TRI Pointe Homes' (TPH) CEO Doug Bauer on Q1 2016 Results - Earnings Call Transcript

| About: TRI Pointe (TPH)

TRI Pointe Homes (NYSE:TPH)

Q1 2016 Earnings Conference Call

April 27, 2016 10:00 a.m. ET

Executives

Chris Martin - VP of Finance and IR

Doug Bauer - CEO

Mike Grubbs - CFO

Tom Mitchell - COO and President

Analysts

Ivy Zelman - Zelman & Associates

Jack Micenko - Susquehanna

Nishu Sood - Deutsche Bank

Patrick Kealey - FBR

Mark Weintraub - Buckingham Research

Jay McCandless - Sterne Agee

Will Randow - Citigroup

Dan Jacome - Sidoti

Alex Barron - Housing Research Center

Operator

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

It is now my pleasure to introduce your host, Chris Martin, Vice President of Finance and Investor Relations. Thank you, you may begin.

Chris Martin

Good morning, and welcome to the TRI Pointe Group’s earnings conference call. Earlier today, the company released its financial results for the first quarter of 2016. Documents detailing these results including a slide deck under the presentations tab are available on the company’s Investor Relations Web site at www.tripointegroup.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call which are not historical facts are forward-looking statements that involve risk and uncertainties. A discussion of such risk and uncertainties and other important factors that could cause actual operating results to differ materially from those in the forward-looking statements are detailed in the company’s filings made with the SEC, including the most recent annual report on Form 10-K and in its quarterly reports on Form 10-Q.

The company undertakes no duty to update these forward-looking statements that are made during the course of this call. Accordingly, 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 of GAAP can be accessed through the TRI Pointe Web site and in its filings with the SEC.

Hosting the call today is Doug Bauer, the company’s Chief Executive Officer; Mike Grubbs, the company’s Chief Financial Officer; and Tom Mitchell, the company’s Chief Operating Officer and President.

With that, I will now turn the call over to Doug.

Doug Bauer

Thank you, Chris, and good morning everyone. 2016 is off to a great start for TRI Pointe Group. Thanks to the solid execution of our team and the strong demand we experienced in the first quarter.

Some of the highlights from the quarter included 13% increase in home sales revenue, compared to the first quarter of last year, driven by 15% increase in new home deliveries at an average sales pace of 3.3 orders per community per month, which continues to be one of the best of the publicly-traded homebuilders.

In addition, we opened 27 new communities during the quarter, which puts us on schedule to open an anticipated 70 new communities for 2016.

Net income for the quarter grew 87% to 28.6 million, or $0.18 per share on homebuilding gross margins at 23.3%. These strong financial results for the quarter provided promising outlook for the balance of 2016. Furthermore, with strong market conditions, we believe the foundation is in place for our six homebuilding brands to grow annual deliveries to between 5,100 and 5,400 homes by 2018.

Our first quarter financial results also reflect an important shift in our company. While our California operations continue to be a key driver of revenue and profit, our operations in other states have made great stride. We expect this improvement to continue, which will grow our bottom line while creating a more balanced and diversified company. Our goal is to raise the operational performance of all of our brands, while reaping the benefits associated with our favorable land position in California. I’m pleased to see both of these dynamics playing out.

Let me begin by making a few comments about the long-term health of the homebuilding industry. We continue to see strong demand drivers such as job growth in household formations in all of our markets. In addition, our markets continue to face an undersupply of new and existing housing coupled with constraints in land and labor. Combined, these demand and supply drivers lead us to forecast an elongated cycle with steady growth ahead. With that as a backdrop, here is some additional color on each of our markets.

Our California operations once again delivered strong results during the quarter, contributing 4.1 orders per community per month. Coastal California is very strong in both Northern and Southern California, and is exhibiting healthy market characteristics, with high job-to-permit ratios and low inventory levels.

In Northern California we have seen strong demand in our new communities in the core Bay Area market, and continue to see positive price trend. In Orange County, our high-end projects in the Irvine Ranch continue to absorb well, selling 3.7 homes per community per month for the quarter. In San Diego, our orders are up 14% year-over-year, while absorbing five sales per community per month, with an average selling price of 1.1 million.

The Inland Empire market east of the 15 Freeway continues to perform well, as we are delivering new homes, taking advantage of FHA financing. Additionally, we saw improved market conditions west of the 15 Freeway during the quarter. Improvement in customer traffic and orders indicates we are gaining momentum in this market as well.

In the Pacific Northwest, Quadrant Homes in Seattle had one of the best sales phases in the company for the quarter, with 4.7 orders per community per month. Quadrant also posted an outstanding improvement in homebuilding gross margins, with first quarter margins expanding 520 basis points as compared to the same period last year.

Our land team has done an excellent job implementing our strategy to position Quadrant closer to employment centers, and we are seeing the positive impact of this strategy in Quadrant’s improved financial performance. We have an excellent land pipeline which enabled us to open new, well-located communities in both King and Snohomish County. We believe we will continue to increase deliveries in these markets which will lead to strong profitability.

