TRI Pointe Group, Inc. (TPH) Q3 2018 Earnings Conference Call Transcript

TRI Pointe Group, Inc. (TPH 1.80%)
Q3 2018 Earnings Conference Call
October 24, 2018, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the TRI Pointe Group third quarter 2018 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. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

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

Chris Martin -- Vice President of Investor Relations 

Good morning and welcome to TRI Pointe Group's earnings conference call. Earlier today, the company released its financial results for the third quarter of 2018. Documents detailing these results including a slide deck under the presentations tab are available on the company's investor relations website at www.tripointegroup.com.

Before we begin the call, I would like to remind everyone that certain statements made in the course of this call which are not historical facts, including statements concerning future financial and operating performance are forward-looking statements that involve risks and uncertainties.

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

Except as required by law, the company undertakes no duty to update these forward-looking statements that are made during the course of this call. Additionally, non-GAAP financial measures will be discussed on this conference call. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be assessed through TRI Pointe's website and in its filings with the SEC.

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

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

Douglas F. Bauer -- Chief Executive Officer

Thanks, Chris and good morning to everyone joining us on today's call. TRI Pointe Group once again delivered strong results in the third quarter, posting net income of $64 million or $0.43 per diluted share. Home sales revenue increased 19% year over year to $772 million and gross margins expanded 180 basis points to 21.3%.

We generated a healthy order pace of 2.7 homes per community in the quarter, which was on par with the order paces we delivered in 2015 and 2016, but was below the exceptionally strong sales activity we experienced in the third quarter of 2016.

As we look at our order trends for the third quarter of 2018 and into October, we are seeing a softening of consumer motivation and demand. Even though the overall fundamentals continued to point to a strong housing market, we believe home buyer demand has slowed in response to higher borrowing costs than the significant price appreciation our industry has experienced over the last few years.

We believe that this is a normal reaction on behalf of the consumer and we are closely monitoring this dynamic in all of our markets as we sharpen our focus on the sales process and ensure that our product offerings are consistent with market demand profiles.

To be clear, we do not feel that the outlook for our industry or our company has been altered in the long run. With respect to the industry, we continued to see a tremendous opportunity ahead of us thanks to a strong economy, job growth, and healthy consumer confidence, which along with pent up demand for young adults should lead to growing household formations for years to come.

On the supply front, the number of new and existing homes on the market remains at low levels. Finished lots availability in the core locations in which we build remains constrained. All of these factors would suggest that the new home market has room for continued expansion and that the current slowdown the industry is experiencing will be temporary.

Against this backdrop, TRI Pointe will continue to focus on design and innovation to grow our premium lifestyle brands in the entry level, move up, luxury, and active adult product segments. We believe our steady approach to all our buyer segments and unique product offerings differentiates us from the competition and meets the lifestyle needs of today's consumer. We continue to develop affordable home solutions for all our buyers while maintaining our land acquisition focus on core market location.

Our operations in California once again posted solid results for the third quarter as the state continues to be one of the most undersupplied housing markets in the country, making the need for new homes and in particular affordable homes critical to its future. This bodes well for our company as we own over 12,000 lots in Southern California, which allows us to target affordable product segments in Los Angeles, San Diego, and in the Inland Empire markets.

We have made significant progress on the planning and development of our long-term California assets and are excited about the grand openings of Skyline in Santa Clarita, our new active adult community, Altis, in Beaumont, and a new highly desirable village in our Pacific Highlands Ranch masterplan in San Diego.

Outside of California, the long-term strategy for TRI Pointe is to maximize our existing operations and to grow our company through both organic and M&A activity focusing on the Southeast and Texas. Periods of adjustment, such as what we're experiencing today, often prove to be great opportunities for well-capitalized companies like ours to plant the seed for future growth. It is in times of adversity that strong companies with disciplined management teams can take advantage of market turbulence to make smart moves and grow market share.

To that end, we are very excited to announce our entry into the Charlotte and Raleigh, North Carolina markets under the TRI Pointe Homes brand. This expansion will be led by Gray Shell, a proven leader in the home building industry with over 20 years of experience. This greenfield expansion allows the time to build a best in class team that will implement the proven strategies of TRI Pointe in a prudent and capital-efficient manner.

We are also excited to share that our newly minted Sacramento division is making progress and now owns or controls over 500 lots and will open its first community in the first half of 2019. These small bites of growth are the seeds to our strategic plan over the next decade and will further establish TRI Pointe Group as a leading home builder in the US.

With that, here is some brief color on the markets in which we build. As I mentioned, our California operations had a solid quarter with a monthly order pace of 3.1 homes per community and average sales prices and gross margins above the company average. Order activity was in line with our expectations in the Inland Empire and coastal Southern California, while Northern California experienced border softness in the quarter.

Seattle is a great example of a market that has experienced significant price appreciation and our margins have expanded nicely as a result. However, we have experienced a significant shift in buyer motivation, anticipating that we may have reached an affordability threshold near the end of the quarter, we made some adjustments to pricing to stimulate demand. As a result, our monthly order pace for the quarter was three homes per community, which was higher on a sequential basis from the second quarter.

In the Southwest, both Phoenix and Las Vegas enjoyed stable market conditions. We continue to see healthy gross margin improvement compared to the same quarter in the prior year. In Phoenix, we are especially excited about the opening of seven new communities during the first half of 2019, including our much anticipated Avance Community, located 15 minutes from Downtown Phoenix. Our operations in Colorado have really gained traction, with a significant growth in orders, deliveries, and margins in the quarter.

This was the result of product repositioning we implemented a year ago. In Texas, we continue to see better demand trends at more affordable price points above Houston and Austin, while pricing has remained firm in both markets. Over the near term, we look to grow our business in Texas as we continue to see strong economic fundamentals in affordable housing.

