Chris Martin - VP, Finance & IR Doug Bauer - CEO Mike Grubbs - CFO Tom Mitchell - COO & President.

Alan Ratner - Zelman & Associates Mike Dahl - Barclays Bank Jack Micenko - SIG Stephen East - Wells Fargo Mark Weintraub - Buckingham Research Group Jay McCanless - Wedbush Stephen Kim - Evercore Nishu Sood - Deutsche Bank Carl Reichardt - BTIG Alex Barron - Housing Research Center.

Greetings and welcome to TRI Pointe Group's First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is my pleasure to introduce your host for today's call Mr.

Chris Martin, Vice President 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 first quarter of 2017. Documents detailing these results including a Slide Deck under the Presentations Tab are available on the Company’s Investor Relations website at www.tripointegroup.com.

Before 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 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 TRI Pointe's Website and in its filings with the SEC.

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

Thank you, Chris, and good morning, everyone who has joined us on today's call. I am pleased to announce that 2017 is off to a strong start for TRI Pointe Group. Orders grew 13% in the first quarter on a year-over-year basis due to a 10% increase in average selling community count and a strong absorption rate of 3.5 orders per community per month.

Delivery and homebuilding gross margin percentage came in ahead of our guidance because of the solid execution by our teams in the field.

We also made further strides in our efforts to unlock the significant value embedded in our long dated California assets by bringing new communities to market and making progress in the development of several projects in Southern California.

In addition, we are very pleased with the strong sales results we are seeing from our recently opened community. We are excited to share the details behind our performance this quarter but first I wanted to briefly address recent news regarding Starwood Capital Group.

We greatly appreciate Starwood's eight-year investment in the company, and as well as their contribution while serving on our Board of Directors.

Starwood was recently announced disposition of its TRI Pointe's shares in no way alters our outlook for the company, nor does it change our confidence and our ability to execute on the goals and initiatives we outlined at our Investor Day last November.

Accordingly, we are pleased to reiterate our guidance for 2017 as we outlined during our last earnings call. In addition, we continue to believe that 2018 will be consistent with our goals presented at our November 2016, Investor Day, including our expectations that we will deliver between 5100 and 5400 homes for the full year 2018.

Our Senior Management team with a full support of our Board remains as excited as ever about the future of TRI Pointe Group and we are confident that we have the right talent, strategy and leadership in place to enhance shareholder value over the long-term.

The homebuilding industry remains on solid footing as we enter the latter stages of the spring selling season. In March, the conference Board's consumer competence index rose to its highest levels since December of 2000.

Single win and an increase sense of optimism around business, jobs and personal income that is conducive to increase home buying activity.

After a rapid rise in the benchmark of tenure treasury following the presidential election, mortgage rates leveled off and have recently come down from the near-term highs keeping home ownership affordable and attractive.

In addition, to support new and existing home inventory in all our markets remains at historically low levels underscoring the need for additional housing. Complementing these macroeconomic tailwinds, our strong housing fundamentals in most of our markets in which we built and a consistent focus on operational excellence by each of our brand.

California continues to produce outstanding results with 39% order growth for the first quarter on a 25% increase in communities, and an 11% increase in monthly absorption rate.

We continue to sell homes at a rapid clip in Southern California, thanks to the factors I just mentioned and the premium design well located nature of our communities which allows us to stand out from our competition.

In particular, I like to note the strength of our Pardee brand in San Diego which is selling homes at a pace above the company average across multiple product segments from entry level homes at selling prices from the mid-$300,000 level, to luxury homes above $2 million.

In Northern California, the strong local employment trends and continued lack of supply help to address 39% increase in orders for our operations in the market in the first quarter. These same factors drove demand and pricing higher in the red-hot core Seattle market as King and Snohomish County.

For operations turned in the best sales space in the company for the quarter along with a 28% increase in our average sales price, as compared to last year. The sales states in our other Western market also remained above three homes per community per month for the quarter, a good indication of local market conditions are healthy.

Our Houston operation continues to show signs of stabilization as evidenced by the 11% year-over-year increase in orders, any mild contractions of incentive. Finally, our operations in Mid-Atlantic also posted improvement in both sales space and margin.

Each of our homebuilding brands made positive contributions to our bottom line for the quarter and more importantly contributed to the overall sense of optimism that we have about the future at TRI Pointe Group. We also have positive news to share with respect to our long dated asset in Southern California.

In February we opened three product types at our Aliento Master Plan Community in Santa Clarita located in Los Angeles County. We have had tremendous response generating 42 orders through April 23, 2017.

