Meritage Homes Corp (NYSE:MTH) Q4 2016 Earnings Conference Call February 1, 2017 10:00 AM ET
Brent Anderson - VP, IR
Steve Hilton - Chairman & CEO
Phillipe Lord - EVP & COO
Hilla Sferruzza - EVP & CFO
Ivy Zelman - Zelman & Associates
Mike Rehaut - JPMorgan
Stephen East - Wells Fargo Securities
Nishu Sood - Deutsche Bank
Stephen Kim - Barclays Capital
Will Randow - Citigroup
Alex Barron - Housing Research Center
Jade Rahmani - KBW
Welcome to the Meritage Homes Fourth Quarter 2016 Analyst Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Brent Anderson, VP of investor relations. Please go ahead.
Thank you, Chad. Good morning and welcome to our analyst call to discuss our fourth quarter and full year 2016 results which we issued in a press release before the market opened today. If you need a copy of the release or the slides that accompany this webcast you can find them on our website at investors.meritagehomes.com or by selecting the investor relations link at the bottom of our homepage.
Referring to slide 2 of our presentation for our customary cautionary language. Our statements during this call and the accompanying materials contain productions and forward looking statements reflecting the current opinions of management. These projections are subject to change and though we may update them from time to time, we're not obligated to do so.
As forward looking statements the famous they are inherently uncertain and our actual results may be materially different than our expectations. We have identified various risk factors that may influence our actual results. They are listed here and explained in our most recent filings with the securities and exchange commission specifically our 2015 annual report on form 10K and our subsequent 10Qs.
We provided a reconciliation a certain non-GAAP financial measures referred to in our press release or presentation as compared to the closest related GAAP measures. With me to discuss our results today are Steve Hilton, Chairman and CEO of Meritage; Hilla Sferruzza, Executive Vice President and CFO; and Philippe Lord, Executive Vice President and Chief Operating Officer of Meritage homes.
We expect the call will run about an hour and a replay will be available on our website approximately an hour after we conclude the call. It will remain active for two weeks. I will turn it over to Mr. Hilton to review our fourth quarter results.
Thank you, Brent and welcome to everyone participating on our call today. 2016 was another year of strong revenue and earnings growth for Meritage and we're encouraged that 2017 has started out strong. We closed 7355 homes for the year including our milestone 100,000 home and generated a 19% increase in home closing revenue topping the $3 billion mark for the first time since 2006.
Our net earnings increased 16% over 2015 and we ended the year with $1.4 billion in shareholders equity. We expect to expand on that growth in 2017. We made significant progress on our strategy to target the returning entry-level and first-time home buyers that have been mostly absent from the recovery to this point.
We put nearly 11,000 lots under contract during 2016 most of which are in communities that will be targeted to this buyers segment and we're continuing to aggressively pursue such communities. We designed dozens of new plans for homes in those community to add to our product library that are in line with today's buyer preferences but are more efficient to build with quicker cycle times than our traditional product.
Turning to slide 5. We have pursued a growth strategy for Meritage homes since starting the Company 31 years ago and have executed that strategy successfully increasing Meritage's market share through strategic expansion, diversification and product innovation. In just the last six years we have more than doubled our sales driving a compounded annual revenue growth of approximately 28% and almost tripling our shareholders equity during that time.
We're at 16 of the top 20 homebuilding markets recognized for the long term growth potential and we're one of the largest builders in Phoenix, Denver and San Francisco's East Bay area, Austin and Orlando with the goal of becoming a top 10 builder in all of our markets. At the start of this decade we undertook an initiative to expand our presence in the southeastern U.S. for greater diversification and long term growth.
We selected six highly ranked markets Raleigh, Charlotte, Nashville, Atlanta, Greenville and Tampa which we entered through a series of acquisitions and startups from 2011 to 2014. Since completing these acquisitions we have been executing a deliberate strategy to position the East region for long term success.
That has included hiring talented teams and making leadership changes where we needed to, providing these teams with the capital and support they need, carefully selecting the best locations for our communities and designing a uniquely competitive set of product offerings for the region that are consistent with our brand.
It was a major undertaking that has taken longer than anticipated, but we believe it positions the region for long term success and we're very close to having all the pieces in place today. While those markets are already -- have already enhanced our growth over the past five years, they represent even greater potential for our future growth.
