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Tri Pointe Homes, Inc. (NYSE:TPH)

Q4 2013 Earnings Conference Call

February 27, 2014 10:00 AM ET

Executives

Glen Keeler – VP and Corporate Controller

Doug Bauer – CEO

Mike Grubbs – CFO

Tom Mitchell – President and COO

Analysts

Nishu Sood – Deutsche Bank

Alan Ratner – Zelman & Associates

Jay McCanless – Sterne Agee

Mark Weintraub – Buckingham Research Group

Brendan Lynch – Sidoti

Alex Barron – Housing Research Center

Joel Locker – FBN Securities

Operator

Greetings and welcome to the TRI Pointe Homes’ Fourth Quarter 2013 Earnings Conference Call.

At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce Glen Keeler, Vice President and Corporate Controller. Thank you, Mr. Keeler. You may begin.

Glen Keeler

Good morning. Welcome to TRI Pointe Homes’ fourth quarter 2013 earnings conference call. Earlier today, the company released its financial results for the quarter. Documents detailing these results are available in the company’s Investor Relations website at www.tripointehomes.com.

Before the call begin, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and constitute forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied in these forward-looking statements. I refer you to the company’s filings with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. 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. The company’s presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through the filings with the SEC at www.sec.gov.

Hosting the call today is Doug Bauer, TRI Pointe Homes’ 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.

Doug Bauer

Thank you, Glen, and welcome to our fourth quarter and full year 2013 earnings conference call. Today I will provide a brief summary of our recent results, as well as share some additional insight into the housing market. And bringing up to-date on our progress related to the transaction with Weyerhaeuser Real Estate Company for our retail. Mike Grubbs will follow up with some additional detail on 2013, provide some perspective on early trends in the first quarter and establish our initial 2014 guidance for TRI Pointe. We will then be joined by Tom Mitchell to take some questions.

We’re extremely excited about our fourth quarter and full year 2013 results given, we only went public in January 2013. It couldn’t have been accomplished without the hard work and dedication of our entire TRI Pointe team. Acquiring the right real estate is important but the ability to execute well exceeding expectations is a direct result of our deep and talented team. Our strategy when we started the company five years ago was to build a best-in-class regional homebuilder. In those five so years we strategically aligned ourselves with Starwood Capital, a leader in the real estate investment business took the company public in January of 2013. And in November of 2013, we announced the powerful combination of TRI Pointe and WRECO.

This strategic transaction positions the combined companies with over 30,000 lots and some of the nation’s leading housing markets and an increase of market capitalization and shares outstanding well providing greater liquidity for our shareholders. As we reflect on the markets in 2013 from a macro perspective, the homebuilding industry experienced three distinct marketing periods. In the first half of 2013, the industry experienced strong sales and pricing moves. In the third quarter, mortgage rates jumped 100 basis points which intended to get the consumer a pause or in some cases a push into the market.

Finally, in the fourth quarter, uncertainty in the economy caused by our federal government along with the rapid moves in the first half of the year caused sales and traffic to slow sequentially. But as we entered 2014, we are anticipating a more normal housing market. We expect home sales prices to rise normally in most of our markets with absorption rates ranging from two to five sales per month per active selling community. This new normal will be a result of an estimated 2.6 million new jobs in 2014. An increase in household formations, and in a cumulative interest rate environment with strong consumer confidence.

During our fourth quarter 2013, we achieved meaningful improvements in deliveries, gross margins and earnings per share as compared to the same period of 2012. We converted over 70% of our backlog which delivered a record 166 homes during the quarter. And homebuilding gross margins of 23%. By our demand and customer traffic throughout all of our markets became choppy in the fourth quarter of 2013 as compared to the previous three quarters. Although our absorption rate for the fourth quarter remain largely stable at 3.5 per month per average selling community as compared to the same period of 2012, it was down sequentially from 5.9 per month per average selling community in the third quarter of 2013.

