Greetings, and welcome to TRI Pointe Group’s Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Chris Martin, Investor Relations Officer. Please go ahead. .

Good morning and welcome to TRI Pointe Group earnings conference call. Earlier today, the company released its financial results for the second quarter of 2019. Documents detailing these results, including a slide deck under the Presentations tab are available on the company’s Investor Relations website at www.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 its quarterly report 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 those non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be assessed 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, good morning, and thank you for joining us today as we go over our results for the second quarter 2019. I’ll take you on our long-term strategy and discuss current market trends. TRI Pointe Group delivered strong results for the second quarter of 2019 generating net income of $26.3 million or $0.18 per diluted share.

We met or exceeded all of our guidance metrics for the quarter. Orders for the quarter were up 11% year-over-year with a strong monthly sales base at 3.4 homes per community, which was comparable to the second quarter of 2018.

In addition, we paid off $382 million of senior notes that matured in June of this year and we ended the period with a net debt to net capital ratio of 37.7%. These results leave us well positioned to achieve our full year guidance at the beginning of the year and pursue our long-term strategic initiatives.

These initiatives include unlocking the value embedded in our long-term California assets, growing our market share within our existing operations and achieving better scale on our early stage market. Contrary to the current narrative, we believe California continues to be a great place to be a home builder.

Thanks to the strength of the space economy, the undersupplied nature of the housing market and continued job growth. Our demand has softened in certain high cost markets. We continue to have great success in other parts of the states such as San Diego and the Inland Empire.

Things in part to the low land basis associated with our long-term California assets. We are able to have great success in these markets by providing a compelling value proposition for our buyers while delivering strong margins at entry level move up in luxury price point.

Another way we are seizing on the opportunity that exists in California is to capitalize on two of the fastest growing buyer segments in the market, millennial and baby boomer.

It should be noted that our initiative to design and produce more product at affordable price points has been very effective in Los Angeles, our new Skyline community in the Santa Clarita market has had great success and we are now planning on an active adult community in Phase 2 of Skyline.

Additionally, in the Inland Empire, Altis, our active adult community in Beaumont continues to gain momentum and is currently selling homes between $300,000 to $500,000.

Also the success of our market rate offering in Sundance has accelerated the development of a 4,000 unit community called Atwell, which will be a new affordable master plan community in Banning schedule to open late next year at estimated price points in the range of $300,000 to $500,000.

In San Diego, our affordable product offering at Weston in Santee in Chula Vista continue to be strong performer. With that success we have planned and we’ll be starting development on Meadowood and 845-unit community in Fallbrook. Meadowood is anticipated open at early 2021 with selling prices between 400,000 to 700,000.

Well, we believe California will continue to produce great results for our company for years to come. We see an equally bright future for our operations outside of the state. We haven’t established presence to some of the best home building markets in the country. Markets with great housing fundamental, job growth and a lack of available supply.

Each of our brands has an opportunity to take advantage of these favorable market trends over the next several years and increase their annual deliveries, thereby enhancing their local economies of scale.

This is especially true for our relatively new operations in Dallas, Austin and to Carolina where the upfront investments have been made with the expectation of solid returns down the road. Thanks to our strong balance sheet and experienced management teams.

We have the capital and know-how necessary to make these initiatives the reality either organically or through acquisition. With that, I’d like to give some color on our existing markets. Overall demand was strong throughout the quarter and we experienced a very consistent sales base in April, May and June.

The decline in interest rates, no doubt, had a positive impact on buyer activity and likely help extend the selling season into the summer. We were also able to scale back on some of the incentives implemented earlier in the year and raised prices in several of our markets.

In California, we experienced a strong monthly absorption pace of 3.8 homes per community at an average sales price of 667,000 for the quarter. We had very healthy demand at our communities in San Diego and the inland markets of the state, but experience continued softness at higher price points in the coastal market.

Buyers in both Northern and Southern California have migrated east and search for more affordable housing alternatives. Fortunately, we have a significant presence in the Inland Empire in Southern California.

Any growing presence in places like Green Valley, Fairfield and Mountain House in Northern California, which allows us to capitalize on this trend. Our operations in Seattle perform well during the quarter with a monthly absorption pace of 3.4 homes per community, which is a strong sales rate considering our average backlog sales price of 857,000.