We are extremely pleased with the demand Aliento has generated and we plan to open a fourth product line later this quarter that will be 95 unit active adult age qualified neighborhood, which currently has 1100 homebuyers on our interest list.

Collins Ranch San Diego order activity continues to be robust with good price elasticity across all product segments. Last week we opened two new communities to very strong demand with selling prices between $1.3 million and $1.6 million.

In addition, we recently received approval for revised map which will reopen additional 64 lots creating opportunity to generate even more profit from this valuable asset. With that, I would like to turn it over to Mike for some additional details about our results for the quarter..

Thanks Doug. Good morning. I would also like to welcome everyone to today's call. As Chris mentioned earlier, we've posted a slide deck on our website, which includes various key operating metrics as well as charts detailing orders, deliveries and absorption rates by homebuilding brands or divisions for the first quarter ended March 31, 2017.

We've also provided certain key operating metrics by state in today's press release announcing our earnings for the quarter. Overall we're pleased with the first quarter results as we exceeded our previously issued guidance for new home deliveries and homebuilding gross margin percentage.

In addition, net new home orders increased 13% compared to the first quarter in the prior year. Slide 6 of the deck provides a snapshot of some of the selected operational highlights from our quarter. Home sales revenue was $392 million for the quarter on 758 home delivery at an average selling price of $517,000.

Our homebuilding gross margin percentage for the quarter was 18.8% and net income came in at $8.2 million or $0.05 per diluted share. During the quarter, we opened 14 new communities, six in California, three in Texas, Two in Arizona, Two in Washington and one in Nevada.

In addition due to the strong new home orders for the quarter will be closed out of 15 communities, resulting in an ending active selling community count of 123 as shown by State on Slide 7.

As I just mentioned for the first quarter we reported a 13% increase in net new home orders on an average community count that was up 10% from the prior year period. Our overall absorption rate increased 3% to 3.5 homes per community per quarter to quarter compared to 3.3 homes in the prior year.

In addition, our new communities that opened in 2016 and 2017 absorbed at a higher rate of 3.7 orders per community per month versus 3.2 orders per communities opened prior to 2016. This result reinforces our confidence and the acceptance of our new product offering in a respective core market of locations.

So far in April through last weekend, we've continued to see strong traffic in orders with our absorption rate increasing to 3.8 orders for the month. We ended the quarter with 1,734 homes in backlog which was a 13% increase compared to the same quarter last year.

The average sales price in backlog increased slightly to 585,000 and the total dollar value of our backlog increased 14% year-over-year to just over $1 billion. During the quarter, we converted 64% of our fourth quarter ending backlog, delivering 758 homes which was 10% higher than our guidance.

Our overall homebuilding gross margin percentage for the first quarter was 18.8%, which exceeded our guidance by 80 basis points.

As we discussed on our last earnings call, the first quarter 2017 was the lowest in terms of our deliveries from our projects in California, which typically deliver the highest average sales price and generated the highest homebuilding gross margins for our company.

Our projects in California will contribute -- will continue to contribute a higher portion of our deliveries in the second quarter and as a result, we expect our homebuilding gross margin for the second quarter to be in a range of 19.5% to 20.5%.

In addition, for the full year 2017, we expect our homebuilding gross margin to be in the range of 20% to 21%. For the first quarter SG&A expense ratio as a percentage of home sales revenue was 15.7% which was a 270 basis point increase compared to 13% in the same period in 2016.

This year-over-year increase for the quarter was due in part due to the unfavorable leverage impact as 7% lower home sales revenue and 210 basis point was related to the addition of incremental G&A cost associated with the strategic growth of our company.

Our G&A run rate in 2017 is approximately $34 million per quarter and it's contributions to our SG&A expense ratio is significantly impacted by the leverage of our homebuilding revenues on a quarter-over-quarter basis. For the full-year 2017, we expect our SG&A expense ratio to be a range of 10.2% to 10.4% of home sales revenue.

During the first quarter we invested $76 million in land acquisition and $87 million in land development. The focus of our land acquisition strategy is to target land for communities which will deliver homes in 2019 and beyond as we currently own or control all of the land needed to meet our planned deliveries for 201.

At quarter end, we owned or sold approximately 29000 lands of which 59% are located in California. Based on the midpoint of our 2017 delivery guidance, the number of years of lots owned or controlled is 6.2.

Our goal is to continue to shorten the duration of our land pipeline by continuing to focus on accelerating our long dated California assets and on investing in faster turning communities in our market held by the California. A detailed breakdown of our lots owned will be reflected in our quarterly report on Form 10-Q which will be filed later today.