However, so far this year, we have seen an increase in the quality of traffic which is converting into an improvement in our absorption rates 4.2 sales per month per average selling community. Home sales revenue of $119 million for the fourth quarter was more than doubled from $55.2 million a year ago. The growth in revenue year-over-year was attributable to the rise in the number of homes delivered combined with an increase in our average sales price in California.

Our company average sales price for deliveries in the fourth quarter was $717,000 compared to $620,000 in 2012 fourth quarter which reflected our increased pricing power and a change in product mix to more move-up product at our communities in 2013 as compared to the prior year. In addition, our year ending average sales price in backlog increased to $749,000. For the quarter, we delivered record net income of $8.3 million which resulted in earnings per diluted share of $0.26 or $0.33 per diluted share excluding expenses associated with the WRECO transaction for the fourth quarter.

For the full year 2013, net income grew to a record $15.4 million were earnings per diluted share up $0.50 or $0.58 per diluted share excluding the expenses associated with the WRECO transaction. We also continue to be active in the land acquisition market. TRI Pointe continue to successfully execute on the strategy to control a supply of developed lots in high demand markets while remaining discipline and selective in our homebuilding activities. We ended the year with 3,466 lots of which 2,282 are owned and a 1,184 are option reflecting an increase of a 125% from the 1,550 lots owned and controlled as of our IPO.

I would now like to provide you with an update on the WRECO transaction. As you probably are aware, in November 2013 we announced our combination with WRECO valued at approximately $2.7 billion. The WRECO transaction will be transformative for the company’s scale and operational enhancements and is expected to be accretive on an earnings per share basis. When the transaction closes we will have 19,000 lots in California and an additional 11,000 lots in some of the nation’s best housing markets including Phoenix, Houston, Washington D.C, Virginia, Seattle, Denver and Las Vegas. In addition to enhancing our land presence we are also strengthening our management team even further with the addition of some of the strongest talent throughout the retail organization.

We’re spending a significant amount of time planning the integration and transition of the WRECO operations and team to the TRI Pointe platform. As to the timing of the transaction, our initial expectations were to close in the second quarter. However, after reevaluating the timing and the required process, we now expect the transaction will close early in the third quarter of 2014. As we begin our only our second year as a public company, our strategies and initiatives remain unchanged. With the expected closing of the WRECO transition early in the third quarter of this year, we will continue on the path of growing TRI Pointe but being patient and selective as we seek additional opportunities to expand our business.

With these comments, I will pass the call to Mike to provide additional detail on our fourth quarter and 2013 financial results.

Mike Grubbs

Thanks, Doug. Good morning. I would also like to welcome everyone to today’s call. I’ll be highlighting some key financial metrics from our fourth quarter, provide a brief summary of our full year results and then some expectations and outlook for the first quarter and full year 2014.

I want to begin to couple of highlights related to the fourth quarter and I’ll discuss little bit more detail in a minute. Our home sales revenue was $119 million and 166 home deliveries with an average selling price of $717,000. Our homebuilding gross margin remain strong at 23%, while our SG&A expense as a percentage of home sales revenue improved to 7.4% for the quarter resulting in net income of $8.3 million or $0.26 earnings per diluted share. During the fourth quarter, the company also incurred $3.6 million in transaction related expenses which included legal and accounting due diligence integration and other transition costs related to the WRECO transaction.

Excluding these expenses, diluted earnings per share was $0.33. The company expects to continue to incur additional transition expenses related to the WRECO integration during the first half of 2014. As far as selling communities, we opened two new communities during the fourth quarter, one in Southern California and one in Northern California. We also reopened two previously sold out communities in Southern California where we had the opportunity to buy additional lots. We closed one community in Northern California ending the quarter with 10 active selling locations at an average of 8.3 selling communities for the quarter.