After a period of softness at the end of last year, we believe the market has found stability and it starting to regain some of its momentum. We recently shifted our focus to more affordable attach and detach product in the core areas of the market and these new offerings have been well received.

In Arizona, Maracay delivered the best monthly sales base out of all of our brands, averaging 5.6 orders per community in the quarter, driven by healthy market dynamics and the successful opening of several new communities.

The order strength was evident across a number of buyer segments, which allowed us to push prices higher in several of our releases. The Las Vegas market is stable, however it is still fueled by incentives and select products in sub markets.

Our positioning and product offerings enabled us to achieve a monthly absorption pace above the company average at 3.8 homes per community. We are also encouraged by our future project land pipeline. Our Colorado operation continues to improve as profit doubles in the quarter as compared to last year.

Thanks to a combination of higher closing volume and better margin. Our shifts are more affordable product has been well received and we now have a land pipeline to allow for significant growth in this market.

Turning to our Texas operations, Houston and Austin experienced a nice lift in monthly absorption pace during the quarter, with Austin leading the way at 3.6 homes for community. Our recent acquisition in Dallas is performing to plan and we look forward to expanding our presence in this robust market.

Now with operations in the top three markets in the state, we are poised for Texas to be a larger contributor to our overall business. Finally, our Winchester brand continues to find its stride with Virginia fairing relatively better than Maryland.

Our recently opened West Oaks community in Tysons Corner garnered 16 orders in its first few weeks of being opened. And we are optimistic this is a positive sign for future community openings in the DC market. With that, I’d like to turn it over to Mike for more details on our financial performance in the quarter.

Mike?.

Thanks, Doug. I would also like to welcome everyone to today’s call. I’m going to highlight some of our results and key financial metrics for the second quarter and then finished my remarks with an update on our expectations and outlook for the third quarter and full year 2019.

At times, I’ll also be referring to certain information from our slide deck posted on our website that Chris mentioned earlier. Slide 6 is the earnings call slide deck provides some of the financial and operational highlights from our second quarter.

Home sales revenue was $692 million for the quarter on 1,125 homes delivered at an average sales price of $615,000. Our homebuilding gross margin percentage for the quarter was 17% and our SG&A expense as a percentage of home sales revenue was 12.1%. Net income came in at $26.3 million or $0.18 per diluted share.

For the quarter, net new home orders increased to 11% on a 12% increase in average selling community. Our overall monthly absorption rate at 3.4 homes per community was consistent with the same quarter in the prior year. You can see the historical monthly cadence of orders on Slide 28. So far in July, orders were up 10% year-over-year.

As per our overall selling communities, during the second quarter, we opened 13 new communities, five in Arizona, three in California, two in Texas, two in Washington and one in Nevada. Those 13 communities resulted in an ending active selling community count of 146.

Our active selling communities at the end of the quarter is shown by state on Slide 7. We ended the second quarter with 2,208 homes and backlog at an average sales price of $652,000, for a total dollar value of $1.4 billion.

During the second quarter, we converted 61% of our first quarter ending backlog delivering 1,215 homes with an average sales price of $615,000, resulting in home sales revenue for the quarter of $692 million. Our homebuilding gross margin percentage for the second quarter was consistent with our guidance at 17%.

It’s worth noting that our current quarter gross margin was impacted by 190 basis point increase in incentives compared to the same quarter last year, due to the softness we experienced in the back half of 2018, in earlier 2019, as we were moving through our inventory homes.

However, as Doug previously mentioned, we’ve seen incentives decreased in certain markets and as a result our overall incentives and backlog have trended down.

As mentioned on the last earnings call, we expect our margins to increase in the second half of the year as we deliver a higher percentage of our revenues from California and more specifically our long-term California assets.

For some additional color as of June 30, 2019, we had 1,942 homes and backlog that are scheduled to close in the second half of this year building a homebuilding gross margin of over 24%. I’ll give some additional guidance on homebuilding gross margins for the third quarter and full year later in the call.

The second quarter SG&A expense as a percentage of home sales revenue was 12.1% which was 140 basis point increase compared to 10.7% for the same quarter last year.

The year-over-year increase in our SG&A percentage was due to the decreased leverage as a result of a 10% decrease in home sales revenue and higher overhead costs as a result of our expansion initiatives into the Carolinas, Sacramento, Austin, and the Dallas-Fort Worth market.