Turning to slide 6. Outside of the East region we continue to invest in our markets in the West and Texas. We temporarily slowed our acquisitions of new land in Houston during 2015 and early 2016, but over the past couple of quarters we have reaccelerated our investment into new communities in Houston as it has stabilize particularly in the first-time home buyers segment.
We ended the year with almost 30,000 lots under control, an increase of more than 2000 lots during 2016. Turning to slide 7. 2017 has gotten off to a good start. We will get the final January orders later today, but based upon early results we expect them to be 8% to 10% higher than 2016's January orders despite a lower community count coming into the year which indicates our sales base was up year over year.
While we're projecting slightly lower year-over-year closing volumes for the first quarter of 2017 due to a lower backlog entering the year, we expect to increase our community count for the first half of the year to drive significant year-over-year growth in the second half of this year. We're projecting total new home deliveries of approximately 7500 to 7900 and closing revenues of three point $3.1 billion and $3.3 billion for the year.
We're projecting gross margins in line with 2016 as we foresee no easing of land or construction costs over the near term. With our projected top line growth we expect that to translate to a 6% to 12% increase in pretax earnings. We focus on improving our overhead leverage in 2016 to help offset the impact of higher land and construction costs that have reduced our home closing margins.
We expect further improvement in our operating leverage in 2017 and have a target of 10.5% to 11% for SG&A as a percentage of closing revenue this year. Based on the market conditions we're experiencing today and the quality of our people, I'm confident that we can achieve these projections. I'll now turn it over to Phillipe to provide some additional color on the trends in our various markets.
Thank you, Steve. We saw solid demand across many of our markets last year especially in the West and Texas. Our overall absorption pace in 2016 was equal to 2015's pace. The principal reason for our single digit order growth was lower community count which I will address.
The decisions we made to limit or acquisitions of new communities in 2015 the delays in openings of a number of communities 2016 resulted in a 4% decline in our ending community count for the year which was evident in our year-over-year order comparisons to 2015. Part of that was due to a strategic decision we made at the end of 2015 to totally revamp our home designs in the southeast and create a robust and cohesive regional products library consistent with the Meritage brand.
That strategy has many advantages for the long term but is time-consuming. The redesign included about 60 floor plans and three foundation types or 30s, 40s, 50s and 60 foot wide lots, both single-family and town homes, one story and two-story towns and homes with and without basements or crawl spaces with multiple options and elevations. In the end this process required a few more iterations than anticipated to get everything dialed in as we wanted it to be before rolling out the new product.
This level of a product refresh is not something that occurs frequently, so we decided to take our time to get it right as we hope to use these offerings and the derivatives for the next 5 to 10 years. We purposely delayed some community openings in our southeastern markets to incorporate these new designs rather than open them with legacy product. We're now very close to completing that process and expect to rollout this new product as we open up new communities in that region.
We're targeting approximately 5% growth in our total community count for the Company by year end 2017. I'll provide some additional order details by region beginning on slide 7 with the West region which has the strongest order trends in the fourth quarter and for the year in total. Slide 8, West region's demand increased sales pace.
Total orders within our West region were up 8% over the prior year in the fourth quarter of 2016 led by a 24% increase in Arizona. Phoenix has been particularly strong and we're very well positioned with a right product and great locations.
Most of our new communities and digs are targeting the first-time buyer and we've had great success with our new live now homes. We included all of our standard Meritage energy efficient features and benefits on those homes but at an affordable price for first-time buyers. We're starting more specs, offering more move in ready homes and have simplified the option collections to streamline the entire process for the buyer. We had strong sales in the fourth quarter in Phoenix and Tucson.
Excluding our Active Adult Communities fourth quarter orders increased almost 40% in Arizona. Colorado produced 10% order growth for the fourth quarter despite having a third less communities on average than we had in the fourth quarter of 2015. Colorado still has the highest absorption pace in the Company at 11.6 orders per average community in the fourth quarter and more than 44 per community for the full year 2016 compared to our Company average of approximately 29 in 2016.
We have continued to see strong demand there despite higher home prices. We're In the process of reloading our communities in Colorado and contracted for more than 1000 lots in a dozen communities during 2016 which should be coming online in 2017 and early 2018.