Well our absorption rate decreased from 5.9 orders per month per average selling community in the third quarter of 2013, we continue to experience strong traffic during the fourth quarter resulting in 88 new home orders or 3.5 orders per month per average selling community. Our cancellation rate remain consistent quarter-over-quarter at 16%. Our fourth quarter order activity resulted in yearend backlog of 149 homes up a 119% compared to the prior year with an average sales price in backlog of $749,000 up 53% as compared to 2012.

Meanwhile, our dollar value of backlog increased 235% year-over-year to $111.6 million. This increase in average sales price of homes in backlog was largely due to the price increases during the year and it’s change in product mix to more move-up product at our new communities compared to the prior year. Our average sales price will continue to vary on a quarterly basis due to the mix of units, product types and timing of our new communities in 2012.

During the quarter, we converted approximately 73% of our 2013 third quarter backlog by delivering 166 homes with an average sales price of $717,000. The average sales price increased 15% sequentially from $624,000 last quarter and 16% year-over-year from $620,000 in 2012. The 115 homes delivered in our communities in Southern California had an average sales price of $651,000. 44 homes delivered in Northern California at an average sales price of over $942,000 and then 7 homes closed on Colorado at an average sales price of $388,000.

Our homebuilding gross margin remain consistent with our third quarter at 23% but increased 280 basis points year-over-year from 20.2%. Excluding interest in cost of home sales our adjusted homebuilding gross margin was 23.6% for the quarter an increase of 220 basis points from 21.4% for the same period in 2012. This improvement compared to the prior year, is a direct result of deliveries from our newer communities where we’ve achieved accelerated absorption pace along with increased pricing.

From the expense side, our SG&A expense increased on an absolute basis, $8.8 million from $4.9 million in the fourth quarter of 2013. But as of percentage of home sales revenue, was 7.4% and an improvement from 8.9% in the previous year’s quarter. To break it down, sales and marketing expense increased $1 million primarily attributable to the increase in our community count and our new home deliveries. Our G&A expense increased $2.9 million primarily attributable to compensation related expenses resulting largely from the increase in our office head count during the year. Other cost incurred to support our growth and the additional stock-based compensation and other incremental cost would be in a public company in the current period versus no comparable cost in the previous period.

For the full year, the company has 477 new home orders or 5.4 orders per month per average selling community versus 204 orders or 3.1 orders per month per average selling community in 2012. Our cancellation rate improved to 10% in 2013 from 16% in 2012. We generated home sales revenue of $247.1 million on 396 home deliveries with an average selling price of $264,000. And our homebuilding gross margin was up to 21.9% for the full year. We’re also proud of the operational efficiency we achieved in 2013 as evidenced by our SG&A expense up 10.3% as a percentage of home sales revenue a significant improvement compared to 14.7% in the prior year. Overall, the company is reporting net income of $15.4 million for the full year or $0.50 per diluted share.

From a balance sheet perspective, at year end we have about $35 million of cash and cash equivalents on hand and $456 million in real estate inventory. We had $271 million of loan commitments of which $138 million was outstanding at an average interest rate of approximately 3.5%. Our ratio of debt-to-capital was 30% as of December 31, 2013. Our current liquidity position consist of approximately $35 million of cash and given the assets currently in our revolving credit facilities based on borrowing base formulas we have approximately $40 million of un-drawn availability of assets today.

Now, in 2014, excluding the WRECO transaction, we expect to open 24 new selling communities at TRI Pointe of which 18 are in California, 10 in Southern California, and 8 in Northern California and 6 in Colorado. During the first quarter of 2014, we will open two new selling communities and close two selling communities resulting in 10 active selling communities at the end of the quarter. The balance of the remaining projected new selling communities will open evenly throughout the balance of the year.

Lastly, for the full year 2014, exclusive of the WRECO transaction, the company has established an initial guidance for TRI Pointe for deliveries of 660 homes and home sales revenue of $475 million. During the first quarter of 2014, we expect to deliver approximately 55% of our 149 units backlog as of December 31, 2013. Well we were very proud of our results and our accomplishments that we produced in 2013 and our first year as a public company, we’re off to a solid start in 2014 and as we look ahead to the balance of the year, we’re very excited and focused on the transformational changes of our company. We look forward to reporting on our progress throughout the year.