Finally, the Mid-Atlantic remains a stable market for us. We remain optimistic about the region, given its steady fundamentals and the under-supplied nature of the market and are excited about our six new communities that will open in the second half of 2019. Now, I'd like to turn it over to Mike who will go into more detail on the numbers.

Michael Grubbs -- Chief Financial Officer and Treasurer

Thanks, Doug. Good morning. I would also like to welcome everyone on today's call. Overall, the third quarter was marked with strong financial results, as highlighted on page six of our earnings call slide deck. Home sales revenue was $772 million for the quarter on 1,205 homes delivered at an average sales price of $640,000.00. Our home building gross margin percentage for the quarter was 21.3% and our SG&A expense as percentage of home sales revenue was 10.7%. Net income came in at $64 million or $0.43 per diluted share.

For the quarter, net new home orders were down 18% on a year over year basis on a 2% decrease in average selling communities. Our overall absorption rate for the quarter was 2.7%, which was below last year's pace. However, as Doug mentioned, was comparable to the third quarter absorption rate we experienced in 2015 and 2016.

As for our overall selling communities, during the quarter, we opened 13 new communities, 6 in California, 4 in Washington, 1 in Nevada, 1 in Texas, and 1 in Colorado. We closed 18 communities resulting in an ending active selling community count of 125. Our active selling communities at the end of the quarter is shown by state on slide 7.

A quick update regarding the accelerated development and buildout of our long-term California assets. During the quarter and year to date, 18% of our net new home orders were from these assets, consistent with the same periods last year. During the fourth quarter, we expected 13 of our 19 new community openings will come from our long-term California assets.

With the opening of four communities at Altis, our 700-unit active adult community located in Beaumont, four new communities at Skyline, our 1,200-unit masterplan in Santa Clarita, and five new communities at Pacific Highlands Ranch in San Diego. We should start to see deliveries from those projects in the second half of 2019, which will benefit our home building gross margins as our long-term California assets deliver margins well above the company average.

We ended the third quarter with 2,101 homes in backlog, which was a 7% decrease compared to the same quarter last year. The average sales price in backlog increased 4% to $681,000.00 and the total dollar value of our backlog decreased 3% year over year to $1.4 billion.

During the third quarter, we converted 53% of our second quarter ending backlog, delivering 1,205 homes, which was an 8% increase compared to the same quarter last year. Approximately 43% of our deliveries for the quarter came from California, including 17% from our long-term California assets.

Our average sales price of homes delivered was $640,000.00, up 10% from last year and up 1% from last quarter. This resulted in home sales revenue for the quarter of $772 million, up 19% from the same quarter last year. Our home building gross margin percentage for the third quarter was 21.3%, an increase of 180 basis points compared to the same period last year. Our gross margin percentage increased in all but one of our home building brands during the quarter.

For the third quarter, SG&A expense as a percentage of home sales revenue was 10.7%, an increase of 50 basis points compared to 10.2% for the same period in 2017, primarily due to the impact of ASC 606 and higher selling costs.

During the third quarter, our effective tax rate was 23.5%. The rate was lower than our previously stated guidance, largely due to the benefit of energy credits taken during the quarter. We expect the tax rate for the fourth quarter to be in the range of 25% to 26%.

During the third quarter, we invested $193 million in land acquisition and $113 million in land development. Year to date, we have invested an aggregate total of approximately $763 million in land acquisition and land development. The focus of our land acquisition strategy is to target land for communities, which will deliver homes in 2021 and beyond.

At quarter end, we owned or controlled approximately 28,400 lots of which 57% are in California. Based on the midpoint of our 2018 delivery guidance, the number of years of lots owned or controlled is 5.5. We continue to focus on our long-dated California assets and investing in faster-turning communities in our markets outside of California.

The detailed breakdown of our lots owned will be reflected in our quarterly report on Form 10-Q, which will be filed this week. In addition, there's a summary of lots owned or controlled by state on page 30 in the slide deck.

Turning to the balance sheet, quarter end, we had approximately $3.4 billion of real estate inventory. Our total outstanding debt was $1.5 billion, resulting in a ratio of debt to capital of 43.7% and net debt to net capital of 42.3%. We ended the quarter with $570 million of liquidity consisting of $83 million of cash on hand and $487 million available under our unsecured revolving credit facility.

With respect to our stock repurchase program, during the third quarter, we repurchased a little under 10 million shares of our common stock for a total aggregate dollar amount of $139 million. As of the end of the quarter, we had approximately $61 million remaining on our $200 million stock repurchase authorization.

Now, I'd like to summarize our outlook for the fourth quarter 2018 and full year. The company expects to open 19 new communities and close out of 14, resulting in a 130 active selling communities as of December 31st, 2018. During the fourth quarter, the company anticipates delivering approximately 80% to 85% of its 2,101 units in backlog as of September 30th, 2018 at an average sales price of $640,000.00. For the full year, the company expects to deliver between 5,025 and 5,130 homes at an average sales price of $635,000.00.

The company anticipates its home building gross margin to be in the range of 20% to 20.5% for the fourth quarter and the full year to be in the range of 21% to 21.5%. Finally, we expect our fourth quarter SG&A expense ratio to be in the range of 8.8% to 9.2% of home sales revenue, resulting in a full-year SG&A expense ratio of 10.1% to 10.5%.

I'd now like to turn the call back over to Doug for some closing remarks.

Douglas F. Bauer -- Chief Executive Officer

Thanks, Mike. I'm very pleased with our performance this quarter and believe that TRI Pointe Group is well positioned to take advantage of the opportunities that arise during this period of adjustment in our industry. We already made some strategic moves to enhance our presence in existing markets and establish our sales in new markets. We will be evaluating other opportunities as they arise, doing some in a prudent, disciplined, and opportunistic fashion.

