Greetings, and welcome to the TRI Pointe Group Fourth Quarter 2018 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.

I’d now like to turn the conference over to your host, Chris Martin, Vice President of Investor Relations. Thank you. You may begin..

Good morning, and welcome to TRI Pointe Group’s earnings conference call. Earlier today, the Company released its financial results for the fourth quarter and full year of 2018. Documents detailing these results, including a slide deck under the 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, including statements concerning future financial and operating performance, are forward-looking statements that involve risks and uncertainties.

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

Except as required by law, the Company undertakes no duty to update these forward-looking statements that are made during the course of this call. Additionally, non-GAAP financial measures will be discussed on this conference call.

Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through TRI Pointe’s website and in its filings with the SEC.

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

Thanks, Chris and good morning to everyone joining us on the call today. 2018 was an excellent year for TRI Pointe Group as the company achieved several milestones and posted record results in a number of key financial metrics.

We clipped the $3 billion mark in home sales revenue for the first time in our company’s ten year history by delivering a record 5,071 homes at an average sales price of $640,000. We generated a homebuilding gross margin of 21.8% representing a 130 basis point improvement from the previous year.

These improvements to both revenue and margin coupled with the benefit of a lower tax rate resulted in diluted earnings per share of $1.81 for the year, a 50% increase over 2017. During 2018, we continued to pursue our long term growth objective with our organic in the Carolinas and the acquisition of a Dallas-Fort Worth based builder in December.

Well, our full year results underscore the strength of our operations and the appeal of our home offering, the market as a whole experienced a slowdown in the second half of 2018. As years of cumulative home price appreciation combined with a sharp rise in mortgage rates created a more challenging demand environment for our industry.

The weaker order trends we experienced in the third quarter carried into the fourth quarter as potential buyers continued to exercise caution with their home purchase decision which resulted in a 15% decrease in our backlog units at year end 2018.

We believe slowdown such as this, are normal occurrences over the course of a housing cycle and do not feel we’re headed for a prolonged downturn given the strong underlying fundamentals of our industry and our economy. Beginning in January we’ve seen a sequential increase in demand and a weekly improvement in orders to February.

With that said, we realize that the housing market has changed and we’ve taken steps to adjust it to new reality while maintaining our focus on what’s best for our shareholders and our company over the long term.

We continue to make a concerted effort to further reduce our input costs and overhead expenses in an effort to keep our cost structure in-line with today’s demand environment. This meant renegotiating terms with land sellers, vendors, trade partners and suppliers and tasking our department head to lower costs and in some cases reducing headcount.

While these are difficult actions to take, they were necessary in light of the current demand environment. Additionally we continue to value engineer our homes in an effort to lower the total cost of construction. Our land underwriting criteria continues to incorporate a more conservative and discipline approach.

In some cases, perspective land deals maybe land bank and/or ventured with our builder partners to reduce capital and improve our risk adjusted returns.

As we continue to focus on our operational excellence along with disciplined land and land development activity, we expect to generate significant cash flow from operations which we will use to reduce our leverage, buyback shares or make opportunistic land purchases or M&A activity in the future.

As part of our operational excellence program, we’ve implemented our 12 point sales and marketing performance program to achieve our demand and pricing objectives.

In today’s challenging new home markets we’re laser focused on being more effective at lead conversion like creating an emotional connection with our entry level, move up luxury and active adult buyers. We continue to focus on building our premium lifestyle brand in each of our markets.

This type of reputation takes years to cultivate and it starts with building quality homes with an emphasis on design and innovation and locations where people want to live or providing an excellent customer experience.

We’ve differentiated our products at every segment of the market which reinforces our standards among home buyers a premium lifestyle builder. Mike will share some of these successes in his remarks. In short, the recent market softness has prompted us to reexamine our business in a number of ways.

Land development, direct and indirect building costs, sales and marketing and land acquisition strategies are all getting increased scrutiny which is a healthy exercise in any market environment. We continue to be positive about the long term outlook for our industry and are in a great position to capitalize on its future.