In addition, there is a also a summary of lots owned or controlled by state on Page 28 in the slide deck. As it relates to our balance sheet at quarter end we had approximately 3 billion of real estate inventory. Our total outstanding debt was 1.4 billion resulting in a ratio of debt to capital of 43.6% and net debt to capital 41.3%.

We ended the quarter with 129 million of cash on hand and additional liquidity of 371 million available under our unsecured revolving credit facility. Now a quick update on our share repurchase activity.

Since our Board authorization on February 23, 2017 due to the close of trading yesterday, we have purchased over 1.2 million shares at an average price of $12.35 for a total of approximately $15 million, leaving $85 million available under our $100 million stock repurchase authorization.

And now finally I'd like to summarize our outlook for both the second quarter and the full year 2017. For the second quarter, the company expects to open 18 new communities and close out of 14 resulting in 127 active selling communities as of June 30, 2017.

In addition the company anticipates delivering approximately 58% of its 1,734 units and backlog as of March 31, 2017 at an average sales price of approximately 550,000. The company anticipates its homebuilding gross margin to be in a range of 19.5% to 20.5%. For the full year we are reiterating our guidance from our last call.

We expect to grow average selling communities by 10% and deliver between 4500 and 4800 homes at an average selling price of $570,000. We expect our homebuilding gross margin for the full year 2017 to be in a range of 20% to 21%, and our SG&A expense ratio to be in a range of 10.2% to 10.4% of home sales revenue.

In addition, we anticipate gross profit from land and lots sales of approximately 45 million, most of which is expected to close in the third quarter of 2017. With that, I'd like to now turn the call back over to Doug for some closing remarks..

Thanks Mike. In conclusion we continue to focus on our three key differentiators to drive value for our shareholders. These differentiators are one, combine the asset turning mindset of the production homebuilder with the design in innovation leadership of a high-end builder.

Two, balance strategic growth initiatives with a return on capital focus, and lastly unlock the value of our longer dated assets in California as highlighted in our press release issued last week. Maintaining this focus served us well in the first quarter and we believe that will continue to benefit homebuyers and shareholders alight in the future.

Our progress in the first quarter of 2017 put us in a great position to achieve the goals we set forth this year and beyond.

By converting 64% of our beginning backlog in the quarter and ending the period with 13% more units in backlog as compared to the same period last year, we are in great shape to reach our delivery goal of 4500 to 4800 homes for the full-year.

Gross margins coming in above our projections in the first quarter give us a good phase on which to build as the year progresses and keeps us on track to reach our gross margin goal of 20% to 21% for the full year. Finally I love to thank all of our team members and our six homebuilding brands on continuing to generate results for our shareholders.

Your passion and focus on operational excellence helps separate us from our competitors, while giving our customers a great homeownership experience. That concludes our prepared remarks and now we would like to take your question. Thank you..

At this time, we'll be conducting a question-and-answer session. [Operator instructions] Our first question comes from Alan Ratner with Zelman & Associates. Please proceed with your question..

Good morning, nice quarter. First question I have on the gross margin, so strong results this quarter better than expected and Tom you had a comment in the release just talking about potential pricing power especially with the absorption level as strong as it is, similar to comments we've heard from other builders.

So as you look at your full year guidance, which you kept unchanged from 20% to 21%, there is obviously a lot of moving pieces here. There's the potential for pricing power. There's the mix in your communities, there is cost inflation.

So at this stage in the game I was hoping you could just frame out the potential upside and downside bias do you see in that margin guidance range and on the surface it would appear that your positions maybe come in closer to the higher end if that pricing power does come to fruition, but I would love to hear your thoughts on that, thank you?.

Alan, this is Mike and maybe Tom can jump in, but yes we left it unchanged at this point. We're sitting here through April. There's a lot to go here in the spring selling season, but we were off to a very good start from the company perspective. We have seen some slight lift in our margins moving forward.

We're very encouraged by the new communities that we've opened in California and we've seen some pretty good price appreciation in those markets so far, but it's still somewhat earlier in the year to think about change in those, but I would say at the end of the next call, we'll have a lot more color on our margins moving forward..

And Alan I would also, this is Doug say that I think you heard about tariff imposed yesterday although a lot of that has been baked into the marketplace on lumber, but since the fourth quarter, cost on lumber have increased quite a bit. So on the cost side, we continue to as all builders battle that equation.

So there's -- we'll have better clarity by the end of the second quarter as we continue to the see a pretty dam good selling season..