Las Vegas is another market where we expect to increase deliveries. Orders are up 29% year-over-year for the quarter, and homebuilding gross margins continue to improve. We have introduced exciting new home designs in Las Vegas incorporating popular aspects of our Responsive Homes we showcased at this year’s International Builders’ Show. And the initial reaction from homebuyers has been excellent.

Overall, we are seeing improved traffic from first-time buyers in the market, and the move-up segment appears to be getting stronger as well. Given the improving economic conditions in Las Vegas, we are optimistic about this market for the next several years.

Our Maracay Homes brand in Arizona also delivered positive year-over-year order growth and margin expansion for the quarter, with new home orders expanding 25% on a 9% growth in average community. Our Center Pointe master-planned community in Tucson is an example of our new home offerings, and comprehensive marketing strategies yielding outstanding results. At our grand opening weekend in January, we had traffic of over 1000 people, which led us to writing 44 new home orders for the quarter. For Phoenix and Tucson combined, Maracay’s absorption pace was 3.6 new home orders per community per month, 15% higher than the comparable quarter a year ago.

Overall, market conditions in Denver can be characterized as strong, with high demand, low new home supply, and extremely tight resale market. While strong employment trends, income growth, and household formations continue, this market also has experienced labor shortages and rapid price appreciation over a short period of time, which has moderated homebuyer demand. 2016 is a transition year for TRI Pointe Homes as we close out several of our high-performing communities and restock our land pipeline with new communities. We continue to like the long-term outlook for Denver, and see an opportunity to increase our deliveries over time.

Trendmaker Homes, in Houston, continues to deliver solid results in the face of difficult market conditions. For the quarter, Trendmaker’s home building gross margins were 19%, and its sale pace stayed flat on a year-over-year basis, at 1.7 orders per community per month, reinforcing our belief that our market positioning asset-light operating model. And the brand’s reputation gives us the distinct advantage over our competition. In addition, we are leveraging our Trendmaker brand by expanding our product portfolio in Houston to include smaller, more affordable homes utilizing some of the research and product designs from our other home-building brands. Lastly, in April, Trendmaker opened its first Austin community in the award-winning Belterra master-planned development, located in the southwest portion of the city, expanding Trendmaker’s geographic reach into a market we are very excited about.

At Winchester Homes in the Mid-Atlantic region, the unexpected slowdown in 2014 and 2015, which was led by sequestration, has subsided. And we are now seeing stronger market activity, driven by improved job growth, a limited supply of inventory, and low interest rates that have brought more buyers into the market. Our results in the first quarter reflect this improvement, as Winchester Homes experienced a 7% increase in orders year-over-year, and a 4% increase in average community. And which resulted in an order pace of 2.9 orders per community per month per quarter -- for the quarter, excuse me.

In light of the [technical difficulty] seen in this market, and our ongoing repositioning to core locations near employment centers, we believe the Mid-Atlantic region has upside potential for us over the next several years.

Now, I’d like to turn the call over to Mike to provide some financial highlights for the quarter.

Mike Grubbs

Thanks, Doug. Good morning. I would also like to welcome everyone to today’s call. As Chris mentioned earlier, we posted a slide deck on our Web site, which includes figures and charts detailing orders, deliveries, and absorption rates by homebuilding brand or division for the first quarter ended March 31, 2016. We’ve also provided some certain key operating metrics by state in today’s press release announcing our earnings for the quarter.

Slide six of the slide deck provides a snapshot of some selected operational highlights from our first quarter. We increased home sales revenue by 13%, compared to the same period in 2015, primarily as a result of a 15% increase in home deliveries. Our home building gross margin for the quarter was very strong at 23.3%, thanks to increased deliveries from our high-margin communities in California, as well as year-over-year improvements at our Maracay, Quadrant, and Winchester brand, as Doug previously mentioned.

We were also successful in recognizing additional operating leverage improvements during the quarter, as reflected in our selling, general, and administrative expense ratio, which improved to 12.9% as a percentage of home sales revenue, compared to 13.7% for the same period a year ago. Net income available to common stockholders was 28.6 million or $0.18 per diluted share, compared to 15.3 million or $0.09 per diluted share the same period last year.

During the quarter we opened 27 new communities, 10 of which were added in January, six in February, and 11 in March. We opened eight in Texas, seven in California, seven in Arizona, three in Washington, and two in Nevada. These 27 new communities represented 177 net new home orders for the quarter, at an average absorption rate of over 4 orders per month per community.

In addition, we closed out of only six communities during the quarter; five fewer than previously anticipated, resulting in a quarter ending active selling community count of 125, as shown by states on slide seven.

For the second quarter of 2016, we anticipate opening 10 new communities and closing out a 15, resulting in 120 active selling communities as of June 30, 2016. For the full year 2016, we expect to open approximately 70 new communities and grow our active selling community count by approximately 20% year-over-year from December 31, 2015.