At quarter end, we owned and controlled approximately 28,000 lots, which represents a 5.8 year of supply based on our last 12 months deliveries. Detailed breakdown of our lots owned will be reflected in our quarterly report on form 10-Q which will be filed this week.

In addition, there’s a summary of lots owned or controlled by states on page 27 of the slide deck. Turning to balance sheet, at quarter end, we had approximately $3.3 billion of real estate inventory. Our total outstanding debt was 1.4 billion resulting in a ratio of debt to capital of 40.7% and net debt to net capital of 37.7%.

During the quarter, we drew on our $250 million term loan facility and paid off the 382 million in senior notes that were due in June. We ended the quarter with $590 million of liquidity consisting of $171 million of cash on hand and $419 million available under unsecured revolving credit facility.

Now, I’d like to summarize our outlook for the third quarter and full year 2019. For the third quarter of 2019, the company expects to open 14 new communities and close out at 12 communities resulting in 148 active selling communities as of September 30, 2019.

In addition, the company anticipates delivering 45% to 50% of 2,208 homes and backlog as of June 30, 2019, at an average sales price of $620,000. The company expects its homebuilding gross margin percentage to be in the range of 21% to 22% for the third quarter and SG&A expense as a percentage of home sales revenue be in the range of 12%, 12.5%.

Lastly, the company expected effective tax rate to be in the range of 25% to 26%. For the full year, the company reiterates its previous guidance of delivering between 4,600 and 5,000 homes at an average sales price of $610,000 to $620,000.

In addition, the company expects homebuilding gross margin percentage to be in the range of 19% to 20% for the full year. The company expects its full year SG&A expense as a percentage of home sales revenue will be in the range of 11% to 12%. And then finally the company expects its effective tax rate for the full year to be in a range of 25% to 26%.

I’ll now turn the call back over to Doug for some closing remarks. .

Thanks, Mike. In summary, I’m very pleased with our performance this quarter. We met or exceeded all of our previously stated guidance from last quarter’s call, generated a strong order performance throughout the quarter, pay off a near term debt maturity and improved our leverage ratio.

We are also furthered our strategic initiatives by growing our operations within our expanding national footprint. Well, it takes some time for us to realize the full benefit of these investments.

We are confident that TRI Pointe is on a path to become a more diversified, well-rounded home builder with the same premium brand focus that has differentiated us from our competitors. Finally, I would like to thank all of our employees for their contributions and making TRI Pointe what it is today.

In particular, I’d like to thank my good friend and partner Mike Grubbs, who announced his retirement earlier this month, effective at the end of this year. As you know, Mike was a founding member of TRI Pointe Group and has played an integral role in every phase of the company’s evolution.

He will certainly be missed by everyone in the organization, but we will continue his legacy approved financial discipline and trust within the financial community when Glenn Keeler, our current Chief Accounting Officer assumes the role at the end of the year. That concludes my prepared remarks and we’ll be happy to take on your question. Thank you..

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from Alan Ratner of Zelman & Associates. Please go ahead..

Hey guys. Good afternoon. And first off congrats to both Mike and Glenn on the upcoming changes on their life. Mike, it’s been great working with you over the years. So, I guess the first question, I just wanted a quick housekeeping question. That 10% July increase, I just want to confirm it.

Is that an apples to apples number, I guess through July 24th or whatever or is that over all of July for the last year?.

Yes, it’s apples to apples..

Okay, cool, thanks. And then the second question, that I appreciate all the comments on the pricing environment. It sounds like you’ve been able to pull back on some incentives through the spring and I think that’s generally been the trend we’ve heard from other builders.

But to be perfectly honest, I’m a little bit surprised, I guess that the pullback has been even greater or I guess you haven’t seen more pricing power in general, just given how strong it seems like the acceleration has been on the order side. I mean you put up over 20% growth in June and a lot of other builders did as well.

And when we’ve seen that in the past several years, I think when order growth has accelerated like that, it’s generally come alongside some pretty aggressive price increases. And it seems like this time might be different in terms of how builders are really approaching the price versus pace dynamics.

So can you just talk a little bit about what you’re seeing and your expectation if pricing power you expect that to accelerate as the year goes on or if you think this is kind of what we expect for the next several years is kind of this fairly flattish pricing environment?.