Understood, thanks for that color. And second question, if I look at your portfolio, you have a pretty diversified product mix as you mentioned I think you guys product you have $2 million is California you mentioned and obviously you cement your level for product as well.

So I think you and others have highlighted late last year some softness at the higher end and maybe just the lower price points were performing a bit better, but just curious how that looks today? Have you seen high end stabilizer pick up a little bit relative to where it would have been pre-election or are you still seeing the relative strength coming from the level product?.

Alan, good question, this is Tom.

I think we're really confident and in the high-end, we've definitely seen stabilization in that marketplace and that's really throughout Southern California, northern California up in Seattle and we continue to see strong demand at our high end that would be evident by the couple openings we just had down between the Collins Ranch in San Diego offering product from $1.3 million to $1.7 million and we see really strong deep demand there and we've had great order flow at the high-end..

Good to hear. Thanks. Good luck guys..

Our next question comes from Mike Dahl with Barclays Bank. Please proceed with your question..

Hi, thanks for taking my questions.

Want to ask about the - with difference in absorption and the interesting comments around kind of the newer vintage communities versus the legacy and even the legacy seems to be absorbing on a decent pace but when you see that difference on your new communities versus the ones prior to - open prior to 2016, is there anything that you're looking at as far as some sort of action that can bring up the legacy communities towards those the newer vintage communities or what else are you seeing kind of drive that, is it just better location or product mix.

Any additional color you can give there?.

Yes, it's Mike.

Obviously on some of the older communities as you near close out, you're going to have probably a slow absorption pace but what we are encouraged by is the pace of our absorption at our new communities that we've opened over the last you know, call it 15 months and as you know in your guidance for 2017 and 2018, we do show a slight increase in our overall absorption rate for the overall company.

So that's kind of beating right into that but we feel really good about our absorption pace and we did have the average 3.5% at our price point I think about the second half price point in the sector.

We average at a pretty good pace but I think it's all based on based on our new product, the consumer experience, the design innovation that we have in our product is just been well received and in our locations..

Got it, thanks.

And then my second question on the comments around April absorption and this isn't meant to be nitpicky but I just assume it will be a question I think last year you were running at 3.9 sales a month and in April so where for the first quarter you had shown some improvement in absorption, sounds like it's tracking down very slightly year-on-year in April.

I know there's an Easter shift this year potentially some issues in California around some of the weather for some of the other things but just curious what your thoughts are, what you can tell us on how you're feeling the spring obviously still very strong level but just address some of the concerns that may be out there if you highlight absorption, that's actually put back down a little bit..

Yes Mike, I mean it, obviously April was our toughest comp that we've mentioned at all year, we had 477 orders last year and absorbed it about 3.9 but we see this month in that same Cisco, we do not expect to have better absorption pace in April then what we had in the previous year but I think when you look in May and June moving for, that's where we start outpacing last year.

But we feel – that's a pretty high absorption pace last year of 3.9 and we’re right there this year..

Yes definitely. Thank you..

Our next question comes from Jack Micenko with SIG. Please proceed with your question..

Good morning, guys. Looking at backlog conversion, we stepped down a little bit year-over-year on 1Q and I think that you applied based on your guidance, in 2Q wondering if there is anything specific driving that, is it TRI Pointe's labor or whether anything in there that – which we think about the balance of the year..

No, I don’t think there is anything specific Jack. Obviously our backlog conversions down slightly in 2Q because we put forward 50 plus unit into 1Q.

And when you look at our backlog and the communities that we go open, we opened more than 50% of our communities in California this year, so far to date and a lot of these communities that opened in the fourth quarter. So those are - take a little bit longer to build because it's typically higher units..

Okay. That makes sense..

Maybe construction or labor or anything like that that’s affecting that..

I got it. And then Mike, on the buybacks, it looks like and correct me if I’m wrong, it looks like you are comfortable paying a higher price than you've paid in the past. Has you and the Board's thinking changed on buybacks or anything around there does like seem your pricing about 10% higher on a valuation basis then you’ve been..

Yes, I think our stock has been trading higher but we typically don’t comment on our trading decisions or the timing of those decisions.

Under our [indiscernible] plan right now for the next couple of days and then more typically an opportunistic through - as I mentioned we brought about 1.2 million shares so far and then roughly in the last 30 days, we have about 85 million of our acquisitions left. So we just leave it at there..

All right, thanks..

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

Thank you. Good morning, guys. A quick follow-up on the gross margin, you know Mike it's pretty dependent on California closings obviously, is weather posing risk as you move through the year on this? And then, can you talk a little bit about your California gross margins versus the rest of the company's gross margins.

Give us at least some idea of some magnitude and swing?.