In California demand is stronger in our communities in north than in the south where pricing is still a hurdle. The excessive rain in north impacted December sales, but despite those challenges, our total order volume value was up 4% for the full year and we grew our committee count setting the stage for additional growth in 2017.
Slide 9, demand in our Texas markets continue to be good. Austin and Dallas/Ft Worth had a particularly good quarter and were the strongest Texas markets for the year. We saw better than expected demand in Houston during the year as oil prices improved and stabilized.
The Texas region saw strong demand in December and delivered a 5% increase in fourth quarter orders and an 8% year-over-year increase in total order value. We've increased our community count Texas last several quarters and we invested more aggressively in 2016 that we did in 2015 so we're expecting continue growth in the region in 2017.
Slide 10¸ with had mixed results in the East region as each market faced unique circumstances and are in a slightly different position in completing the strategic transition that Steve explained. Overall, our decline in the fourth quarter 2016 orders in the East reflected a lower community count.
In Florida, we had a significant number of highly successful communities close out during the year and experienced delayed opening in several other communities. That resulted in a 15% decline in average active communities and 21% fewer orders for the fourth quarter of 2016 compared to 2015. Demand at the upper price points slowed during the year.
We're focused on acquiring and opening more communities at lower price points this year to meet the growing demand for those homes. We also closed out several high-volume communities in Tennessee that reduced orders in the fourth quarter of 2016 compared to 2015. However, we plan to grow our community count in Tennessee significantly this year which should drive additional order growth in 2017 and beyond.
Summer community openings were delayed in the Carolinas and Georgia where we're discontinuing the legacy product that we acquired with Legendary Communities and replacing it with plans from our new Meritage product library for the east region. We expect those plans will be more appealing to consumers and more efficient to build and therefore more profitable.
Additionally we turned over sales agents and management in Atlanta during the quarter and that disruption had a temporary impact on the performance for the quarter. As Steve noted, the development of new products for our regional library in east was a massive undertaking that has taken longer to complete than we anticipated, but we believed it was the right decision to position us for long term success in that region.
While total orders for each region were down 27% year-over-year in the fourth quarter, our full-year 2016 orders there were marginally higher than 2015 despite a decline in community count. With our new teams and product in place we're projecting strong order growth in 2017 after opening new communities and increasing our total east region count during the first half of the year.
I will now turn it over to Hilla for some additional details on our financials.
Thank you, Phillipe. I will review some additional details from our income statement, key land and balance sheet metrics and our first quarter Outlook. Starting on slide 11, our not earnings for the fourth quarter of 2016 were in line with the fourth quarter of 2015 as our increased home closing revenue was mostly offset by lower home closing margin and lower land closing profit.
Fourth quarter home closing revenue increased 15% year-over-year on a 10% increase in volume and a 4% increase in average closing price. Our average closing price was $414,000 in the fourth quarter of 2016 and based on the 432 ASP and our backlog this trend will continue in the near term. The average prices of our move-up homes are still rising even as we're opening more entry-level plus communities at lower price points.
That mix which includes a shift towards higher ASP geographic markets provides additional revenue while we make the transition to grow our business in the entry-level and first-time buyer segments. At 17.9% our first quarter home closing gross margin -- our fourth quarter home closing gross margin was up sequentially from the third quarter and lifted our full year home closing margin to 17.6%.
As a Steve noted we're projecting flat home closing margins for the full year 2017 which will be higher in the back half of the year than in the first two quarters due to increasing leverage on higher volumes throughout the year. We were pleased to have achieved a 60 BIPS improvement in our full-year 2016 SG&A expenses as a percentage at home closing revenue.
As we have covered previously our new commission structure in 2016 was partially responsible for that and we carefully managed our G&A expenses to generate additional leverage. We expect to further improve our leverage in 2017 as we grow our closing revenue and implement additional cost control initiatives.
Financial services profit increased 7% in the fourth quarter and 14% for the full year driven by increased home closing volumes. We had a minimal amount of interest expense for the fourth quarter 2016 as a capitalized near all interest incurred to additional land and homes under development. Our income tax rate was 32.1% of the fourth quarter 2016 compared to 30.5% in the fourth quarter of 2015 compared to -- at timing of recognition of energy tax credits.