That completes our prepared remarks, but let me also reiterate that while we can discuss to our year we’ll be somewhat restricted on discussing certain information on the WRECO transaction.

At this point, operator, I think we’d like to open it for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. (Operator Instructions). Our first question comes from Nishu Sood of Deutsche Bank. Please proceed with your question. Your line is live.

Nishu Sood – Deutsche Bank

Thanks. Good morning, guys. And nice finish to the year.

Doug Bauer

Thanks Nishu.

Nishu Sood – Deutsche Bank

So, I wanted to focus in on the community count first, the 24 net – I’m sorry the 24 new selling communities, I assume that that’s a growth spaces. So, I was wondering if you could tell us what that net number would be by the end of the year 10 plus 24 then minus what to get to the net figure?

Mike Grubbs

Yes, minus 6.

Nishu Sood – Deutsche Bank

Minus 6. Okay. So, it will be in the high 20s which is a little bit higher. I think you’d said mid 20s?

Mike Grubbs

Correct.

Nishu Sood – Deutsche Bank

Last quarter, okay. So, this is a slightly accelerated pace for that. So, given you’re expecting a return to normalized trends in 2014 and I think you laid that out well compared to the ups and downs of 2013. You’ve had a lot of success in terms of plans to open new communities. Your delivery pace out of your backlog has been robust, that looks like it’s been managed very well. So, the 660 homes delivery guidance looks conservative. So, I was wondering even if you look back again to your original plans which had lower expected community count growth, it looks conservative even against that and that was probably based on normalized conservative assumptions as well. So, how should we look at that? Is it conservative? Is it on the absorption pace? So what’s going into that?

Doug Bauer

Well, Nishu, it’s Doug. I’ll take that question. As I pointed out, the fourth quarter had sequentially a significant slowdown as we look into our planning efforts for 2014 we were obviously influenced by what was happening in the second half of last year. But, as I pointed out, just to give you some color, through the first month and a half of this year, our sales rate per community is up I think at 4.2 which as you know anywhere from 2 to 4 or 5 sales per month per community is – if there is everything – anything called normal in this business that would be very normal. The first half of last year had some very rapid sales velocity that frankly wasn’t sustainable. So, when you factor in what happened in the fourth quarter where we saw the market going into the beginning of the year, and then where we’re seeing in the first 8 weeks, we feel pretty – very good about our plan. And actually we’re feeling very good about the quality of traffic in Southern California, Northern and Denver right now for the first 8 weeks.

Nishu Sood – Deutsche Bank

So, you’re assuming that the sales pace in the beginning of the year that – can you tell us what sales pace you’re assuming for the year?

Doug Bauer

Well, as I indicated the new normal is 2 to 5 sales per month per community so depending on where that community is and where it’s priced and how it’s positioned versus its competition. Those are some of the assumptions that we use.

Nishu Sood – Deutsche Bank

Got it. Great. Thanks a lot.

Operator

Your next question comes from Ivy Zelman of Zelman & Associates. Please proceed with your question. Your line is live.

Alan Ratner – Zelman & Associates

Hi, good morning guys. This is Alan in for Ivy. And a nice first quarter. Doug, my first question on the SG&A, you guys have had tremendous leverage there in this quarter just over 7% of revenue is among the longest in the peer group. And thinking about how that might evolve as the WRECO deal comes to provision here. Is that 10% level that you ran it for the full year? Is that something you think is sustainable over the long run or should we expect to see some added costs associated with WRECO as you bring out into the fold?

Mike Grubbs

Yes, Alan this is Mike. Once we combine the two companies, it will take some time to bring our SG&A back down to that 10% level but that’s ultimately our goal any of our years but right now if you look at SG&A on the WRECO entities, they’re little bit higher to math [in our] SPs a lot lower than ours as well. So, that would definitely be a targeted goal but that’s going to take some time to get to that point.