During the first quarter, we had 1,149 net new home orders, down 45 order or 4% compared to the same period in 2015. It's important to note that our new home orders for the first quarter of 2015 reflected an increase of 79% from 667 orders for the same period in 2014. Our overall absorption rate remains very strong at just over 3.3 orders per community per month for the quarter, and continues to be one of the best of any of the publicly-traded homebuilders.

We had 1,534 homes in backlog at the end of the quarter, down 24 homes or 2% compared to last year's first quarter, with an average sales price of 581,000. The corresponding dollar value of our backlog decreased 5% year-over-year, to 892 million. During the quarter, we converted 67% of our fourth quarter in backlog delivering 771 homes, resulting in a 13% year-over-year increase in home sales revenue to 423 million.

Our average sales price for homes delivered with 500 margin was 23.3% for the quarter, which is up 340 basis points year-over-year from 19.9%, and up 110 basis points sequentially from 22.2% in the fourth quarter of 2015. Our gross margin continues to be very strong for our Pardee brand, especially in California due to the legacy land basis and outstanding operational performance. In addition, we saw year-over-year margin growth at Maracay, Quadrant, and Winchester, as Doug mentioned.

SG&A expense as a percent of home sales revenue was 12.9%, which is an 80 basis point improvement compared to 13.7% in the same period in 2015. The favorable leverage impact of higher home sales revenue in the quarter more than offset increase is related to supporting our operations and future growth.

During the quarter, we spent 149 million on land acquisition, and 79 million on land development. The focus of our current land strategy is to target land for communities which will deliver homes in 2018 and beyond as we currently own or control all the land needed to meet our planned deliveries for 2016 and '17.

As we previously messaged, we started development of our Pardee's Golden Valley master plan community, now called Aliento [ph] in Santa Clarita, California. Initially we intended to sell lots in this community to guest merchant builders in 2015. However, our strategy has changed, and we have decided to build out the entire community using our homebuilding operations at both [technical difficulty] homes and TRI Pointe homes. This will allow us to capture all of the upside in homebuilding profit, grow our community count, and increase our annual deliveries. This change in strategy will not decrease our land and lot sale revenue -- will decrease our land and lot sale revenue for 2016. So we will have no impact on our anticipated land and lot sale gross profit for the year. The community grand opening is currently scheduled for the first quarter of 2017.

Now I would like to make a few comments about the balance sheet. At year end, we had approximately 2.7 billion of real estate inventories, representing 27,929 lots owned or controlled, of which 63% are located in entitlement constrained markets of California.

Our lots owned or controlled represented 6.7 years supply of land on a trailing 12 months delivery basis, significantly down from over nine years of supply when we closed the WRECO transaction in July of 2014, and well on our way of reaching our goals of approximately at five years supply.

A detailed breakdown of our lots owned is reflected in our Form 10Q, which we file later today, and in addition, there is a summary of lots owned or controlled by states on page 23 of the slide deck.

At quarter end, we had approximately 374 million outstanding under our $550 million unsecured revolving credit facility. Our total outstanding debt was 1.2 billion, resulting in a ratio of net-debt-to-capital of 39.4%. We ended the quarter with 144 million of cash on hand, and additional liquidity of 170 million available under our revolving credit facility.

Before I turn the call back over to Doug for some closing remarks, I’d like to summarize our outlook for the second quarter and full year 2016. During the second quarter, we expect to deliver approximately 60% of our homes in backlog as of March 31, 2016. We anticipate opening 10 new communities and closing out of 15, resulting in a 120 active selling communities, as of June 30, 2016. We expect our homebuilding gross margin to be in the range of 21% to 22%.

For the full year 2016, we are reaffirming our previously issued guidance of opening 70 new communities resulting in a 20% year-over-year community growth, delivering between 4,200 and 4,400 homes at an average sales price of 550,000, and SG&A expense ratio in the range of 10.3% to 10.5% of home sales revenue, and generating land and lot sales gross profit of between 45 million and 50 million.

And then lastly, based on our first quarter success, we are now anticipating our full-year homebuilding gross margin to be in the range of 20.5% to 21.5%, increased from our previously guided range of 20% to 21%.

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

Doug Bauer

Thanks, Mike. In conclusion, I’m extremely pleased with our accomplishments this quarter. We doubled our earnings per share, averaged more than 3.3 orders per community per month, and grew our active community count by 20% on a sequential basis.

TRI Pointe Group and its six homebuilding brands are led by some of the strongest operating teams in the industry. The management teams are all seasoned veterans with over 15 to 20 years of experience working together to provide outstanding results. Their experience is the competitive advantage that allows us to source superior land positions and attract the best trade partners and team members that will provide the foundation for growth as we scale our operations.

As always, these results are only possible because of the efforts of our team members. Their willingness to work hard, think differently, and share best practices has made TRI Pointe Group a more complete and diverse organization, benefiting homebuyers and stockholders alike.