We were not able to take those credits in 2015 until the fourth quarter when legislation was passed extending the credits for both 2015 and 2016. In 2016 we therefore took those credits each quarter for qualifying homes. Since Congress has not yet renewed the energy tax credits for 2017 we will be using an effective tax rate of approximately 34% to 35% until they do. While we still expect that to happen we cannot assume so for GAAP reporting or for financial modeling.
Based on those expectations, we're projecting approximately 1400 to 1475 home closings with closing revenue of $585 million to $625 million for the first quarter of 2017 and pretax earnings of $22 million to $26 million. Turning to slide 12, we ended the year with $132 million of cash and $15 million drawn against our revolving credit facility.
Our cash balance declined $131 million from last year as we invested it into homes and lots to support organic growth. Our total real estate inventory increased by $324 million in 2016, over 2015. Our net debt-to-capital ratio remained within our target range of low to mid 40% ending 41.2% at December 31, 2016 compared to 40.4% at yearend 2015.
41% of our closings in the fourth quarter of 2016 were from spec inventories compared to 35% in the fourth quarter of 2015 reflecting more spec sales within our first time buyer and live now communities. We ended the year with 1692 specs completed or under construction compared to 1270 a year ago.
An average of approximately seven specs per community in 2016 versus 5 in 2015 as we build additional specs for those entry level communities. Approximately 29% of total specs were completed at the end of the year compared to 37% at the end of 2015 indicating that while we're starting more homes in our entry-level plus communities most are selling before they are completed.
With that I will turn it back over to Steve.
Thanks, Hilla. In summary we were pleased with the revenue and earnings growth we generated for 2016 and are predicting additional growth in 2017. With the community count growth expect in the first half of the year and solid orders already in January; we're projecting strong orders and closings in the second half of 2017 and beyond.
The key drivers for the housing market remain positive including job growth, consumer confidence, increasing household formations, low interest rates and good affordability in most markets. We're well positioned in our markets and have developed new products that we can deliver at lower price points to meet the growing demand for first-time buyers. And we're continuing to execute on the strategy for long term growth that we believe will deliver significant value to our shareholders.
We will explain this in more detail during our analyst day on March 14 in New York City at the New York Stock Exchange. Contact Brent Anderson for more information. We're dedicated to delivering a life built better for all of our customers.
That is our brand promise something we strive to provide and all of our homes. Thank you for your interest in Meritage homes and for supporting our growth and success. We will now open it up for questions and the operator will remind you of the instructions. Chad?
[Operator Instructions]. First question comes today from Ivy Zelman with Zelman and Associates. Please go ahead.
Recognizing you have done celebrity transition to really going to entry-level and congratulations on the entry-level plus and live now products. Maybe Hilla can you tell us roughly if we're looking at the fourth quarter a % of orders with a representing I have a follow-up.
Sure. Our orders in the fourth quarter about 23% 24% from the entry-level product. But are and amenity comp was actually closer to 20%. Since we closed, we opened some communities this personally later in the corner so you should be able to see a large percentage of our order volume coming from those communities in 2017.
So to be clear, 20% of our communities are facing the entry-level buyer and our goal still remains that by the end of 2018, 30% to 40% of those communities will be facing the entry-level buyer and we expect the sales from those communities to be even a higher percentage of our total orders.
I think Phillipe you mentioned resolve a higher and price points seem maybe less robust activity and recognizing I think Hilla he said the mix has benefiting your revenues.
So thinking about on a go forward look is you are shifting mix and you're working to reposition herself, I think there is a lot of questions round the impact if we have and inflating economy which is good for job growth and all of the things that come with that, what the interest rate impact is. Another recognizing you don't have a crystal ball and what the impact is with respect to her rates are going to be we had quite a rate move the lithic about the higher and sluggishness that do to rates Phillipe is that the because people are being a little bit more careful in the lower end consumer is going to be more resilient because it is more lifestyle driven and they just need the shelter, relative to what is available.
So maybe Steve or Phillipe anybody want to, but just so I understand given the shift the overall positioning of the company, rates are having or will have an impact as we have more of the impact right now Phillipe that you're seeing already on that higher and that you commented was a bit lower or sluggish I don't remember your exact word and then what is it due to the entry-level product where you are positioning as rates rise?