Yes, I’ll let Tom dive into the question too, but I mean generally speaking the pricing environment incentives have been very project and market specific, but if you take a kind of – if you take a couple steps back and remember there's a pretty big adjustment in the second half of 2018.

And then you look at our premium brand space that we build in, probably I'm not going to speak for the other builders, but we're always pulling the levers of pace versus price.

And I'm very proud of the fact that our company at ASP is well north of $600,000 is able to keep pace with frankly the entry level price points for some of the other buyers, and that's really due to our premium brand positioning that differentiates ourselves.

So, I continue to think going into the second half of the year that that in certain markets and in certain projects we’ll have a pricing power and in certain markets it will be flat and maybe a couple projects will have a little bit more incentives. So I call it a very normal market. We're pretty excited about where we stand right now.

We're very excited about the second half of the year and going into next year too. We've got our positioning and both the entry level move up and luxury price point is resonating with many consumers.

Tom?.

Yes, and the only other thing I'd add to that is basically we also had a lot of built up inventory in the industry and that was probably leading to less price elasticity on that type of product. But overall, as Doug mentioned, we're encouraged as we go forward on a month-over-month basis to see more price elasticity in most of our marketing..

And on that inventory comment, Tom, how would you characterize the situation today? Do you feel like builders that mostly worked through a lot of those excess specs that were built late last year?.

Yes, definitely. We have a lot of success in the first couple of quarters where we're back down to about two per community..

Got it. Okay, thanks guys. Good luck..

Tom Mitchell:.

Mike:.

Doug Bauer:.

Mike:.

The next question is from Stephen Kim of Evercore ISI. Please go ahead..

Yes, thanks a lot guys. Congratulations on the quarter. And also Mike, congratulations as well..

Thanks, Stephen..

You'll be missed. Well, I hope this isn't a sign of any of any changes to the negative in terms of financial disclosure, but I don't think you gave a land spend this quarter. I was wondering if I could get that to start off with..

Actually, I'll get that to you here in a minute, Stephen. I'll have to look that up, but that's no sign. We just did put it in the prepared remarks this time..

Okay, good. Okay. Well, your ASP and backlog, it came down about $20,000, I think sequentially. Your closings ASP actually rose to $10,000 sequentially. I assume that's probably just due to the longer cycle time of higher priced units and all that.

But I was wondering you didn't lower your ASP guide for the year for closing, but it would seem that the drop in ASP backlog price should eventually flow through in closing. So I want to make sure that I'm thinking about that properly.

Why you didn't change your full year ASP guide? What does that say about the back half ASP?.

Yeah, I mean it – kind of one of those things, our backlog ASP just never seems to flow through on our delivery ASP just because most of the time the majority of our – a lot of our backlog is California units and probably Washington units with the higher ASPs and they take a little bit longer to build. So they sit in backlog a little bit longer.

And some of the other markets we're able to sell and close within the existing quarter. So we still have confidence in our full year ASP guide. I would say, I think our orders for the quarter were around $600,000 though. And so, ASPs and backlog will be coming down after we deliver some of those long-term California assets in the third quarter..

Got it. But it sounds like it's more like the backlog is going to come down to kind of where the closing price is….

Correct..

Closing price will continue to sort of live where it is for the foreseeable future..

That's correct..

Okay, great. That's what I wanted to understand a little bit better.

Also from a – just a housekeeping perspective, the Dunhill orders, can you give us a sense for how much that was? And then lastly, gross margins, would we be wrong in thinking the gross margin could peak or likely to peak in the third quarter? Or is there – is that due to lumber – timing the lumber and things like that? Or is it conceivable that you could see gross margins continue to improve sequentially in the third quarter?.

I think margins will be relatively flat between 3Q and 4Q. Originally, we said that we thought our margins would be a little bit higher in 3Q with the delivery of some of the longer term assets, those are flowing into 4Q. So, I'd say, it's relatively flat for 3Q and 4Q..

Okay, that's helpful. Thank you..

Then I'll get back to you on that LAN number..

Yup, okay. Thank you..

The next question is from Truman Patterson of Wells Fargo. Please go ahead..

Hi. Good morning, guys. Thanks for taking my question and nice results..

Thanks, Truman..

I wanted to follow up on Allen's questions for a little bit of clarity. Could you guys give the magnitude of the incentive decline and the order incentive decline during the quarter and possibly breakout between some commentary between California in your markets? And then the inventory levels that you guys set are normalized today.