That concludes our prepared remarks, and now we will take your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Ivy Zelman with Zelman & Associates. Please proceed with your question.

Ivy Zelman

Hey, guys, good morning, and congrats on the strong quarter, very effective results. I have two questions. Can you please talk about your strategy, and maybe the numbers around entry level –- Doug, you spoke about the strength of entry level, and recognizing you guys already have a decent percent, can you quantify today within the 1Q results, what percent of orders are entry level, and maybe within FHA loan limits? And then, just strategically, how you see that over the next few years expanding, and is that where the main strategy or focus will be?

And then my second question and think I’m trying to get it all in because I can ask a thousand, but the second question relates to your G&A improvements as a percent of revenues, as Mike, you indicated that you did see support for continued growth in your operation. When we think about modeling your going-forward cost as a percent of revenue, does the G&A stay at these lower levels, and is it sustainable? Thanks guys.

Doug Bauer

Thanks, Ivy. I’ll take your questions in different orders. As far as our game plan on the entry level, Tom will talk more about the percentages, but we’re going to continue to be a well-diversified company, taking advantage of the products and offerings that we have across the country. And we see an opportunity, I’m sure not different than anyone else, but in Houston, for example, taking our Trendmaker brand, and coming up with a new product offering on 50 foot to 60 foot wide lots, and bringing that price point down in the Houston market. There’s been rapid price appreciation through 2014. We have a very strong brand. It’s very well-recognized by brokers alike. So we’ll continue to expand that offering. And actually look to have a couple of communities come into the market early part of next year.

As far as the rest of the company party, really commands the entry price point in the Inland Empire. They do enjoy a lot of product that we offer, and within FHA ranges. But as you and I know, those price points or the price points allowed under FHA, we could really see a significant improvement in order activity and just velocity in the Inland Empire because many of those home-buyers are actually commuting to Los Angeles. And that county out there is still large. It’s a little unfair the way the FHA price points play out. But we’ll work through that, and we continue to have a lot of success because of our low land bases out there.

Tom, you want to talk about the percentages and where we’re growing?

Tom Mitchell

Sure. Hi, Ivy. We do see the first-time buyer segment and the Millennials as key drivers going forward in the future, so we do want to take advantage of that. This year, we expect about 36% of our deliveries to be coming from that first-time buyer segment. And in the coming years we’re looking to target around 40% of our deliveries moving forward.

Ivy Zelman

Great, thank you guys. And then the G&A, maybe Mike, you can address that please?

Mike Grubbs

Hi, Ivy. How are you doing? So you want to specifically talk about G&A. When you - I’ll just talk about SG&A to start with. Our range is 10.3% to 10.5%. So let’s call that 10.4%. We’re averaging around 5.2% this year in 2016 for the S side and 5.2% for the G&A side. But as we move forward into 2017 and ’18, that G&A component will definitely get fairly significant operating leverage going forward as we see our home sales revenue increase in the out-years.

Ivy Zelman

So would you guide any particular range that we should model, I mean you have very strong performance this year in margin or the quarter, will it be a little bit more specific on the SG&A?

Mike Grubbs

Ask your question again. You kind of cut out a little bit, Ivy.

Ivy Zelman

I’ll just talk to you offline, and I’ll let someone come in with the next question. Thanks guys, and good luck.

Mike Grubbs

Okay.

Operator

Our next question comes from the line of Jack Micenko with Susquehanna. Please proceed with your question.

Jack Micenko

Hi, good morning guys. Of course more to keep a bit better, obviously to think guidance range up a bit, was that all quadrant or what else is behind the improved margin outlook from where we were come out of the fourth quarter?

Mike Grubbs

Jack, obviously we delivered a higher backlog conversion as well, 67% versus our 60% that we guided to. So we saw increased deliveries in California. Originally we thought California would deliver around 37% of our overall deliveries. They delivered just about 41%. So that’s where we saw the improvement in our margin. The party operation averages in the high-30s on a gross margin basis. And when we pull some of those forward it impacted our margin.

Jack Micenko

Okay, thanks Mike. And then the West numbers on your home sales yesterday were surprisingly down, it doesn’t sound, Doug, from your commentary that you’re seeing any of that. Can you just confirm? I mean, I know that number is subject to some revision and some wild swings, but you’re not seeing anything, it sounds like, that would suggest what we saw in the March numbers yesterday?

Doug Bauer

No, I always caution everybody in reading in between the headline noise on those new home orders. They always get revised. But as we spoke earlier, up and down California we continue to see strong activity. As I mentioned earlier, San Diego, it’s a pretty impressive sales base, at five orders per community per month at 1.1 million. And so we continue to see a lot of strength here in California.

Mike Grubbs

And Jack, just to add to that, I mean, when you look at April, we showed it in our slide deck. I mean, April we’re averaging around 3.9 orders versus the quarter average of 3.3. We had our best sales week last week. We had 134 orders last week, which is the largest order count we’ve had since we combined the two companies. So we continue to see strong growth. Our issue is our absorption phase is a difficult concept for us for the first six month to a year.