My specific comments about the sluggishness at the higher price point was isolated too early in the -- we have city South American buyer have been impacted by what is going on over there so that low down a little bit specifically in Orlando. I wouldn't say the rest of our markets we're releasing anything like that occur.
So we're still seeing strong demand in Texas and California, Arizona and out east with the exception of relatively higher price point. As it relates to the interest rate impact on live now ELP the first-time homebuyer, we're priced so below everything especially in the affordable price point we're just thing that demand really third and there is tremendous urgency being created with interest move. We think that has a long way to run really where we're positioning into the market. I don't know if you want to comment or Steve.
Let me just add on we did see a substantive decline in our traffic in November in December. After the interest rate RoHS. That has rebounded totally and our traffic in January has been very strong.
That is good news Steve and obviously your generate orders reflected that. If you are going to take a step back a minute and talk with the legendary acquisition and the repositioning of the product and the southeast in the time it takes and it has taken longer to have the it looks like there are great things to come, how do you better manage expectations within the operating day-to-day operations with making sure that given your conveying measure being measured on Wall Street that you don't for the delays and disappointment and what can we look forward to assume that those are not going to be continuous issues where we're just being told it is great news in your repositioning, but is disappointing to the timing
I hear you loud and clear. Clearly we made some mistakes and integrating the acquisition and our entry into the five markets in the South. We have learned a lot from them and I think we put ourselves in a position for future success. Changing all the product was a daunting task as Phillipe has already discussed.
It took a lot longer than we expected to implement it. We're still in lamenting it. But we're well on our way to completion and we made Ed acquisitions the cycle between the mid-90s and the mid-2000 and for the most part we integrated all of those very successfully but for some reason, for multiple reasons, these acquisitions that we made recently in the South, we didn't do as good of a job. But I think going forward we will be better. Will be better off for it and we're expecting big things from the south over the coming years.
Our next question is from Michael Rehaut with JPMorgan. Please go ahead.
First question I had was on the guidance with the revenue growth gross margins SG&A if you just kind put through the model the 3.2.billion flat gross margins and SG&A leverage at the midpoint you get homebuilding EBIT growth of a little over 15%. So I was curious what are the drivers perhaps below the line item, below homebuilding operating profit that is suppressing that growth down to the pretax earnings guidance range.
I can give a little bit more insight. When we're modeling at this level we're not assuming any other items that are nonrecurring. Anything related to land. Anything related to pick up and JV and incremental pickups from interest expense is going to be capitalize. So for consistency we're modeling both as nonexistent while they may occur during the year it is probably not prudent to build us into a financial model. So if you're running the numbers compared to prior year there is some differences in our actual results versus how the financing model should work.
Maybe we can walk through it line by line Hilla but have kind of taken out the other income benefits, the interest expense I assume is being fully capitalized at this point. Your tax rate, is that is your pretext guidance so the tax rate doesn’t matter.
We can review off-line, perhaps. The second question I had was on order cadence. Steve, I think it is mentioned previously other they had some fall off in traffic in November, December. I was curious if there is any impact on order trends as it progressed through the quarter if you think about that down 5% for the full quarter, what was it month by month?
I don't know if I have those. But I can tell you that December was off significantly I believe October was slightly down from last year. November was slightly up, but December it fell off. But that is consistent with the traffic that we experienced.
We were essentially flat through October and November. And in December was really the monitor we were down.
And one last one, just on gross margins expecting it to be flat or in line with the 2016 and I guess still fighting some cost pressures, will be the offset to those cost pressures that would allow you to hold the gross margin line if it's some of the benefits from the reorganization in the South and I guess looking forward, Steve you talked about focus on perhaps getting that gross margin level back to prior years. How do you think about that particularly given an increased mix on first-time which typically does carry everything else equal, lower margin but faster turn type of a proposition.
I will answer part of it I will let Phillipe as a part of it but I think we're very positive with some of the early returns we have gotten on our new product cost. Our new product has come in at the lower cost than our old product and a surprisingly we could even get a better price because the product is better which will allow us to drive higher margins and offset some of the price pressure that we're experiencing.
We're also bringing on new communities in Colorado. That are coming on at higher prices with the markets and appreciating there. Phoenix margins are improving. The market of Phoenix is really strengthening in Tucson.
So we're able to push some pricing increases through to help with the margins. So there are a lot of good things happening.
