions..

Thanks, and thanks as always for all the detailed reporting. The question I wanted to ask first was on SG&A. You folks have traditionally run a pretty lean organization SG&A wise. This year your SG&A up year-over-year, obviously with all the growth, and in the third quarter as well SG&A coming a little bit higher than expected.

Obviously reflected in your guidance for the full year as well.

I was wondering if you could break down for us the pieces that kind of drove the variance that caused SG&A to be higher this quarter and your expectations for the year? And how should we think about it, like what proportion of the increase in SG&A spend is just related to the surge in growth and you're going to continue to grow as you're talking about with your longer term '18 targets.

So how should we think about SG&A leverage going forward?.

Yes, Nishu, this is Mike. You know, SG&A was a little bit higher and we are guiding a little bit higher to it. I tried to cover it in my comments. But what we see specifically is a significant increase in broker co-ops in some of our communities. That’s had about a 30 basis points difference.

We saw commissions around 2.4%, 2.5% for the quarter of our overall revenue. So that’s a big expense line that’s hits the SG&A immediately. And that’s up from 2.1%, I think, about the same period last year. And that we have been growing our staff, obviously, to be able to grow to the deliveries of 5100 to 5400.

So we have seen about a $5 million increase in gross dollar and G&A and just building the overall infrastructure of our company to be able to deliver that we see in the out years. SG&A, on the S side it's about 5.4% of revenue and I think on the G&A side for the quarter is roughly about the same, 5.4%, 5.5%..

Hey, Nishu, this is Tom. Additionally, it should be noted just on the S side that we do have some very specific plans and improvements underway in marketing efforts of our larger master plan communities that are scheduled to come to market, and so that has some additional expense items there.

As we are planning on the Sundance active adult, we have got our Ocean View Hills community reactivated, our Aliento community up in LA, as well as the West Ridge community out in Lake Elsinore. So those have maybe a higher than expected spend right now to bring those products to market..

Got it. Appreciate the color. Second, I wanted to ask, Doug, you mentioned improving labor position and you specifically referenced Maracay and Phoenix, and that is a 180 degree opposite of what almost every other builder has been saying especially about the Phoenix market. So just wanted to get some color on that.

Now you have some pretty long tenured divisional management teams and so you had some success in navigating the difficulties last year, but if you could just kind of give us some more color on that.

How your experience on the ground seems to be so different than what we're hearing from the other builders?.

Well, I mean, Phoenix has been obviously a challenging place for labor and it continues to be such. But we have seen, as I mentioned, our cycle times improve from its peak and that really occurred at the beginning of the year.

As you mentioned our teams in Maracay led by Andy Warren have average tenure of well over 20 years, and it's really a partnership. It's not just lip service, it is not just trailer talk. But what Jeff Eschliman, our VP of Operations and Andy and the whole team there did was set out for the year what we expect.

We have got tremendous growth plan for this year and going into '18, to buy into our business plans and to be part of that business plan. In the end, the trades would rather know that their paycheck is there on a consistent basis with jobs that are set up for there is no interruptions, they are paid on time.

And if you make them buy -- have them buy into your business plan, you will reduce cycle times and that’s exactly what we did..

Got it. Got it. And just last one if I could. The investor day, you mentioned you're going to go over long-term financial targets, so we look forward to that.

Just thematically, maybe a little bit of a teaser about what else you'll be covering, land positions, land investments, what should we expect?.

Well, we are going to hit off the accomplishments that we had from our strategic outlook in November of '15 that a lot of you attended. We are going to talk about some of the differentiators of the TRI Pointe brand of companies.

We are going to hit on our long-term land assets which gives us -- which we feel gives us visibility in our margin profile going forward because of this low cost land and how we can bring that on much more rapidly than what we anticipated when we closed in 2014. And we will also talk about some of the value attributable to that land.

So those are kind of the highlights in addition to giving more guidance for '17 and '18.

As I mentioned earlier, this year at the beginning we are setting the ground work for a very strong plan for '17-'18 and frankly we are very excited about where we sit today, where the markets are still heading and able to achieve our business plan growth of deliveries of up to 5100 to 5400 by 2018. That all takes planning and implementation now.

It doesn’t happen in September 2017, as you know..

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

Doug, thanks for the color on the California markets. Just, if you could dig a little bit deeper. You talked about the Inland Empire being pretty strong and then you touched on Northern California.

I'm interested in what you all are seeing there on those two markets on pricing and pace and on the Inland Empire, were you going down in price points? What's stimulating the buying, if you will, in that particular market? And then what type of pricing power do you have in Northern California, because we're seeing and hearing that the pricing side of it is really checked up and so margins might come under pressure more broadly for the industry.

So I was interested in your view there..