While we are currently experiencing some softness in demand, I remain optimistic about the future of TRI Pointe Group. Many of our recently opened communities are performing well and I'm excited about the prospects for our new communities that are coming online ahead of the spring selling season. As Mike mentioned, we are currently targeting land buying opportunities for 2021 and beyond, meaning we own or control all the lots for homes expected to close through 2020. Our land position allows us to deliver positive cashflow for the next several years providing the tool to maintain a solid capital structure and liquidity.

In the meantime, we will continue to operate and execute to close out the year on a strong note, making adjustments to our pricing and marketing strategies when necessary to meet the demand profile of our customers and achieve our order pace goals. Our company's leadership is comprised of industry veterans who know how to compete effectively in challenging demand environment. This experience, coupled with our strong balance sheet, product differentiation, and excellent market positioning makes TRI Pointe Group well-positioned for long-term success.

Finally, I'd like to thank all of our team members for their continued contributions to their success. Lost in all the noise surrounding the current trajectory of the housing market is the fact that the TRI Pointe Group is poised to have our highest year of profits in our company's history all coming from our core homebuilding operations. This is no small feat in our competitive industry and I'm appreciative of your efforts.

That concludes our prepared remarks and now, we'll be happy to take your questions.

Questions and Answers:

Operator

Thank you. We'll now be conducting a question and answer session. In the interest of time, we ask that you please limit yourself to one question and one follow-up and welcome you to rejoin the queue for any additional questions you may have.

If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * key. One moment please while we pull for questions.

Our first question comes from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Alan Ratner -- Zelman & Associates -- Analyst

Hey, guys. Good morning. Thanks for taking my question and congrats on the expansion into the Carolinas. So, Doug, you mentioned, I guess, the price adjustments you made in Seattle, which seems to have had a positive impact on the absorption sequentially.

I was hoping you could give us a little bit more color in terms of what exactly did you adjust, maybe quantify that, if you can. Are there any other markets where you made similar adjustments where you didn't quite see the same elasticity to the demand, in other words, orders did not really increase? I'm just trying to get a feel for how elastic the consumer is today to discounts or incentives.

Douglas F. Bauer -- Chief Executive Officer

Yeah. It's a good question, Alan. It really is project-specific, speaking to Seattle. One of our new projects that we opened at a price point that's over $2 million has sold very well in the King County area, whereas some of the other projects that we are selling have prices have rose in Seattle, we adjusted through incentives and pricing anywhere from the mid-single-digits to as high as 10% just to stimulate demand.

Once we got there, you found the momentum. I was actually out walking the track and it was on one particular project that we actually had to make that adjustment. It's not like it's across the universe is my point. The sales people are really back to not taking orders and they're selling homes. You're grinding out sales. This is very normal to the home building business. I think as we reflect back, 2017 was probably the peak of the selling season.

Alan Ratner -- Zelman & Associates -- Analyst

Got it. That's helpful, Doug. I guess just on that point, I know it's one specific community, but that's a big adjustment. One thing we hear a lot from builders is really a reluctance to make those types of cuts because of the backlog and protecting the backlog and making sure you don't have a spike in cancellations.

So, a) how did you avoid that in this particular situation? And b) when you look at the success you had there, is there a thought of perhaps becoming more aggressive where your sales pace has pulled back in Northern California, for example? Or are you already doing that? Thank you.

Thomas Mitchell -- President and Chief Operating Officer

Hi, Alan, this is Tom. Again, good follow-up with that. It's important to note that specific example in Seattle was really relative to a new community opening. So, we didn't have that backlog, but we immediately recognized when we came out with a lack of demand that we could make a shift and make that happen.

Most of our other operations and projects throughout all of our areas, we've really implemented more promotional activities, make your move type events that are really more incentive-focused. In particular, we've had some success relative to financing incentives and locking in some good financing for buyers that seems to have stimulated demand.

Alan Ratner -- Zelman & Associates -- Analyst

Great. If I can just squeeze in that last one, just because of the timing of when these incentives have come under wraps here, is this something that really gained steam toward the end of the quarter into October or was it in place for most of the third quarter?

Thomas Mitchell -- President and Chief Operating Officer

No. I'd say it was later in the third quarter that it began to be evident that we needed to increase and stimulate demand.

Douglas F. Bauer -- Chief Executive Officer

Just to add a point on the incentives -- as a company, we've been through these market changes before and they're not all -- you can't paint a brush on it. Many of our markets are moving along at a good pace, but interest rates have gone up, pricing has gone up for several years. So, everybody's got to be on their A-game when it comes to sales and marketing. As a company, when you look at our sales incentive per delivery, as a company, it actually went down 50 BIPs. It went from 3.9% to 3.4%.

So, are you going to continue to have to grind out sales going forward in 2019? I'm not trying to sugarcoat it. That's the market we're in, but we've been doing this for 30 years. We've got one of the most experienced management teams in all of our brands. They're very motivated and excited about hitting their results going forward through the end of the year and into next year. It's back to blocking and tackling and the fundamentals of selling homes and building them.

Alan Ratner -- Zelman & Associates -- Analyst

Got it. Thanks, guys. Appreciate it.

Operator

Thank you. Our next question comes from the line of Steven Kent with Evercore ISI. Please proceed with your question.

Stephen Kim -- Evercore ISI -- Managing Director

Thanks very much guys, appreciate the color. I want to follow-up on the incentives. I think Doug, you just mentioned this is kind of normal, Doug, as you pointed out, over the years of operating in the business. Every customer always likes to feel like they get a deal. So, there is sort of a normal range of incentives. In general, where would you put that range of incentives versus where we are today?