Normally we turn somewhere between 25% to 35% over a community in any given year so there are quite a few falling off and coming back on. So some of both that are falling off reflect underwriting that was done before we had the knowledge of the significant increases in construction cost and labor cost. So the new product has been underwritten with these assumptions and the entire underwriting structure already accommodates the current environment. We realize there could be continuing tightening and that should be adjusted for bite with enormous market would normally give you on a one-for a shown ASP to labor. So we should be able to cover the continuing tightening or any further tightening with just incremental increases. But the new product that is rolling on this year has already had those assumptions make them.
The next question is from Stephen East of Wells Fargo. Please go ahead.
One more question on the gross margin a maybe this is for Hilla, but as you look at the overhang from the FHA product in California and the Southeast how long does it take you to run through that. I assume the turnover in communities and the Southeast would run for all of this year and maybe part of next year. So just trying to understand the trajectory of those issues on the gross margin.
Is were. Lifted her Q4 closings and the contribution from the FHA affected communities and it is impacting us about 30 bps of the margin is a 30 bps declined companywide from the FHA communities. There's enough units of the communities to probably expect similar trends for all of 2017 but after 2017 we drop pretty noticeably. We will have and equitable drive in 18 for those communities.
And the turnover in the Southeast, how long do you think that takes to work through the product?
This year every new community that we open up has a new product. Plan for it. So that is going to happen this whole year and we're pretty much going to turn over 50% to 62% of our communities in the South this year.
But the margin benefits won't come until very late in the year. It is really more of a next year kind of event and that is why we're guiding towards a flat margin for this year.
Yes. Sure. I understand. And then just sort of following on that if you look at your land and development in 2017, what do think it will be and can you give us a feel for your trajectory of community growth and where it is going to be where you are putting your dollars to be more specific.
We're growing. We have capital allocated to most of the company's geography for growth. We're trying to generate 5% community count growth this year which we think we have. We're getting big dollars into California right now trying to go to the California region. We continue to invest in the Colorado heavily. Texas is in growth mode specifically in Dallas and San Antonio. Out of the South, Atlanta and Charlotte are sort of markets of priority but we're still looking at the other three as well. Orlando and Tampa we continue to look to grow. The dollars are distribute it pretty well and we want to grow and all of the markets.
Okay. And how much do you think you will spend this year?
I think last year we noted I decided that we spent about $900 million in land and land development. We should be around the same ballpark maybe slightly higher.
Probably around $20.
The next question is from Nishu Sood of Deutsche Bank. Please proceed with your question.
Stephen your comment I think you mentioned January getting off to a good start. I think you said high single digits orders growth for the first month. But in your press release, you talked about the community count drag leading down year over year orders for the first quarter. So I was wondering if you could just reconcile that for us, please.
We exceeded our expectations a little bit so far in January. We still have to month to go. We just tabulated these results here in the last few hours because of the month just ended last night. So I guess that there is a little bit of a disconnect there.
But it is too early to tell how the quarter is going to end up, we're opening into new communities but it is not enough new communities we're opening this month to really push the sales of forward.
Also, coming up again to pretty tough cop and March we had a phenomenal margin 2016 three hoping to be able to match it but we're also trying to keep realistic and we're going to push, we're trying to make sure that we're managing.
The other thing is that if you go back to last year, the -5% is very disappointing. We hoped that we had done a lot better than that but we also had a 23% order comp for the fourth quarter of 2016 which I think was a month if not the highest of the entire group. So we had some very strong headwinds to overcome in Q4.
I appreciate that and another kind of moving parts question let's just go with the potential headwinds for the first quarter. Your backlog is slightly down to into the year. And the first quarter faces the challenge of these comps and the letter community count. So it sounds like your order growth might not get going until maybe mid-to-late second quarter.
But closings volumes are still expected to grow I think the midpoint is 5% or 6% or so. Given the labor environment, it would seem like the surgeon sales would be too late in the year to drive closings growth, unless I am missing something. Maybe with the turnover of the new product, does it deliver faster?
Are you seeing labor is up or how does that turnaround happen time to kind of drive the closing growth for the year,?
Absolutely, it is all about the product. We're building more and are product. Market is spec oriented. We have more specs to go the number it is up significantly from where it was a year ago.