With the strength of our balance sheet, our differentiated premium brand focus and our seasoned leadership team, we’re confident of our continued growth and success. With that I’d like to turn it over to Mike for more details on the numbers..

Thanks Doug. Good morning and welcome everyone to today's call. I’m going to highlight some of our results and key financial metrics for the fourth quarter and full year ending December 31, 2018. And then, finish my remarks with our expectations and outlook for the first quarter and full year 2019.

At times I’ll be referring to certain information from our slide deck posted on our website that Chris mentioned earlier. Slide 6 of the earnings call slide deck provides some of the financial and operational highlights from our fourth quarter. Home sales revenue was $1.1 billion on 1,727 homes delivered at an average sales price of $649,000.

Our homebuilding gross margin percentage for the quarter was 21.9% and our SG&A expense as a percentage of home sales revenue was 9.1%. Net income came in at $99 million or $0.70 per diluted share.

Our fourth quarter net income included a $17.5 million charge for a legal settlement related to litigation that we’ve previously disclosed in our SEC filings involving a lawsuit filed by [indiscernible] in connection with a party homes land sale that occurred in 1987.

In addition, we incurred transaction expenses related to the acquisition of a Dallas-Fort Worth based builder that closed in December. Excluding these expenses adjusted net income was $113 million or $0.79 per diluted share. Slide 7 of the earnings call slide deck provides some of the financial and operational highlights for the full year 2018.

Home sales revenue was $3.2 billion on 5,071 homes delivered at an average sales price of $640,000. Our homebuilding gross margin percentage for the year was 21.8% and our SG&A expense as a percentage of home sales revenue was 10.6%. Net income came in at $270 million or $1.81 per diluted share.

Excluding the legal settlement and transaction expenses I previously mentioned, adjusted net income was $284 million or $1.90 per diluted share. For the quarter, net new home orders were down 24% on a year-over-year basis on a 2% increase in average selling communities.

Our overall absorption rate for the fourth quarter was 2.1 homes per community per month, which was below last year's fourth quarter pace of 2.8. For the full year our absorption rate was 3.0 homes per community per month.

As for our active selling communities, during the fourth quarter, we opened 18 new communities, 14 in California, and one each in Arizona, Colorado, Texas and Washington. Of the 14 new communities opened in California during the quarter, 12 were from our long term California assets.

Since opening those communities in the middle of the fourth quarter we sold 36 homes at sales prices from $300,000 at Altis, our 700 unit active adult community located in Belmont.

61 homes at sales prices from $500,000 at Skyline, our 1,200 unit master plan in Santa Clarita and a 114 homes at sales prices from $1.1 million at Pacific Highlands Ranch in San Diego.

We should start to see deliveries from those projects in the second half of 2019, which will benefit our homebuilding gross margins as our long term California assets delivered margins well above the Company average.

In addition to our 18 new communities we added 14 active selling communities in Dallas-Fort Worth with our acquisition at the end of December. We closed out 11 communities during the quarter resulting in an active selling community count of 146. Our active selling communities at the end of the year is shown by state on Slide 8.

We ended the fourth quarter with 1,335 homes in backlog, which was a 15% decrease compared to the same quarter last year. The average sales price in backlog increased 2% to $672,000 and the total dollar value of our backlog decreased 13% year-over-year to $897 million.

During the fourth quarter, we converted 82% of our third quarter ending backlog, delivering 1,727 homes, which was a 2% decrease compared to the same quarter last year. Approximately 46% of our deliveries for the quarter came from California, including 18% from our long term California assets.

Our average sales price of homes delivered was $649,000, up 2% from the same quarter last year. This resulted in home sales revenue for the fourth quarter of $1.1 billion, which was consistent with the same quarter last year.

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

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

During the fourth quarter, we invested $41 million in land acquisition and $79 million in land development. For the full year we invested an aggregate total of $883 million in land acquisition and land development. At quarter end, we owned or controlled approximately 27,740 lots.