Douglas F. Bauer -- Chief Executive Officer

Well, what's normal? I've been doing this for 30 years, as I mentioned, and I've never been through any sort of adjustment in the housing cycle that's normal, Stephen. But typically, just pick on Texas, just pick in Houston, as the oil crisis went through that area for several years and incentives ranged from 7% to 9%, I would say typically, roughly speaking as an average, let's say 3% to 5% is a broad range. But all cycles are different. Each project, you have to manage individually to meet its pace goals. So, it's really hard to paint a brush on it.

Michael Grubbs -- Chief Financial Officer and Treasurer

Stephen, this is Mike. Just to give you some color on that -- what we delivered in the third quarter, the average incentive was 3.3%. So, roughly speaking, that's $20,000.00 a house. Clearly, it's different in different markets, but we would expect that number to go up, I would think, as we deliver houses in the first and second quarter.

Douglas F. Bauer -- Chief Executive Officer

But again, it's well within a normal range from what we've been experiencing. When we have softening demand, we need to incentive the consumer to jump in. That's very typical.

Stephen Kim -- Evercore ISI -- Managing Director

Yeah. That makes sense. If we could talk about the broader market environment, one of the things that's a little different this time, I'm guessing, is the degree to which you have some competitors in the market that have gone to great length to standardize their product and even embrace spec building to a greater degree than maybe we've seen in the past. I don't see a lot of reasons for that.

I was curious whether or not -- first of all, whether you're really bumping up against that in your price point or if largely you sort of sidestep by virtue of your price mix? And to the degree that you do see it, do you see that as limiting their ability where the markets will be generally, to operate through incentives because there are not that many levers to pull when you have a standardized product. In other words, is it hitting the ASP quicker, the actual reduction in the ASP?

Douglas F. Bauer -- Chief Executive Officer

That's a great question, Stephen. Obviously, some of the larger builders have definitely gone to more of a standardization, but our buyers and our universe is really focused on offering strong design innovation and options to their buying process. That experience really differentiates ourselves. Frankly, at our price point from entry level to move up to luxury to active adult, that's a huge differentiator for us. Not only is it a huge differentiator for the customer, but also with the trades and the land sellers.

So, as I mentioned before, we're going to stick to our steady approach being well-diversified. Affordability in the core markets is a relative term. We'll continue to focus in on that. That means we're going to build and design product that is attached to smaller square footages, but hits that right price point, whether you're in Orange County, Austin, Phoenix, or DC.

Stephen Kim -- Evercore ISI -- Managing Director

Great. That's helpful. Then last one for me regarding margins generally, kind of a two-parter. Lumber pricing has obviously come back a lot -- different builders have a little bit more of a lag time between when they might actually see that. I'm guessing you guys will probably be on the later side.

What I'm trying to figure out is are we more likely to see that, for you guys, the benefit in 2Q next year or would it start showing up in 1Q? Would it be reasonable to think the lumber package is in that 3% to 5% range of selling price? Actually, I shouldn't give you a range. If you could just tell us, the lumber pack in general, what percentage of the selling price is it for your homes? That was a lumber question.

Then the second one is remind me -- I think you told me that a cash product does not have necessarily a lower margin when we were out there recent. Can you just revisit that? When we hear you say attached product, should we be thinking any margin implications?

Thomas Mitchell -- President and Chief Operating Officer

Yeah, Stephen, this is Tom. I'll take some of that and try to hit on all of that. Relative to the attach product first, it definitely does not have a lower margin. The reason we're interested in attached product and a lot of our markets is because it provides a more affordable opportunity and a lower ASP that's going to relate to a broader segment of a market. So, that's the reason behind our push there. We're finding that it has equal margins to our detached product as well.

On the cost side, you're right, lumber has been a big benefit to us lately. We do expect to see some of that benefit in the beginning and late in the first quarter of next year, but I'd caution you to note think that it's going to be automatically a windfall to the bottom line because we still are fighting significant cost increase, the tariffs. I don't expect it to have a strategic impact to our margins going forward.

Stephen Kim -- Evercore ISI -- Managing Director

Just so I'm clear, you are specifically referring to the combined cost picture, not factoring in any incentive that you would have to do, right? So, barring any incentive --

Thomas Mitchell -- President and Chief Operating Officer

Correct.

Stephen Kim -- Evercore ISI -- Managing Director

Okay. Got it.

Douglas F. Bauer -- Chief Executive Officer

The lack of pricing power is going to have an impact on that as well.

Stephen Kim -- Evercore ISI -- Managing Director

Yeah.

Operator

Thank you. Our next question comes from the line of Stephen East with Wells Fargo. Please proceed with your question.

Stephen East -- Wells Fargo -- Analyst

Thank you. Good morning, guys. Doug, just looking at California, the absorptions were down pretty significantly. Can you talk a bit more about what you think the drivers are? I mean, I sit here and look at it and we walk that market, we heard the international buyer and had really pulled out to a significant degree.

How much of it is that, how much of it do you think is true affordability versus just sticker shock that the consumer needs a little time to work through, if you will, and are you really seeing the consumer do anything differently other than hesitate on the on the actual purchase? And then could you expand a little bit more on your strategy to combat it?

I know in the short-run, it's primarily incentives, but as you look out into maybe the spring selling season and into '19, you mentioned some attached, is there anything else that you all might do to change what's happening in the business?

Thomas Mitchell -- President and Chief Operating Officer

Hey, Stephen, it's Tom. Good question. California is a big part of our operations. Again, we had such a strong first half of the year. I do believe a natural reaction to what's happening when you combine rates and sticker shock is an appropriate way to put it. Certainly, the lack of international buyer has had an impact. They're less prevalent now. They're not completely out of the market, but they are significantly reduced from what we were seeing a year ago at this time.