Jack Micenko

All right. Thanks for that clarity. Thank you.

Operator

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

Nishu Sood

Thanks. Yes, actually, Mike, just wanted to follow up on that absorption discussion. The monthly data is very helpful. And you folks had been pretty clear that in the first part of ‘15, the first quarter in particular, there was, as you aligned the recall operations on an absorption basis there was a surge of sales. So the April improvement is pretty large on an absorption based on the year-over-year but -- so, is that -- are we seeing an improvement in trends then in April? I mean, is it, or is this just that, the first quarter was where most of the alignment was happening in terms of absorptions, and so that becomes less of a factor on a year-over-year base as we move into the second quarter.

Mike Grubbs

Yes, and I think -- Nishu, it’s Mike. And also I think in April what happened is we did open 27 new communities sporadically throughout the first quarter, and now we have the benefit of those being open for, call it, a month-and-a-half on average. And so we’re seeing better traction there as well. As we mentioned, we had, I think, 177 orders out of those communities, averaging well over four. And you mentioned it, and it’s really the first half of the year we averaged 3.5 orders per community last year on a company average. We’re off in California. When you look at the percentage, it’s 25%. But that’s going from an average of 5.1 orders with very high ASPs, the 4.1. I mean, we’re averaging 4.1 now. I don’t know how many the other builders are doing that right now. So I think we feel good about our absorption, it’s just a difficult concept for us.

Tom Mitchell

Nishu, this is Tom. From a perspective of being on the ground in our stores and sales operations, we really feel good. We’re entering into a strong spring selling season. And we’ve got great buyer motivation, and strong traffic. And I think it’s translating into new orders that you’re seeing in April. So we’re anticipating a really good seasons going forward.

Nishu Sood

Got it. Now, that’s very helpful. On Houston, excellent results there considering the context and the price points that you folks operate out, which is, I think, amongst the highest of the public builders. Margins at 19%, if I'm remembering correctly, that's I think roughly flattish on a year-over-year basis, so just wanted to dig into that. That runs so counter to the trends that we've been hearing on the ground. We have heard it does sound like Houston has stabilized even at some of the mid-price points on a sequential basis. So just want to understand, what drove that in the first quarter? Is that likely to persist or is there -- the day of reckoning, it comes later on this year? And the recent trends, if there's been any stabilization, if you could just give us some context there that would be great.

Doug Bauer

Yes, Nishu, this is Doug. We continue to think that the operating model that we have, it’s very asset-light. So we’re continuously renegotiating terms and conditions, future land and lot takedowns -- actually lot takedowns, not land, at gross margins of 18% to 20% -- 18% to 22% actually, depending on the risk factors of the project. It’s still a very competitive market. Incentives still range around 11% to 13%. And that’s probably a couple, maybe 200 to 300 basis points higher than it was a year ago. So there’s going to be continuous pressure on margins through the rest of this year. But we still believe that we have one of the most outstanding brands that’s recognized by the realtors, which promotes almost all the activity.

And being in some of the biggest master-planned communities, we’re going to be well-positioned as Houston comes out of this downward cycle it’s been in for about 14 months. So, A, I would say there’d be continued pressure, and incentives. So I’m not going to fall in love with a 19% margin. But as I think I pointed out at our end-of-the-year earnings call, the Trendmaker team has never lost money in its 25 years of working together. I think their margins got to as low as the mid 16s if I recall. So I feel pretty well knowing that team is in place in Houston, is operating under the model that we have.

Mike Grubbs

And then, Nishu, it’s Mike. Just to answer your question; the direct comps, that we’re at 19.7 in the first quarter 2015 versus the 19 that Doug mentioned in 2016.

Nishu Sood

Got it.

Tom Mitchell

In addition, we see the -- so one thing I was just going to add, and Doug did cover it in his remarks is, we’re excited about the opportunity to take advantage of diversifying our product offering there, and moving into a more affordable price point. So we think that’s going to yield positive results in the future.

Nishu Sood

And the smaller product that you're mentioning, is that on -- is that new lots? Is that new phases? Or if you're putting it on your existing lots which would've been originally intended for probably a higher price point home, does that have an impact on margins or should that be neutral to profits?

Doug Bauer

It’s neutral to margins. We would be putting that product on new lots. The one piece of land that we do own, the south and southeast portion of Houston is very strong. We have a community down -- called Clear Lake is South Houston. And we will be putting this new product down on our 50-foot-wide lots down there. So it’s all new lots that we’re talking about.

Nishu Sood

Great. Thanks for the details, guys.

Operator

Our next question comes from the line of Patrick Kealey with FBR. Please proceed with your question.

Patrick Kealey

Good morning. Thanks for taking my questions. So first wanted to focus on, you talked about the California land parcel you're going to be developing as opposed to selling. Maybe if you could give us a little bit more insight as what went behind that decision? Was it just market dynamics and demand, was it something you saw in the land market? I think any additional color be helpful there.