Based on our full year 2018 deliveries, the number of years of lots owned or controlled is 5.5. A detailed breakdown of our lots owned will be reflected in our annual report on Form 10-K, which will be filed later this week. In addition, there is a summary of lots owned or controlled by state on Page 31 in the slide deck.

Turning now to the balance sheet; at quarter end, we had approximately $3.2 billion of real estate inventories; our total outstanding debt was $1.4 billion, resulting in the ratio of debt to capital of 40.7% and a ratio of net debt to net capital of 35.5%.

For the full year 2018, we generated $310 million in cash flow from operation and ended the quarter with $846 million of liquidity consisting of $278 million of cash on hand and $568 million available under our unsecured revolving credit facility.

With respect to our stock repurchase program, for the quarter we repurchased 541,000 shares for an aggregate dollar amount of $6.7 million. For the full-year, the company repurchased approximately 10 million shares for total aggregate dollar amount of $146 million.

Last week on February 21st, we replaced our previously stock repurchase program with a new $100 million authorization that will expire in March 2020. Now, I will like to summarize our outlook for the first quarter and full-year 2019.

For the first quarter 2019, the company expects to open nine new communities and close out of seven communities resulting in a 148 active selling communities as of March 31st 2019. In addition, the company anticipates delivery in 55% to 60% of its 1335 homes in backlog as of December 31st 2018 at an average sales price of 600,000.

Company expects its home building gross margin percentage to be approximately 16% for the first quarter.

A decrease in home building gross margin percentage compared to the previous quarters as a result of a lower mix of deliveries from California and more specifically a lower mix from our long-term California asset, higher incentives on the inventory homes that you're in and purchased accounting adjustments related to the acquisition with Dallas-Fort Worth builder.

Due to the low number of homes expected to the close in the first quarter, the company anticipates it's SG&A expense its percentage of home sales revenue will be in a range of 15% to 16%. Lastly, the company expects its effective tax rate to be in a range of 25% to 26%.

For the full-year assuming similar market conditions to what the company is currently experiencing, we anticipate delivering between 4600 and 5000 homes at an average sales price of $610,000 to $620,000.

In addition, the company expects its home building gross margin to be in a range of 19% to 20% for the full-year with a higher mix of deliveries from our California assets in the third and fourth quarter 2019. Finally, the company expects our full-year SG&A expense as a percentage of home sales revenue will be in the range of an 11% to 12%.

The company expects its effective tax rate for the full-year to be in the range of 25% to 26%. I'll now like to turn the call back over to Doug for some closing remarks..

Thanks, Mike. In conclusion, I'm very proud of our company's performance in 2018. We set records in a number of key operating matrix. At year-end, our book value per share increased over 17% year-over-year to $14.52 per share which is a testament to their earnings growth generated from our home building operations.

I'm also extremely glad of how far our company has come over the last 10 years from a small startup in 2009 to a national builder with annual revenues in excess of $3 billion. For other, some uncertainty regarding the near-term outlook for our industry, we continue to have confidence in the long-term trajectory of our company.

We believe we can double our revenues over the next 10 years while continuing to maintain strong operating margins. Our goal is to increase market share in our existing division and manage its smart growth in our early stage divisions which includes Sacramento, Austin, Dallas-Fort Worth and the Carolina.

Lastly, we will utilize our strong financial position to expand our geographic presence through organic expansion and our acquisition. Our leadership team has been through several housing cycles and knows how to compete a difficult market environment as well as identify opportunities when they arise.

This experience coupled with our strong balance sheet and strategic focus gives me great confidence in the future at TRI Pointe Group. Finally, I'd like to thank our team members for their contributions to another great year.

While the road ahead maybe less certain than in years past, I know we have the right people in place to successfully achieve our long-term goal. That concludes our prepared remarks and now we like to open it up for questions. Thank you..

[Operator Instructions] Our first question is from Stephen East with Wells Fargo. Please proceed with your question..

Thank you, and good morning guys. Doug, maybe you can talk a little bit about what the trends you all were seeing from a demand perspective as you moved through the fourth quarter and maybe a little bit more detail on what you all were seeing in January and February. And I guess, specifically there I'm wondering also about incentives.