Well maybe if you look at our Investor Day deck, you'll see the difference, maybe I'll talk about the margins and our deal in California, they're relatively higher because of our land basins that we have there.

They're North of 30%, which you would expect given the long-term nature of those assets and that's why we're excited about pulling more of those forward in our homebuilding operating. But California is typically generating margins well above the company average and ASPs well above the company average.

So it does drive our margins to a certain, especially when you start adding in product North of a million, million and half dollars at very high margins and specific range for instance..

This is Doug. As far as weather, weather was an issue, we will rattle with the drought here in California but shifted a few things between model opening maybe 30 days here or there, but nothing is material to change our guidance for the whole year..

Okay. Fair enough. And Doug, you all did -- you released that paper about your either six big communities and big plans, I guess the timeline, you've already got some of them here in the process of opening, how long do these projects take you to run and I guess just a little bit more broadly, you've scaled a lot of them etcetera.

It looks like you got more upfront investment.

I'm just wondering how you all look at the risk return of these -- of these communities and then could you also tie that into your inventories the longest in our group and how quickly you think you bring your inventory down and what would you like to see as a normalized your supply if you will?.

Yes Steven it's a good question and actually all those long dated assets if you reference the November 2016 Investor Day, we actually put together a detailed schedule of the 12,900 lots that shows how we forecast those to be delivered over the next I believe it was seven years maybe eight years, I have it in front of me.

So we got pretty good visibility on how we see those assets turning ultimately as we mentioned in several instances we like to have the overall number of years of inventory down to about 5.0 versus 6.2. That 6.2 is highly affected by the long dated asset. So you'll see that coming down to 5.2 over the next couple years.

But the flipside those long dated assets are generating significant value.

We highlighted what we thought the value of those assets were last November and that were bearing fruits of those assets and as I've always said all builders are not equal when it comes to the land inventory in that reverse more trust we did a couple years ago, 2.5 years ago is beginning to -- continuing to bear fruit..

This is Tom. One thing I'll just add to that relative to the risk profile, in optimizing these communities I think we are doing a really good job of making sure we're cognizant of what we're delivering.

One of the things we continue to do is define product segmentation and we intent the segmentation opportunities at each one of these communities as well as have a very defined phase delivery model in our land development. So we're taking on right sized chunks that we can manage and look out to the marketplace to see how we best proceed..

And if I can on that, we saw some really nice active building in your mid-Atlantic market and your opening some -- you switched out a little bit your opening more active adult in California.

Where do you think that goes as a part of your business and does it become a much bigger part of the six communities that you got?.

Yes absolutely, great question. Thanks for highlighting that. We do see that demographic playing a key role for us going forward and will be increasing our deliveries in that demographic particularly in upcoming communities we’ve got a great opportunity to maximize that and we see it as an additive demographic to our volumes.

So it’s taking the volume we have in those existing communities and increasing it.

So first up will be the smaller parcel that we talked about in our Aliento community we got huge demand there it just a 95 unit community that we will begin to open in the second quarter this year but our big one will be through our Sundance offering out in Belmont and that’s going to be about a 700 unit community, but each of our other communities going forward we’re looking at the possibility of adding that active adult segment..

Thanks a lot I appreciate that Tom..

Our next question comes from Mark Weintraub with Buckingham Research Group. Please proceed with your question..

Thank you.

So as you’ve indicated you got great margins and great returns from the California asset particularly Pardee and presumably has come up and already on the call some of the other geographies aren’t as profitable and I guess I am trying to understand to what degree that this will be inverse situation that where as party has these long dated very valuable land asset.

Is that some of the operations just have less well positioned land that just not much more valuable than where else on the books let’s say or is it that they are operational improvement opportunities at some of these builders and to lack of scale.

May be a little bit more clarity on how things can play out outside of the California operations which good news are going to become a big part of the mix and are doing great.

But the other operations what can be the strategy there?.

It’s good question Mark, this is Doug.

I think we’ve try to articulate this in a number of ways but the TRI Pointe Group kind of has the best of both worlds we’ve got this long dated asset that we’re going to continue to bear fruit from a number of years going forward at the same time we've got a merchant homebuilding production mindset in all the other brands which continue to do fine land opportunities, design and innovate new product so that ultimately their margins in some areas will grow in that 18% to 22% range as we continue to underwrite and see discipline to that.

And so we look at the operations and companies outside of California that kind of rise the tide of going over time as they continue to source new opportunities, design new product and executed at its highest level.

And obviously we’ve seen that in Seattle we’re seeing that in Phoenix and we’ll continue to see that in the mid-Atlantic going forward to as we bring on new opportunities.