Could you guys just elaborate on whether you think industry inventory levels are normalized as we enter this seasonally slower period?.

Okay, I'll ramble up some numbers real quick, Truman, it's Mike. So order incentives as a percentage of our orders for 4Q 2018 was 6.9%, 1Q was 5.7% and then 2Q was 4.7%. And then delivery incentives for 1Q was 5.8%, 5.4% for Q2. And then our backlog incentives were 3.6% in Q1 and its 3.4% in Q4.

So when you look at it monthly the cadence, I think, we’ve dropped from about 5.9% to 5.1% on a monthly basis. So we’re seeing progress incremental improvements incentives as we move throughout each of the month in the quarter..

Okay, that's really helpful. Okay..

From an inventory perspective, I mean for us it’s somewhat normalized it usually two to three homes per community is what we have. We're not huge spec builder for other markets because we're private one. .

Okay, okay. Thanks. Looking at Phoenix, or Arizona orders were up 90%.

Could you guys elaborate a little bit on what was driving this? Is it purely market? Did you guys have some flagship community openings? Maybe discuss the repeatability of this going forward to the some pretty tremendous growth?.

Yes we opened five new communities in the first part of the year and definitely Truman had a significant impact. I mean, the market is good, very good. And Phoenix, we're very well positioned in some of the major employment quarters in the southeast valley.

But we also opened up a project just outside of Phoenix called Avance, we got our website right along the south mountains with four communities, I believe there. So it was just timing of a lot of communities opening, some of which wish we would open a little earlier. But we had some rain during the winter, as you probably remember.

But needless to say, it's a very positive sign for Phoenix. We're very excited about our Maracay division in Phoenix and we see continued growth going into 2020 and 2021 with that division. So it's all very strong results from the marketplace..

Yes, I would just add Truman that all of our teams did a great job in preview marketing and generating interest for our new communities or new communities continue to perform very well and that many times we're opening with a significant amount of presales and strong demand and we're off to great starts in how that momentum moving forward, which is our goal..

All right. Thank you guys. .

Thanks Truman..

Your follow-up to Steven's question, we had 66 orders in DFW for trend maker for the quarter..

The next question is from Mike Dahl of RBC Capital Markets. Please go ahead. .

Hi, thanks for taking my questions. One or two, I wanted to get a little more color on the sequential step up in the second half. And clearly you guys have been mastering that just given the mix of longer term California.

But based on those comments you just made around the incentives in both orders and backlogs, can you help break down kind of the call it 450 basis points step up sequentially, second half versus 2Q? How much is land mix versus better pricing dynamics?.

Well, I mean it's a little bit of both, right there are land mixes some of it is with the geographies of what we're closing. We're closing more California units within the long-term California assets and a significant amount of those are coming from our Pacific Highlands Ranch projects which the margins are relatively high.

And that's on the heels of us opening those five new communities there at the end of last year and the beginning of this year that had tremendous sales.

But we've also had pretty good pricing power in San Diego, specifically, at PHR in the higher end, our ASPs there close to a $1 million for that whole division, because we're building between $300,000 and $3 million. So it's a little bit of both.

But the significant increase in margins are coming from just a lot more California delivers in the back half of the year and then a lot within the long-term California assets versus the first half of the year we sold a lot of inventory units and we're moving through those.

And not many California deliveries in the first half from the long-term California assets. .

Right. Okay. And then some of the better incentive activity and selective pricing power would be more of an impact for first half of 20 closings at this point..

Correct. .

Okay.

And then back to the conversation around ASPs and mix and as you noted kind of order ASPs dipped a little below 600, and that's the first time in a while that we've seen that, I think some of the commentary you've made so far around the new community openings and some of the positioning, it seems like the mix is a little down the price spectrum.

How should we be thinking about the 600 a good run rate going forward? Do you think it will moderate further? How should we be thinking about the ASPs going forward?.

Yes it's Mike again, we are focused on coming down price point. I mean, I think, 600 is a pretty good number for probably 2020.

But just what's sitting in backlog again, a lot of the sales of the long-term California assets happen in the first half of the year primarily in – a lot of it in 1Q and even a little bit of it in 4Q at the higher price points, the $1 million to $3 million range in San Diego.

And so those are already kind of locked into backlog impacting the orders, overall ASP. But I mean 600 is roughly just below the company average, I guess for the full year..