So I will start and I am sure Mr. Mitchell can finish. But as I mentioned, Northern California, the need for new housing is very significant. Unfortunately here in California, we have this little thing called [indiscernible], so that really prohibits the entitlement or lengthens the entitlement timeframe.

So it's a very unique set of circumstances in especially the Bay Area because you have got this strong employment growth, lack of housing but we saw absorption pace, as we mentioned, come down to two a month.

But we haven't seen much in incentive growth at all because frankly, the way I look at it, Stephen, is the demand funnel, because pricing has gotten pretty steep, has just gotten smaller but there is no supply. So there is some econ for a one button there that between the econ demand and supply there is just not a lot of projects compete against.

So we still feel our margins will stay. They we are very strong going into '17. We just may absorb less than what we historically as a company would want to forecast at three homes per community per month.

Tom, you want to talk about Inland Empire?.

Yes, Stephen, we have seen really strong market conditions in the Inland Empire, both east of the I-15 corridor which primarily serves our lower price points, but kind of a resurgence of those markets west of the I-15 as well, that has a little bit higher of a price point. That’s primarily served by our TRI Pointe brand.

As we stated we see kind of an influx of those traditional Orange County buyers that are seeking a better value and more affordable options going to the western side.

On the eastern side we have been fortunate by introducing some really price sensitive products at the lower end of the affordability range, primarily within FHA loan limits, that have been very successful. That knew opening of the West Ridge community in Lake Elsinore is all targeted specifically for that. It's been very well received.

One other thing just on Northern California. We did quite a bit of analysis on it. We have had a softer third quarter but as we went back over the last four years, we really saw a trend which was not following the typical seasonal patterns of a lot of the other market places.

So we have seen a much higher propensity of sales activity in the first half of the year and then a pretty strong flowing over the second half over the last three or four years.

So we don’t see it as much different than what happened last year and we are hopeful that we will see the same level of pickup in the first quarter of '17 that we did in the first quarter of '16..

Okay, that's great, I appreciate that. And then, without stealing your thunder for the analyst day, this year was a lot about revitalizing the pipeline etcetera, so a lot of dollar spend.

As you look forward on your capital allocation, a similar type approach in '17, or do you take more of your cash and apply it to either debt reduction or share repurchase like you did this quarter?.

Well, I think from a share repurchase, we are in the market opportunistically. We currently are under a 10b5-1 plan that will expire here in a couple of days. We have $57 million or so left outstanding under our plan and we will continue to be in the market if we see our stock at the current prices that it's currently trading at.

But as far as overall capital need, we typically spend that $800 million to $1 billion on land and land development. We see that continuing into 2017. But we will be generating quite a bit more of revenue because of the volume increases and so you won't see as much of a negative cash flow in 2017.

But when we look out into 2018, Stephen, we do see pretty significant cash flow coming back to the company from there on. These long term assets are taking a lot of capital to get those positioned to start delivering..

Yes.

And in '17 you've got a couple of big wins in California coming on, correct, timeline of those?.

Yes. That’s correct. Early in the first quarter we see our Aliento community coming to the marketplace later in the year. We see our Castle Rock community down in San Diego coming to the marketplace and then as we mentioned in the notes, we have got two new communities coming in our Ocean View Hills master plan down in San Diego as well.

So there has been a pretty significant land development spend relative to that..

We will lay that out in a lot more detail in the investor day where we will show you a pipeline of how all the long-term assets, any asset over 400 units in California, how that rolls into your homebuilding deliveries pipeline..

Our next question comes from the line of Jack Micenko with SIG. Please go ahead with your questions..

This is actually [indiscernible] for Jack. So we were down in the mid-Atlantic a couple of weeks ago and got a chance to see your developments in Cabin Branch and Silver Springs and we actually came away quite positive on the region overall. However, it did sound like August maybe had a low. However, overall it seemed like the market is picking up.

And it was a little surprising that Winchester was down year-over-year despite having a largely flat community count in the region.

Could you maybe give us more color there and what margins you did there specifically year-over-year?.

Actually absorption pace was slightly down in the third quarter but it's more important to look at the year-to-date numbers. Our orders were up 8% for the nine months ending September 30th and our gross margins continue to improve, as I mentioned, both in the quarter and for the year-to-date..

Okay. Great. So switching to California. We have increasingly heard, and Doug you mentioned [SECA] [ph] and how these impact fees are adding to your cost of doing business in California.

Given that you have an outsize concentration in California relative to other builders, is there any way you could size how much these impact fees are like affecting margins, and so you see any, of these headwinds, easing going into 2017?.

Well, I don’t have a -- we would have to do some analysis to see what the impact fees have on in California because they vary so greatly from jurisdiction, county, city.