We just opened a new opportunity in the mid-Atlantic in Maryland called Two Rivers this is some very strong demand in the active adult area and those are the type of opportunities that will kind of rise the tide for the companies outside of California..

Mark, this is Tom. I think we also will be trending margin improvement in some of those other markets as the legacy asset kind of wind down and close out and we’ll have a higher mix of our newer more innovative product as Doug just mentioned..

And can you give us any sense as you look at the margins on the newer products at these operations now how they compare to let’s say the more legacy what type of spread are you seeing?.

Well, we underwrite to the 18% to 22% range and typically the newer projects are opening at those underwriting margins versus the legacy project.

So we’ll continue to stay disciplined that way obviously you've got well located – great very well executed communities like you also battling all the other challenges in the business whether it’s a land prices, lumber costs, fees so there is a whole balancing affect that goes on here as you continue to play in the merchant homebuilding segment with the rest of our company..

And Mark we've been pretty transparent about our margins in all of our brands.

So I think if we just look back to the November Investor Day, you would see what those trailing margin have been, healthy margins I think at 9.30 for those other brands and clearly we've articulated many times that as we work through the legacy assets and the new products that are coming on, new products coming on it's typically higher ASPs, higher absorptions and higher margins or going to either bode well for the company moving forward into '18 and '19 and that's why we lifted our margin guidance for '18 at our Investor Day higher than what is was in '17?.

Okay, great. So I hear this sound like it is kind of just the legacy land operationally you feel good about where do you have their builder outside of California are because it's really difficult into the land submissions..

That's correct..

Okay. Thank you..

Our next question comes from Jay McCanless with Wedbush.

Please proceed with your question?.

Hi, good morning, guys. The first question I had I was wondering if you could walk me through from the guidance that you guys gave for 1Q on the February 22 to the results that we're seeing today because you guys closed a lot more homes at a lower price and a better gross margin than what you had anticipated call it 60 days ago.

What happened in the month of March to take you from that guidance to what we're seeing today?.

Yes Jay, that's a great question. It's Mike. We essentially pulled forward a handful of units in a lot of our brands and division, but primarily at lower ASPs. So we brought forward a few more at Mary Kay in Phoenix, 10 or 12 in Las Vegas, 10 or 12 in the Inland Empire, a handful in Winchester.

So bringing those forward into the quarter at lower ASP or effective ASP slightly, but as we mentioned there is this mist that the Inland Empire doesn’t do that well. We generated very good margins in the Inland Empire through our party Pardee brand and so that had some impact on the margin in the upward trajectory..

Got it.

So should we think something maybe a little bit in terms of backlog absorption for 3Q, should we be able to more conservative with pulling those units forward or do you guys think you're going to be trying to ramp up spec sales? What's kind of the game plan for hitting that absorption number for 2Q?.

Well I think we're on track with our absorption number for Q2, but you're talking about the delivery numbers. So where conversion is 58%, so we're closing let's call it roughly a 1,000 units for the quarter.

We clearly have spec inventory in Texas and we have spec inventory in Las Vegas that if we get better than expected sales, we're moving through some of that a little bit quicker. But I think we feel good about where we sit today on our 2Q guidance for sure..

Okay. Sounds good. Thank you..

Our next question comes from Stephen Kim with Evercore. Please proceed with your question..

Yes, thanks guys. Strong quarter. Just wanted to ask you couple of questions about your land and inventory.

Could you update on what your land spend was in the quarter in terms of for development and what you spend on development as well as acquisition?.

It's Mike, Stephen, we invested $76 million in land acquisition and $87 million in land development. So it's relatively a light quarter from that perspective.

While it's clearly California rain impacted us somewhat of the land development side, since we had a lot of long dated asset under operations, we tried to spend a little bit less in land developments than we anticipated during the quarter..

And is that likely to tolerate as we go forward?.

Yes it is. I think we guided for the full year that land and land development was roughly $900 million to $1.1 billion. And so we maybe probably on the lower end of that as we look for the balance of the year now..

Okay. Got it. And by chance, do you have homes under construction number yet? This is dollar number, sorry..

Sure. Hold on one second or ask another question while I am finding it out..

Yes, sure. Absolutely and if you want to get back, that's fine. I wanted to….

It's about 1600 just about 1600 units homes under construction right now and about 1100 of those are sold of those have sold..

Okay.

And give a dollar value of those 1,600 units roughly?.

I don't have that of hand no..