Douglas F. Bauer -- Chief Executive Officer

You look at the sales base in California at 3.1, that's still very solid. As far as going in the first quarter, you're not going to change a lot in product in the first quarter. Where we had a huge advantage, Stephen, is going forward into the later part of '19, really into 2020 by us controlling these 12,000 lots in Southern California. Those programs, whether it's Skyline, Altis is active adult, PHR is obviously going to be move up.

We have several other communities that we're working on in San Diego. They provide affordable product alternatives. We have a land basis that gives us a significant advantage in a -- California is housing constraint. Yes, house prices have risen over the last few years due to lower interest rates, but we're pretty blessed with a strong balance sheet, but most importantly, land that we own that we can design build affordable product going forward, but it's not going to magically happen in the first quarter, I'll tell you that. It's just timing process.

Michael Grubbs -- Chief Financial Officer and Treasurer

Just to add to that so that everyone knows, 100% of our absorption degradation came from our entry level products. We absorbed better in our move up, luxury, and active adult, but it's primarily related to product availability in that market segment. That's why Tom's talking about going to more of a detached product to bring that price point back down. We just absorbed really well in our entry level product and all of our markets in 2017.

Stephen East -- Wells Fargo -- Analyst

Okay. That makes a lot of sense. I got you. And then the can rate jumped up. I was wanting to understand how much of that is the inability to qualify versus people getting cold feet, if you will. When you look at your backlog, gross margin versus what you produced in the third quarter, what type of delta are you seeing there?

Douglas F. Bauer -- Chief Executive Officer

Yeah. On the can rate, Stephen, I'd say the most significant factor there is really the inability for some of our contingent buyers to convert the sale of their home in a timely manner. Obviously, we're getting closer to year end and wanting to make that year end goal and plan, we're cleaning that up, but there has been an increase in resale inventory and I think that market has slowed as well. So, a big part of our success going forward is going to be how we manage that contingent buyer.

Michael Grubbs -- Chief Financial Officer and Treasurer

Our backlog margins, Stephen, for the fourth quarter are out of our range that we provided but we still have some units to sell and we assumed the positional incentives are going to come in a little bit.

Stephen East -- Wells Fargo -- Analyst

Thanks a lot, guys. I appreciate it.

Operator

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

Jack Micenko -- Susquehanna International Group -- Analyst

Hey, good morning. First, a high-level question -- I hear you changing some of the product targeting and it's going to take some time, maybe 2019-2020. Thinking about the five and a half years of inventory, has what's happened in the last several computers changed your view on whether five and a half is the right number or something along those lines?

Michael Grubbs -- Chief Financial Officer and Treasurer

That five and a half is kind of an interesting number because it's heavily skewed by the California 12,000+ lots that we own. You've really got to break it down, Jack, to each individual area. Some of our divisions are actually very undersupplied in the one to two range. Generally speaking, if you take out the two-year range, if you take out the party in California elongated assets, they're really around that two to three level. We'll continue to manage that level. You really need to dissect that five and a half. We do the math for you, but you've really got to break it down by division and by company. We have a slide in the deck that breaks it down.

Douglas F. Bauer -- Chief Executive Officer

But fundamentally, this recent pause has not changed our shift in what we feel is the right level of inventory to be carrying forward.

Jack Micenko -- Susquehanna International Group -- Analyst

Yeah. Perfect. That's what I was getting at. Then Mike, more specifically, on the G&A and 606, I was under the impression it was a beginning of the year event, but we had the G&A numbers to amp in the back-half. Is there something around 606 that is hitting more on the back-half? Can you give us maybe what the dollar amount would be so we can figure out what the give up on margin was versus the G&A side?

Michael Grubbs -- Chief Financial Officer and Treasurer

Yeah. If you look at ASC 606, the impact of that is a continuing impact as we open new communities. This quarter, we were 50 basis points higher year over year and that's primarily related to the 13 California communities that are coming out. I said mention 13 of the 19 communities are coming from the long-term assets and more specifically 5 of those from the Pacific Highlands Ranch, those are highly amenitized models, where you put a lot of dollars in up front. That's a pretty big impact.

Overall, when you look at year to date, it's about an 80-basis point difference. That map is in the 10-Q, if you want to see it. We do have what the numbers would look like without ASC 606, the reconciliation.

Jack Micenko -- Susquehanna International Group -- Analyst

Great. We'll back into that. Thank you.

Douglas F. Bauer -- Chief Executive Officer

Jack, I wanted to add one point in your land question. We pointed this out in the earnings call script that we went over -- we're in great shape for deliveries for 2019 through 2020. Our focus is going to be on generating positive cashflow to allow us to have the capital levers to do what is appropriate to increase and protect shareholder value over the long-term. We've been to this party before, so to speak. We're very confident in our balance sheet going forward and our position for the next couple years is in excellent shape.

Operator

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

Nishu Sood -- Deutsche Bank -- Analyst

Thanks. First question on the ASPs for the third quarter -- they came in I think stronger than you indicated. I just want to understand the driver of that. Is there some mix effect that drove that in terms of higher price point deliveries or is that still reflecting the stronger pricing environment early this year?

Michael Grubbs -- Chief Financial Officer and Treasurer

It's a little bit of both. The mix did have some impact on it as well. You can see our backlog margins continue to grow as well.

Nishu Sood -- Deutsche Bank -- Analyst

Got it. You mentioned the long-term California assets as they -- the ones you're opening now -- as they deliver in the second half of '19 that those communities carry higher than company average gross margins. So, I just want to understand -- how do those new communities, gross margins, compare against what's likely to close out. Does that offset that effect? Obviously, there are pricing pressures here. So, I just want to understand the weight of that gross margin lift relative to other factors that are going on, how much that's going to carry through as we get to the second half of '19.