But our projects that we own and control in the Pardee Homes brand, a lot of those projects have their entitlements in place, all of them primarily except for Otay Mesa and project at Stockton. We are finishing some entitlements in San Diego at Meadow, Meadowbrook.

But I would have to get back to you on that percentage, I am not sure real relevant to our overall margins because our low land basis overall for the bulk of those land holdings is pretty damn strong. So we will have to dig into that. It's that something that you want to follow up on..

Right. No, that’s a good point in the land basis. And then just lastly, in terms of ASP going forward, what is your general expectation and specifically your ability to offset, I think you mentioned a 3% increase in labor cost last quarter.

How much room do you think you guys have to offset those prices of our ASP growth and then are you expecting any increases in material cost going forward?.

Well, this is Mike. I mean our ASP, we will see ASP growth going forward into '17, '18, but that’s primarily mix related. If you are asking about pricing power, that’s dictated by every market. And each market is different on what we are seeing on the cost increases and labor pressures versus ability to move pricing to cover it..

But the general expectation is that ASP growth will cover labor increases or materials?.

That’s correct..

Our next question comes from the line of Jay McCanless with Wedbush. Please go ahead with your question..

First question I had, could you refresh us on your outlook for fiscal '17 land sales and what you think the timing of those will be?.

Well, again, that’s part of what we are going to cover in the investor day but as we mentioned, Jay, we are only going to have probably one more land sale and that would be in 2017. More than likely probably in the third quarter and it's a sale in [indiscernible]. So it's of a significant nature.

But after that in 2018, we don’t plan on any land sales moving forward, anything of any material nature anyway..

Okay. And could you repeat the numbers that you gave for October sales, for the first two weeks of October.

And how did that compare to last year for the same time period?.

Yes. What I said is that our absorption pace for the first three weeks of October continued to be relatively strong at about 2.75. I think last year in October -- October is a tough comp set for us, much better comp set in November and December for us. But I think October is around 2.8 last year.

But it was a strong quarter, or strong month for the company last year as well..

But we are off to a good start relative to orders of October and I would expect similar number of orders compared to 2015..

And the thing we are most encouraged about is this is actually the first quarter where we see positive community count trends, right. We have been up against it all every month and so September we barely turned a corner. But fourth quarter will be the first quarter in 2016 where we actually have positive average community comps..

And double digit order growth..

Our next question comes from the line of Will Randow with Citigroup. Please go ahead with your question..

Thanks for taking my questions. Most of them have already been answered, but just wanted to have some follow ups.

As you talked about 2018, I know you will get into more detail and we look forward to seeing that in person, but your current land buy when you're looking at markets like the Inland Empire, are you seeing any, I'll call it softening in land prices which allow you to kind of boost the closings outlook for 2018..

Hey, Will, this is Tom. Now we haven't seen any softening in land values in the Inland Empire, really any of our markets for that matter. We continue to see strong competition and improved market conditions, so I think that will be indicative of land values going forward.

What is great for us is our long-land basis and low cost in our California markets given the amount of lots that we have in our Pardee brand and that’s why we are accelerating bringing those to market and we expect to be able to capitalize on those positions..

Our next question comes from the line of Stephen Kim with Evercore ISI. Please go ahead with your question. .

This is actually Chris on for Steve. You mentioned that September strengthened, but I wasn't clear if you are primarily attributing that to the new communities coming on or if you felt [indiscernible] improvements in underlying demand.

And can you comment specifically on whether you saw an improvement in demand and if there is anything specific to call out with respect to geography or buyer type?.

Hi, Chris. Yes, we had overall strengthening in that 26% month over month increase. We obviously had some nice pops in some new communities that opened, as I mentioned in my prepared remarks. But overall, the breadth of the order growth in September was broad based..

Okay. Great. And then on operating margins.

Do you think labor rates from your sub-contractors might increase due to changes in the Fair Labor Standards Act?.

Say that again, I didn’t understand your question..

So the Fair Labor Standards Act, there have been changes with the minimum wages, wondered how that might affect your subcontractors and then your operating margins?.

Yes. We see continued pressure on labor cost. That’s going to continue inclusive of the Fair Labor Standard Act. As we stated previously though an effect on margins. We don’t see it having too big of an effect as we feel that our pricing power will outpace our cost relative to labor..

Great.

And then just finally, do you have any more plans to repurchase shares by the end of the year and will it be done opportunistically?.

Well, this is Mike. As I mentioned, we currently have about $67 million available under our share authorization and if you see, we have been active subsequent to the quarter and we will probably continue to be active if our stock continues to trade at the values that it currently it as..

Our next question comes from the line of Alvaro Lacayo with Gabelli & Company. Please go ahead with your questions..