Alan Ratner – Zelman & Associates

Okay, great. And that’s helpful. And then, second on the new community openings the 24 you have, is it possible to provide a little bit of color just in terms of where the pricing or margins might look on this communities because you’ve seen a tremendous run up in your pricing over the back half of this year and then the margins have shown some nice improvement as well. So, should we think about any mix issues there as those mix maybe it’s coming from mix?

Mike Grubbs

Yes, there is little difference, we do see some mix issues because some of our communities are more Easterly and West Coast sold oriented. When you see our average sales price for 2014, it will probably continue to decline just slightly for the first couple of quarters and then start falling off a little bit in the latter half of the year as some of these newer communities at lower price points start delivering houses. One thing I target to is to look at it is typically when we file our 10-Qs and our 10-Ks we have a project cable in there and that project cable will give you some guidance on estimated base sales prices on some of the newer communities that are coming to market in 2014.

Alan Ratner – Zelman & Associates

Actually, that’s helpful.

Mike Grubbs

You’re able to see it by market.

Alan Ratner – Zelman & Associates

So, then in terms of the margin on those I mean I think you said in the past you generally underwrite to something in the 20% [earnings]. Is that something to assume that – assume we’re going to see the same level of price appreciation that we saw this year that the margins probably revert closer to that level versus where they are today 23%, 24% annually?

Mike Grubbs

Yes, annually that’s kind of where they would end up but our underwriting is between 18 and 22 kind of depending on where the project is obviously in some of the master-planned communities in Southern California it’s on a lower end of that. So, our margins will start to falling off slightly towards the end of 2014, again some of these new communities that have been purchased more recently have a little bit lower margin without appreciation.

Alan Ratner – Zelman & Associates

All right. Thanks a lot.

Operator

Your next question comes from Jay McCanless with Sterne Agee. Please proceed with your question. Your line is live.

Jay McCanless – Sterne Agee

Good morning, everyone. First question, could you just talk about the slowdown in orders per community from 3Q to 4Q?

Doug Bauer

Well, overall the fourth quarter as I mentioned in my opening remarks was a combination of factors both macro and from all the rapid price moves and interest rate moves in the first half or third quarter of last year. But, frankly as we’ve started the beginning of this year, we’ve seen an increase in the quality of traffic and as I pointed out our sales per community per month has gone to 4.2, so it’s gone back to very normal sales pace and we’re seeing a very solid traffic in our communities.

Jay McCanless – Sterne Agee

Okay.

Doug Bauer

But in the fourth quarter, also has seasonal aspects to it too.

Mike Grubbs

Yes, this is Mike Grubbs. It is very comparable to our fourth quarter of 2012 which was a pretty good quarter from homebuilders.

Doug Bauer

That’s right.

Mike Grubbs

And we were at 3.5 last year, we’re 3.5 this year. Some of that is related to our product we’ve been doing in some of our communities as well during the fourth quarter as we were getting close to closing out some of those communities, there was less product available but just to have a sustainable pace that we were having during the first three quarters we had 5, 6, 6, 4, 5, 9 and to sustain that through the fourth quarter was not realistic so.

Jay McCanless – Sterne Agee

Okay, understood. And I know you said that, there were going to be some more transaction cost related to the WRECO deal. Did you give an actual estimate of what we should put into our models or just or what – how should we be thinking about the similar level to what we saw in 4Q or something higher?

Mike Grubbs

I think it might be less than what you saw in the fourth quarter, fourth quarter was when the transaction was pretty heavy lot of the M&A activity, lot of the due diligences was happening. Right now, lot of our energy is being spent on some of the public filings, but we are spending a lot of energy on transition, transition costs. But I don’t think the run rate would be similar to the fourth quarter, no.

Jay McCanless – Sterne Agee

Okay. Thank you.

Operator

Our next question comes from Mark Weintraub with Buckingham Research Group. Please proceed with your question. Your line is live.