Tom Mitchell

Hi, Patrick. Good morning, this is Tom. Yes, as we went through this process we really took a good solid look at the competitive nature of the land market. And saw an opportunity to diversity ourselves with multiple brands up in our Golden Valley community in Santa Clarita. By doing that we think we’re going to be able to increase delivery growth, community count, and capture home-building profit. As we looked at those potential land sales in specific, it was really being driven by cash flow. I think we previously mentioned that. And so, as we looked at our cash flow we saw an opportunity to really capitalize on the advantages of having multiple builders in that one community, and building that out ourselves and retaining builder profits versus giving them away for a cash flow purpose.

Patrick Kealey

Okay, great. And then if we could focus on Maracay for a second. You talked about your better margins, you had average sales price growth and absorption growth, so you kind of -- it looks like got everything here year-over-year. So, has there been any change in your thought process as you move into second quarter. Given the absorption pace, do you feel you can push prices there a bit more to get better margin or are you kind of comfortable with pricing, and getting the absorptions? Or maybe just kind of digging in your outlook for 2016 there, I think, would be helpful.

Doug Bauer

Well, Patrick, our outlook for Maracay is significant growth ’15 to ’16. And we continue to look over the next three to five years of growing that brand. Phoenix is a super-competitive marketplace. And it’s all about execution. We’ve got one of the strongest teams, and led by Andy Warren at Maracay, and has done an outstanding job of implementing both product and land development to get these type of results. We have seen, in certain pockets, some price appreciation. But Phoenix is not going to go crazy with price appreciation. It’s going to range in the low single digits. But that’s going to be fighting off a lot of labor cost issues too. So, overall, as you look at margins you’ll see gradual improvement over time. But it’s a gradual process in Phoenix. And that’s been at least my history over 28 years, it’s just a very gradual process. The only time I saw rapid margin appreciation is when I saw a double-digit pricing, and that leads to an unhealthy market, frankly. So Phoenix is still battling some labor issues, I'd say, Phoenix and Denver are the two markets that we continue to feel that pressure the most, and we will continue to work in offsetting those cost issues with price.

Patrick Kealey

Great, thank you.

Operator

Our next question comes from the line of Mark Weintraub with Buckingham Research. Please proceed with your question.

Mark Weintraub

Thank you. So, obviously you laid out an increase of 50 basis points on your gross margin expectations for the year, is there anything that might be offsetting that, or should we now be seeing this year as having a bit higher earnings than what previously you would have been believing or indicating?

Mike Grubbs

Well, Mark, this is Mike. That's the only metric that we actually increased. So I guess, effectively we're highlighting the fact that earnings could potentially be higher, but it's a fairly wide range on our deliveries, which will probably hopefully tighten after we get to this spring selling season, maybe on the next call.

Doug Bauer

Yes, I would add, Mark, I mean, it is game time. I mean, the next four month is crucial to homebuilders. So we gave -- we're feeling good. We had a great quarter. We feel very good about the market, but it's too early to message anything other than that. We will call you back in four months and tell you how strong the spring selling season was or wasn’t.

Mark Weintraub

Okay, great. And you mentioned some of the more affordable homes you're building in Houston, are you looking at doing that elsewhere as well, or is that specific to that market?

Tom Mitchell

Well, specifically we're taking advantage of the opportunity in Houston to do that and diversify our product, but I would say across all of our brands we're looking to capitalize on that entry level buyer segment, and bring our average selling price down. As Doug mentioned, we're seeing particular traction in the Inland Empire in our Pardee brands, but both southern and northern California and our TRI Pointe brands we've got a significant amount of entry level product, and we continue to see opportunities in Las Vegas in the entry level market as well.

Mark Weintraub

And I guess at the other end of this spectrum, I think in Seattle, Washington area, you're sort of moving the other way, any update on how things are progressing in moving those price points higher?

Doug Bauer

Yes. Seattle is actually going the opposite way. You'll see the ASP grow over the next three years pretty significantly as the product mix -- has changed, and the market has -- the market in Seattle is red hot right now. So, our team led by Ken Krivanec in Seattle, and their land team has done an excellent job of positioning more future communities for the next couple of years in the key marketplaces that I mentioned earlier in King Houston home. So you'll see because of those strong markets and the product offering that we continue to introduce, price is going up and the margins continue to be very strong for Quadrant.

Mark Weintraub

Great. And then lastly, obviously you talked about April, the absorption rates looking really good et cetera. Now, orders in the first quarter for reasons you noted weren’t as robust perhaps as I modeled incorrectly, does that begin as the community count increases and the -- you're continuing to get good absorption rate, any sense of -- any guidance you can give us in terms of what type of order growth you would be targeting for the balance of the year recognizing how the market plays out yet to be determined?

Mike Grubbs

No. Mark, this is Mike. I mean, again as a company we plan on an average of around three. So as we achieve an average greater than that for the full year, we'd have more order growth than we previously anticipated, based on our -- when you apply that to our community count growth.