Right..

We're incurred by our offerings going forward. We're well positioned and we think overall around that 600 is a good place to be..

Okay, great. Thank you. .

The next question is from Soham Bhonsle of SIG. Please go ahead. .

Hey, good morning guys. So first question was on clearing account.

So this year is obviously growth year there, but as we look beyond 2019, is this sort of a double digit growth target or is it sustainable, or do we sort of step up this year and then you work through that next year and we accelerate after that?.

Yes Soham it’s Mike. It's a good question. I mean the step up this year is primarily the acquisition of Dallas. We added communities there. And so when you just look at the pure averages at the end of the year, we're up roughly 12% year-over-year.

Going into 2020 it's more a mid-single digits on the community count and then it probably steps up a little bit more from that into 2021. .

Got It. All right, thank you. And then Doug….

As we start delivering more projects from those greenfield operations that we have in several divisions..

Yes, makes sense. Okay. And then Doug longer term, obviously sounds like you’re still bullish in California, but that's 50% of the business, but as you look a year or two out where do you sort of want to get that down to? And we sort of know the geographies, but if you just talk about all the geographies you want to get bigger in..

I don't think it happens in a year timeframe. I mean it takes anywhere from two to four or five years to bring assets into the marketplace and turn it. But we see tremendous growth in outside of California in the Texas, the southeast markets.

But we continue to see growth in California, Sacramento, the LA division with some more affordable price that we're targeting. So, the narrative on California has been, we think, significantly overblown.

It's a state that's really has a housing crisis and we have the ability to not only deliver more affordable price points and luxury price points in southern California, but we also have more importantly the teams to find the land and be able to deliver that here in a very entitlement constrained state so it's going to be continued growth outside of California with measured growth inside California is the best way to put it..

Got it. And if I could just sneak one in on active adults, one of your peers this week highlighted some, I just think slower to pick up there.

Have you guys seen the same or are your price points, I guess, just more favorable there?.

Yes, I mean the active adult buyer is definitely a little bit more measured in the second half of last year with interest rates tipping up and now they've tipped back down. But they're definitely out as a percentage of our business is actually growing. Mike what’s the….

Yes, just to follow on to that. I mean the absorption rate we saw for active adult was really strong. This quarter it’s actually 41%, which is one of the higher absorption rates. But it's only 20% of our business right now of our orders. So just a couple of projects can swing that pretty quickly.

Just to give you the overall absorption rate, I'm sure it will be one of the questions entry-level we are at 47%; move-up we’re 23%, luxury 29% and then 41% for the active adult and the average was 34%. And I wanted to answer the question that Steven again asked about land and land development, we apologize didn't put that in our prepared remarks.

But land acquisition was $87 million; land development is $86 million for the quarters for a total of $173 million. So that puts us year-to-date at $308 million for Land Act and land development $308 million..

Great. Thanks guys. .

Thanks Soham..

The next question is from Carl Reichardt of BTIG. Please go ahead. .

Hi guys. Mike you're too young to retire. I wanted to ask about California outside the legacy assets, just to try to get a little more granular there.

So given the Sacramento expansion and some looks at some other markets outside of legacy, how are margins trending there Doug? So what's your expectation for what your mix of product outside the legacy will look like? Will it be over time, sort of a similar split between entry-level and move up, or could you expect more of an aggressive move towards first time buyers in those markets outside legacy?.

Hey Carl, this is Tom. Good questions and as you know we're certainly very encouraged by our operations outside of our legacy assets, as well. I would say that as we look at the different markets where we see the biggest potential for growth and that being our Sacramento market, obviously that's more of a opportunity to reduce our ASP overall.

But in general, we will have a diversified portfolio approach to that market like we have in all of our markets. Similarly, I would say that the Inland Empire continues to show strength and we're encouraged by our ability to have strong demand and generate significant margins.

And we are actively in the acquisition phase for several new acquisitions that we're really encouraged by. Our positioning going forward again has been to capitalize on lower ASPs with the buyer segment that's probably shifted a little bit towards that entry-level buyer.

Overall, as you look to the coastal market, we see these markets being a little more challenged currently because of the higher price points. And so we are looking continuing for infill opportunities to offer product at a little higher density, again, to bring down our average selling price.

So there's a lot of diversity in California and that diversity holds true in each one of our operations as well. .