Have you been able to back off incentives as we've entered the New Year versus what was going on in the fourth quarter?.

Yes. Hi, Stephen. I'll have Mike talk about the incentive percentage. But overall, as we indicated, I mean in second half of 2018 fourth quarter with a combination of interest rate peers and some portability concerns, definitely slowed the absorption pace.

I think you saw that in our numbers, so it's pretty self-explanatory and every builders have the same results..

Sure..

So, let's see. Now we were going to changing market conditions which is for 30 years in the business, it's very normal as I indicated. Obviously the fed took their foot off the pedal a little bit on interest rates. I guess, we'll probably I'll say that has some contributing factor to some of the success in the first seven weeks of this year.

Every week seems to be getting stronger. We had some very strong openings in Phoenix as we mentioned. Everybody likes to talk about our California portfolio between Altis had an average from sales price to the 300,000 which is our active adult all the way up to $1.1 million to $2 million down at Pacific Highlands Ranch.

We are showing homes at a very good pace. Up at Skyline Ranch, we have the ability in the luxury because of our land basis to produce more affordable price point and that's been partly contributing to our success up at Skyline price is a 500,000.

So, overall I mean one of the reasons why we gave guidance for the year compared to both our competitors is what we feel right now is okay here. It's not going to be great, it's going to be a grind but we're pretty excited about it. And we got a great team, we have a great brand that continues to differentiate itself.

So, that's why we gave the guidance. And if the market turns makes a U-turn, then we'll tell you all about that the next quarter too but right now we're feeling pretty positive. To be honest, it is. I'm not going to get through above this might squeeze though..

Fair enough.

And on the incentives?.

Yes Stephen, this is Mike. On the incentives, so for the units that we delivered in the fourth quarter, our incentives ran about 4.6% of our home sales revenue which is up about a 130 basis points from the third quarter. And then currently sitting in backlog are incentives to about 3.5%..

Okay..

And we've seen that back off slightly and as we moved into January and February..

Okay. Yes, that's exactly what I was looking for. Thanks. And then as you look at your gross margin, your fourth quarter, what drove that big B in the fourth quarter.

And it sounds like both from what you did the fourth quarter and what you just now talked about a fair amount of conservatives and then your guidance for this year but I did know if there was anything in particular that was going to weigh on your gross margins and plus the guidance of '19 to '20?.

Yes. I mean, it's a good question. Maybe instead of saying conservative, I've said maybe our guidance is a little cautious in that perspective since we're seven weeks into the year so far. But yes, the first quarter's obviously very tough; what drove that is really we pulled forward a lot of deliveries in California.

In the fourth quarter, typically we average anywhere from around 38% to 42% of our deliveries in California and for the fourth quarter we delivered them in around 46%. So, we're able to pull forward a lot of those high margin high ASP projects that we sold in the first half of the year when orders were still strong.

And of course, finally California was difficult on an order perspective on the back-half for the year. So, our first-half of the year is a tough comp for us because we closed very few units in California and even more specifically there's long-term California assets.

Having said that, we've had good success as we mentioned on our call with some of the long-term California assets those 12 mono-complexes that we opened right at the end of last year. And so, that should help our margins going forward.

Just to give you some perspective even though our margins are 16% the first quarter are currently sitting with almost 1700 units in backlog. This is at the end of January. And our margins there are 21.3%. So, we have pretty good conviction in where our margins going in the back-half for the year to offset kind of that tough start in the first quarter..

Yes, that's perfect. That’s what I was looking for. Thanks a lot, guys..

Thanks, Stephen..

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

Hi guys, good morning. Thanks for taking the question. So, I was hoping to dig in a little bit to just get an update on the margin profile of some of those long dated California assets.

I know in the past we've kind of highlighted that they're obviously well above company average I think roughly 30% is the number you gave about a year ago or maybe a little bit less than that. I'm just curious with the market conditions as you described in the softer sales environment.

When you look at maybe those 1700 homes in backlog, of the ones that are in the long dated communities.