Mark Weintraub

Okay, great.

Mike Grubbs

So we typically can see higher absorptions in the first half of the year, and then absorptions typically fall off in the third and fourth quarter of the year. So we look to average around three, given our product mix.

Mark Weintraub

Okay, thank you.

Doug Bauer

And then Mark to add to that, I would say that last year in the third and fourth quarters we saw those absorptions trail off in the industry more so than normal, and if we anticipated more normalized seasonal selling cycle we'd be experiencing better results…

Mike Grubbs

Building backlog for the year end, and then you mentioned something at the Quadrant ASPs, I mean, if we just take a look at the backlog, you know, the ASPs in backlog is a pretty significant shift at the end of both the first quarter '15 and '16.

Mark Weintraub

Thank you.

Operator

Our next question comes from the line of Jay McCandless with Sterne Agee. Please proceed with your question.

Jay McCandless

Good morning everyone. First question I had, you were talking about the FHA loan limits in the Inland Empire, are there other areas of the country where you're having to work on price, or work on your offerings to stay under those FHA limits?

Doug Bauer

Jay, I mean, ideally you'd see that pressure in Phoenix also from the reduction they have there. The phenomenon in the Inland Empire is Riverside-San Bernardino County is huge. What is it, Tom, 29,000 square miles? And if you really examine the FHA loan limits in that region, you've got the West region much as hitting to Los Angeles, which has a FHA loan limit, I think of 625,000, and they're commuting back into the Inland Empire in the West side and it's 355,000.

So the federal government has it kind of backwards, and either they need to look at it on zip code, they've got to consider these large counties and the pricing effect swing and product in the Inland Empire, which is very large. And again, I'd say Phoenix, I think we've experienced it there, I really can't tell you anywhere else that we've experienced it, because a lot of our product would be more on the upper end price points.

Jay McCandless

Okay, thank you. The second question I had, just thinking about the progression of the gross margin through the rest of the year, based on what you guys sold this quarter, it looks like gross margin should trend down maybe sub-20% for 3Q-4Q, is that how we need to think about giving to the full year guidance?

Mike Grubbs

Well, I think, Jay, we talked about it on our first quarter call. We do see our margins contracting somewhat in the back half of the year, because of the newer communities that we're opening in the first half of the year. And so, we see kind of the full spring selling and what our price has been accepted by the consumer. We are not guiding anymore than 50 basis point increase in our margin. So you'll see our margins trend off in the back half of the year.

Jay McCandless

Okay. All right, thank you.

Operator

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

Will Randow

Helo. Good morning, and congrats on the progress.

Doug Bauer

Thanks, Will.

Mike Grubbs

Thanks, Will.

Will Randow

In terms of -- it's been hit on a few times, in terms of Pardee and the TRI Pointe Homes brand, can you elaborate just some of the drivers of absorptions coming in later in the first quarter year-on-year in light of the weaker holiday shifts, any pricing actions you may have taken year to-date, and really the key drivers for the TRI Pointe Homes brand in terms of price point?

Mike Grubbs

Yes. Will, it's Mike, I mean again when I mentioned, last year Pardee averaged 6.1 orders in the first quarter. There were some new communities opened out in the Inland Empire, which we're taking advantage of lower price points. So we had very strong absorption I think over several months in the Inland Empire last year.

This year, we average around 4.8, which is still a very solid absorption in Pardee, California, given our price points in San Diego. In TRI Pointe California, what happened there, if you remember in the fourth quarter of last year we were selling much better in coastal California, and so we closed out of lot of our coastal California projects. And rest of the 15 was fairly weak, the back half of 2015. So absorptions were low. And so, it's really that mix of open communities right now that happened in the first quarter, it's more towards the Inland Empire, and so we've seen our absorptions fall off from what was 4.5 last year, primarily coastal, to 3.6 this year, which is primarily inland. But we're still seeing a strong 4.1 absorption rate in our California market.

Will Randow

So, there has been no pricing actions year to-date, or whether something that constrained orders potentially?

Tom Mitchell

Could you repeat that, Will?

Will Randow

In terms of pricing actions in California, have you raised pricing up for -- there were some sort of elasticity?

Tom Mitchell

We certainly are seeing the elasticity in our high-demand markets, and we have been able to continue to raise pricing. I think even in the Inland Empire, as Mike was alluding to, some of those really fast absorbing projects in the first quarter of 2015 experienced significant price gains throughout the year. so we are coming into this year with much higher price points than we were at the first quarter of '15. So, overall we feel really good about our position and our ability to continue to gain price going forward in our high-demand markets.

Will Randow

And just as a follow-up to that, for April 385 orders, you showed, if I remember correctly the strongest part of the month for you guys is right at the end of the month. I guess, is that a fair statement, and potentially as we close up this month in the Saturdays, there's potential upside to that 3.9 absorption number?