Thank you Tom. And then you started to answer my next question, which is given California has been softer than other markets, given that your perspective is that there's still a lot of long-term value in the state, which makes sense.

Have you started to see any movement from some of the privates that are still around in sizable in the state towards looking to sell their businesses? Would you be interested in something like that, given that you've also got a mandate to try to diversify out of the state?.

This is Doug Carl..

Hey Doug..

We haven't seen any of that from any of the privates. So we would love to take a look at that opportunity. Obviously we'd look at it as more of a land acquisition, because we've got strong teams in most of the marketplaces, but we haven't seen anybody in any form or fashion..

Is that true outside of California as well Doug? I think I asked you this every quarter. .

Yes, we continue to see some activity in the M&A front. Our focus is really growing our early start division. In Carolinas we're having really strong success in tying up land there and getting going there in 2020 with our first communities, Austin, Dallas, Sacramento, LA.

But on the heels of that with our strong balance sheet we continue to look at M&A opportunities primarily in the southeast and the northwest..

Great. Thanks guys. .

Thank you..

Thanks Carl..

Thank you. The next question is from Scott Schrier of Citi. Please go ahead. .

Hi, good afternoon..

Hi, Scott..

Earlier you talked about price elasticity in some of your markets. And looking at your monthly absorption pace through the quarter, it looks like you trended a little more evenly than the past few years.

I'm curious if there's anything to read into there, whether there was incentives used to moderate it, if interest rates were a factor, or if it's indicative of a better demand for your price point of a product? Perhaps some folks are a little more confident in the economy of the stock market.

Typically concerns are on the downside people saw the new home sales print show more activity in the 500k to 750k range than what we've seen. So yes I'm just curious on that, the absorption pace, how it trended through the quarter. .

Well, I think you're hitting on a key differentiating point for TRI Pointe. And we focus in both entry-level, which is about 30% of our orders, roughly 50% is move up first and second; 70% luxury; and 3% active adult year-to-date. When we look at our strategy, it's more of a premium brand strategy with our customers. That doesn't mean higher price.

As I said, we're 30% entry-level, but clearly at our absorption pace in our ASP the consumer is walking in on our product offering in many market areas. And it starts with the land planning all the way through the product offering. And that premium brand strategy is a big differentiator.

And I applaud the results of some of the builders going to the entry-level. I think that's great. They're doing really well. We love entry-level buyers that come into the market because then they become move-up buyers first time and second time.

So the food chain and the housing business is great, and we're well positioned and very differentiated ourselves from the competition, that's for sure..

Scott, this is Tom. I'd basically add to that relative to your question. I think there's a little bit of everything you suggested happening that has led to an extended selling season for us.

So as we look at the market going forward, interest rates certainly have helped, there’s stronger demand overall as Doug just went through, our product offerings are focused on being a premium brand. And design and innovation certainly differentiates and makes a difference.

But when you look at us year-over-year relative to demand and absorption on a monthly basis, we've had the least decline in absorption over this last quarter than any of the prior seasonality in other years. So we're definitely optimistic and encouraged by that. .

Thanks for that. And then my next question really hits to the points that you both were talking about in your differentiated product offering. And in the land market it seems like there's a lot more capital that's chasing after the entry level type land.

Does that create opportunity? Are you seeing potentially any easing in some of the – more of that move up type land that's more of where you focus on?.

It's a great question and certainly the land business 30 years I've been in this business is always super competitive at all levels.

But clearly with a majority of the competition looking for the lower entry level price points and where we offer our premium brand strategy at entry level move up and so forth, just give us a strong bargaining position as the table. So we continue to focus on very well located land close to employment quarters.

We're not going to change price points out to the hinterland so to speak. So great question and it does help us, but it's still very competitive out there..

Great. Thanks and good luck. .

Thanks..

Thanks Scott..

The next question is from Jay McCanless of Wedbush. Please go ahead..

Hey, good morning everyone. Congrats Mike. The first question I had is on specs.

In what percentage of your closings this quarter started out as a spec and how does that compare to last year?.

I don't have that number off the paper that we have in front of us. Jay, we'll get back to you on that. But I mean we obviously closed more specs during the quarter than we did in the previous year. I'll just have to get back to you on that.

And really why we hit the upside and outside the range on the delivery guidance is we were able to sell more within the quarter and close them and that had a little compression on our margin for the quarter as well..