Is that 30% still a good number to think about or have you seen outsized pressure there given California is a little bit softer today?.

Actually Alan, this is Mike. I mean I think the numbers maybe slightly higher than that, probably around 35% and a lot of that's based on the strength of Pacific Island's Ranch.

We clearly had some successful openings there and a high amount of deliveries an 110 units coming from ASPs that are between a $1 million and a $2 million and we have a very low basis there..

Got it. So, I guess first follow-up on that. Mike, if you can maybe just quantify what the other communities outside of Highlands look like.

But then, just a bigger picture question and several of your competitors have kind of made this line in this same comment that we're going to deliver this many homes that in 2019 regardless of market conditions and obviously that could have negative implications for margins as demand remains choppy.

But it would seem like with your land pipeline, if you want it to you could push a little bit harder on those projects and get more volume and not really have that big of an impact on margin given they're well above average.

So, can you just talk a little about the thought process there whether that's coming to into your strategy at all?.

Yes, and this is Tom. We certainly had a lot of discussion about that and we do have the benefit of those long dated assets and the margins that we have there. So, we are constantly trying to optimize our performance and manage that price and pace equation.

So, we continually look at that and I think we've got the right recipe in till right now and we'll continue to monitor as we go forward..

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

No, no changes..

Yes, I'd add. And what I mean, right Tom said. When we look at each project as we roll up the business plan, obviously the long dated assets in California have above average margin profile that Tom or Mike just mentioned.

And we obviously are managing to a profit and pace scenario whereas you may have a project that bought two years ago and the margin profiles less and you're going to want to move that a little quicker. So, they all have different case studies. I mean, we literally go to each project and manage them that way.

And obviously the California assets, I know a lot of people get concerned about California but we're very blessed to have very strong assets in California with a very strong margin profile, at least here in Southern California.

Northern California was a very tough second half of the year and I anticipate that Northern California will be this is going to be a tough year going into this year. But in Southern California with what is that likely on the control over 15,000 lots. We have a pretty good head start in everybody..

Got it. Alright guys, thanks a lot, good luck..

Thanks..

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

Hi, good morning. This is actually Chris on for Steve. So, looking at your land strategy, a lot of your peers are adopting this more asset like approach by increasing the proportion of option lot.

Is it something that you would consider doing on a go-forward basis?.

Yes. We've always looked at how to maximize our risk adjusted returns as I mentioned in the remarks. We've employed a fair amount of land banking especially in some of the higher priced land acquisition targets that we have encountered probably more in the West Coast and a little bit on the East Coast. So that continues to be a strategy.

We also have very good relationships with several of our builder partners and we team up on that to reduce our capital commitment. And then third, I mean, we tie up land and we put it under auction and we don't close until the entitlements are in place. So that's a strategy we continue to employ throughout every market..

Got it. And then on --.

Hi guys, actually its Stephen Kim, I wanted to jump in if I could with the question on incentive.

In general, when Chris and Tran, I’ve gone on our market visits, we have heard that in this period of recent rate volatility customers are really kind of favoring these quick move-in homes, in other words spec homes more than they historically might have.

But our sense is that a lot of the builders haven't really adjusted incentive strategies to reflect this and so may actually be discounting homes more than they need to.

So I guess, I was wondering like have you – do you agree that today's buyer is maybe a little bit more open to a spec driven product assortment and that therefore there might be an opportunity for you and others in the industry to actually hold back incentives until later in the build process for the homes that you have that are either to cancellations or whatever close to -- something you would typically have incentivized heavily?.

Stephen this is Dough, and I will let Tom chime in here. But typically, where we have close to finish inventory spec designer homes those typically end up having a higher incentive percentage than our dirt starts and that's typically the way we see our pricing paradigm going forward..

Yes Stephen, I would agree with you that there is an interest in a completed spec home right now. Obviously, interest rate volatility had a lot to do with that. We’ve certainly taken advantage of it, but again, most of the incentive dollars we are spending are related to financing incentive.