Tom Mitchell

Yes. I think that's probably not true what you recently said, and we don’t see any difference in absorption at the end of a month versus beginning of the month. Our absorption is dictated because we have 40% of our actions in California, and we are a phase builder in California. It's based on phase releases. So that could come at anytime during the month. So I think we feel pretty good about continuing at 3.9 absorption pace for the balance of April. Our toughest comps that is the month of May, I think last year we had 457 orders in the month of May. So we feel good about where our absorption pace is where our new communities have opened, and we'd like to keep it perform at that pace.

Will Randow

Thanks for that, guys, and congrats again.

Tom Mitchell

Thanks.

Operator

[Operator Instructions] Our next question comes from the line of Dan Jacome with Sidoti. Please proceed with your question.

Dan Jacome

Hey, good morning. How are you?

Doug Bauer

Hey, Dan.

Dan Jacome

I appreciate the time. Two quick questions; for the Winchester, can you give us an update on the competitive dynamics there in terms of pricing, and I know you'd mentioned promotional activity last year in the suburban pockets; wondering if there is any change there, things have been intensified or possibly moderated?

Doug Bauer

Hey, Dan. As I indicated, our absorption pace in order activity is up year-over-year. Last year at this time, at the end of the quarter we were at about 2.7. It's about 2.9 orders per community per month. I'd say generally speaking, even incentives a year ago were averaging about 11.6%, first quarter was 8.9. So, that's where you're going to see net improvement in pricing and ultimately over time margin.

Generally speaking, we have a strong presence in Maryland and we've seen a lot of activity up in Montgomery County and then in the southern end of Fredrick County at our Landsdale community and in Montgomery County in our capital branch can be master plan community. So, overall there seems to be a stronger market presence, stronger consumer confidence that trickles across the river and also into Northern Virginia.

Dan Jacome

Okay, excellent. And then on Houston -- turning to Houston, I appreciate all the color, just wondering if like the major infrastructure changes that are happening there right now, I think two segments of the Grand Parkway or State Highway 99 just opened up, wondering if that's leading to any incremental traffic for you guys, and how much exposure your communities have to that?

Doug Bauer

Well, we have the Grand Parkway opening up. We're not a land developer there. So we are -- over 80% of our revenues come from lot options. So the Grand Parkway has definitely allowed some new communities. I believe the newest one that will be coming onboard, and I think they've done some pre-marketing. It's called Elyson by Newland, which is right off the Grand Parkway. So that has and will continue to have a positive effect on people getting around town and being able to live in those areas.

Dan Jacome

Okay, great. And then just one last one if I may; you said for the land sales, are you still -- is that going to be centered in the second and third quarter still?

Tom Mitchell

Yes. That's right, Dan.

Dan Jacome

All right. Thanks a lot, nice job.

Operator

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

Alex Barron

Thanks, guys. I guess I was kind of trying to still reconcile the performance of TRI Pointe brand orders for this quarter. Was it just kind of a dropping -- temporary dropping community count that accounted for the lower amount, or…

Mike Grubbs

Well, that -- some of it obviously in Colorado, our community count was off 8%, I think -- I believe it was 8% in Colorado; sorry, 29% Colorado, and I think our orders were up 25% as well in Colorado. But then in California it's a little above, right, we opened some new communities during the quarter, which didn’t come out to later in the quarter. But the mix of products that were available for sale comparative to the prior year's first quarter was less coastal products, more inland products.

Alex Barron

Okay. And when you were seeing an improvement or a strong sales pace in the Inland Empire, was that just only for the Pardee brand, or also for TRI Pointe Homes brand?

Mike Grubbs

No, Alex, we're seeing improvement across the Board in both brands. Historically, we have messaged that east of the 15 Corridor has been strongly absorbing through our Pardee brand, west of the 15 Corridor had been struggling, but in the first quarter of this year we're seeing momentum and the buyers returning to that marketplace, which is really encouraging for us, and TRI Pointe is capitalizing on that.

Alex Barron

Got it. And then just to go back on the margin trends, so this quarter, I guess you're expecting this to be the peak margin quarter for the year, given your guidance, and you said it's just all based on what the mix of land, the vintage of the land?

Mike Grubbs

It's primarily because we accelerated deliveries from our Pardee brands and other deliveries in California into the quarter, remember we're a phase builder, and so it's very difficult at time the closings if you're delivering additional half phase of a project we were able to pull units forward into the quarter. And pulling those units into the quarter at a higher ASP and at a much higher margin had impact on our margin for the quarter. Correspondingly, those will come out of the second quarter which you know the margins are going to fall up slightly in the second quarter to where we guided.

Alex Barron

Okay. Great job, thanks.

Operator

Mr. Bauer, we have no further questions at this time. I'd now like to turn the floor back over to you for closing comments.

Doug Bauer

Well, thank you everyone for attending the first quarter 2016 earnings conference call. As we mentioned, we're very pleased with the first quarter. It's off to a great start, and we looking forward to talking to everybody at the end of the second quarter after the spring selling season comes in for a landing. So, have a great quarter, and thank you for attending today's call.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

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