Mark Weintraub – Buckingham Research Group

Thank you. First is if I could follow up a little bit on the gross margins question. So, is the expectation that for the full year, you’ll be roughly in the 20% range and given the backlog that you have right now, would it be little bit higher in the first part of the year and then as you noted some of the other communities coming in at, it calls off in the later part of the year, is that how to read, just comment on that.

Mike Grubbs

Yes, but I don’t want you to – I don’t want to guide you that 20% number, that was not what I was representing. I think our margin will be fairly consistent for the first couple of quarters is what you see in the last couple of quarters. But, as we bring on these new communities that when once we see what the market acceptance is and what the price point is, if you assumed no price appreciation, our margin would typically fall off in the latter half of the year just because those new communities were underwritten at lower margins.

Mark Weintraub – Buckingham Research Group

Okay.

Mike Grubbs

But we achieved price appreciation and we’ll maintain higher margin. But I think annually our margins will be somewhat comparable to what it was in 2013.

Mark Weintraub – Buckingham Research Group

Okay. And then just as a kind of relatedly, when you look at what you’re paying for a land today versus where it was say a year ago for similar lot et cetera, what type of increase has there been?

Tom Mitchell

Jay, this is Tom. I’d say the land market continues to – sorry Mark. The land market continues to be very competitive out there. And in the first half of the year to now we’ve experienced probably about a 10%, 20% increase in land prices from the same time at last year.

Mark Weintraub – Buckingham Research Group

Okay, great. And then lastly, on the timing with WRECO, push back just a little bit but at this point is there a high level of confidence on that timing or is it still the number of moving parts and so that’s your best estimate. Just trying to engage how much clarity you have on the timing at this point?

Doug Bauer

No, we’re very confident and look forward to completing the integration transition, there is just lots of work as we’re proceeding with as Mike mentioned the various filings and so forth. So, it’s just a matter of labor of love and it’s a lot of work when you deal with a very complex transaction as a reverse mortgage trust is.

Mark Weintraub – Buckingham Research Group

Sure. Thanks very much.

Operator

(Operator Instructions). Our next question comes from Brendan Lynch with Sidoti. Please proceed with your question.

Brendan Lynch – Sidoti

Hi, good morning guys.

Doug Bauer

Good morning.

Mike Grubbs

Hi, Brendan.

Brendan Lynch – Sidoti

My question is on your land acquisition in California, you acquired some more lots during the fourth quarter. And just given the 19,000 or so that’s coming from WRECO, can you give us a little bit of detail on your land acquisition in the future and a few other areas of California that you don’t have exposure to there, you want exposure to or some of – perhaps some of the Las Vegas getting from WRECO, you don’t think will be usable in the immediate future. If you could just give us some color on that.

Doug Bauer

Well, as we mentioned, WRECO has a very strong land positions through the party entity in Southern California most notably San Diego, Inland Empire, and the LA region. And that compliments TRI Pointe’s land positions along more of the coastal areas a little more in field. So, we think as we look at Southern California, we’ve got excellent coverage and positions to continue to grow in those sub markets. So, that’s one of the most exciting things about this transaction is the party position here in California complimenting and enhancing the TRI Pointe position.

Brendan Lynch – Sidoti

Great. And then if you could just give us a bit of a color on once the WRECO acquisition closes, how you anticipate land acquisition in the markets where WRECO has assets currently?

Doug Bauer

We really can’t give any forward kind of looking guidance on that right now Brendan. When we close and hit the road, we’ll be able to talk more freely about our business planning efforts on the combined company but right now I really need to stick to the TRI Pointe operation.

Brendan Lynch – Sidoti

Okay. Fair enough. And then, just one another question on labor constraints. Just based on the community count growth that you’re guiding to over next year, can you give us some color on your relationships with labor and if there is efficient supply to get up to that community counts level and get homebuilding underway?