Michael Grubbs -- Chief Financial Officer and Treasurer

I think we're not really giving guidance on our overall margins for '19 yet. You should see margins lower in the first half of the year and then higher in the back half because the expected deliveries coming from these newer communities. We mentioned historically the long-term California assets generate margins well in excess of the company average. They're typically at higher ASPs. So, the weighting of that has a pretty good impact on our overall gross margins.

Right now, we have currently 17 communities, I think, opened from the long-term California assets. We're adding 13 to that. Clearly, during this period, there also be some that close out. I think the sheer volume of communities from the long-term assets is going to be a greater percentage than it was this year, so it has some impact in a positive direction on margin.

Nishu Sood -- Deutsche Bank -- Analyst

Got it. So, even weighting it overall against what you're delivering out of the long-term assets? You'll have more opening than closing. That would obviously be a kind of positive force for margins. But then what about as well, our previous conversations, I've understood that your lower price point long-term assets in California don't necessarily -- they have obviously great margins, but maybe not as high as some of the really high price point ones like PHR. So, is that kind of a countervailing effect as well?

Michael Grubbs -- Chief Financial Officer and Treasurer

A little bit. Not too many of the long-term California assets have margins below the company average. Most of the ones that are opening up will have margins in excess of the company average.

Douglas F. Bauer -- Chief Executive Officer

Relative to our PHR offerings, we have a lot of product coming to the market. This will be the highest number of active communities we will have at one point in time and it is by far in our best village of PHR. So, we're really optimistic about those new offerings.

Nishu Sood -- Deutsche Bank -- Analyst

Got it.

Operator

Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Mike Dahl -- RBC Capital Markets -- Managing Director

Good morning. Thanks for taking my questions. I wanted to follow up with the first question around the product discussion and then specifically relating to the long-term assets opening up in the 13 communities. To the earlier comments around looking at the front end of communities adjusting strategies on pricing, could you comment on whether you've looked at or made any adjustments to the new community openings from the long-term assets. Then also, related to that, just remind us what the average price point is in those -- I know it's in the queue, so I just don't recall off-hand.

Thomas Mitchell -- President and Chief Operating Officer

Yeah, Mike, this is Tom. The price points really vary by project. You've got a real dichotomy between PHR at the upper end with all of our new product offerings being over $1 million and then out into our Beaumont offerings with our active adult introductions starting in the mid-300s. So, there's a pretty big band there.

Then relative to the offerings overall, again, we're very optimistic, but we really haven't changed strategies. We are wanting to make sure that we're coming to market with attractive pricing to gain momentum at these new projects. It's critical to get off to a good start, but we really aren't implementing any different strategies at the opening of all of our new product offerings.

Douglas F. Bauer -- Chief Executive Officer

I will add to that, Mike, Skyline I noted in the earnings call that we're opening here in November, that's been in the planning stages for some time. That does afford product types in a more affordable price range to the LA County buyer. So, we're very excited about that. That was all planning that's gone on for the last 6 to 12 months prior to the opening. Then you look forward and you look forward to some of the other long-term assets that we have, both in the Inland Empire and San Diego.

We have the ability to further plan those for affordable price points. We've done all kinds of planning with our banning asset next door to Beaumont. You get down to Meadowood, all the projects that are in the queue, that's where we have this distinct advantage of designing and building product at a more affordable price point for years, for many years to come in a very supply constrained market. We definitely have a huge advantage there going into those markets for the next several years.

Michael Grubbs -- Chief Financial Officer and Treasurer

Hey, Mike, one more thing to add just to give you some perspective -- the average sales price of our year to date delivery so far in the California assets are $778,000.00. Last year that was $569,000.00. I would expect as we move forward that number is going to go forward a little bit because of weighting the PHR.

Mike Dahl -- RBC Capital Markets -- Managing Director

Got it. Thank you for all that commentary. My second question, then, relates to some of the comments around the incentives picking up toward the end of the quarter and then thinking about October and understanding the month's not over yet, but when you think about whether the incentives and just your overall product strategy for that matter and the demand responses is having the intended effect, could you give us context on how the first few weeks of October are trending?

If I look at the last two years, you've got a lot going on both years. '16, you were pretty flat, October to September in terms of absorption rates. Last year, you obviously had a really strong September that you were comping against, so it was a little difference. So, any directional commentary you can give us on October would be great.

Douglas F. Bauer -- Chief Executive Officer

I would tell you it's still a grind with higher interest rates and the consumer adjusting to those rates with the pricing that's gone on, that has increased for years, I'd say not only is it seasonal, you obviously have a seasonal period you're heading into right now, but it's a grind. There's no more order takers. We're going to have to fight and scratch for everything that you earn out there. So, the sales force and all our teams are going to earn their money going forward.

Mike Dahl -- RBC Capital Markets -- Managing Director

Okay. Thank you.

Operator

Thank you. Our next question comes from line of Carl Reichardt with BTIG. Please proceed with your question.

Carl Reichardt -- BTIG -- Managing Director

Thanks. Good morning, guys. Doug, you mentioned M&A. Looking at deals in Texas and the Southeast, when you talked earlier this year, you talked about more private deals coming over the pricing that was not attractive. Has it changed much in the last 6 to 9 months? Has the change in business begun to change the perspective of privates who might be interested in those markets?

Douglas F. Bauer -- Chief Executive Officer

In select cases, yes. I would say that there's a slow realization that we're in market adjustment periods. So, we've been very active in looking, as I've mentioned, over the past year, and everybody -- we were like 0 for 15 or 20 because we've stayed very disciplined. I would say there are definitely some adjustments going on going forward. As I mentioned, this is when companies with strong balance sheets can make a big adjustment. Again, you're kind of crawling before you walk, walk before you run. But we're definitely going to take advantage.