I just have a question on absorption. The comment around sort of the new communities versus the old communities driving sort of better absorption.

Can you just maybe break down a little bit, how much of that is sort of market mix versus a apples-to-apples per market and then maybe highlight some of the markets that are seeing a bigger improvement versus others?.

This is Mike. As Doug mentioned in the prepared remarks, what we have seen and we constantly do an analysis on how our communities are performing and so we look at the communities that have opened in 2016, where I think that they are just coming on with better product, better well located and we have seen an increase in absorption.

This year year-to-date we are at 3.6 orders per community for our new communities. Our legacy communities that were opened prior to 2016, we are seeing 3.1 orders per community and overall we are 3.2 for a company.

And we are seeing that across the board there is about a -- that same gap in each of our markets, I would say, with the exception of maybe Texas. But everywhere we are seeing better absorbing communities on the ones that we have currently opened. And we have expected these.

I mean you typically get better absorptions at the beginning of products and sometimes when communities are getting a little bit older, the choice of lots wane a little bit. So we just think it's encouraging for us that the consumer has accepted our product very well and it's outpacing the market..

Yes. I would add to that. I mean you look at the three segments of our company, we are very well diversified between entry level move up and luxury and as we have introduced new communities in all three of those segments and various locations, whether it's Arizona, California, the East Coast, up in the northwest.

We have had different layers of success based on those three segments..

Okay. And then on SG&A, I guess the full-year guidance of 10.5 to 10.7, a little bit higher. There's a lot of growth going on as well. As you look forward and you sort of see maybe where industry peers are in the low nines, some even below that.

How do you think about SG&A, SG&A leverage, and you balancing that out with your growth plans going forward?.

Yes. This is Mike again. I mean again I think we talked about even on the last call, by 2018 our expectations are to deliver on our goal of 5100 to 5400 units. We get significant operating leverage based on that and we see ourselves somewhere in the mid to high nines percent by 2018.

This year we had to tweak our SG&A guidance a little bit primarily because of the softness in orders in July and August that are attributed to lower closings for the year which is bringing in our home building revenues than what we thought. But that’s offsetting some of that G&A expenses associated with or growth into other markets.

So we are kind of setting the table into 2016. So we should see pretty good SG&A leverage moving forward from here..

Our next question comes from the line of Alex Barron with Housing Research Center. Please go ahead with your questions..

Yes. Thanks. Sorry, if I missed any commentary you did at the beginning regarding specs, but can you just comment on your spec strategy.

Whether that's changed any recently versus earlier in the year and also roughly what percentage of closings come from specs?.

Yes, Alex, it's Mike. It’s so different by market as you know. Technically, since 40% plus of our business is in California, it's all 100% spec. I mean we are starting phases without buyers and then by the time that we close the houses so there is not any standing inventory typically in California.

But we have definitely adjusted our spec [formally] [ph] if you will in Texas, as that market has slowed down over time because we do see clearly better margin on door sales than we do on our spec sales typically..

And then I would add Alex, I mean in some markets where you have got labor headwinds, I say headwinds, labor constraints, let's say the Pacific Northwest. We will push a little bit on starting more specs to make sure we get the homes in the marketplace and complete it because of that.

So it's market by market, there is no overall secret formula for our spec strategy. I mean overall though, we try to be very cautious about that and in California even we open a phase of 10 or 12 homes, we won't look to open the next phase until we get at least 50% to 65% of those homes pre-sold under good loan conditions.

So it's a very tightly managed process as we look even here in California..

In general, Alex, I would say we are on average about two to three spec homes per community..

Yes..

Okay. Great. And then, as it pertains to the pickup in September versus the other months, did you guys do anything, it sounded like the broker commissions went up a little bit, but did you guys do anything else in terms of a special incentive.

And also what by, roughly, if a home is a spec right now, by when would you need to sell it in order to close it in December..

Well, we have got our in-house mortgage company. Ideally by the middle of November but I many cases you could run it until the end of November depending on the status of the home buyer..

Our next question comes from the line of Dan Jacome with Sidoti. Please go ahead with your question..

I think all of my questions have been answered and sorry to beat a dead horse, but just on the upcoming investor day, I think you said you're going to discuss 2018.

Are you going to be laying out specific metrics and goals or ranges for SG&A and gross margin at that point?.

Yes, we will..

Okay. Perfect.

And then lastly, I think I heard it correctly, you expect ASP to be up next year and possibly into '18?.

That’s correct. We see an increase in ASP based on the mix that we currently have in our pipeline..

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back to Doug Bauer for closing comments..

Well, thank you everyone for joining us today. We look forward to chatting at our next call covering our full year results for 2016. Have a great weekend and thank you for attending our call today..

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