Okay, that's fine follow-up later. My last question relates the SG&A you talked about where you see SG&A for the full year which is a good level the SG&A was elevated this quarter I think you then emphasized that it is due to the big SG&A but when we sort of run the numbers it still having a little bit of difficulty closing the GAAP.

So I wanted to see if we can understand a little bit more about what the quarterly cadence might look like going forward. For instance your guidance would seem to suggest for the year that your SG&A ratio is going to show some very healthy improvement in the back three quarters of the year.

With that also be true that you would see a decline in year-over-year ratio in the second quarter or is this going to be entirely a function of the back half being down year-over-year?.

No, no we see a significant reduction in the second quarter as well I'm glad you asked that question 44 minutes into the conference call because that the one number that we didn’t provide guidance on I wanted to get some clarity on it but as we mentioned we’re comfortable with our range 10.2 to 10.4 that’s roughly made up of about G&A asset let’s call it 5% to 5.1% G&A and 5.2% to 5.3% of the S side.

Clearly the G&A is divided by four right, we are not hiring and firing based on the deliveries that we have so that’s a fixed number.

And then about call it 3% of that 5.2% to 5.3%, is kind of fixed number as well that’s model operations, sales and advertising, the amount of dollars that we’re spending on opening new communities and the other two 2.4% what other numbers are remaining are more variable based on units.

And I think if you use that kind of rule of thumb within 10 to 20 basis points here or there you’re going to get to the right cadence but there's clearly significant reduction under SG&A percentage on a quarter-over-quarter basis and pretty dramatic in the fourth quarter.

Because you remember you know the midpoint of our number is roughly 4,650 units and the cadence we closed call it 700 and 750 units in 1Q we’re going to close about 1,000 in 2Q and it ramps up about 300 units thereafter each quarter roughly to get to that 4600 midpoint.

And at the same time we’re increasing our average sales price each of those quarter so there's a lot of leverage on that number moving forward..

All right, great. That's very helpful. Thanks very much guys..

Our next question comes to Nishu Sood with Deutsche Bank. Please proceed with your question..

Thanks. Just following up on the SG&A if I heard you correctly I think you mentioned that about 200 bps of the G&A was due to spending related to some of the longer term project about 8 million or so if I ran those numbers correctly.

Now your SG&A guidance for the year you’ve obviously maintained so that 8 million was it anticipated or has been offsetting cuts and more importantly if it is related to the longer term land development obviously you guys are doing all kinds of great things with the long-term asset, but it does add a layer of expense from a development perspective.

Would that affect later this year the SG&A would it affect 18 or 19 how should we think about as well?.

Nishu, maybe I want to make sure I understand your question. So clearly there was an increase in our overall G&A quarter-over-quarter from 1Q of 2016 to 1Q 2017 as I mentioned we’re running roughly 34 million a quarter and that’s pretty consistent with.

What it got ramped up in 2016 I mean did we spend 33 million, 34 million roughly in the fourth quarter of 2016 as well. And so that's related to when say our strategic growth it’s not just related to long-term asset it was really related to the addition of Austin and then our Los Angeles operation when we opened Aliento.

So but that run rate is going to be pretty good for the next couple of years because now we have those people in place to get to the operational level that we’re talking about in 2018 – 5,100 to 5,400 deliveries..

Got it, okay. So I guess then the question is – may be the assumption there is incorrect that the development of the longer term assets will be SG&A heavy.

So if there, is that the way we should -- I guess we're thinking about is that just in your normal G&A run rate like you mentioned $34 million that would incorporate any of the land development entitlement etcetera activity, around that the longer term asset.

I am just trying to parse out the effect of there is some merchant builder and then there is the long-term asset.

I am just trying to parse out that impact on SG&A?.

Yes Nishu, this is Tom. I think you're correct in your latter assumption that the long-term assets do not have a significant impact on our SG&A at all. There is not a heavy spend relative to developing those assets..

Got it. And also related to that, cash flows you were just talking about this as well, the $900 million to $1.1 billion of land spend. You've talked previously I think about having positive cash flow in '18 as you've really begun to ramp development of these long-term assets as you talked about at your Investor Day.

How should we think about the cash flow from operations shaping up? I think it was negative $150 million or so last year? Are we looking at a similar number for this year? Are we still on track to turn positive in '18? Will it be meaningfully positive and again trying to understand the impact of the longer term assets on the development of the cash flow trajectory?.

Yes, it's clearly in 2000 -- thanks for that question 2017 its roughly about $200 million of negative cash flow this year primarily related to those long term assets and how much we're spending and we still anticipate that we will be cash flow positive in '18 and more so in 2019..