And that reduces the cycle times and allows us to sell homes later into the year. We expect that to be a big driver of our closings for this year and will position ourselves to be opening many entry-level plus communities this year and when they opened they will be completely stocked with inventory to close.
And that is really one of the keys to dealing with this labor market. We get a lot more positive reception from our contractor base if we can line build and have a much more predictable building cadence. And we can accomplish that with more spec homes. And so that is why I believe this year we can hit those numbers.
And one more if I could just on Houston, really encouraging to the investment and the turnaround. When Houston was slowing, it started at the higher price points and migrated out North towards the mid to even the garment price points. Where is the rebound that you're seeing price point wise and I would imagine that is where the dollars are flowing.
If you could just give us some color on the kind of nature price point wise of the civilization rebound that you're seeing there, please. Slightly lower price points are certainly doing the best and the higher price points in some markets are doing okay. Also particularly down the South. In sugar land and markets closer to that.
Our junction rates are clearly down from where they were a year or two years ago. But we're still selling homes and we haven't had to increase the discounts there. And the reloading Houston is occurring for us in the new land that is rolling out at that lower-priced.
We have some exciting things that we're going to be announcing in the future in Houston. Some infill locations that I think are going to reap the dividends for many years to come. I'm very encouraged about that market.
The next question is from Stephen Kim of Evercore ISI. Please go ahead.
Just as a housekeeping item to follow-up, you had given some land spend guide for this year and I think you did $880 million this year could you give us a breakdown on acquisition and development on the land and?
Yes. I think that we haven't here. I think I have it for the quarter. I will connect with you later Stephen.
That is fine.
Land development was about 68 of the 225 with a balance being land purchases. We will get to a full your number on it.
More broadly, my recollection is that the East region which I assume -- the East region general had some lower profitability than some of your other regions and I assume the Southeast and some of the problematic communities in particular were probably the main culprit. Wanted to just verify that as you talk about having an acceleration in your year-over-year compares on orders in that region with the resort of the new product, is that your expectation that margins will be running in light of the company average or better, maybe when these new communities come online or will they continue to sort of run a little bit below the company average?
I would expect that they would be equal to or greater than the company average. We underwrite to a 20% gross margin. The company average right now is slightly less than 80%. So I'm expecting that these Nick amenities in the South, particularly in the South because our margins in Orlando are pretty good. That is part of the East.
But our new communities in the South area, the five markets in the South I expect to be 80% or better. Hopefully closer to 20. But as I said earlier, a lot of that is not going to impact the 2017 income statement because it is going to be coming later in the year.
Just as we can understand it's because without seeing the product in hand yet, we're just left to imagine. Can you give us a sense for the nature of the product reset. What in particular that you are doing differently, what you think will drive better reception with the consumer and also particularly why that would result in a better margin profile for the company.
One thing we're doing is using the same product with different elevations in all five markets. That allows us to really leverage our cost and drive down our cost and compare our cost from market to market and gives us a lot more efficiency. The product is just very fresh. It is very consumer facing.
A lot of consumer research on what the buyers are looking for. It is reflected in the product. Some of the product we had before was pretty old. And we have also really value engineered all of the product. The way that we do the roof trusses the way that we do the things behind the walls to make it more cost efficient.
Phillipe do you want to piggyback on that?
I would add onto that that the way the South works you have three different foundation types. Have a slab on grade a crawlspace and a basement. We're able to design those three foundation types into all of the plans, before we literally had a new plan for every foundation type.
Now we have one plan with presentation types that we building across all five markets. So to Steve's point we can really tighten up the cost of the trade because it is kind of the same planned. We're also able to really clean up all you're putting into houses a from a stack level and design features to create some consistencies on the scale there. What we're doing in Asheville versus Greenville, versus Atlanta versus key markets that we entered organically we're very different and so being able to streamlined that really creates a better margin profile as well.
We will have a lot of pictures and a lot of details on what we were doing in these southern cities at our analyst day on March 14. In New York. If you want to come out for a visit we would be happy to meet you in the South and show it to you.
The next question comes from Will Randow with Citigroup. Please go ahead.
I guess specifically as somewhat of a follow-up from Steve's question, as you shift towards more first-time buyer products how to take about potentially changing your input cost and specifically the focus on spray foam. Is there any thought to changing that up and similarly, how are you thinking about lumbar inflation for the overall business? If we have these Canadian tariffs come through in April or a bit later.