Tom Mitchell

Sure Brendan. This is Tom. Certainly, the whole land industry is experiencing some pressure relative to labor and to some extent materials but we think we’ve got an outstanding trade partner base and we do not see any issues in having enough supply off there to meet the demands of those new communities. So, we continue to work on a daily basis with our trade partners and further enhance those relationships and I think we’ve been doing a great job and making sure we’ve been getting the paid labor sources out on our jobs. So, we don’t anticipate again any problems on the charges.

Doug Bauer

Yes. I would add to that Brendan. There’s been a lot of chatter about – with the AHB builders said in their conference doing down due to labor and materials and materials are fairly minored. There is pressure on labor but to be honest with you, it really comes down to relationships, we look at our trade some contractors as partners and we treat them that way, and what we mean by that is we keep them very well informed, keep our schedules very tight, make sure that they can get their manpower out there on time and there is no disruption in their business planning, pay them on time, pay them as early as week or two as soon as they get invoice in, we’re all pay for list here we move very quickly. And those little things like that make a big difference and combating what would be a tight labor market.

Brendan Lynch – Sidoti

Great. Thanks for the color.

Operator

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

Alex Barron – Housing Research Center

Thank you. Good morning, guys and a great job.

Doug Bauer

Hey, Alex. How you’re doing?

Mike Grubbs

Thank you.

Alex Barron – Housing Research Center

Great. And how you’re doing?

Doug Bauer

Good.

Alex Barron – Housing Research Center

I wanted to ask you, if you could give us a little bit more color on the communities that you’re opening up later in the year more like in terms of where are they, are they Inland or coastal, is they’re coastal, can you give us maybe more granularity and also in terms of price point?

Tom Mitchell

Sure, Alex. This is Tom. That was reported earlier in the call, 10 of those projects are in Southern California, 8 in Northern California and 6 in the Colorado, so that gives you a little geographic positioning there. As you look to Southern California, we’ve been trying to balance our portfolio and last year we had an emphasis on really the 15 corridors in Inland Empire, so significant amount of those 10 are going to be coming from there. And then we currently opened one of those 10 projects in via this Southern [indiscernible] we master-planned in LA so that’s obviously, that’s much more of a coastal orientation. And then we’ve got a few more projects planned for our Orange County. So, we think we got a really balanced portfolio coming in Southern California with a good planned and mix of more affordable product in the core Inland Empire as well as some of those premium communities in coastal oriented locations.

In Northern California as I said we’ve got 8 new projects coming there, that is one of excellent locations in the Core Bay Area, we’ve got a couple of projects that are planned to be opened in Alameda. And then also in that location there we’re looking to move Inland creates a more affordable balanced portfolio and so we’ve got a few projects coming in the Redwood community as well. And then we’ve got one additional community that will be a follow on project to our Amelia project in master-planned of Bay Meadows in San Mateo and that will be opening here in this first quarter. So, again an excellent mix that came and done a great job and we’re going to be get a really balanced portfolio.

And then in Colorado we got 6 communities opening there and builders spread out, we’ve got additional one coming down in the Castle Rock community as well as few coming up in the Northwest [Quadrant] there. And then later in the year, we’ll be moving into our first entry in the Northern Colorado. So, again our goal has been to – such as premium markets core locations and really develop a balanced portfolio.

Alex Barron – Housing Research Center

Got it. And any comments you can offer on the trends in the last week so far into the year, January and February, how those would revolve?

Doug Bauer

I’m sorry, Alex, I couldn’t hear you, trends for the first part of the year, sales trend?

Alex Barron – Housing Research Center

Yes.

Doug Bauer

Yes, we [blow] it as this I noted in our prepared remarks, we saw an improvement in our sales rate to 4.2 versus the fourth quarter. So, that clearly indicates obviously stronger market conditions, they’re not like the first six or eight months over six months of last year but as I mentioned earlier, as we put our boots on the ground in Southern California, Northern, then in Denver and it’s because of our disciplined approach at focusing in on project locations and the key employment corridors, we continue to see strong traffic, continue to see interest. And so, we’re feeling very good about as we look into the spring selling season, I think we’re in a very good position.