And then obviously, a larger portion goes to auctions and upgrades. But in general, I agree with Dough that we are not incentivizing extra on a spec home until its closer to inventory..

Thanks guys..

Our next question comes from Jay McCanless with Wedbush. Please proceed with your question..

Good morning everyone. So when I look at some of the markets you guys have especially California and Seattle, we have seen pretty big increases in existing homes, competing existing homes sale as well as price trend starting to slip.

What are you guys seeing on the ground right now and I guess with the absorptions are being down thus far in February based on the slides, seems like you guys are still seeing a pretty fair amount of competitive pressure out there?.

Yes Jay, this is Tom. I think you're absolutely correct in those markets both California and Washington State, Seattle -- in particular, we've seen a increase in resale inventory and certainly a softening in demand that put a lot of competition amongst us and the resale market and certainly leading to slower absorption for us overall.

California markets have shown some pretty healthy improvement for the first couple months of this year comparatively the Q4. Up in Seattle we've had the benefit of some increases, but it doesn't feel like it's gotten that full-bore demand profile back yet..

And then with the Dallas acquisition, did you all generate the order spend for 4Q and may be with the orders it's all disclosed in the slide, can you tell us how many of those came from that acquisition, the first couple of months this year?.

On the first couple of, well Jay, there was just a handful of orders because we close right mid December so there's only a handful orders related to last year that were in the orders number.

There was roughly 130 units in the backlog number though that we came into this year with and I don't have Dallas offhand for the first seven weeks, but I can get back to you on that..

That would be great. And then just the other question around --.

I believe it’s around 40, 41 orders something like that out of 14 communities..

That's correct..

And then, just the increase in the cancellation rate was that strictly just both feed on the part order, do you guys cancelled some of the orders out that you acquired?.

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

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

Yes, I didn't know if that was some of that you guys decided to cancel -- that you wanted or it was just like Doug said --.

Well, there was a heavy can rate in Dallas at the beginning in January for us, but the can rate was relatively high in the fourth quarter a lot of that related to continued sales where people just were not able to sell their homes to move into ours..

Thanks for taking my questions..

Our cancellation rate just so far this year is 15%, which is pretty consistent with what historical averages normally are..

Great, thank you..

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

Hi this is [Mayur] in for Nishu. My first question is about the fires in California.

Have the fires infected your development or community opening schedule in any way?.

I didn't quite understand, you say fire. No, I mean at the end of last year there was a concern up in Northern California in getting meters set with PG&E but we fought through it, but nothing continued into this year. Our biggest issue now is to get a lot of snow and a lot of rain..

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

Thank you.

And then my second question, how much community count growth we expect from [indiscernible] for the full year, if you could provide that?.

It should be pretty flat.

You talked about the Dallas based builder we bought?.

Yes..

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

Appreciate it. Thank you..

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

Good morning.

Looking at the ASP trend outlook for full year 2019, how much of that is geography? I'm guessing most of it and then how much of it is maybe product mix?.

Yes some of its geography Jack because of Dallas we're going to do roughly 300 units in Dallas at an ASP that’s around 350. So that does pull the overall averages down and then the rest of it is probably product mix..

So like would you say 50:50 maybe or I mean that's totally hard to --.

Dallas has less impact. Yes. It’s probably more product mix..

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

Well, I'd say we plan on an absorption pace of 2.8 for the full year. Historically we've been at about 3.0. Last year we're 3.3 so that seems to be the high-water mark I think you look at the slide deck it shows you historically what our full-year absorption rates are.

So we're planning currently 2.8, so if we see that the market is a little bit better in the spring sowing season we can outpace that and it will be some impact on our deliveries in the back half of the year..

Good and then I'm just one last one for me.

How much in the G&A line is I think, it’s above 700,000 in the fourth quarter from Dallas and then the De Novo out in the Carolinas, is there a number or basis points but you could frame out and say hey this is tucked in the G&A number for 2019 that wasn't really there in 2018?.

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

And that theoretically say it, as we get through late 2019 and 2020 and they generate more --.

When they start generating revenue obviously yes..