Okay.

But despite that, you are – I believe you said earlier you guys do expect the gross margin to be flat from 3Q 2019 to 4Q 2019, correct?.

That's correct..

Okay..

So effectively the same guidance range for both quarters..

Got it. And then the other question I had, well I have two more actually.

Share buybacks, could you update us on that and have you all been active on that front?.

Well, as we talked about at – I think, our first quarter earnings call, we had the authority of $100 million that we wanted to focus on paying down our debt for the first couple of quarters, which we just did in June, where we paid off the $382 million of our 2019 bonds that were maturing.

And so now we're probably a little bit more focused on an opportunistic basis going forward on fulfilling that authorization. .

And then I apologize I got knocked off call for a few minutes.

Can you guys talk about your stick and brick cost how that's running this year versus last year? And are you besides the lumber benefit, are you seeing any other cost inputs that may be trending in TRI Pointe’s favor?.

Yes, that's a good question. Jay, this is Doug. But I would tell you that currently through year-to-date, our stick and brick costs are down in every one of our markets except for Austin. Tiny, tiny increase in Phoenix and then flat in Houston. When I say down, it’s down 1% to 4%.

Our teams, we had a very – we focused quite a bit at the end of last year going into this year on a number of initiatives. We talked about our 12 point sales and marketing initiative, but we also had our cost initiatives, not just direct, but all cost segments to the P&L of anywhere from 4% to 10% depending on the division.

That's not just direct by the way, as I mentioned. So we continue to focus on our costs out of the equation. I always believe that you have more control over your costs and there may be less price elasticity. So you always want to be a very good operator on the cost side. .

Right. I appreciate you taking my questions. .

Yes..

Thanks Jay..

Thanks Jay..

The next question is from Alex Rygiel of B. Riley FBR. Please go ahead..

Thank you.

Can you comment a little bit more on the cancellation rate? It obviously appears to have stabilized, but are there any regional discrepancies there?.

No, Alex this is Tom. We're holding pretty steady the low cancellation rate of about 15% overall for the entire operation. We have seen a little bit higher can rates and that in Vegas. So that's something that, again it's not a typical for that market, but it is a little bit higher relative to that.

And then the Dallas-Fort Worth market again has a little higher can rate overall, but again, that seems normal for what our experience in the past has been. .

And then what was your option rate as a percentage of sales in the quarter? And has that changed much at all recently?.

It was about 10% will get the exact numbers soon. .

12.8% in the quarter compared to 10.5% in the prior year. So that was about 130..

It was the focus of ours into the forward community..

Thank you..

Thanks Al..

The next question is from Alex Barron of Housing Research Center. Please go ahead. .

Yes, thank you. And congrats Mike on the retirement and Glenn for you appointment..

Thanks Alex..

I wanted to just ask on the order side, the 10% number you gave us was that including Dunhill or excluding Dunhill?.

That was including Dunhill. So Dunhill had 66 orders for the quarter. The orders are up 11%. .

Okay.

Now I meant for the July?.

July..

It was inclusive as well..

Yes, that was a consolidated number, sorry. .

Got it. Okay.

Then my other question was what is generally your policy on taking contingencies, given that you guys obviously work with a lot of move-up buyers and has that changed at all?.

Alex this is Tom. We've had a big focus on contingency management. We think we do that extremely well. Basically in order for us to take our home off the market, we have to be very confident in the contingent sale that we're looking to. And we've done a great job with that. Most of our contingencies tend to come to fruition in a timely manner.

So we're very cognizant of the timeframes of what will take a contingent home to sell for. And we've been very successful with that..

Got it.

If I could ask one last one, in the Inland Empire, do you feel the current FHA loan limit still an issue as far as what you are able to sell or not really?.

We think that's a competitive advantage for us. Most of our offerings are able to accommodate a lot of FHA buyers. So at our price point we think we're currently aligned where the FHA limits are positive for us. .

Got it. Okay, best of luck. Thank you..

Thank you Al..

There are no additional questions at this time. I'd like to turn the call back to Doug Bauer for closing remarks..

Thank you. And thanks to everyone for joining us on today's call. We look forward to sharing our results with you at our next quarter's call and have a great weekend. Thank you..

This concludes today's conference. You may now disconnect your line. Thank you for your participation..