Alex Barron – Housing Research Center

Okay. Thanks Doug.

Doug Bauer

Thanks, Alex.

Operator

Our last question comes from Joel Locker of FBN Securities. Please proceed with your question.

Joel Locker – FBN Securities

Hi, guys. I guess first of all on the fee building income, well, do you expect how much and the lot of that going into 2014, you think that will taper off?

Mike Grubbs

Yes, that’s a good question, Joel. This is Mike. No, we’re done with fee building, that will taper to zero. We closed our couple of projects that we were working on in 2013 and so we will not be doing any fee building going forward at this point.

Joel Locker – FBN Securities

All right. And then – I was thinking about your guidance to 660 closing and if you close just using two a quarter of a communities and you go kind of 10, 16, 22, 28 and you have about 4.5 kind of average absorptions for the first three quarters. It seems like that come to a line like 610 if you keep your backlog conversion rates similar to last year. So, do you – is that insinuating that you think your backlog conversion rate in quarters two, three and four would pick up year-over-year?

Doug Bauer

Well, I mean we typically average just – I mean the fourth quarter obviously the backlog conversion seems to be much higher than it typically is in the other quarters. But we typically average between 50% and 60% in a backlog conversion.

Joel Locker – FBN Securities

Right. And then I mean I was using 60 in the second, 55 in the third and 70 in the fourth for 2014 and just using 4.5 sales, sales of community per month and just kind of got to around 610 versus the 660. So, just was wondering if there was some – maybe you’re going to close the huge amount in the fourth quarter is something or?

Mike Grubbs

Yes, we typically like we did this year we will close around 40% of our deliveries will happen in the fourth quarter.

Joel Locker – FBN Securities

Right.

Mike Grubbs

It’s very backend loaded as it was this year.

Joel Locker – FBN Securities

Right.

Mike Grubbs

Again as we get the ramp up in the communities, we’ll get the sales in place and then delivering the houses in the fourth quarter.

Joel Locker – FBN Securities

Got you. And then what about on your gross margin and backlog currently, are they – they just like the 23%?

Mike Grubbs

Yes, I believe I mentioned that already, we feel like that’s a pretty good run rate for the next couple of quarters.

Joel Locker – FBN Securities

And just what about your – and the final thing, your amortization of interest it was down to 60 basis points, I think the prior quarters to 120. Do you expect that 60 basis points that would continue?

Mike Grubbs

Yes, we done pretty good job on reducing our pricing in all of our debt in the last year. So, it’s never reflected in that number.

Joel Locker – FBN Securities

Will that I mean as I guess your capital essentially is going 0.5% in your inventory or some really minimal, so…

Mike Grubbs

Yes, it’s [minimal].

Joel Locker – FBN Securities

That’s kind of a good numbers of run rate going forward, it just 60 basis points or something?

Mike Grubbs

Maybe slightly higher than that.

Joel Locker – FBN Securities

Maybe slightly higher. Right. All right. Thanks a lot guys. Nice job.

Doug Bauer

Thanks.

Operator

Okay. We do have a follow up question from Alex Barron with Housing Research Center. Please proceed with your question.

Alex Barron – Housing Research Center

Thanks. I was wondering if you could comment on the timing of the debt and equity rates for the WRECO transaction, is that going to be roughly same as when you close it?

Mike Grubbs

Yes, that’s the final one correspond with the closing date. So, we’ve got a lot of work ahead of us on getting the OM and going to city agencies and we’ll do a Road Show towards the latter half of the second quarter in order to be preparing to close in the early part of third quarter.

Alex Barron – Housing Research Center

Got it. Thanks.

Operator

Thank you. At this time, I like to turn the floor back over to Doug Bauer.

Doug Bauer

So, thank you everyone for attending this call today. And we look forward to our next quarter’s call. Have a great day.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.

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