Got it..

So we're a little conservative on our SG&A guidance from that perspective..

Great, thank you, that's helpful..

Our next question comes from Carl Reichardt with BTIG. Please proceed with your question..

Thanks, good morning guys. Hey Dough, I mean, the January absorptions looks like they’re down 39% or so which is worse than Q4 and your February numbers are better but obviously you don't have many cans in those recent orders. So I'm just trying to understand sort of the confidence level here.

Is something happened in just the last few weeks relative to January beyond just a normal seasonal pump that's giving you the confidence that you see in running a 2.8 sort of for the year? I'm just struggling just given January looked like it was a fair amount weaker than Q4.

So that's what I'm trying to figure out?.

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

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

Let me put it to you this way Carl, if we're reporting at the end of January I probably wouldn't be giving you a full year guidance for 2019, but we're through almost February and the housing business is tough. We've got a very seasoned management team here and we're not going to sugarcoat it. You got to have your a-game.

We've got a 12-point sales and marketing strategy. We're hitting on all cylinders on cost, management as we mentioned in the deck. So it's not for the faint of heart, but we're going to have a lot of fun and we're going to kick a lot of fanny..

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

Fair enough and then I wanted to ask two quick ones. One is, all of your Nevada business ex-rate co and then also Dough you mentioned weather and I was going to ask about that your expectation for backlog conversion rate for this quarter is not too dissimilar from last year.

Obviously, I mean in California we know how bad the weather has been in the last month.

So are you anticipating, is it assumed in your backlog conversion rate that you'll have some construction delays just getting stuff close?.

Well there may be a few, but we also have a fair amount of inventory going into the beginning of the year. So that doesn't get affected by the weather..

And what was the first part of your question..

Just in Nevada, your Nevada legacy reco -- or is there, what percentage of it is legacy reco your current log count versus anything you bought?.

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

I appreciate it guys. Thanks very much..

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

Good morning, thanks for taking my questions and all of the details so far. I wanted to follow up on just a conversation around absorption and touching on some of those monthly trends versus the full year.

So just to make sure we understand it correctly, it seems like if you kind of carry out February for a full month you're running absorption probably down similar amount year-on-year, quarter-to-date versus what you did in 4Q so down kind of mid to high 20s.

So when you're planning that 2.8 are you then taking just kind of normal seasonal trends off of those levels so you see a pretty substantial narrowing in the year-on-year absorption trends as early as 2Q or how should we think about kind of cadence that you guys are planning for?.

Yes I think we're feeling, Mike, this is this is Mike, relatively strong second quarter so we think we're growing into the second quarter and then we think in the back half of the year we may better than we did last year, but that that's kind of how we're looking at it. Obviously the first six months is a very difficult comp for us.

I think we average around 3.5 the last few years. We don't anticipate being at 3.5 for the first six months of the year..

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

Yes. .

Got it. And then Mike, just kind of a clean-up question around 1Q margins. You talked about some of the go-forward in 4Q from the California closing. Think there is also some backlog purchase accounting.

Can you just give us like can you quantify any of that in terms of in breaking down that mix impact versus purchase accounting versus just the incentive environment?.

Well, incentives we talk about we're roughly maybe a 130 basis points when we start deliveries in 4Q versus 3Q. So, that incentive variance is going to go-forward into the first quarter. And that it's going to be much higher than a 130 basis points because that's not going to be as many California deliveries in there.

California's typically a lower percentage from an incentive perspective and then when you look at the markets in Texas and some of the other markets it’s a much higher percentage. So, a lot of it's been driven by the incentives given.

And then it's primarily mix, I mean as we mention, we only close 15% of our long-term California assets in the first quarter and some of those are coming from some of the long-term California assets that are maybe equal or below the company average. And very few coming from the long-term assets that are higher than the company average.

From a purchase accounting perspective, clearly we're not generating much margin because the purchase accounting in the first quarter from the Dallas closings. We haven’t really quantified that on a basis points..

Okay..

So, it's just up quarter from most of those are standing inventory units that we've incentivized pretty highly to close in the first quarter..