We're still committed to spray foam. We will see what the new tax code brings us and will value it at that time. We can only control what we can control as it relates to the lumbar tariffs and any other tariffs we get put in place. That will have to be passed onto the consumer. There is not much we can do to hedge that.
We have a very progressive, forward-looking structure to how we by our lumbar with our trades. We do have protection out free to four months. Beyond that I don't really know what we can do with regard to that.
This affiliate as it relates to the income Kosovar first-time homebuyer I would just say not necessarily as expensive, we don't put as much in the house. 's we're much more streamlining what we're offering. So we take a lot of the complexity. We're offering thing sort of our custom options and everything at that price point. So that allows you to control your cost lot better because the less input you're trying to manage with the trades, the better cost that you get.
Steve also touched on a survey but the consistency indicated that the entry-level plus and increases that we have to take on the construction hopefully would be mitigated by labor savings as we're offering the consistency of the spec that they are looking for.
As a follow up, thank you for the generate color in terms of demand. Did you see any volatility in terms of incentives, cancellation rates or closing versus the list price ratios?
For January? No.
Our next question is from [indiscernible] with Bank of America Merrill Lynch. Please go ahead.
The first question I guess you gave color on the January orders and I think you mentioned that March was a tough comp but I was just wanting if you could give us the actual monthly ear of your comps in the first quarter for January, February and March.
We can't give that information out. That is not normal practice for us.
If we have any additional cover color we can share progression document at endless David I think at this point to Steve's earlier comments we haven't even ratified the month 12 hours ago so we need a little bit more time to collect all of the data but early indications are positive.
I guess the second question would be, it doesn't appear that there is any impact from hurricane Matthew. Is that fair?
We're not using that as a reason why our sales were lower in the fourth quarter in the South but clearly the we can were traffic was down to a minimum because it was raining like cats and dogs. So there was an impact but it is not something that we're going to hang our hat on.
Next question is from Alex Barron of the Housing Research Center. Please go ahead.
Just wanted to verify if I heard your pretax income guidance correctly. $22 million into $26 million.
For Q1. Okay. So I was kind of working through the deliveries in revenues and try to figure out how you get there is there kind of I margin like in operating leverage issue on your margin in the first quarter. It seems like that happened last quarter but I just -- lastly but I just wanted to verify that that was some of what is going on right there.
I think we noted as a historical trend for us we're typically lower in the first half of the year and then we increased in the back half of the year as there is some variable components and margins in our overhead. We can certainly take the time to walk through the model dynamics in a follow-up call. But we didn't give any specific guidance beyond units closings and pretax for Q1 at this point.
Okay. That is hopeful. And then I guess just more general question with regards to the interest rates and people and backlogs. Any comments on what you guys are seeing as far as any people who may be are trying to cancel because they no longer qualify and what you guys are able or willing to do.
We're not seeing much of that. That is not really been an issue. Cancellation rates really haven't changed.
From Jade Rahmani with KBW. Please go ahead.
This is actually Allison Boyd [ph] on for Jade Rahmani. Had a follow-up question from earlier when you were talking about your product turnaround with your more spec sales that I was wondering what percentage of delivery this past quarter were from spec sales?
I think we mentioned it was 41% this year versus 35% last year's fourth-quarter we're definitely seeing a pick-up there which we would expect and it's positive of course and we would expect to see that as we shift towards entry-level.
I was also wondering if you had any comments about your recent joint venture with [indiscernible] and if you are looking at any other additional joint ventures currently?
My recent joint venture as I start is really exciting have the press release outlined it was a phenomenal infill site in Scottsdale Arizona the backyard think there's going to be deep demand we also have a lot of calls gets of the press release in the communities more than a year away. From opening for sales. It is a $350 million plus project that I think will pay dividends to the feast division for years and years to come.
We're always looking at other opportunities. There's nothing I can really comment on today we try to be more opportunistic in all the market that we build and that would have to be a site that we're following for a long time. It has sat dormant for the last eight years.
I think that concludes all of our questions and comments for today so we thank you very much for your participation in our fourth quarter earnings call and we look forward to talking to you again next quarter. Have a great day.
Thank you, sir. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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