The TRI Pointe Company -- I believe Texas is a huge area of growth for us. It has a strong economy, affordable housing. You look at the map in the US, we're not in the Southeast. We're very excited about bringing Gray Shell on board and spending time building our brand there at more affordable price points. So, definitely some cracks in the armor for some of the small privates.

Carl Reichardt -- BTIG -- Managing Director

Okay. Thanks, Doug. To go back to Steve's comment or question about the international buyer, I'm trying to understand -- is that euphemism for offshore buyers who are effectively investors/speculators in homes or is this an issue maybe connected to H-1B visas, something like that? I just want to get some clarification as to specifically what weakness in California, Washington's headquarters you're seeing from that customer.

Thomas Mitchell -- President and Chief Operating Officer

Yeah, Carl. This is Tom. We really haven't seen or heard in our sales offices any implications of the H-1B visas. So, it's not that. It's more of the former, as you described. It's really that international investor-oriented buyer that we've seen a reduction in.

Carl Reichardt -- BTIG -- Managing Director

Okay. Thanks very much, Tom. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Alex Rygiel with B. Riley FBR. Please proceed with your question.

Alex Rygiel -- B. Riley FBR -- Analyst

Thank you, Gentlemen. You provided some great guidance with regards to a number of new communities opening in 2019. Could you summarize that again for us and quantify it in total and discuss a little bit of the cadence to help us model?

Michael Grubbs -- Chief Financial Officer and Treasurer

Are you referring to the fourth quarter, Alex? You cut out a little bit on your question.

Alex Rygiel -- B. Riley FBR -- Analyst

Sorry. I'm referring to 2019 and the cadence.

Michael Grubbs -- Chief Financial Officer and Treasurer

We really haven't given any guidance on 2019 on community count growth. So, we haven't provided anything yet, we just provided what our fourth community counts were. But I would expect that 2019 is going to be relatively 4% to 5% community count growth.

Alex Rygiel -- B. Riley FBR -- Analyst

And then as it relates to options and land premiums, can you talk about how those have changed in light of the incentives increasing.

Michael Grubbs -- Chief Financial Officer and Treasurer

Yeah. Options as a percentage of our overall sales price for the current quarter were 11.2%. That compared to 9.9% in 2017 for the same quarter.

Douglas F. Bauer -- Chief Executive Officer

That's a strategy that we're hoping to capitalize on and differentiate ourselves through customization and personalization for our consumer. We can see that as a highly profitable component of our business and something that really enhances the customer experience and their satisfaction. We do have an intentional focus on that going forward.

Alex Rygiel -- B. Riley FBR -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Jay McCanless with Wedbush. Please proceed with your question.

Jay McCanless -- Wedbush Securities -- Analyst

Good morning, everyone. Excuse my voice, I'm fighting the annual fall cold. The first question I have -- what are the orders month to date for October and how does that compare to last year?

Michael Grubbs -- Chief Financial Officer and Treasurer

Well, as Doug just mentioned, orders for October currently are tracking at about 2.0.

Jay McCanless -- Wedbush Securities -- Analyst

How does that compare to last year?

Michael Grubbs -- Chief Financial Officer and Treasurer

If you look at the slide deck, last year would have been much higher, 2.95, 2016 was 2.83. 15 of our 19 new communities are going to be opening in November. So, we should be a pretty good bounce back in November.

Jay McCanless -- Wedbush Securities -- Analyst

And then the second question I had -- thinking about this expansion into the Carolinas, can you talk about the cadence of that and what type of impact should we expect for gross margin? It seems like at face value, this might be another drag on gross margin right at the time you don't need --

Douglas F. Bauer -- Chief Executive Officer

There's no drag on gross margin. It's a slow march over the next two five years. It's minimal. An organic start-up, you've got overhead costs that you're starting with and you're slowly building into a team and a pipeline.

Jay McCanless -- Wedbush Securities -- Analyst

And then the last question I had -- in terms of the incentives, it sounds like most of what you all are doing now is going to affect [inaudible]. What about outside brokers? Are you all having to pay more to them and if so, would that show up on the SG&A line?

Douglas F. Bauer -- Chief Executive Officer

Yeah. Our outside broker sales have remained constant, but again, in a more challenging environment, that is an era where you could expect to see some increased cost.

Jay McCanless -- Wedbush Securities -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Alvaro Lacayo with Gabelli & Company. Please proceed with your question.

Alvaro Lacayo -- Gabelli & Company -- Analyst

Good morning, guys. I just wanted to go back to the comments around identifying the pricing threshold in Seattle and pricing adjustments you made to drive the sequential improvement. If you could just maybe talk to us about the different looking things you're looking at in terms of how you identify those thresholds, is it just a question of absorption or are there other elements, and then when you apply that to Southern California, maybe talk a little bit about what the thresholds are there, how close you are to them and what that might mean going forward in terms of potentially incentives and pricing.

Michael Grubbs -- Chief Financial Officer and Treasurer

Yeah. This is Doug. In Seattle in particular, it's really a case by case, project by project analysis. In our marketing strategies, which can include incentives and other marketing strategies to sell homes, it's all about meeting a pace. We're focused on pace here. We play with the dials of incentives. We play with marketing game plans throughout sales game plans. We've been very successful with the financial and we've had some great success with buy downs and forward commitments that we bought. So, you play with all those levers to get to a pace.

Douglas F. Bauer -- Chief Executive Officer

And typically, Alvaro, I'd say we're targeting that three a month pace in some instances, we might be up to four months. We're looking in actively in real time, analyzing what our absorption paces are and we're going to implement pricing strategies to maintain those paces.