Okay, makes sense. And if I could fit one more in just as a follow-up to that, just to clarify that around incentives because you talked about the 4.6 in deliveries but then the 3.5 in backlog. Given that geographic mix, you just called out in terms of California versus some of the other markets.

I know this might be difficult but how much of that delta between the 46 and the 35 is attributable to just a lower backlog in California then versus like for like pull back in incentives to start the year?.

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

Okay, alright thank you..

Our next question comes from Alex Rygiel with FBR & Company. Please proceed with your question..

Thank you, good morning.

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

Hi Alex, this is Tom. Probably the biggest reasons for cancellations in Q4 were really the inability for the continued buyer to move their resale product.

So, we are seeing their desire to get into new housing still there, they're currently out shopping but it's just a matter of getting their head around potentially a new price for their existing home.

Relative to financing, it really hasn’t skewed much, there is some talk of people looking at adjustable raise but the reality is that just hasn’t happened yet..

Very helpful.

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

Yes. it's I'll just give you through them on, it's roughly 15% of first quarter as I mentioned the third quarter's the highest, it's roughly 25%. So, you are going to see a significant spike in margins in the third quarter. By and any weather delays or construction delays as we see as sitting here today.

But for the full-year it's roughly 20% and on the comp set that was 17% last year..

Very helpful, thank you..

Our next question comes from James Finnerty with Citi. Please proceed with your question..

Hi good morning, Doug.

Just checking in on the balance sheet and then in the debt maturity this year and what your thoughts are with debt reduction versus refinancing it, something you come to conclusion on or what do you see?.

Yes. Well, I mean we've talked about we will probably refinance those bonds that are coming due in June. We did generate a $300 million in cash flow last year, we think we're going to be generating positive cash flow this year as well. So, we more surely we have the option to do either refinance or pay it within our existing debt structure right now.

So, right now we're just kind of moderate the markets and what that might that outcome might be..

So, for the full-year we expect that the debt counts to remain kind of stable?.

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

Okay, great. Thanks so much..

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

Yes, thanks guys. I was hoping you can comment on the G&A of $43 million this quarter run rate given the acquisition going forward or was there more of a one-time maybe cost out something in there..

I mean, well it was a strong quarter for us. The company had a record year from an earnings perspective. So, there's probably some more bonus accrual associated with that number. Sure, that I mean we added the Carolina's --..

More to start the cost..

More to start the cost in some of the other smaller divisions that we have. So, you're going to see that run rate kind of continue, Alex..

Can you give any comment, Mike, on financial services, what you expect during this year?.

I didn’t give any on this year but its last year we generated roughly I don’t know a $10 million $9.8 million $10 million. It's very comparable on a year-over-year basis to what we did in 2018. I mean, the volumes being roughly the same, ASPs are down, I mean it' going to be roughly the same number..

Okay great, thanks guys..

Our next question comes from Jay McCanless with Wedbush. Please proceed with your question..

Hi, thanks for taking my follow-ups. Just two quick ones.

1) What percentage of your current orders over your backlog are under a -- contract and how is that percentage driven over the last few quarters?.

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

So, I don’t have the exact percentage but it's certainly lower than what we've had historically..

And then, on the Mid-Atlantic, still seems weaker results there. What -- can you give us kind of an update, I know you'll have some leadership changes there and maybe some product shift.

What's going on there and how are you thinking about absorptions for the rest of this year?.

Yes Jay, this is Doug. At the beginning of this year with the government shutdown, we definitely had some impact Winchester buyer confidence in the first part of this year. For the year, I was pleased to see that our Winchester division actually exceeded their proper plan.

So, the leadership led by Brad Blank, he's done an excellent job of kind of reengineering the sales and marketing, land acquisition and product in collaboration effect and really implementing the TRI Pointe operating strategy in the Mid-Atlantic.

So, we're pretty bullish about the long-term impacts that Winchester can have and a positive impact going forward. And Brad's one of our strong leaders going forward to do that..

Great, thank you..

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

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

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