Got it. Great. Thanks..

[Operator Instructions] Our next question comes from Carl Reichardt with BTIG. Please proceed with your question..

Thanks, hi guys.

To put a bullet on Alan on Steve's question about product mix, where do you sit down in terms of first time versus move up, versus active adult and over the course of the next 2.5 or so, how do you see that altering?.

Yes Carl, this is Tom. Relative to the first time we're remaining fairly consistent in that 30% to 35% range. Active adult obviously is a very small portion of our business now, but as I mentioned, it definitely will be growing.

I don't have the exact stat, but I see significant growth in that segment really beginning in 2019 as we bring on our Sundance community..

Carl, I would just add, currently based on our orders as Tom mentioned, our entry level is 30% or so. Your move up in 45% to 50% and the balances fluctuate and that diversification has served us well as we highlighted even down in San Diego where we're building and selling homes that the mid-300,000 all the way up to $2 million plus.

So we continue to believe that diversification serves us well in attracting further land opportunities across the country and in making us a lot more diversified and being able to source land in really strong location.

And generally speaking land in good locations is going to demand a higher premium and probably a higher price and we'll continue to focus on designing and innovating products to fit that pipeline..

Okay. Thanks Doug. And I've a bigger picture question on brand. The legacy brands that came from warehouse that have stayed local in their markets. The TRI Pointe obviously is the newer brand more of the start-up brands.

Do you have plans to extent that to new markets and just as a comment the products that we've seen that's connected to the TRI Pointe brand is at least by personal opinion is quite innovative and interesting. And I am just curious if outside of Colorado and California, you expect to move that brand to other markets thanks..

Good question, Carl. No, we continue to focus our brands and their current markets. We have expanded our TRI Pointe brand organically in Austin.

We will -- as discussed at the end of last year and beginning this year we're looking at Sacramento to expand the TRI Pointe brand but for states and some markets outside of our main playing area so to speak, we would look to bolt-on another brand in our operation whether it was in the east coast, I’d say east coast, we have winter drop in the south east.

So we will continue to look at M&A that way as more of a bolt-on..

Carl just as clarification, Doug was referring to Trendmaker brand in Austin but also thanks for the compliment on the TRI Pointe product.

I think as time goes on, you will see us taking the opportunity to enhance all of our product offerings at all of our brands as we’ve been talking about, we've held a really great design summit last year for all of our brands.

And so a lot of things you're seeing in TRI Pointe will begin to see in the other brands as well related to product and operational execution..

Our next question comes from Alex Barron with Housing Research Center. Please proceed with your question..

Morning guys.

I don't think I’ve heard about financial services, is the number of $8 million for this year still good Mike?.

Yes, Alex, this is Tom. We feel really good about that number still for our outlook for 2017. Overall, our financial services group continues to perform and we’re optimizing it and we’re getting good traction in all our markets..

Okay. You also commented on Houston and what you guys are seeing there. Obviously the orders were pretty good.

But is that more widespread or is it at certain price points? Where do you guys expect the pricing of the orders to keep going? Are they going to keep going lower or is this a pretty stable number here?.

Alex this is again me. As we reported orders quarter-over-quarter were up 11%. Trendmaker obviously is with an ASP at the higher end, more of a premium brand.

And as we continue to look to diversify our product offering, I indicated in the last year that we’re looking and we are going to be entering into a new project in smaller lots sizes comp 50s and 60s foot wide product. And so over the next several couple of years, you'll continue to see actually the ASP for Trendmaker come down.

And hopefully some mild bump in absorption pace too as you become more diversified in price points. So, we’re happy with the progress. We’re happy to see Houston kind of move in the right steps forward. I think the biggest challenge still for Houston this year to clean it up, is every builder has finished inventory that they got to burn through.

And as you burn through, some of those finished, completed homes, there’ll be further stabilization and I think more shrinkage of incentives as we progress and go into '18..

Thanks, sounds good.

Any comments you can also on Denver?.

Yes, we continue to be encouraged by the Denver marketplace. It’s definitely very competitive. But our product mix is shifting slightly to more affordable, smaller lots and we are encouraged by that.

We’ll be having an opening of two new products in our terrain community down in Castle Rock and then additionally we’re opening another store in Candelas up in the Arvada market that we think is going to provide some good order growth..

Okay. Good luck and look forward to positive during the next quarter. Thanks..

We've reached the end of the question-and-answer session. I'm sorry. Go ahead..

Thank you, Operator. I was just going to say as we continue to make progress towards our year end goal we welcome all of you to the next quarter's call. And I thank you and appreciate you joining us today..

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