Alvaro Lacayo -- Gabelli & Company -- Analyst

As you look at your footprint on the back of rising rates and you think about affordability, what kind of momentum from an order pace are you seeing in states where average selling price has been more stretched versus not. Is there a widespread -- I also look at the improvement you guys had in Texas. I just wanted to think about on behalf of the fact that rates will probably continue to rise and if the expectation on order pace be disparate by segment or if it's just more of an overall footprint kind of situation.

Douglas F. Bauer -- Chief Executive Officer

When you look at the absorption pace throughout the country, it varies by geography. You definitely had higher pace appreciation and the consumer has adjusted to a slower motivation in Northern California, Seattle, but many of the other submarkets have continued to move along at a good pace and again, we're always targeting about three a month other than our Texas operation, which is really around that target of one half, two a month. So, that's our target going into '19 and we'll continue to play with the dials to get that pace going forward.

Alvaro Lacayo -- Gabelli & Company -- Analyst

Great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Scott Schrier with Citi. Please proceed with your question.

Scott Schrier -- Citigroup -- Analyst

Hi, good morning. I just wanted to follow-up on some of those Texas comments with respect to Trendmaker. I recently saw some of your product up in Bridgeland. It's very interesting. It looks like you're continuing to make strides in Texas both in orders, absorption pace. Can you talk a little bit about what you're seeing.

Are you seeing more pricing power? I know there's been a lot of talk about incentives. Is that a market where maybe you have to give a little bit of incentive and just in general in the market as you move, kind of away from downtown into some of those areas, are you still seeing a lot of demand kind of around the outside of Houston?

Douglas F. Bauer -- Chief Executive Officer

When you talk about Houston, one of our strategies has been, Scott, to diversify into some more affordable price points focusing on lot sizes in that 50-60-foot category and you'll see our ASP on average come down over the next couple of years. Our incentives in Houston actually came down about 3 BIPs from 17, but that's still in that 8.5% range in Houston and you're seeing a very competitive marketplace at that more move up product, that's for sure.

Michael Grubbs -- Chief Financial Officer and Treasurer

If you're just looking at the comp improvement year over year, the comp was pretty difficult because the hurricane last year and just a tougher market in Houston. So, it's not like we're blowing [inaudible] out of the gate in Houston.

Scott Schrier -- Citigroup -- Analyst

Understood. Then just on some of your prepared comments on difficulties finding finished lots, I know you're talking about a long cycle from a macro fundamentals perspective, when you look at your land acquisition right now in some of those core areas, are you finding it more difficult to underwrite deals? Just kind of a segue to that, in North Carolina, as you think about ramping up your land there, how is the environment there? Are you seeing land deals coming or do you think you're able to flip the numbers.

Douglas F. Bauer -- Chief Executive Officer

Well, we're just getting going in the Carolina markets. I'll tell you, the land acquisition strategy in changing market conditions actually gets more challenging for the land acquisition teams because we remain very disciplined in our underwriting and our standards that to me return for the company and its shareholders. Having been through this a number of years, it always kind of has the land sellers lagging the adjustments that are going on in the business.

That typically takes 6 to 12 months for that adjustment. That's where disciplined and experienced management teams have some pretty strong success. I use the phrase hanging around the hoop. We'll continue to be very disciplined, whether it's Carolinas, Phoenix, Texas, throughout the nation. There are adjustments going on in the business and you've got to be disciplined in how you underwrite new land deals.

Scott Schrier -- Citigroup -- Analyst

Great. Thank you.

Operator

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

Alex Barron -- Housing Research Center -- Analyst

Thanks, guys. I was wondering if you guys have found any one type of incentive to be working better than another in this environment. Is it better to raise broker commissions or offer rate buy-downs or closing costs or what's been working for you guys, if anything.

Douglas F. Bauer -- Chief Executive Officer

It's a good question. It's definitely the financing incentive, whether it's a rate buydown or repurchase commitments and offering those types of financing programs has been the strong driver for us in many of our markets.

Alex Barron -- Housing Research Center -- Analyst

Got it. And then as far as the share buyback activity, have you looked forward to this softer environment? Is that something we should expect going forward or was that more of a one-time thing, do you think?

Michael Grubbs -- Chief Financial Officer and Treasurer

We have a $200 million authorization out there and we spent about $139 million of that. I think we're going to continue to balance the use of our capital and return of capital to our shareholders as well as the potential to paydown debt. We'll be opportunistic in that perspective.

Alex Barron -- Housing Research Center -- Analyst

Got it. Thanks a lot.

Operator

Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to Mr. Bauer for any closing remarks.

Douglas F. Bauer -- Chief Executive Officer

Thanks, everyone for joining us on today's call. I want to wish everybody a great pre-holiday season wish and we look forward to talking to you after the new year. Thank you very much.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Duration: 66 minutes

Call participants:

Chris Martin -- Vice President of Investor Relations 

Douglas F. Bauer -- Chief Executive Officer

Michael Grubbs -- Chief Financial Officer and Treasurer

Thomas Mitchell -- President and Chief Operating Officer

Alan Ratner -- Zelman & Associates -- Analyst

Stephen Kim -- Evercore ISI -- Managing Director

Stephen East -- Wells Fargo -- Analyst

Jack Micenko -- Susquehanna International Group -- Analyst

Nishu Sood -- Deutsche Bank -- Analyst

Mike Dahl -- RBC Capital Markets -- Managing Director

Carl Reichardt -- BTIG -- Managing Director

Alex Rygiel -- B. Riley FBR -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Alvaro Lacayo -- Gabelli & Company -- Analyst

Scott Schrier -- Citigroup -- Analyst

Alex Barron -- Housing Research Center -- Analyst

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